IMF board shies away from bold mandate changes

11 June 2010

In a series of four papers the IMF executive board has been discussing fundamental changes to the way it does business. Despite the financial, economic and debt crises demonstrating the failures in the current international architecture, there was no consensus on the need for, or direction of, reform.

In late May, the board discussed options for reforming the monetary system (see Update 70). Despite recent swings in currency valuations and a Fund policy paper saying that “the current system has serious imperfections that feed and facilitate policies – of reserves accumulation and reserves creation – that are ultimately unsustainable and, until they are reversed, expose the system to risks and shocks”, most IMF executive directors “observed that the current [system] has demonstrated its resilience.” Board members, however, were firmly divided over key issues, including a multilateral framework for managing capital flows, penalties for countries with persistent current account imbalances, and the role of the special drawing right (see Update 65). They did manage to agree on rejecting a new international currency modelled on the Keynesian proposals from the 1940s.

In mid April, the board considered proposals for reforming the IMF’s financing toolkit, including changes to the Flexible Credit Line (FCL, see Update 65) and the introduction of new facilities (see Update 70). A second paper considered some fairly radical suggestions for the Fund, including guaranteeing sovereign debt, lending against collateral instead of policy conditionality, and Fund purchases of sovereign debt in secondary markets. While the board agreed that “the remaining shortcomings in the current financing toolkit need to be addressed”, they only agreed that refinements to the FCL would be welcome, and supported “strengthening the Fund’s engagement with regional financial arrangements”, as happened in Europe (see Update 71).

Separately, in mid April, the board discussed papers on multilateral and financial sector surveillance. The board asked the Fund to find new ways to do analytical work on “outward spillovers”, meaning the impact of the domestic policies of important countries on other countries and systemic stability. The board also agreed to the regular collection and use of data on financial firms and markets and, in principle, to make the Financial Sector Assessment Programme (see Update 57, 15) mandatory for important countries.

In analysing why IMF surveillance failed to foresee the financial crisis of 2008, former Argentinian IMF executive director Hector Torres warned that “boundless faith in markets’ self-regulatory capacity … appears to be at the root of the Fund’s failure to find what it was not looking for.” He also said that the IMF’s “governance structure indirectly impairs the Fund’s capacity to criticise its most important members’ economies (let alone police compliance with their obligations).”

The IMF’s public consultation period on the mandate review closed in mid May with only a handful of contributions. University of Vienna professor Kunibert Raffer stressed that to prevent excessive accumulation of reserves, the IMF should obey its Articles of Agreement, which “clearly stipulate the right to capital controls, even explicitly restricting the use of Fund resources to finance speculative outflows.” A submission from London-based NGO the Bretton Woods Project said the IMF needs to focus on “reform of the international monetary system; surveillance over the policies of systemically important countries; and providing rapid access, conditionality-free finance to countries facing crisis.”