Tensions in the Role of the International Monetary Fund

1. Tensions in the Role of the International Monetary Fund Presentation by Timothy Lane (IMF) Oliver Smithies Lecture Balliol College in association with Oxonia 9 November, 2004

2. Main themes • Changes in the world economy have brought major changes in the role of the IMF • These changes have led to some strains • Efforts have been made to reform the IMF in light of this experience • But some underlying tensions remain unresolved

3. Purposes of the IMF • Policy spillovers • Benefits of pooling liquidity • Financing to give members confidence to make adjustments without damaging national or international prosperity

4. Some trends in recent decades • Fall of Bretton Woods system • Capital mobility • Growth disappointments • Low-income countries debt crises • Fall of Communism • Emerging market crises of 1990s

5. Some broad areas where problems have emerged • Conditionality • Emerging market crises • Prolonged use • Low-income countries

6. Conditionality • Classic purpose: safeguards and assurances • Reasons for expansion of conditionality • “Grandmotherliness” • Example of tension: Indonesian clove monopoly • Concern over proliferation of conditionality—and doubts about its effectiveness • Conclusion: 2002 Conditionality Guidelines—streamlining and focusing conditionality

7. Remaining tensions in conditionality • Tailoring versus uniformity—both in establishing conditions and monitoring results • Streamlining as counterpart of selectivity • “Ownership” and its limits

8. Emerging Market Crises • Examples: Mexico 1994-95, East Asia 1997-98, Russia 1998, Brazil 1999, 2002; Argentina 2001 • Key features: • Massive withdrawal of external financing • Massive current account adjustment • Deep economic slumps—in some cases short-lived, in others persistent

9. Problems with IMF crisis response • Surveillance: failure to anticipate outbreak of crises (in some, but not all, cases); lack of candid criticism of vulnerabilities (including exchange rate regime) • Despite large financing packages, massive (and largely unforeseen) over-adjustment in current accounts • Difficulties in handling financial sector fallout • Moral hazard concerns • Difficulties in saying no (e.g. in Argentina); lack of mechanisms for orderly sovereign debt restructuring • Debates over specific policy advice

10. Response to crisis experience—surveillance • Vulnerability assessments • Financial sector work (FSAPs), etc. • Data dissemination • Standards and codes • “Fresh look” surveillance • Debt sustainability analysis • More caution on capital mobility

11. Crisis financing • Catalytic approach and its limits • Alternatives • Bigger official packages? • SRF, CCL, • But moral hazard, resource constraints limit overall package • Bailins? (standstills, default, capital controls)—could be counterproductive • Sovereign debt restructuring • Elusive quest for rules-based approach—but concerns that discretion could be misused

12. Information flows • Data dissemination • Increases in transparency • Learning: IEO; ex post assessments; INS courses, etc. • Interaction with market participants (ICMG and more informal contacts)

13. Prolonged use—why is it a problem? • Defeats idea of revolving pool of financing • May be symptomatic of flaws in program design, conditionality, implementation, and/or projections • May indicate that IMF support is the wrong instrument—i.e. because a country’s problems are longer-term in nature • May stunt domestic policy formulation processes

14. Reasons for prolonged use • Failure to achieve objectives • Lack of realism on time required • Signaling—pressures from donors • Facilities adapted to permit prolonged use, especially for low-income countries

15. IMF’s response to prolonged use • Ex post assessments • Monitoring of incidence • More general efforts to focus conditionality, improve program design • Work on IMF’s role in low-income countries • Signaling—attempts to create signaling mechanism separate from financing

16. Remaining issues with prolonged use • Difficulty of saying “no” • Continuing lack of an alternative signaling mechanism

17. Low-income countries • Disappointing growth performance, failure of successive development models • Pervasive problems led to comprehensive programs—but likely to be ineffective and illegitimate in absence of sufficient ownership in country • Coordination with World Bank and donors • Institutional capacity • Debt crisis and HIPC Initiative • In 1990s, increasing macroeconomic stability (and, in later 1990s, somewhat better growth) • Key problems are not primarily macroeconomic—but debt sustainability is still a major issue • Ongoing financing needs are longer-term • Continuing need for Fund to help countries hit by shocks

18. Response to problems • Debt reduction (HIPC Initiative) and new debt sustainability • PRSP approach—a step in the right direction, but doesn’t yet work as intended • Signaling—lower-access arrangements • Response to shocks—work under way

19. Some key remaining issues for LICs • How can countries graduate from IMF financing (while continuing to receive aid from other sources)? • How long is signaling needed? • Will PRSP approach help build ownership and capacity? • How can we avoid an endless cycle of lending and debt relief?

20. Summary—some key remaining tensions • Bailins and bailouts—need for clear principles versus perils of predictability • Selectivity versus pressures to lend • IMF financing as a signal • Parsimony versus comprehensiveness • “Ownership”

21. Preview of next lecture • Reform proposals include two strands which are intertwined: • What should the IMF do? • How should the IMF be governed? • The next lecture will discuss possible directions for reform, considering both of these strands