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Contents Introduction |
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The International Monetary Fund is engaged in reforms aimed at focusing its work more sharply on core responsibilities and expertise in the areas of macroeconomic and financial sector policies. The reforms include revisions to the IMF's financing facilities; a reassessment of the conditionality attached to its loans; closer collaboration with other international institutions—especially the World Bank—in such areas as financial sector assessment programs, and debt and poverty reduction; a prioritization of its technical assistance programs; and a firm commitment to transparency and accountability. The architects of the post-World War II international economic order made the IMF the central institution for the promotion of international economic cooperation, charged with fostering an open and stable international monetary system that would contribute to global prosperity. So it is natural that following the emerging market crises of the 1990s, the recent reassessment of the global financial architecture has included a re-examination of the IMF's operations. Common criticisms have been that the Fund has fallen short in its efforts to detect and address the economic vulnerabilities that lead to crises; that IMF-supported programs have been too intrusive and demanding of recipient countries; that the Fund has exceeded its mandate and failed to cooperate adequately with other international institutions, especially the World Bank; and that the IMF has not been adequately transparent or accountable. IMF Managing Director Horst Köhler assumed office in May 2000 and described his vision of the future IMF at its 2000 Annual Meeting in Prague. He explained that he viewed the IMF as an active part of the workforce to make globalization work for the benefit of all, and as an institution more sharply focused on its core responsibilities. The membership of 183 countries gave a strong endorsement to this vision of an IMF that would:
Also explicit in the Managing Director's vision is a commitment that the IMF will continue working to help the poorest countries gain the maximum benefits from today's highly integrated global economy. This highlights the importance of the Fund's collaboration with the World Bank on the enhanced poverty reduction strategy introduced in late 1999, and on the associated effort that has already yielded substantial debt reduction to 22 heavily indebted poor countries. Against this backdrop, the Fund's staff, management and member governments have accelerated the work to refocus its operations. This work is taking place in the context of the effort to reform the international financial system. Transparency in economic policymaking and in the dissemination of economic and financial data are key elements of the international community's efforts to be more effective at preventing financial crises. Greater openness and accountability are therefore essential to the reform process, both at the national level, to reduce individual countries' vulnerability to crisis, and at the Fund itself.2 Several reform initiatives launched since the crises of the 1990s have concentrated on enhancing transparency—for example, the effort to encourage the broader availability of economic and financial data. Indeed, the IMF has played a central role in formulating, disseminating and assessing a range of standards setting out economic and financial good practices.3One key IMF-developed standard is the Special Data Dissemination Standard (SDDS), which guides countries in the dissemination of economic and financial data to the public; 47 countries currently participate in the SDDS.4 The effort to broaden IMF transparency has resulted in the regular release of a vast range of materials related to all aspects of the Fund's work, including information on the surveillance process with member countries, documents related to Fund-supported programs, policy papers, external and internal assessments, financial information, and archival materials. Among the most recent steps, the Fund has set up an Independent Evaluation Office to assess the institution's activities, and in mid-April announced the appointment of Montek Singh Ahluwalia, a former Finance Secretary of India, as director of that office. The Fund also is enhancing its interaction with the public and civil society organizations to ensure that it is listening—and communicating—better. Financial System Stability and Crisis Prevention In recent years, the Fund has worked to strengthen its role as the center of excellence for the stability of the international financial system. At the same time, it is striving to increase its cooperation with other institutions in this area. The emerging markets crises of the 1990s made it clear that action was needed to enhance the work of crisis prevention and resolution, especially to broaden the work of identifying the domestic and external vulnerabilities that can increase the potential for damaging crises. A key element of this work involves seeking a deeper understanding of the dynamics of emerging market financial sectors and their interaction with global capital markets, particularly in light of the impact of volatile capital flows on individual economies. The centerpiece of the effort to strengthen financial sectors is the joint IMF-World Bank Financial Sector Assessment Program (FSAP), launched in 1999 to identify strengths, risks and vulnerabilities in national financial systems and to help ascertain their development and technical assistance needs. After a pilot phase covering a dozen countries, FSAP assessments have been conducted in a further dozen countries, and the formal program aims to cover another two dozen each year.5The assessments form the basis of the IMF's analysis of the risks to economic stability stemming from possible financial sector weaknesses and the capacity of the sector to absorb macroeconomic shocks. The Fund also has launched organizational reforms to strengthen its expertise in financial sector issues. An International Capital Markets Department is being established to deepen the Fund's understanding of capital market operations and of the forces driving the supply of and demand for capital; to strengthen its capacity for addressing systemic issues related to the capital markets; to enable the IMF to conduct more effective surveillance at both the national and international levels; to enhance its ability to provide early warning of stress in financial markets; and to help member countries formulate and implement appropriate policies that will enable them to gain access to international capital markets.6 In addition, a Capital Markets Consultative Group has been established to foster a regular dialogue with the private sector. This will provide the Fund with a better understanding of the dynamics of the capital markets and the operations of private financial institutions. It will also serve to enhance the dialogue aimed at finding constructive approaches for involving the private sector in the prevention and resolution of financial crises. Especially since the 1980s, the conditionality attached to IMF financing has expanded to cover a range of structural reforms viewed as important for strengthening economic growth and improving financial sector stability. The extension of conditionality also increasingly has reflected the fact that the Fund has become involved in assisting countries facing severe structural economic problems: the transition countries of central and eastern Europe, the world's poorest countries, and the emerging market countries where complex financial sector problems became apparent during the crises of the 1990s. But concerns have increased that Fund conditionality has evolved to cover too many aspects of economic policy, including some outside the IMF's core area of responsibility, and that it has become too detailed. There are worries that such conditionality may undermine national ownership of Fund-supported programs—stretching a country's capacity to implement reforms—and be less effective than more focused conditionality. The IMF is conducting a thorough review of conditionality to address these concerns. In the first stage, the Managing Director, in a September 2000 guidance to Fund staff, gave a high priority to streamlining and focusing conditionality.7A set of staff studies has been prepared,8which led to a discussion in the IMF Executive Board.9The public has been invited to comment on the conditionality papers before the Executive Board proceeds to the next stage of the review.10 There is an emerging consensus that while conditionality remains indispensable to the work of the Fund, streamlining is needed. The Executive Board agreed that countries should have leeway in making their own policy choices, while ensuring that Fund financing is focused on policies essential to restoring and maintaining macroeconomic stability. Structural reforms that are critical to these objectives will generally continue to be covered by the conditions of Fund-supported programs. However, a more restrictive approach is envisaged for structural reforms that are relevant, but not critical, to macroeconomic objectives. Many issues will need to be further analyzed as the conditionality review continues in the coming months. Among those issues: how to draw the line between issues critical to program objectives and those that are just relevant; how to apply conditionality outside of the Fund's core areas of responsibility and expertise; and whether the IMF should be more selective in providing financing in support of programs suffering from weak country ownership. Reform of IMF Financing Facilities The IMF has implemented important changes to its loan facilities to ensure that its lending is more effective in supporting members' efforts to resolve, and also prevent, crises, and to promote a more efficient use of its resources. These reforms represent the culmination of a review process launched in 2000 that also resulted in the elimination of four little-used or obsolete facilities, and the simplification of another.11 The terms of a new loan facility, the Contingent Credit Lines (CCL), were made more attractive to the IMF's member countries. The CCL offers countries with sound economic policies a precautionary line of credit that can be quickly activated to help them counter the impact of financial crises elsewhere. The new measures lower the cost of borrowing under the CCL and provide more automatic access to a large amount of resources in the event of a crisis.12 The IMF has also approved measures to encourage early repayment of loans and discourage prolonged use of its funds. These measures will reduce reliance on the IMF as a source of longer-term financing and free up funds for potential use by other countries. Under the new policy, borrowers will be expected to repay loans early if their external position allows. In addition, the large use of IMF resources will be discouraged by interest surcharges, and the Executive Board has agreed that at the conclusion of a Fund-supported program, there will be a presumption that a country's economy will be more closely monitored when its credit outstanding exceeds 100 percent of the country's IMF quota. Cooperation with the World Bank Reform of the IMF also involves a reassessment of its relationship with other international institutions, particularly the World Bank. The challenges facing the global economy—from preventing and resolving financial crises to addressing the root causes of poverty—require an unprecedented degree of cooperation between the Bretton Woods institutions. To that end, IMF Managing Director Horst Köhler and World Bank President James Wolfensohn have committed both institutions to an enhanced partnership. In September 2000, they issued a joint statement outlining each institution's respective roles and the principles of cooperation. The statement underlined the importance of focusing on core tasks and expertise, and especially on cooperating in areas where the work of the Bank and Fund overlaps.13 This commitment to cooperation is especially important in the areas of debt relief and poverty reduction, and financial sector reforms. The two institutions have redoubled their joint efforts in these areas, and the results have been clear: 22 countries received debt relief totaling some $34 billion by the end of 2000,14and many countries now are benefiting from the FSAP initiative. The IMF review of conditionality also entails redefining the roles of the two institutions in the context of Fund-supported programs. Prioritizing Technical Assistance The IMF has recently reoriented its technical assistance program to better support countries' efforts to undertake economic and financial reforms. In January 2001, the Executive Board endorsed a strategy that establishes the central role that technical assistance will play in supporting the work of the Fund in crisis prevention and management; capacity-building for countries eligible for debt relief and the related poverty reduction facility; and in restoring macroeconomic stability in post-crisis situations. Coordination and cooperation with other donors will be strengthened, particularly with the World Bank, to ensure that important complementary areas needed for Fund technical assistance are effectively covered. These changes will be implemented over the next few months.15 The world economy has faced an unprecedented series of challenges during the past two decades: the debt crisis, the plight of the poor countries, the transition from central planning, and the volatility of large-scale global capital flows. The international community has invariably looked to the IMF to play a major part in addressing these challenges, and in doing so the Fund has taken on new responsibilities. Meeting these new responsibilities effectively will require that the IMF strengthen its expertise and effectiveness while at the same time remaining focused on its core mission of promoting the stability of the international monetary system. Endnotes 1 "Address by Horst Köhler, Chairman of the Executive Board and Managing Director of the International Monetary Fund, to the Board of Governors of the Fund", Prague, September 26, 2000; Available at: http://www.imf.org/external/np/speeches/2000/092600.htm. 2 "Transparency"; IMF Issues Brief 01/05; April 2001 3 "Standards and Codes"; Available at:http://www.imf.org/external/standards/index.htm. 4 International Monetary Fund; "Dissemination Bulletin Board" Available at: http://dsbb.imf.org/. 5 "Financial Sector Assessment Program", April 2, 2001; Available at: http://www.imf.org/external/np/fsap/fsap.asp 6 "IMF Establishing International Capital Markets Department", News Brief No. 01/24, March 1, 2001; Available at: http://www.imf.org/external/np/sec/nb/2001/nb0124.htm; "Briefing by IMF Managing Director Horst Köhler and First Deputy Managing Director Stanley Fischer on Establishing an International Capital Markets Department", Transcript of Press Conference, March 1, 2001; Available at: http://www.imf.org/external/np/tr/2001/tr010301.htm. 7 "Conditionality in IMF-Supported Programs-Policy Issues", February 16, 2001, p.5; Available at: http://www.imf.org/external/np/pdr/cond/2001/eng/policy/index.htm. 8 "Conditionality in Fund-Supported Programs-Overview", February 20, 2001; Available at: http://www.imf.org/external/np/pdr/cond/2001/eng/overview/index.htm; "Conditionality in IMF-Supported Programs-Policy Issues", February 16, 2001; Available at: http://www.imf.org/external/np/pdr/cond/2001/eng/policy/index.htm; "Structural Conditionality in IMF-Supported Programs", February 16, 2001; Available at: http://www.imf.org/external/np/pdr/cond/2001/eng/struct/index.htm " Trade Policy Conditionality in Fund-Supported Programs", February 16, 2001; Available at:http://www.imf.org/external/np/pdr/cond/2001/eng/trade/index.htm; "Transcript of a press briefing on IMF Conditionality by Masood Ahmed, Deputy Director, IMF Policy Development and Review Department", March 21, 2001; Available at: http://www.imf.org/external/np/tr/2001/tr010321.htm. 9 "IMF Executive Board Discusses Conditionality", Public Information Notice No. 01/28; March 21,2001; Available at: http://www.imf.org/external/np/sec/pn/2001/pn0128.htm. 10 "IMF Invites Comments on Streamlining and Focusing Conditionality", News Brief No. 01/34; April 9, 2001; Available at:http://www.imf.org/external/np/sec/nb/2001/nb0134.htm. 11 "IMF Board Completes Review of Fund Financial Facilities", Public Information Notice No. 00/101; November 30, 2000; Available at: http://www.imf.org/external/np/sec/pn/2000/pn00101.htm. "Statement by the Staff on Review of Fund Facilities: Proposed Decisions and Implementations Guidelines", November 17, 2000; Available at: http://www.imf.org/external/np/pdr/fac/2000/02/ss.htm. 12 "Summing Up by the Acting Chairman of the IMF Executive Board: Contingent Credit Lines", November 17, 2000; Available at: http://www.imf.org/external/np/pdr/fac/2000/02/111700.htm. 13 "The IMF and the World Bank Group: An Enhanced Partnership for Sustainable Growth and Poverty Reduction, Joint Statement by Horst Köhler and James Wolfensohn", September 5, 2000; Available at: http://www.imf.org/external/np/omd/2000/part.htm. 14 "Progress Report on the Heavily Indebted Poor Countries (HIPC) Initiative and Poverty Reduction Strategy Papers (PRSP) Program and Work Priorities for 2001", February 6, 2001; Available at: http://www.imf.org/external/np/hipc/2001/020601.htm. 15 "Policy Statement on IMF Technical Assistance", April 1, 2001; Available at: http://www.imf.org/external/pubs/ft/psta/index.htm. 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