Speech

Is the IMF Entering a New Era? Remarks by Shailendra J. Anjaria

October 14, 1998

I am pleased and honored to be asked today to share with you my personal thoughts on where the International Monetary Fund stands today in helping to build--and be part of--a strengthened international monetary system for the future. Allow me to do so under three broad headings:

• What is the broad context in which we find ourselves debating this reform of the international monetary system?

• What areas of reform look promising, which relatively more difficult?

• How will the IMF itself need to change in a new international monetary system?

Consider one single proposal for international monetary reform: whether and to what extent the IMF should act as a lender of last resort--that is, be prepared to provide large liquidity support for short periods of time at penalty interest rates and against collateral. Professor Martin Feldstein wrote last week in the Wall Street Journal that the IMF must become more like a lender of last resort. Perhaps in some respects we are already moving in that direction. But there are questions. For example, as The Economist asked this week, would governments have the will to provide the IMF with the substantially larger resources that could be required to carry out a lender of last resort function? Moreover, at the international level, do we have in place--or can we agree to establish--the legal and institutional frameworks, rules and procedures that would allow the IMF to function like a world central bank? Given your group’s focus on public policy, you will not be surprised to hear that questions such as these require a lot of time to sort through.

I would not pretend that reform of the financial architecture is only, or even mainly, about revolutionary changes in the way in which the international monetary system is organized. Rather, it will consist of more concrete, specific, and "doable" steps that would make the present system better adapted to today’s requirements. Even these more modest steps--which are the ones on which I will concentrate my remarks--will require more intensive analysis, a higher level of international cooperation, and the broader participation of different actors than has been the case for the adaptations that have been made to date on the original Bretton Woods system, established more than 50 years ago.

1. The Broad Context

Turning now to the broad context in which the discussion takes place, a central element is, of course, the prospects for the world economy. Everyone is now beginning to recognize that these prospects are significantly affected by the Asian crisis that broke out in Thailand in July 1997. The IMF’s latest projections call for world economic output to expand by about 2 percent this year, down from a forecast of some 4 percent, pre-Asian crisis. Barring further shocks, it is expected that global growth would then expand by somewhat more than 2 percent next year. Thus, the world economy is not about to experience a global recession, much less a depression. However, given the considerable uncertainties and downside risks in the world’s second largest world economy, Japan; in the former East Asian tigers; and in Russia and Latin America, a lot of people are worried about what can be done to avoid these risks and difficulties, and minimize the chances of further contagion.

At the recent annual meetings, the IMF’s Interim Committee addressed the issue of how the world economy can face the immediate difficulties and deal with contagion. The basic elements of the strategy that the Committee recommended are:

• to build on the solid economic performance of North America and Western Europe;

• to encourage the continued strengthening of economic fundamentals in many developing and transition economies that has not made the headlines the way that developments in the Asian crisis countries have; and

• above all, to avoid protectionist measures.

Turning to the Asian crisis countries themselves, it is crucial to recall the quite different situations that the various countries found themselves in, at the outset of the crisis. IMF advice and financial support have acknowledged and responded to these differences, contrary to what the media coverage of the Fund’s support has often conveyed. In particular, when it was recognized, beginning as early as the fourth quarter of 1997, that the contagion and loss of confidence effects were deeper and more pervasive than initially thought, the parameters of the IMF-supported programs were adjusted accordingly, to help deal with these difficulties. In Indonesia, Korea, and Thailand, the fiscal stance has been significantly eased, and many explicit and country-specific provisions have been made for increased social spending in the budgets of these countries. This year, the costs of social spending to offset the negative effects of the economic crisis in the budgets of these three countries are estimated at 8 percent, 2 percent, and 6 percent of GDP, respectively.

2. Areas of Reform

Three areas of reform that in my view are particularly critical are transparency; the role of international standards, and involving the private sector.

Transparency

First, transparency. Although much of the public discussion of transparency, especially in the discussions that take place inside the Washington beltway, has focussed on the transparency of the IMF, I personally think it is fair to say that this is no longer an issue under real dispute. Indeed, I venture to say that the IMF’s membership is now inclined to give sympathetic consideration to virtually any reasonable proposal for greater openness of the institution. Let me give some examples.

Here, an aside. In May 1997, I remember discussing with colleagues how we should organize the logistics to carry out a new directive from our Executive Board, which was to publicly release, if the country consented, the Board’s conclusions on Article IV consultations--that is, on the famous IMF surveillance reports on each member country that are the bread-and-butter work of the Fund. After tossing back and forth what might be involved in issuing these Public Information Notices (also known by their acronym, PINs), we concluded that we had nothing much to worry about because, according to our best guess, no more than 5 or 10 countries --perhaps 15, at the absolute maximum-- could be expected, over the following twelve months, to volunteer to allow the public release of these IMF assessments. We hoped of course that over time, the issuance of PINs would pick up as everyone--we, the country authorities, and the press itself--had plenty of time to observe and absorb the release of these surveillance summaries.

We were therefore quite surprised when we discovered that in just the six months following the May 1997 decision, fully 31 countries had agreed to the public release of the Executive Board’s assessments of their economies. In the first 12 months, the number was up to 74. And recently, fully 80 percent of all Article IV consultations have resulted in the release of a PIN to the public. As an additional sign of transparency, we now post on our website (www.imf.org) a current list of all Article IV consultation discussions concluded in the Executive Board. Presumably, anyone can raise the question, if a member subsequently chooses not to give permission for the release of a PIN: why not?

As another means of increasing transparency, the IMF has opened itself to external evaluation. A group of independent experts began an evaluation of the IMF’s concessional lending facility, the Enhanced Structural Adjustment Facility, or ESAF, in 1997. These experts were afforded full access to documents, data, and the staff of the IMF, and interviewed many national officials and representatives of the private sector and civil society. We published the external evaluators’ report, the summary of the Executive Board’s discussion and analysis of the report, and the staff’s response -- and then widened the process even further by asking the general public to comment. Another external evaluation is already underway, this time on IMF surveillance.

Many other measures are actively under consideration by our Executive Board or already in the pipeline, including providing monthly summaries of the Board’s activities; a shortening of the waiting period for access to the Fund’s archives, and the publication of information on the Fund’s liquidity position.

A newer area is the calls for greater transparency on the part of financial market participants, which may require additional regulatory and disclosure measures. Although the IMF itself does not have a direct role in taking the initiative in this area, the Interim Committee called last week for an in-depth analysis by concerned agencies of the prudential and supervisory implications arising from the operations of international institutional investors, including highly leveraged operations, with a view to determining whether additional disclosure requirements of regulations are appropriate, to allow better public assessment of the risks involved. Clearly, this is an important and sensitive area, and one that will require further reflection and debate. But, here too, progress is virtually certain to be achieved.

The role of international standards

The second major area of reform--more difficult than the first--that I would like to discuss is the role of international standards. You, as government economists, know that many standards in the area of international financial relations already exist, including those that involve undertakings by governments to observe certain codes of conduct with respect to certain practices or policies. One could say that the IMF’s charter is itself a "standard", a set of guidelines for the operation of national economies and the international monetary system under which member countries undertake to cooperate to maintain open markets and exchange systems and cooperative exchange rate arrangements.

Recently, the term "standards" has been broadened to cover a number of new domains where existing codes of conduct either needed to be refurbished and strengthened, or new ones created. I would like to mention in particular a few areas where the IMF is involved. First, the IMF has crafted and adopted a code of good practices on fiscal transparency. This code is intended to be a guide for members to increase fiscal transparency and thereby enhance the accountability and credibility of fiscal policy as a key feature of good governance. The IMF will have a key role in monitoring progress by members in implementing the code. We are now working on a code of monetary and financial policies that will have an equally important role in allowing public assessments of the transparency of these policies. Also, in a newer field, the Fund is and will be promoting standards that support financial sector soundness. The IMF has coordinated with the Basle Committee with regard to its Core Principles for strengthening banking regulation and supervision. The IMF plays an important role in disseminating information about the Core Principles to all its member countries through its annual consultation process. We will also be working with other institutions on standards that are not directly in the competence of the IMF, but which the IMF’s membership would like to see developed or disseminated. These include codes and standards on corporate governance, accounting standards, and bankruptcy regimes.

Involving the private sector

A third area of reform--the most complex of all--is how to involve the private sector in forestalling and resolving financial crises.

This work is important for, among other things, limiting moral hazard and making sure that all the diverse sectors that are parties to the international community equitably share some responsibility for its smooth functioning, to help to avoid situations where private sector creditors "rush for the exit" from a distressed economy at the same time that the official community, including the Fund, is being called upon to provide public resources. The IMF has emphasized that crisis prevention--via appropriate macroeconomic policies, strengthened financial systems, and the orderly integration of international financial markets--must continue to be the first line of defense against the emergence of financial crises. But the IMF also acknowledges that it will never be possible to prevent all such emergencies.

Discussions on involving the private sector are underway in a number of fora; this is also the area where it will be most important to secure the collaboration and cooperation of different elements of the international financial community. The Executive Board is considering a number of possibilities. These include ex ante mechanisms, designed ahead of time, to provide private sector liquidity support to countries in times of financial stress. Credit and swap facilities and the embedding of call options in certain short term credit lines fall into this category of mechanisms.

Having been faced with several cases during the Asian crisis requiring rapid and concrete action on voluntary debt restructuring, the IMF has gained experience as member countries and their creditors have found practical approaches to improving the coordination of debtor-creditor relations in voluntary debt restructuring, when feasible alternatives to the renegotiation of debt contracts appear to be exhausted. The modification of the terms of sovereign bond contracts to facilitate collective action and the creation of creditor councils to share information between debtors and creditors are measures being considered to support voluntary debt restructuring.

Finally, the international community must also be prepared to deal with extreme situations, where the pressures are extraordinary and neither preventive, ex ante, nor voluntary restructuring methods are able to forestall or resolve a crisis that involves private sector debt. In the context of such extreme situations, the Executive Board has agreed that the Fund should be willing, on a case-by-case basis, to consider extending its 1989 decision on lending into arrears to provide support for members, but only when a number of very strict conditions are met.

3. How Will the IMF Itself Need to Change in a New International Monetary System?

Given the current economic circumstances that form the background to calls for strengthening the international monetary system and the types of reforms that I have rather summarily surveyed, how might we expect the IMF to change as we progress toward this new world? Since this is a work in progress, I will limit my comments to a few simple, and selective, prognostications.

• First, financial sector weakness lay at the heart of the Asian crisis. And this is an area where the IMF will need to be ever more active, ever more present. Strengthening of the financial sector happens to be an area where there can be considerable overlap between the work of the IMF and the World Bank. Over the past year the two institutions have taken steps to further strengthen their longstanding collaboration.The Interim Committee last week considered several reports on Bank-Fund collaboration, and the new international monetary system is likely to involve new procedures or frameworks that enhance the collaboration and synergies between the two institutions.

• Second, the IMF will become an even more transparent institution, not just because of the measures that the institution itself is taking, some of which I described above, but also because it will continue to encourage members to move toward greater openness on their own account. For example, 46 members have already subscribed to the Special Data Dissemination Standard, which is designed for those countries that have or hope to establish access to the international financial markets Countries not yet having such an active status in the global financial markets can sign on to the newly established General Data Dissemination System.

• Third, the huge and rapid increase in the volume of international capital flows, and the contagion it can engender, is a dominant feature of today’s global economy, and the IMF must respond to this phenomena. It created the Supplemental Reserve Facility (SRF) in December 1997 to provide financial assistance to IMF members experiencing exceptional balance of payments difficulties due to a large short-term financing need resulting from a sudden and disruptive loss of market confidence. The IMF will probably need to continue to adapt to take account of the powerful trends in international financial flows in its policies and operations.

• Finally, as you know, in 1945, the IMF’s charter gave the Fund the responsibility to promote an open payments system to make free trade operationally feasible, and to foster the economic growth that its creators believed would come with an acceptance of the principles of free trade. Today, policymakers, economists, and other observers are keenly aware that the institutions and tools of the international monetary system must keep pace with the developments in that system, such as the rapid increase in international capital flows. There is a global effort now underway to build a basis for the orderly integration of the international financial markets, and the Interim Committee asked the IMF at its annual meeting last year to investigate how it might foster orderly, cautious capital account liberalization and ensure that it is underpinned by appropriate macroeconomic and exchange rate policies and a sound financial sector. The Asian crisis and subsequent bouts with contagion have necessitated extending and broadening the analysis of the integration of financial markets, and I imagine that a greater focus on properly sequenced capital account liberalization will characterize the IMF in the future.

I can sum up with my personal answer to the question that you have asked: "Is the IMF Entering a New Era?" Yes, definitely, because not to do so in today’s globalized economy is not really an option--for the IMF or for the international community.