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Tensions in the Role of the International Monetary Fund

Tensions in the Role of the International Monetary Fund

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Tensions in the Role of the International Monetary Fund

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  1. Tensions in the Role of the International Monetary Fund Presentation by Timothy Lane (IMF) Oliver Smithies Lecture Balliol College in association with Oxonia 9 November, 2004

  2. Main themes • Changes in the world economy have brought major changes in the role of the IMF • These changes have led to some strains • Efforts have been made to reform the IMF in light of this experience • But some underlying tensions remain unresolved

  3. Purposes of the IMF • Policy spillovers • Benefits of pooling liquidity • Financing to give members confidence to make adjustments without damaging national or international prosperity

  4. Some trends in recent decades • Fall of Bretton Woods system • Capital mobility • Growth disappointments • Low-income countries debt crises • Fall of Communism • Emerging market crises of 1990s

  5. Some broad areas where problems have emerged • Conditionality • Emerging market crises • Prolonged use • Low-income countries

  6. Conditionality • Classic purpose: safeguards and assurances • Reasons for expansion of conditionality • “Grandmotherliness” • Example of tension: Indonesian clove monopoly • Concern over proliferation of conditionality—and doubts about its effectiveness • Conclusion: 2002 Conditionality Guidelines—streamlining and focusing conditionality

  7. Remaining tensions in conditionality • Tailoring versus uniformity—both in establishing conditions and monitoring results • Streamlining as counterpart of selectivity • “Ownership” and its limits

  8. Emerging Market Crises • Examples: Mexico 1994-95, East Asia 1997-98, Russia 1998, Brazil 1999, 2002; Argentina 2001 • Key features: • Massive withdrawal of external financing • Massive current account adjustment • Deep economic slumps—in some cases short-lived, in others persistent

  9. Problems with IMF crisis response • Surveillance: failure to anticipate outbreak of crises (in some, but not all, cases); lack of candid criticism of vulnerabilities (including exchange rate regime) • Despite large financing packages, massive (and largely unforeseen) over-adjustment in current accounts • Difficulties in handling financial sector fallout • Moral hazard concerns • Difficulties in saying no (e.g. in Argentina); lack of mechanisms for orderly sovereign debt restructuring • Debates over specific policy advice

  10. Response to crisis experience—surveillance • Vulnerability assessments • Financial sector work (FSAPs), etc. • Data dissemination • Standards and codes • “Fresh look” surveillance • Debt sustainability analysis • More caution on capital mobility

  11. Crisis financing • Catalytic approach and its limits • Alternatives • Bigger official packages? • SRF, CCL, • But moral hazard, resource constraints limit overall package • Bailins? (standstills, default, capital controls)—could be counterproductive • Sovereign debt restructuring • Elusive quest for rules-based approach—but concerns that discretion could be misused

  12. Information flows • Data dissemination • Increases in transparency • Learning: IEO; ex post assessments; INS courses, etc. • Interaction with market participants (ICMG and more informal contacts)

  13. Prolonged use—why is it a problem? • Defeats idea of revolving pool of financing • May be symptomatic of flaws in program design, conditionality, implementation, and/or projections • May indicate that IMF support is the wrong instrument—i.e. because a country’s problems are longer-term in nature • May stunt domestic policy formulation processes

  14. Reasons for prolonged use • Failure to achieve objectives • Lack of realism on time required • Signaling—pressures from donors • Facilities adapted to permit prolonged use, especially for low-income countries

  15. IMF’s response to prolonged use • Ex post assessments • Monitoring of incidence • More general efforts to focus conditionality, improve program design • Work on IMF’s role in low-income countries • Signaling—attempts to create signaling mechanism separate from financing

  16. Remaining issues with prolonged use • Difficulty of saying “no” • Continuing lack of an alternative signaling mechanism

  17. Low-income countries • Disappointing growth performance, failure of successive development models • Pervasive problems led to comprehensive programs—but likely to be ineffective and illegitimate in absence of sufficient ownership in country • Coordination with World Bank and donors • Institutional capacity • Debt crisis and HIPC Initiative • In 1990s, increasing macroeconomic stability (and, in later 1990s, somewhat better growth) • Key problems are not primarily macroeconomic—but debt sustainability is still a major issue • Ongoing financing needs are longer-term • Continuing need for Fund to help countries hit by shocks

  18. Response to problems • Debt reduction (HIPC Initiative) and new debt sustainability • PRSP approach—a step in the right direction, but doesn’t yet work as intended • Signaling—lower-access arrangements • Response to shocks—work under way

  19. Some key remaining issues for LICs • How can countries graduate from IMF financing (while continuing to receive aid from other sources)? • How long is signaling needed? • Will PRSP approach help build ownership and capacity? • How can we avoid an endless cycle of lending and debt relief?

  20. Summary—some key remaining tensions • Bailins and bailouts—need for clear principles versus perils of predictability • Selectivity versus pressures to lend • IMF financing as a signal • Parsimony versus comprehensiveness • “Ownership”

  21. Preview of next lecture • Reform proposals include two strands which are intertwined: • What should the IMF do? • How should the IMF be governed? • The next lecture will discuss possible directions for reform, considering both of these strands