Rethinking the IMF again

But will it do any good?

15 April 2010

The IMF’s ongoing mandate review – with a particular focus on how it can better serve large emerging markets in the areas of surveillance, crisis prevention and the international monetary system – is ignoring most of the Fund’s developing country members and potentially resulting in few changes.

In October 2009, the G20 group of countries asked the IMF to conduct a review of its mandate. The IMF officially launched the process by publishing a “chapeau” paper which was discussed by the board in late February. Throughout this spring and summer the IMF board will debate more in-depth papers on the size of the IMF, its future financing role (crisis prevention and alternatives to self-insurance), the international monetary system, surveillance, and the IMF linkage to the Financial Stability Board (FSB). In mid March the IMF created an online platform for a consultation on the mandate, which will be open until mid May.

It is unclear how willing the IMF’s major shareholders are for a radical rethink of any of the Fund’s roles. The last such review, launched in late 2005 by then managing director Rodrigo de Rato, resulted in little change and a failed multilateral consultation process on global imbalances (see Update 54, 51, 48).

focus on addressing rich country policies that hurt the poorest

There are numerous contentious issues. IMF shareholders will likely clash over the issue of capital controls (see Update 70) and how the Fund can become more even-handed in its surveillance. Developing countries have long complained that the IMF has no ability to force non-borrowing rich countries to consider the external impact of their domestic policies, yet it frequently rebukes developing country borrowers over domestic political choices (see Update 56). This was borne out in a recent Independent Evaluation Office report on country relations with the IMF (see Update 69).

As if on cue, in March, Germany was accused of ignoring IMF advice about rebalancing its economy. The IMF and the French finance minister both noted that global imbalances – and the European imbalances plaguing Greece – are created by both surplus countries and deficit countries, and called on Germany to boost domestic consumption. This advice has been routinely ignored and German chancellor Angela Merkel defended her country’s export-oriented economy. Some rich countries have also complained about a lack of Fund traction over developing countries with large surpluses, especially China (see Update 70). The discussion harkens back to the debate had during the conception of the IMF over whether surplus and deficit countries should share the burden of adjustment (see Update 64).

A companion paper to the mandate review, on the related legal issues, makes clear that the IMF may not even have the legal authority to address concerns related to the impact of ‘systemically important’ countries’ financial sector policies on the rest of the world because the IMF mandate covers only the balance of payments. In cases when countries have not considered the impacts of their policies on developing countries, “spill-over effects may not be discussed in the context of surveillance because they are not transmitted through the balance of payments,” said the paper.

Overseeing the financial system?

The review paper also leaves the door open for the Fund to take a greater role in overseeing the global financial system, though its articles of agreement currently limit its mandate to the international monetary system. The paper admits, “the Fund cannot realistically cover all financial sector issues, nor should it try to become a global regulator. Nevertheless, it must cover all that bears on macroeconomic and financial system stability, the two being intertwined. One option would be for the Fund to take the lead in identifying and prioritising macro-systemic risks through its macroeconomic, early warning, and macro-financial analyses. This task would still require substantial collaboration with expert bodies such as the FSB and BIS.”

Regardless of the formal niceties, IMF staff and its managing director Dominique Strauss-Kahn have already embroiled the Fund in the institutional details of financial regulation and supervision in Europe. In a March working paper, Fund staff called for “an integrated EU-level framework for crisis prevention and management, crisis resolution, and depositor protection that resolves the problematic institutional mismatch between, on the one hand, pan-European banking groups and, on the other, crisis management and resolution by national authorities.” In a mid March speech to the European Parliament, Strauss-Kahn repeated the working paper recommendations, calling for “a European Resolution Authority, armed with the mandate and the tools to deal cost-effectively with failing cross-border banks.”

While the IMF has often set financial sector reform as a condition in its lending programmes, it is unusual for the Fund and its leader to be so outspoken about institutional restructuring in the rich world. It raises questions as to the role the IMF sees for itself in a new financial regulatory architecture.

Crisis facility revamp?

In the review, the Fund will consider expanding access to its new crisis prevention facility, the Flexible Credit Line (FCL, see Update 65). Alternatively, it could create another new facility, which would fall between the FCL and the standard stand-by arrangement in terms of level of access and conditionality. The creation in early 2009 of the FCL was contentious and further changes promise to spark strong debate.

The FCL is proving to be of limited but continuing popularity. In March, Mexico, the first and biggest country to agree such a programme, renewed its FCL, citing the closing of its bilateral swap line with the US Federal Reserve as one reason why it would be helpful. The Colombian finance minister said in March that he was also considering renewing his country’s FCL. Meanwhile in Poland, the only other country to use the FCL, renewal of the facility has caused a rift between the finance minister and the governor of the central bank.

However other countries that could have made use of the liquidity provided by the FCL either chose not to or were prevented from doing so. Most notably, Turkey has been in constant disagreement with the IMF about a new loan since its last programme concluded in May 2008 (see Update 61). It needed funds but the IMF wanted to impose conditions that Turkey found unacceptable. In early March Turkey broke off negotiations with the Fund, and in mid March instead borrowed $1.3 billion from the World Bank for “crisis response and [the] transition back to sustainable growth” with specific focus on supporting “measures taken to maintain employment and household incomes in the face of the global crisis.” Such a loan would normally be agreed with the IMF, highlighting two debates around the IFIs: the desire to avoid IMF conditionality (see Update 70), and where countries should go to when they have fiscal, but not balance of payments, problems (see Update 70).

Rebuffs to reserves plan

The question of stigma will have to be addressed as well. Countries prefer to build reserves rather than turn to the IMF. The Fund paper gives multiple reasons for reserve building: “concerns about the availability of international liquidity in times of crisis”, “no automatic adjustment of current account imbalances”, and that the dollar is a good store of value. The Fund believes that if it had more capital, countries would not accumulate such large reserves. However the $500 billion capital injection in 2009 (see Update 65), a trebling of the Fund’s size, does not seem to have had any impact on countries’ reserve levels.

An argument will be had this year about whether any further capital increase for the IMF should come through quota increases or expanding the bilateral arrangements the Fund has to borrow from rich countries, called the New Arrangements to Borrow (NAB). Final agreement was reached in April on expanding the size of the NAB to $500 billion, thus cementing of the promise for an IMF resource increase originally made by the G20 in April 2009. Until now the capital increase had been in the form of bilateral borrowing arrangements.

The Fund paper’s explanation of the reasons countries build reserves ignores the problems of stigma and anger at IMF conditionality. Mexico indicated in its renewal of the FCL that over the medium-term it preferred to build up its own reserves rather than rely on the Fund. In mid-March, the Brazilian central bank governor Henrique Meirelles said, “it is better to self-insure even if there is a cost associated with that” and indicated the IMF’s proposals would have no impact on Brazilian policies for reserves management. There are significant social costs to holding reserves (see Update 62), but developing countries seem to judge these as preferable to turning to the IMF and facing its conditionality.

The expectation is that developing countries will continue to amass large sums of reserves to protect themselves from speculative capital flows and frequent financial crises until there are resolutions to the faults of the international monetary system (see Update 70) and the distrust of the IMF because of its historical record on conditionality and its imbalanced governance.

Ignoring its users

Despite all the discussion on the mandate, low-income countries, the most numerous users of the IMF, merit just a single paragraph in the Fund paper on the basis that the IMF’s concessional facilities were revamped last year (see Update 67). Even though they are affected by many of the same issues as large emerging markets, the mandate review will not focus on them. These countries also have a stake in surveillance and crisis prevention issues, especially as they are increasingly susceptible to financial crisis contagion. Yet it seems that their views on the issues will largely be ignored.

Collins Magalasi, executive director of NGO Afrodad, says: “Given what we have seen in the past two years, it is clear that small and low-income countries have just as much to fear from bad policies in the rich world as the large emerging markets. If the IMF really wants to serve all its members it needs to focus on addressing the spillovers from rich country policies that hurt the poorest.”

UNCTAD secretary general, and former WTO director general, Supachai Panitchpakdi, said “the time has come to seriously promote governance reform at the IMF, including a balanced voice and the participation of developing countries. That will enable the Fund to get back to what it was originally asked to do … macroeconomic surveillance and management. If it is to have a stronger role in reserve currency management, it should remove itself from other areas, such as development finance and poverty reduction, which only clutter and confuse its mandate.”