The IMF’s Medium-Term (or Reinvention) Strategy
Upon joining the Fund in June 2004, IMF Managing Director Rodrigo de Rato launched a Strategic Review Process to consider how to redefine the role of the institution. The strategic review’s first report was published in September 2005 and laid out several recommended new functions and institutional reforms. The second report, released during the Spring Meetings 2006, contained the Medium-Term Strategy made up of proposals for implementing the recommendations contained in the first report.
The Medium-Term Strategy’s proposed new directions and priorities include the following seven main areas:
- engagement in low-income countries
- governance of the Fund
- multilateral surveillance of global trade imbalances
- role in emerging market/middle-income countries, i.e., crisis prevention
- streamlining Fund internal procedures and documentation
- capacity building
- the medium-term budget
The first four areas have the most CSO interest and are explained in some detail below.
The two main thrusts of the IMF’s reinvention are: becoming more relevant/palatable to low-income countries – as a provider of services through new assistance instruments and through the quota & voting reforms; and trying to reign in China’s trade imbalances and unbridled foreign investment through multilateral consultations and stronger emphasis on both financial sector and currency exchange rate reform/surveillance.
Engagement in Low-Income Countries
The IMF's plan
The Fund’s strategy proposes concentrated work in low-income countries in the following areas: (i) country-specific macro-critical issues, (ii) aid and the MDGs, and (iii) debt relief. These three focus areas are described below.
Country-specific macro-critical issues – According to the IMF, the main focus will continue to be on policies and institutions that are critical to economic and financial stability—particularly fiscal, monetary, and exchange rate policies and increasingly on financial markets (e.g., removing credit constraints on the poor ). The Fund has also stated that there will be a broadening of the division of labor with the World Bank (explored by the External Review Committee on IMF-World Bank collaboration) and more flexible lending facilities (already some created in 2005, see below). In a recent speech, de Rato stated that “the Fund is strongly committed to making sure that countries have the fiscal space they need to expand social programs, especially in health and education...including floors on poverty-related spending.”
Increased trade: The Fund admits that their role with respect to trade is less clear-cut. De Rato continues with the Fund’s stance that increased trade, bolstered by multilateral agreements, is fundamental for low-income countries development prospects (CGD speech, July 31, 2006). De Rato also states that the measures of particular concern for the poorest countries include phasing out export subsidies and providing quota- and duty-free access from the poorest countries to developed and large developing country markets.
Critique
With the Fund’s decreasing relevance elsewhere, the IMF has an increased interest in its ability to stay involved in the low-income countries. Unlike middle-income countries, the poorest countries have not been able to build up foreign reserves and do not have access to other forms of finance (especially some African countries). As such, several CSOs, as well as others, are calling for the exploration and development of alternatives to the Fund, such as regional monetary funds (as mentioned above). They remain skeptical if not cynical about the Fund’s potential to provide low-income countries with selfless advice and assistance.
One of the main CSO critiques with respect to IMF engagement in low-income countries is the undermining of national policy space. Many CSOs believe that the IMF’s PRGF work goes well beyond the IMFs core mandate of macroeconomic sustainability, and, thus, results in conflicts and negative impacts to low income countries. Moreover, it subordinates the voice and interests of those in the country (particularly the poor) at the expense of foreign donors. IMF staff rarely understand the root causes of poverty and thus do not fully appreciate the complex relationships between poverty and macroeconomic policies. Among several other issues, many CSOs believe that the IMF requires inappropriate conditionalities, for example the IMF’s involvement on spending prioritization is considered to be a clear infringement on the political process in its member countries. Moreover, some believe the PRGF is a duplication of the World Bank’s IDA program (which also has its problems) and is based on too short of a lending term to address longer-term poverty reduction strategies (see, for example, Akyuz, 2005).
As further evidence of the IMF’s strategy to reinvent itself as a provider of services to low-income countries is the establishment back in 2005 of two new types of instruments for low-income countries - one lending and one non-lending.
Exogenous Shocks Facility - In November 2005, the IMF established the Exogenous Shocks Facility (ESF) within the Poverty Reduction and Growth Facility (PRGF) Trust. The ESF provides concessional financial support to low-income member countries facing exogenous shocks such as adverse commodity price swings, natural disasters, and conflicts and crises in neighboring countries. For countries that wish to exit, or "graduate", from continuous engagement in PRGF programs, the ESF can serve as a safety net. In the event of a shock, an on-track Policy Support Instrument (PSI) would facilitate access under the ESF because it would reduce the time normally required to design an appropriate program. Although, the ESF requires that a poverty reduction strategy be in place, in exceptional cases, authorities need only to provide assurances that the strategy will be launched during the program. The IMF further states, that the lack of a PRS is not expected to unduly delay approval of an ESF program.
Policy Support Instrument – The Policy Support Instrument (PSI), introduced in October 2005 and originally an idea from the US government, is another way in which the IMF keeps itself involved in low-income countries, specifically those that do not want or need IMF financial assistance. According to the Fund, the PSI is a non-lending program that promotes a close policy dialogue between the IMF and member country; involves more frequent Fund assessments of a member's economic and financial policies than the Article IV consultation process; and is intended to give signals on IMF approval of country policies. Like lending programs of the IMF, an “on-track” PSI also sends a signal to donors, MDBs, and financial markets that the country’s economic framework is sound (according to the IMF), and, thus, is intended to pave the way for debt cancellation, aid, grants, and better financing terms in capital markets. The PSI is available to PRGF-eligible countries only. The IMF plans to conduct a review of the PSI after three years, i.e. in 2008.
Critique: The establishment of these two new instruments for low-income countries may be in response to the backlash against PRGFs by some low-income governments who want less scrutiny and less public involvement processes, (not to be confused with the reasons Southern citizens and CSOs contest the PRGF). The ESF provides loopholes for the government not to adhere to “best practice” in public participation. Given the nature of ESF is emergency lending, a country would almost always be able to make the case for not needing to have a PRS in place prior to approval. Furthermore, it is not clear that an ESF-PRS has to follow the same public consultation requirements as a PRGF-PRS. Also, it is important to point out that the IMF is trying to push the existence of an on-track PSI for access to ESF funds.
Supporters of the PSI say that the new tool will prevent the IMF from lending unnecessarily to countries which do not have balance of payments problems but where donors require an IMF program to validate the country’s policy framework (this was the case for Nigeria’s Paris Club debt cancellation). Critics suspect the PSI is little more than a new way to extend IMF domination. BWP and 50 Years is Enough each have produced initial articles critiquing the PSI instrument. However, follow-up analysis of PSI policy and practice has not yet been done. Both groups want to keep an eye on it. It still remains to be seen whether the PSI will take off or not. Currently, it is only being used by three countries – Nigeria, Uganda, and Cape Verde. If it starts to gain more traction, some CSOs think it will be important to critically focus on this instrument.
Aid and the MDGs - The Fund will assess whether projected increased aid flows are consistent with macroeconomic stability and achieving countries’ development goals (e.g. MDGs) (including strengthening management of public expenditures). The Gleneagles Compact committed to significant increases in aid. As such, the Fund says it will focus on helping countries manage their macroeconomic policies in ways that maximize their capacity to absorb more aid, as well as debt relief. The IMF will also advise countries on how to deal with the risks that higher aid could hurt international competitiveness by causing an appreciation of the currency or higher inflation. De Rato states that the donor community should push forward vigorously with the delivery of Aid for Trade (De Rato CGD speech, July 31, 2006).
Critique: The Fund’s new focus on helping countries manage absorption of increased aid flows provides new opportunities for the Fund to prescribe how countries chose to spend their money, and potentially to determine whether and how much money those countries can “safely” (from a macroeconomic perspective) manage. Many CSOs would like to stop the Fund as the gatekeeper of bi-lateral aid. CSOs have some important allies, including individuals at UK government/DFID and UNDP. Tony Blair’s Commission on Africa report in 2005 referred to IMF policies as “analytically unsound” and DFID now claims that it will no longer only look to IMF assessments in its lending decisions. However, it is not yet clear to what extent this has occurred in practice. At the UNDP, Terry McKinley and Rathin Roy have been doing work on the need for more expansionary fiscal and monetary policies than what is in the PRGFs. In addition, some CSOs have discussed getting HPIC finance ministers together to encourage them to seek out alternatives to the Fund – in part because of the cracks that are appearing in the Fund’s gatekeeper role with respect to bilateral and other multilateral development aid.
Debt relief — The Fund states that it will seek to ensure that the beneficiaries of debt relief do not again accumulate ‘excessive’ debt. The Fund has expressed concern with new trends in lending to low-income countries. According to the IMF, countries that received debt cancellations are now taking on new debt from newly “moneyed” countries, such as China, where the Fund is unable to easily track financial data. Recently, the IMF and World Bank have designed a new debt sustainability framework for low-income countries “to assist financing decisions and to sound the alarm to official creditors when debt service levels are likely to become a problem” (de Rato CGD speech).
Critique: Thus far, debt relief and HIPC triggers have been heavily based on having an on-track PRGF with the IMF, despite the Bank arguably being better placed to assess the need of and use for freed up resources. The IMF’s role as a gatekeeper for debt relief resulted in an overemphasis on macroeconomic conditions to qualify and meant that PRSPs were designed to please the IMF rather than focus on country priorities. CSOs would like to see an independent, transparent body to supervise debt restructuring and debt relief. Some CSOs believe that the Bank and Fund’s only role should be writing off multilateral debts. For many debt campaigners debt relief has not gone far enough. Cancellation of odious debt may be forthcoming campaign push.
With regard to the new debt sustainability framework, the new Framework aims to put debt at the center of the IFIs’ decision-making process. Nonetheless, according to Eurodad, the philosophy that informs the entire proposal does not come close to addressing the problem of long-term real sustainability from the perspective of creating conditions for low-income countries to attain the Millennium Development Goals (MDGs).
Internal Governance
IMF Medium-term Strategy: With regard to internal governance, so far, the Strategy has mainly focused on quota and voting share reform. At the 2006 AGM in Singapore, the Board approved quota increases for China, South Korea, Mexico, and Turkey to reflect the increased global economic weight of these emerging market countries. The second phase of the program (to be completed no later than the 2008 AGM) will allegedly aim at enhancing the participation and voice of low-income countries by increasing the number of "basic votes," which are the minimum and equal number of votes, unrelated to quota size, to which each member is entitled.
In addition, the quota formula, which includes factors like gross domestic product, will be changed to make it 'more transparent, credible and simple' and the IMF will take steps to make quota increases easier to implement in the future to reflect changes in the global economy. Meanwhile, low-income nations would also be guaranteed minimum quotas.
In addition to quotas and voting shares, the Medium-term Strategy mentions that the Fund must also address other aspects of governance, including transparent selection of management and better definition of the role of the IMF Executive Board.
Critique: Many CSOs feel that the quota reform means very little. The first phase resulted in changes of less than 1% for the four countries benefiting from the reform. Furthermore, the proposals for the second phase involving an increase in basic votes results in Africa only increasing its aggregate share by 1%. Recognizing that modest changes to voting shares will not result in any appreciable difference in IMF accountability or its decision-making processes, some CSOs are advocating for changes to the voting process itself. For example, putting in place a double majority voting system (i.e., majority of the votes and majority of countries) would go a long way towards improving the Fund’s governance. Decisions at the WTO, for example, are reached by a one country-one vote system. CSOs are also disappointed that the Strategy did not concretely address a transparent selection process for the Managing Director or accountability of the Executive Board. New Rules has recently put together a panel of experts on Board accountability (for more on governance please see the CSO IMF Work Matrix below).
An important omission in the Fund’s Medium-term Strategy with regard to internal governance is the accountability of Fund management and staff. Professor Daniel Bradlow of American University points out that the IMF’s management and staff operate without effective oversight by the Executive Board and without any clear guidelines on what their responsibilities are and how they are to execute them. He advocates that the IMF should develop and publish a set of operational policies and procedures that will guide management and staff in each of their various types of activity and the IMF should establish a mechanism through which staff can be held accountable when they fail to comply.
Multilateral Surveillance & Consultations - Global Trade Imbalances
IMF Medium-term Strategy: The Fund believes that the world is experiencing unprecedented global trade imbalances that have the potential to contribute to significant global financial instability. As such, the Fund has taken on a new mandate to conduct surveillance of global trade imbalances (as opposed to bilateral trade imbalances). Specific proposed activities include: (i) conducting multilateral consultations within economically strategic groupings of countries on issues of systemic importance; (ii) broadening the IMF’s internal consultative group on exchange rates to include all major emerging market currencies; (iii) strengthening the analysis contained in the World Economic Outlook and Global Financial Stability Report on macroeconomic risks; and (iv) formulating regional work plans that focus on the main policy issues facing the region (please see footnote for changes to country-level surveillance).
In Autumn 2006, the first IMF multilateral consultations are to begin taking place between China, Saudi Arabia, US, the Eurozone, and Japan. The IMF considers these five participants to be “systemically important economic areas for the global economy.” The IMF has stated that it wants to emphasize that their role is to "facilitate" as only member countries themselves can resolve global imbalances. The IMF has established a multilateral surveillance unit within the Research Department to support both the Board and the multilateral groupings. The IMF has decided not to make the schedule, planned agenda, or minutes of these consultations transparent to the Board or the public. When the first multilateral consultations have concluded, there will be a discussion of the outcomes with the Board. All that has been said about the first set of consultations is that they are aimed at addressing global imbalances while maintaining robust global growth.
Critique: Some predict (e.g. the Kiplinger Letter) that these multilateral consultations will become more important/relevant than the G-8 meetings and, that the IMF will play an important role as the convener/facilitator. Some CSOs believe the important issue that should be addressed by the consultations is the source of the global trade imbalances – mainly the US. In the world of multilateral trade imbalances, the US is well above all others (in 2005 the US trade deficit was $805 billion, while the sum of trade surpluses of Europe, Japan, and China was only $325 billion) (see Stiglitz’ article, May 19, 2006). However, most doubt that the Fund will be able to influence the US. Given the meetings are secretive, the public will be unable to tell how much of the discussion will focus on the current account deficit in the United States and insufficient growth in Europe and Japan as opposed to the time spent on China and Saudi Arabia.
Furthermore, the US, itself, seems pleased with the IMF’s expanded role on trade imbalances as it may result in more pressure on China. During the Singapore meetings of the G7, US Treasury Secretary Paulson stated that China needs greater currency flexibility, stronger domestic consumption, and financial sector reform. Such an US outlook speaks to CSO and some countries’ concerns that the new multilateral consultations may be used by powerful countries to extract favorable economic policies from weaker nations. Indeed, one could ask why the IMF is needed to “facilitate” these talks at all, whether such a role is consistent with its mandate, and what access countries not involved in the talks will have to their agenda and outcomes. For now, CSOs, such as BWP, plan to monitor the consultations and keep the public informed. Given its secrecy, the process will be difficult to monitor. The first CSO action (possibly by BIC) should be to advocate for greater transparency across the whole process.
Role in Emerging Market Countries – Crisis Prevention
IMF Medium-term Strategy: The Strategy plans to strengthen IMF policies and activities to better assist emerging market countries, with a focus on crisis prevention. Surveillance is one of the IMF’s main tools in the prevention of financial crisis. A key part of the Strategy is to enhance financial sector surveillance. With globalization there has been a dramatic increase in capital mobility (in part, related to the IMF’s support for capital account liberalization), where the distinction between domestic and international financial markets is increasingly blurred. In recognition of this situation, the IMF is shifting the emphasis of surveillance from the real sector to the financial sector, with a greater focus on balance sheet linkages and the sources of financing.
A key tool for financial sector surveillance is the IMF’s Financial Sector Assessment Program (FSAP), which was adopted in the wake of the emerging market crises in the 1990s, and is a joint initiative with the World Bank. In its effort to enhance financial sector surveillance, the IMF is now making sure that FSAPs are done for systemically important countries (read this to mean China and India). Given that participation in the FSAP is voluntary, the IMF states that it is taking measures to “encourage” key countries to participate. For example, the IEO proposes that management should indicate to the Board which countries it considers the highest priorities for FSAP assessment. &
The IMF’s enhanced financial sector surveillance will also involve assessing the adequacy of Basel II implementation, at least in countries “choosing” to adopt Basel II. In 2004, the Basel Committee on Banking Supervision issued a new bank framework, Basel II, that is more comprehensive and advanced than the original Basel I framework. Basel II offers options for assessing the capital adequacy of banks, requires strengthening core supervisory functions at banks, and requires public disclosure of more information on banks’ risk profile and risk-management systems – all in an attempt to foster conditions for the exercise of market discipline by improving risk management in financial institutions.
Lastly, for countries that are active in international capital markets, the IMF has created a new liquidity instrument, the Reserve Augmentation Line, aimed at supporting these countries’ policies while ensuring the availability of substantial financing. The Reserve Augmentation Line is a new version of the old Contingent Credit Line (CCL) for crisis financing. The new line is linked to the IMF’s surveillance activities and will be discussed by the Board the first quarter of 2007.
Critique: The IMF categorizes the crisis prevention/enhanced surveillance as mainly a Middle Income Country (MIC) activity. However, CSOs do not necessarily consider this only a MIC issue and see it linked to low-income country debt sustainability issues and capital flows available to these countries, among other issues. For potential CSO initiatives related to the IMF’s financial sector activities, it is interesting to note that 2007 is the East Asian crisis 10th anniversary. The ten-year lapse now provides for the disclosure of previously undisclosed IMF documents.
On the part of the Board , the directors have cautioned the Fund to avoid conveying that countries will be criticized for not adopting Basel II. Directors have also voiced concern that the increased risk sensitivity created by the Basel II framework may result in higher capital requirements for loans to emerging market and developing countries as well as higher risk-related capital charges, resulting in reduced capital flows to these countries. Although, they also note that bank lending rates to emerging market and developing countries may already incorporate this risk premium and may be unaffected by Basel II.
Furthermore, a country could experience reduced financial flows due to market insecurity resulting simply from the country being placed on the IMF’s list of priority countries for a FSAP.
It will be important to explore what the enhanced financial sector surveillance, including Basel II implementation, indicates for the IMF’s gatekeeper role on donor aid and financial markets. What does it mean for financial flows to middle- and low-income countries? How is it tied to monitoring for terrorism finance? How may it be used to reign in China and India? What implications does the IMF’s shift in focus from the real sector to the financial sector have for poverty reduction and other social development issues?