The IMF’s Managing Director won global backing at the Spring Meeting of the International Monetary and Financial Committee (IMFC) for his medium-term strategy to reorient the organization’s work so that it can better meet the demands of a more integrated world economy. The IMFC, the primary advisory committee of the Fund’s Governors, supported Managing Director Rodrigo de Rato’s vision for the organization and called on the IMF to make new efforts, including new multilateral consultations, to encourage actions to address issues of systemic relevance. The IMFC communiqué (see page 117) also asked the Managing Director to make concrete proposals for bringing voting shares into line with current realities in the world economy.
The April 22–23 meetings of the IMFC and the joint World Bank-IMF Development Committee took place amid the continuing resilience and strength of the global economy. However, spiking oil prices and large and widening current account imbalances—discussed at a Global Imbalances Conference held at the IMF on April 21—lent urgency to calls for policymakers to shake off complacency and take actions to reduce risks to sustained global growth.
Strong expansion continues, but risks remain
The world’s top economic and financial officials welcomed World Economic Outlook (WEO) projections (see page 122) that global growth would reach 4.9 percent in 2006 and 4.7 percent in 2007, with increasing evidence of more geographically balanced growth. While observing that inflation and inflation expectations “remain well contained,” the IMFC echoed WEO concerns that increased vigilance on inflation is needed. The committee also noted downside risks arising from high and volatile oil prices, the potential for an abrupt shift in financial market conditions, a rise in protectionism, and a possible avian flu epidemic.
The IMFC, reiterating that action for an orderly medium-term resolution of global imbalances is a shared responsibility, again urged the international community to make a concerted and sustained effort to reduce the associated risks. The communiqué reiterated the needed policies—notably, raising U.S. national saving, including by reducing the budget deficit; boosting growth in the euro area and several other countries through structural reforms; further structural reforms in Japan, including fiscal consolidation; greater exchange rate flexibility in emerging Asia; and promoting efficient absorption of oil revenues in oil-exporting countries. But the committee asked the IMF to work on modalities, in consultation with country authorities, aimed at “encouraging actions needed to reduce the imbalances”—including use of the new multilateral consultations proposed in de Rato’s medium-term strategy (see page 120).
The IMFC underscored that the world economy’s well-being hinged on taking effective steps to improve the supply-demand balance in the oil market over the medium term, strengthen medium-term fiscal positions, secure a successful outcome to the Doha Round, and improve growth prospects in poor countries, notably in sub-Saharan Africa.
Redefining the IMF’s role
The IMFC’s endorsement of de Rato’s medium-term strategy follows a lengthy period of internal and public debate and now sets the stage for implementation to begin. Two of the areas to be given attention over the coming months are the IMF’s new multilateral consultations and the formulation of a concrete proposal to revise voting power within the institution.
The introduction of multilateral consultations, de Rato explained, is a very important step in tackling global imbalances. Used well, he said, these consultations will help policymakers show that their proposed measures will be matched by others, with greater benefits gained through coordination. De Rato also envisaged these consultations as a key vehicle for the analysis and consensus building that precede policy action.
Speaking with the press after the IMFC meeting, de Rato made it clear that it is governments, not international institutions, that need to act to address imbalances. The IMF will provide a framework in which consequences of actions and inactions can be seen more clearly and, in addition to providing description and analysis, will engage governments in an active consultation process. De Rato hoped that it would “teach us a new way of understanding international cooperation.” U.K. Chancellor of the Exchequer and IMFC Chair Gordon Brown concurred, noting that this “is not the IMF as an institution accepting responsibility for multilateral surveillance; it is the members of the IMF as a whole—and therefore the global economy itself—accepting that we have responsibilities to each other and that these responsibilities have got to be addressed.”
The IMF must also ensure that the institution remains legitimate in the eyes of all of its members. There has been growing concern about the fact that quota shares have become increasingly out of line with countries’ weight in the global economy, particularly for many emerging market economies, and that basic votes have been eroded.
De Rato has championed the need for reform, explaining that “the world economy is not a frozen thing; it changes over time.” The IMF has reorganized voting power before, he said, “and it has to change again.” To safeguard the IMF’s effectiveness and credibility as a cooperative institution, the committee called upon “the Managing Director to work with the IMFC and Executive Board to come forward with concrete proposals for agreement at the Annual Meetings” in September.
The IMFC also welcomed the IMF’s efforts to respond to the new challenges and needs of emerging market countries. In an April 20 address at the Institute for International Economics, de Rato challenged those who argue that Fund lending may no longer be necessary now that capital markets have become more important. “There will be financial crises in the future, in current emerging markets or in those that have yet to emerge,” he said, adding that the Fund could prepare for those crises now or “react in haste to them later.”
The Fund’s medium-term strategy focuses particularly on crisis prevention and the desire of emerging market countries for more predictable and flexible financing instruments.
The IMFC backed a “further examination of the Managing Director’s proposal on a possible new instrument to provide high-access contingent financing for countries that have strong macroeconomic policies, sustainable debt, and transparent reporting but remain vulnerable to shocks.” The committee also encouraged the IMF to explore a possible role in supporting regional arrangements for pooling reserves.
Moving beyond debt relief
The IMFC reaffirmed a critical role for the IMF in low-income countries, especially in helping these countries absorb increased aid flows and debt relief (see page 128) and maintain macroeconomic stability. The Fund will also play a role, in its areas of competence, in monitoring low-income countries’ progress toward the Millennium Development Goals. The IMFC and the Development Committee asked the Fund and the Bank to refine their debt sustainability framework and help countries implement sound medium-term debt strategies and strong public expenditure management and tax systems to avoid reaccumulating crippling debt burdens.
The IMFC also welcomed the Fund’s new Policy Support Instrument (for low-income countries that seek IMF policy guidance without financing) and Exogenous Shocks Facility (for poor countries coping with oil price or other shocks). Brown appealed to all members, including oil producers, to fully finance the new facility.
On to Singapore
Brown promised that the IMF’s 2006 Annual Meetings in Singapore will “become a reform summit.” An IMF that, at Bretton Woods, was asked to cope with sheltered, protected, and closed economies and offer temporary support for balance of payments adjustments now must cope with open economies and international, not regional, flows of capital, Brown said. The IMFC has now made clear its resolve that the IMF will be equipped to meet these challenges, and 2006 will be “a year of reform for the international economy.”