IMF in Rethink of Its Role in Post-crisis World
IMF Survey online
February 26, 2010
- First step in process to update IMF's mandate in post-crisis world
- Feedback sought from governments, civil society, academics
- Governance reform will be central to its legitimacy, effectiveness
The IMF is rethinking its role in the post-crisis world to ensure that it is doing the right job for its 186 member countries.
At the 2009 IMF-World Bank Annual Meetings in Istanbul, the IMF’s membership called on the Fund to review its mandate to ensure that it covers “the full range of macroeconomic and financial sector policies that bear on global stability.” The IMF’s policy steering committee asked the IMF to report back by the time of the 2010 Annual Meetings.
As a first step toward a formal proposal, the IMF has issued a paper, the first in a series of reflections on the Fund’s mandate, on what it should do to promote global stability and how the IMF’s membership might best support that process. The aim of the paper is not to put forward concrete proposals but to float ideas that can stimulate debate. The IMF’s Executive Board discussed the paper on February 22, 2010.
In coming months, the Board will discuss other papers that focus on the Fund’s role in the key areas of its mandate: surveillance, financing, and the stability of the international monetary system. The IMF is also seeking extensive feedback from governments, academics, and civil society before it issues its final report to the International Monetary and Financial Committee in October 2010.
Why a broader mandate is needed
The basic question is whether the Fund is adequately equipped to be an effective guardian of global macroeconomic and financial stability, according to Reza Moghadam, Director of the IMF’s Strategy, Policy, and Review Department. To answer this question, the IMF is looking at every aspect of its work, including how it conducts economic and financial surveillance, how it provides financing to its member countries, how it conducts its oversight of the international monetary system, and how it works with other international organizations.
The paper points to three main challenges:
• Crisis prevention. The IMF must improve its ability to assess systemic risks. National regulatory oversight after the crisis is shifting from assessing risk in individual institutions to assessing risk to the entire financial system. The IMF’s surveillance covers both economic policies in individual member countries, and developments relating to the global economy as a whole. But in practice, the bulk of the Fund’s efforts have been at the country level. In future, more attention should be given to the linkages and spillovers between economies. The coverage of financial sector policies is particularly important if the Fund is to be ahead of the curve in crises.
• Crisis response. In future, the IMF’s crisis lending has to be of a speed, coverage, and size far beyond previous assumptions. The crisis has highlighted the risk of sudden runs on liquidity in advanced, emerging, and developing economies alike. The Fund can help by offering more flexible insurance facilities that build on recent reforms and by expanding its lending capacity. Far-reaching reforms were introduced during the crisis, but more is needed.
• Stability of reserves. The crisis has also cast a spotlight on the tension between the high demand for global liquidity by emerging market economies and the dependence on the stability of just a few suppliers of such liquidity. If the IMF’s ability to prevent and respond to crises is strengthened, this could help alleviate countries’ perceived need to accumulate vast reserves. It may also make sense for the Fund to back the use of a global reserve asset and other initiatives that could reduce risk in the international monetary system.
With those three challenges in mind, the paper looks at what changes may be needed to the Fund’s policies.
A better guardian of economic stability
As a guardian of economic stability, the IMF has tended to emphasize surveillance and lending at the country level. Yet a lesson of the crisis is that the larger risks in a globalized world are systemic in nature, requiring the Fund to adopt a more systemic perspective.
To meet this challenge, the paper proposes to map out exactly how the Fund should carry out its responsibility of overseeing the international monetary system, including a procedure for the Fund to analyze—and, more importantly, discuss with a wide range of policymakers—how countries’ policies affect the world economy and financial system.
Clarifying the IMF’s responsibilities when it comes to oversight over the financial sector is also crucial, and the Fund can do more to monitor capital movements and provide guidance on how to manage volatile flows.
Providing financing for countries in crisis
During the crisis, many countries accessed the IMF’s crisis lending and contingent credit lines on new, more flexible terms. In future, the Fund must be ready to handle not just country crises but also systemic ones. This means it should be prepared to deliver financing rapidly to several countries simultaneously, the way the U.S. Federal Reserve did at the start of this crisis, in the interest of protecting the stability of the overall global financial system. This will require a rethink of the IMF’s size and ability to deliver short-term liquidity quickly.
But even if the IMF’s Articles of Agreement already allow for a great deal of flexibility in lending, the IMF should do more to provide countries with necessary insurance against crises. New reforms should seek to reduce the stigma that many countries, especially in Asia, still associate with turning to the IMF for assistance, the paper notes.
Supporting global economic stability
The buildup of international reserves as a buffer against shocks is widely expected to resume as the crisis fades. Indeed, to some extent, it already has. Such accumulation can be costly for surplus and reserve-issuing countries alike. There are three underlying problems.
First, there are concerns about the availability of international liquidity in times of crisis. This prompts a precautionary reserve buildup, especially when heavy capital inflows threaten to overwhelm emerging markets.
Second, there is no automatic adjustment of current account imbalances, because neither surplus countries nor reserve-issuing deficit countries face pressures to adjust.
Third, the concentration of reserves in U.S. dollars reflects the absence of close substitutes that can act as a global store of value and anchor for asset and price stability.
Because it has been tasked with ensuring the stability of the international monetary system, it is required to seek solutions to these three problems, the paper notes. The Fund can support systemic stability by providing alternatives to reserve buildup and by helping to avoid abrupt shifts between reserve assets. A rarely discussed clause in the IMF’s Articles of Agreement calls on member countries to collaborate on reserve policies. In the paper, IMF staff suggest that it might make sense to revive this forgotten provision as a basis for action, not least because official reserves have become large enough relative to private flows as to have significant—and potentially destabilizing—market impact, should a sudden portfolio reallocation take place.
Getting it right
The paper suggests that the IMF has a chance to build on the positive role it has played in the crisis, addressing shortcomings in its mandate that have held it back when it comes to preventing and responding to crises, and helping its member countries confront pressing issues such as how to regulate banks and financial institutions.
But an updated mandate is not a silver bullet, and its capacity to resolve problems should not be oversold: a wanting mandate was not at the root of the Fund’s failure to predict the crisis, and a change to the IMF’s Articles of Agreement does not mean that it will be able to predict the next one, the paper says.
Key to the IMF’s success will be the broader push for reforms now in train, especially when it comes to the institution’s governance. Legitimacy in the eyes of all its 186 member countries will ultimately decide the effectiveness of any mandate, new or old.