IFI governance


Experts call for end to PRGF

Malan and Crockett reports highlight need for overhaul at the Fund

2 April 2007

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An external committee of experts found collaboration between the World Bank and IMF seriously wanting, and included in its recommendations that the IMF withdraw from development finance. Taken with an earlier external report on Fund finances, it presents challenges to the Fund’s medium-term strategy.

The Malan committee, so named because it was chaired by Brazilian banker and former finance minister Pedro Malan, was appointed in March 2006 by Bank president Paul Wolfowitz and Fund managing director Rodrigo de Rato (see Update 51). Despite worries that the committee was packed with insiders who had historical ties to the Bretton Woods institutions, the committee’s final report in February 2007 is feeding into increasing questioning about the role of the Fund in low-income countries.

the Fund should start withdrawing from long-term financing operations in low-income countries

The most sensational statement in the report criticised the IMF’s Poverty Reduction and Growth Facility (PRGF), its concessional lending instrument for low-income countries. “The Fund’s financing in low-income countries is an area where it has moved beyond its core responsibilities”. While not endorsing the concept of a strict division of responsibilities, nor a division based on country income levels, the committee felt that the Fund was “becoming involved in issues such as civil service, land and energy sector reforms; privatization; property rights; and judicial reforms. These areas should be the responsibility of the Bank.”

The committee found that “the criteria for Fund financing in low-income countries based on the concept of ‘protracted balance of payments need’ is so vague as to be difficult to distinguish from development finance in practice.” And given that PRGF disbursements have already started decreasing, “the Committee recommends that the Fund should start withdrawing from long-term financing operations in low-income countries.” This is at odds with the Fund’s medium term strategy being championed by de Rato, which calls for increased Fund involvement in low-income countries.

The report also highlighted that “there is currently no robust dialogue between the Bank and Fund as they consider their future strategies.” Emblematic of the inability of the two institutions to work well together, “the Fund acknowledges that putting its medium-term strategy into operation will have implications for the division of responsibilities between the Bank and Fund, but it appears that it did not discuss this with the Bank.”

In another key area, the committee dismissed the debate over fiscal space (see At Issue), calling the trade off between stability and growth “a false dilemma”. But the committee’s work points to distrust at the Bank, whose staff were concerned that “Fund advice to governments on fiscal stance does not pay adequate attention to the growth effects of expenditure composition and efficiency, contributing to a contractionary bias in fiscal policy design.” This corresponds to the findings of the Independent Evaluation Office (IEO) report on the IMF in Sub-Saharan Africa (see page 7), which confirmed that Bank staff find collaboration with the IMF disappointing and unproductive. The Malan report mentioned numerous other shortcomings in collaboration but sought to avoid overemphasis on any particular one.

The main recommendation of the report was for “a stronger culture of collaboration … along with stronger incentives to collaborate.” To implement this, the committee called for better collaboration at the level of the board of governors and the executive board, staff exchanges and the development of a new Understanding on Collaboration. The committee believes these measures would result in better collaboration on the ground, harmonised recommendations in areas like fiscal policy and financial sectors, and the ability to continuously update the implementation of the collaboration policy. Wolfowitz and de Rato “expressed their deep appreciation to the Review Committee for its vital contribution” but it is as yet unclear how the pair will proceed. Inside sources in at the Fund said that the committee’s recommendations had not enthused the boards at either institution and they expected the report to “sit on the shelf”.

Cash-strapped Fund needs a rethink

As the Malan report concedes, the financial squeeze at the IMF means that it should seek to be as efficient as possible in meeting its core mandate. Another external committee recently reported on the Fund’s finances and suggested a complete revamping of the Fund’s financing model.

The Crockett committee, chaired by US investment banker and former chairman of the Bank for International Settlements (BIS) Andrew Crockett, was appointed by the IMF’s managing director Rodrigo de Rato to propose long-term financing mechanisms for the Fund (see Update 51). The IMF is projected to have a shortfall of more than $100 million in the current fiscal year, rising to more than $365 million by fiscal year 2010.

The Crockett committee’s end-January report characterised the Fund’s current financing arrangements as inflexible and unpredictable. It also said the Fund’s financing model “lacks economic logic”, “is arguably inequitable” and is based on perverse incentives in regards to preventing financial crises. It stressed that the Fund should avoid cross-subsidies between its major areas of activity: credit intermediation, provision of public goods and provision of bilateral services. By separating the financing of public goods (such as global economic surveillance) and services (such as technical assistance and concessional lending) from credit activities, the proposal would end the practice of the interest payments of debtors paying for the Fund’s entire administrative budget.

But the Crockett committee’s terms of reference specifically excluded consideration of measures to reduce the Fund’s administrative expenses, preventing it from looking at the roles that the Fund should ideally play. Inside sources at the IMF indicate that the G7 is in agreement that the Fund needs to entirely reassess these roles before it should go about implementing a reform to its financial model. De Rato also seems to recognize that he cannot modernise the income position of the Fund very quickly, saying “these Committee recommendations will need a period of internal discussion”.

However, there is not yet any clarity on how this consideration of the role of institution will be addressed. The medium-term strategy (see Updates 48, 51) is now well into the implementation phase, and forcing a rethink would be a serious blow to de Rato, who is said to be personally responsible for the setting the strategy’s main objectives. The major shareholders, who are also major donors, seem keen to keep the Fund actively involved in low-income countries, despite abundant criticism of the Fund’s work there.