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“International Monetary Fund Reform: Mission Possible?”
Summary of Remarks by
Prakash Loungani
Division Chief, Policy Communications
International Monetary Fund
March 22, 2007
Dr. Loungani spoke about the recent internal reform agenda undertaken by the International Monetary Fund (IMF) over the last two years. The reform effort aims to accomplish three primary objectives: a better business model, a better income model, and a better governance structure.
The IMF has three main lines of business: Surveillance, Capacity Building, and Lending Operations. The IMF’s main task is that of “surveillance,” which involves global economic monitoring and producing economic reports on its member countries. Capacity building involves providing technical assistance and training. Lending operations include two main loan facilities: the generally available loans, and the loans to Low Income Countries (LICs). Although surveillance is the IMF’s main area of operations (accounting for about 45% of expenditures), its lending operations generally receive the most press.
The IMF’s “clients” are its 185 member countries. These are broken down into “Advanced” economies, Emerging Market Economies (EMEs), and Low-Income Countries (LICs). The IMF also serves its clients by monitoring the global economic and financial system. As part of this effort, the IMF produces a number of publications, such as the World Economic Outlook and the Global Financial Stability Report.
The IMF is in the process of modernizing its surveillance capabilities. It is improving its exchange rate surveillance and now calculates equilibrium exchange rates for Emerging Markets. It has also created a new tool, called the Multilateral Consultations, whose aim is to address global issues. The first of these consultations has brought together five major players (China, the EU, Japan, Saudi Arabia and the US) to discuss jointly policies that can help resolve current account imbalances. Surveillance improvements include streamlining processes (i.e., less paperwork and shorter documents), and taking a more even-handed approach toward all its members. The IMF strives to convey its messages clearly, but sometimes the internal review process can thwart this goal.
Capacity building activities comprise about 25% of the IMF’s expenditures. Reform efforts in this area focus on better prioritization, searching for more external financing sources, and greater prioritizations in reports on standards and codes.
There has been a marked decline in IMF lending in recent years, likely a result of the following factors: more prudent policies in emerging markets; a move from fixed to flexible exchange rates; global macroeconomic and financial stability; and the counterpart surpluses in many countries to the historically high US current account deficits. IMF loans outstanding have dropped from almost SDR 70 billion in 2003 down to about SDR 10 billion in 2006.
The IMF has several roles to play in emerging market countries: working on financial/capital market issues; developing new instruments aimed at crisis prevention; reviewing countries’ debt restructuring efforts; and providing support for reserve pooling arrangements.
The recent “Malan Report” attempted to define more clearly the division of labor between the IMF and the World Bank. It recommended that the IMF should better focus its work in Low Income Countries without reducing its involvement. For instance, the new Policy Support Instrument could be used rather than successive financing arrangements.
The IMF is also in the process of developing a better income model to deal with the current decline in lending. The primary recommendation of the Crocket Report, issued in January 2007, was for the IMF to diversify its sources of revenue. Currently, the IMF’s income stream is unpredictable, inflexible and inequitable. Paradoxically, the better the IMF performs, the less income it earns from loans. The Crocket Report recommended the following steps for the IMF: liberalizing its investment operations to allow for higher-yielding assets; selling about 1/8th of its gold reserves to establish an income-earning endowment; charging fees for its technical assistance operations; and seeking “voluntary contributions” from its members to raise money.
Dr. Loungani closed his talk with a discussion of efforts to reform the IMF’s governance structure. The current formulas for determining country quotas and country votes within the IMF are somewhat out-dated. Since its creation in 1944, the relative economic sizes of member countries have shifted. As a result, quotas are misaligned with countries’ relative economic positions, and Basic Votes have declined in relation to Total Votes. Governance reforms center on a 2-year, 2-stage action plan to arrive at a new quota formula and take other steps to create a better governance structure.
Dr. Loungani has been with the IMF since leaving the staff of the International Finance Division at the Federal Reserve Board in 1998. He has also served as Adjunct Professor at several Universities, including Johns Hopkins University SAIS currently.
His lunch slideshow and our podcast recording of his talk (NEC Podcast #10) are available online.
Rapporteur: Carlos Stagliano
