Implementing the IMF's Medium-Term StrategyBy IMF Staff
The IMF is moving ahead with the implementation of the Medium-Term Strategy launched last year to modernize the institution's activities and governance. Proposed reforms would rebalance quotas to reflect the rise of new economic powers, while protecting the voice of low-income countries. And a new consultative approach has been proposed to address global problems that require collective action by many countries—the first such "multilateral consultation" has begun and will focus on narrowing global trade imbalances.
Twenty-first century globalization is presenting the global community with new challenges. The IMF has an important role in fostering international economic cooperation and helping individual countries meet these challenges. But to do so it must remain in step with a rapidly changing world.
To this end, IMF Managing Director Rodrigo de Rato presented a medium-term strategy1 last year, with specific proposals outlined in a paper2 considered by the International Monetary and Financial Committee (IMFC) in April 2006. The focus has now shifted to implementation, recognizing that many proposals will require additional work by staff and management as well as formal decisions by the IMF Executive Board.
Implementation of the strategy is now focusing on the following seven areas:
1) New directions in surveillance. The difficulties in tackling unprecedented global trade imbalances and the challenges facing individual countries underscore the need for stronger exercise of the Fund's policy analysis and advice to its member countries, a process known as surveillance.
At the global level, this means doing more to identify—and promote effective responses to—risks to economic stability, including from trade and payments imbalances, currency misalignments, and financial market disturbances. The IMF needs to sharpen its advice to countries whose economies can have a regional or global impact, especially where there are vulnerabilities that could affect world financial markets.
Specific proposals to make global surveillance more effective include:
- (i) broadening the IMF's internal consultative group on exchange rates to include all major emerging market currencies;
- (ii) strengthening the analysis in the World Economic Outlook and Global Financial Stability Report of macroeconomic risks and their interactions;
- (iii) formulating regional work plans, focusing on the main policy issues facing a region; and
- (iv) implementing multilateral consultations, in which issues of systemic or regional importance can be addressed comprehensively and collectively with some members and, where relevant, with entities formed by groups of members—the first multilateral consultation has already begun and will focus on narrowing global current account imbalances while maintaining robust global growth.
At the country level, it means choosing focus and effectiveness over comprehensiveness, with deeper analysis of financial systems, a multilateral perspective to surveillance, and more regional context and outreach. Specific proposals include: (i) elevating the coverage of financial sector issues in Article IV reports; (ii) instituting rolling multi-year surveillance agendas; (iii) streamlining Article IV reports in alternate years for selected countries; and (iv) increasing the multilateral dimension of Article IV surveillance through a strengthened focus on spillovers and cross-country experience.
2) The changing role of the Fund in emerging market countries. In the many countries that have already emerged to become major global players, the main priority must be to augment candid and focused macroeconomic analysis with enhanced surveillance over financial and capital markets. At the same time, the Fund will renew its efforts to support emerging market countries' crisis prevention efforts as well as to ensure the adequacy of the Fund's lending framework.
In order to improve the effectiveness of IMF support for emerging market countries, the Fund's member countries are discussing the need for a new financing instrument to provide liquidity for emerging market countries that have strong fundamentals but remain vulnerable to shocks. The aim would be to provide assurances that substantial financing will be available in time of need. The instrument would also provide (1) a framework for policy commitment and monitoring, and (2) a signal to markets of the countries' commitment to sound policies.
3) More effective engagement in low-income countries. In recent years, great strides have been made in contributing to economic development through poverty reduction strategies and the Poverty Reduction and Growth Facility. More flexible instruments of IMF support have recently been introduced. The U.N. Millennium Development Goals (MDGs), which seek to halve key poverty indicators by 2015, are receiving much attention, with the Fund and the World Bank called on to monitor and report on progress. One of the challenges ahead will be to marshal the expected rise in aid flows, including from debt relief, to achieve higher growth and the MDGs. Helping countries do so requires a deeper but more focused engagement by the Fund, including new understandings with the World Bank and other agencies on the division of labor.
Under its strategy for low-income countries, the Fund will focus on macroeconomically critical reforms—in particular in the areas of trade and the financial sector. These two areas are especially important for low-income countries seeking to reap the benefits of globalization. Regardless of the outcome of the multilateral trade negotiations, countries should reform their own trade regimes. Also important for these countries is the development of a robust financial sector that facilitates and contributes to overall growth.
The IMF is assisting low-income countries to meet the MDGs through provision of expertise to help manage aid flows. The Fund offers advice on the macroeconomic management of increased aid flows and on the strengthening of public financial management systems, providing low-income countries with the tools for effective resource management. While the IMF does not direct the flow of aid, it does provide expertise to assist countries in creating the fiscal space necessary for MDG-related spending. Therefore, when grants are made available for priority spending in areas such as health and education, fiscal targets in Fund-supported programs are adjusted to ensure the money flows to donor-supported programs.
4) Governance of the Fund. Fair voice and distribution of quotas are central to the legitimacy and effectiveness of the Fund. Emerging market and other countries need to have a voice in the IMF commensurate with their weight in the world economy. With the requisite political support emerging from the Singapore Annual Meetings, governance within the institution will begin a two-year process of reform. The package of reforms includes initial ad hoc quota increases for four countries that are clearly underrepresented—China, Korea, Mexico, and Turkey. The package also includes more fundamental reforms—the details of which will be developed by no later than the Annual Meetings in 2008—including agreement on a new quota formula to guide the assessment of the adequacy of members' quotas in the IMF; a second round of ad hoc quota increases based on the new formula; and work on a proposal to increase the basic votes that each member possesses together with a mechanism to keep the share of the basic votes in total voting power subsequently unchanged. 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.
5) Capacity building. Targeted efforts in this area are key to helping members implement reforms. As evidence of further progress in this area, the IMF will soon open a third center for regional technical assistance in Africa. Capacity building also needs to be part of the strategy to address vulnerabilities identified in surveillance. The Fund's efforts to build macroeconomic institutions through technical assistance and training can be strengthened with better prioritization and country ownership.
6) Streamlining. Action is needed to control procedure and documentation, lest the work, messages, and governance of the institution be lost in a sea of paper. Many specific proposals are being considered to enable management and the Executive Board to shift attention from routine and detail to broader strategic issues.
7) Medium-term budget. The overall approach of our strategy must be reconciled within a medium-term budget that deals with the projected fall in the Fund's income. Yet even with declining real spending, a new business model is needed to finance future IMF activities, with less reliance on margins from lending and more on steady, long-term sources of income.
While the Fund has already begun implementing certain proposals under the new strategy, other proposals will require additional direction by IMF members and further work by staff and management prior to their implementation. A number of key decisions taken at the 2006 Annual Meetings will define the procedures and details necessary for the implementation of these proposals.