IMF Managing Director Rodrigo de Rato secured broad support at the Fund’s Spring Meeting for his medium-term strategy to revamp the work of the Fund. The International Monetary and Financial Committee (IMFC) on April 22 urged the IMF to complete considerations of the strategy and “move rapidly to implementation.” In particular, the IMFC endorsed the Managing Director’s proposal to strengthen IMF surveillance and said that to reflect changes in the weight and role of countries in the global economy, the IMF must adjust countries’ quotas and representation in the governance of the institution (see Box below).
IMF plans changes in country representation
Fair voice and distribution of quotas are central to the legitimacy and effectiveness of the IMF. In his report, IMF Managing Director de Rato referred to “important deficits that have emerged in members’ sense of ownership and participation” in the Fund, which made clear the importance of making progress on the issue of country representation and voice. Country representation in the IMF has been slow to adapt to changes in countries’ weights and role in the global economy and the Fund. In recent decades, a number of emerging market economies, in particular, have become more important on the world stage.
De Rato proposed a two-stage approach, with an initial ad hoc adjustment in quotas to reflect important changes in the weight and role of countries in the global economy, pending more fundamental reform in a second stage. The IMFC endorsed this approach, and called on the Managing Director to present concrete proposals to the IMF’s Annual Meetings in Singapore in September.
High on the new agenda is the aim to give the Fund a larger watchdog role in the world economy at a time of rising oil prices and large global payments imbalances. De Rato said the IMF needed to complement its existing arrangements for individual country consultations with multilateral consultations, enabling the Fund to take up issues comprehensively and collectively with systemically important members and, where relevant, with entities formed by groups of members, such as the European Union.
“This is not a modest proposal,” de Rato said in an April 20 speech at the Institute for International Economics in Washington, D.C. “Multilateral consultations would be something new for the IMF and for our member countries, and they would be an important vehicle for analysis and consensus building.” Officials in the Fund said that details of how multilateral surveillance would work in practice were still being fleshed out.
“In the future, the IMF should be more able to address global questions with multilateral surveillance, such as current account imbalances, the impact of oil prices, and financial sector questions,” said Gordon Brown—U.K. Chancellor of the Exchequer, who is the chair of the policy-setting IMFC—at a press briefing after the meeting.
Refocus amid income restraint
Work on the IMF’s medium-term strategy began under de Rato’s direction in 2004, and his first report on the strategy to the IMFC was endorsed by the committee in September 2005. In recent months, reduced income from loans outstanding has become another factor to be taken into account in the adaptation of the Fund (see box, next page). Key elements of the Managing Director’s report on implementing the medium-term strategy, published on April 5 ahead of the IMFC meeting, include the following:
IMF surveillance. De Rato proposed a number of changes to make the IMF’s surveillance more effective, including the introduction of a new supplemental consultation procedure, in a multilateral format; broadening the coverage of the Fund’s framework for exchange rate assessments from industrial countries to all major emerging market currencies; reviewing the 1977 Board decision on the principles and procedures for surveillance; strengthening the analysis in the World Economic Outlook and Global Financial Stability Report of macroeconomic and financial risks and their interactions; and looking at the main policy issues facing regional blocs.
IMF sees decline in income
Managing Director Rodrigo de Rato noted in his report to the IMFC that the recalibration of the IMF must take into account a decline in the Fund’s income from lending. The IMF has traditionally financed its activities from the money earned in interest on loans to members. These have declined for a number of reasons, including the relatively buoyant global economy, improved policies in many emerging market countries, and the pattern of global payments imbalances.
De Rato noted that paying for surveillance and capacity building with margins on adjustment lending is no longer tenable, and proposed actions on both IMF expenditure and income. He said that a new business model was needed to place the institution on a sound financial footing over the long term, based on a stable source of income. However, developing a political consensus around any particular measure—be it conversion of gold into earning assets or an annual fee linked to quota or anything else—will take time. It is therefore proposed to catalyze this process by establishing an external committee, headed by an eminent personality, to make recommendations.
The IMFC agreed with the Managing Director that actions would be needed on both income and expenditure and called both for proposals for more predictable and stable sources of income and for further prioritization and streamlining of the Fund’s work.
Surveillance would also be bolstered at the country level by choosing focus and effectiveness over comprehensiveness, with deeper analysis of financial systems, a multilateral perspective to surveillance, and more regional context and outreach.
Emerging markets. De Rato argued that, in the many countries that have 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 can do more by way of crisis prevention and response.
Specific proposals for crisis prevention include
• allowing for high-access contingent financing through a new instrument available to countries with strong macroeco-nomic policies, sustainable debt, and transparent reporting but still facing potential balance sheet weaknesses and vulnerabilities; and
• standing ready to support regional and other reserve-pooling arrangements, including by signaling sound policies.
There also are proposals for reviewing the framework for crisis resolution, including the complications from rare but important cases of sovereign debt restructuring and arrears.
Low-income countries. De Rato said that 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 UN 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 to manage the macroeconomic challenges of stepped-up aid requires a deeper but more focused engagement by the Fund, as well as new understandings with the World Bank and other agencies on the division of labor.
Capacity building. Targeted efforts in this area are key to helping members implement reforms. Capacity building also needs to be part of the strategy to address vulnerabilities identified in surveillance, de Rato argued. The Fund’s efforts to build macroeconomic institutions through technical assistance and training can be strengthened with better prioritization and country ownership.
Anne Krueger announces plans to leave IMF
Anne O. Krueger, who has served as the IMF’s First Deputy Managing Director since 2001, announced that she will be leaving the Fund on August 31 when her term expires. Krueger came to the IMF after a distinguished career at Stanford University and the World Bank.
Krueger made particular note of the friendships she had made while at the Fund, counting among them members of the Executive Board and staff and her management colleagues, including former IMF Managing Director Horst Köhler and the Fund’s current head, Rodrigo de Rato. “Fortunately,” she said, “leaving the Fund will not mean leaving these friendships behind. Nor will it mean leaving behind the issues which have preoccupied all of us.”
De Rato expressed appreciation and gratitude for Krueger’s work at the IMF, praising her strong intellectual leadership, which he said, “has made others think deeply, on policy issues such as trade and the relations between sovereign debtors and their creditors.” He also stressed her important role in shaping the IMF’s medium-term strategy.