The International Monetary Fund is struggling to find a role in the global capital markets, which have all but forgotten all the useful work it did in the past. It has been several years since a part-time global economic fireman has been required and the IMF needs to refocus much more on the day job of surveillance and data collection. James Crombie reports.
The IMF has long been drifting into obscurity for many capital markets participants. It is at best a research shop and conference organiser, to its harshest critics a politically manipulated waste of money. Barry Eichengreen, professor of political science at the University of California has described it as, "a rudderless ship, adrift on a sea of liquidity".
The IMF's research lacks edge, benign global conditions have obviated the need for a lender of last resort, while its proximity to the G7 and involvement in the Argentina debacle have dented its credibility. The Fund's failure to reach out sufficiently to the capital markets and enhance surveillance has been bluntly criticised by the sell-side lobby group, the Institute of International Finance (IIF).
As its loan book dwindles along with revenues, the overstaffed Fund has embarked on a medium-term review. Several changes in the way the IMF operates should be announced at the annual meeting in Singapore, but many are sceptical that it can sufficiently reinvent itself.
However, it is too soon to talk about the end of the Fund as we know it. A starring role may be just a crisis away, and there is a need for solid, multilateral data.
"We need [the IMF] as much as ever," said Nouriel Roubini, chairman of Roubini Global Economics. "The objective of international monetary and fiscal stability is crucial in a world where financial globalisation is increasing," added Roubini.
"If the Fund performs its role perfectly, there are no disasters. But then people start to question its existence. Success breeds failure, in a sense," said Philip Suttle, head of EM research at Barclays Capital. "We need an institution like the International Monetary Fund, if we didn't have it, we'd have to invent it."
Framework for reform
Assuming the good global economic times continue to roll and no multilateral bailout is needed, the IMF must rebrand itself for the 21st Century. The Fund's new strategy prioritises surveillance, crisis prevention and response in EM; engagement with low-income countries; governance; and streamlining its processes.
A focus on surveillance is the only way forward for the Fund and goes hand in hand with a push towards a more rules-based approach for promoting a stable and open trading system.
IMF Managing Director Rodrigo de Rato is expected to unveil in Singapore a two-year action programme covering all areas of the Fund's activities.
"It proposes changes in the way we conduct surveillance of individual members' economies and of the global economy; changes in our approach to preventing and dealing with crises in emerging market economies; a refocusing of our activities in low-income countries; and changes in the Fund's own governance to improve voice and representation," said de Rato in a recent speech. "It also proposes that the Fund streamline its activities, and that we consider broadening our sources of financing for them," he added.
Surveillance is seen enhanced by multilateral consultations, in which issues of global or regional significance can be taken up comprehensively and collectively with members of the Fund.
Global imbalances
The IMF's first forum focuses on how to rebalance the large US current account deficit and hefty surpluses in the external accounts of other countries while maintaining robust global growth. It involves Japan, China, the euro area, Saudi Arabia and the US and is expected to take several months.
"Global imbalances did not build up overnight and the problem will not be solved in one shot. But I am confident that with action by many countries, the international community can make progress on tackling it," said de Rato.
In relation to surveillance, analysts say the Fund needs to upgrade its research, using its privileged position to gather more data.
"The Fund gets itself into difficulty because it goes with the flow too much. Its views can be too responsive to immediate trends," said Suttle. "Statistics should be the leading edge."
The Fund is also working to put greater emphasis on financial sector issues. This is an area for which it has been criticised in the past, but the managing director envisages enhanced analysis of financial sectors in country reports and a renewed emphasis on risks to financial market stability, building on the work that the IMF does in its annual Global Financial Stability Report.
The Fund recently merged its International Capital Markets Department (ICM) and Monetary and Financial Systems Department (MFD) under Jaime Caruana, former governor of Spain's central bank. The capital markets effort has so far fallen short and needs greater participation from market practitioners and firmer leadership to survive.
Governance overhaul
De Rato is also expected to unveil shortly a substantive modernisation of governance, including immediate increases in the quota of a few of the most under-represented countries. The IMF wants a different governance structure with quotas and votes redistributed to reflect the size and importance of EM countries.
It also requires more representative Asian membership, but an uphill struggle lies ahead as it convinces existing members – mainly the G7 – to cede control. More quota means greater voting power and borrowing capacity.
"I would like to see an increase in the number of basic votes, which are the minimum and equal number of votes, and related to the quota size to which each member is entitled," said de Rato.
In addition, de Rato is seen proposing another round of increases for other countries and a review of the formula that is used to calculate the economic weight of nations, to be used to define the increases. He also wants to boost the reputation and voice of low income and small economies.
The IMF has also put back on the table the idea of a short-term, fast-disbursing liquidity facility to complement crisis prevention efforts.
"We need to make sure that if world financial conditions worsen we have the tools we need to support emerging economies," said de Rato.
The last time the Fund tried to set up a fast disbursing contingent line – the CCL – it had no customers. Those who qualified for one did not want to apply, because they did not want to be seen flagging a crisis. And countries that potentially would need the assistance did not qualify.
The IMF wants to meet with possible lenders and creditors to discuss how to structure the line and the extent to which some EM economies that have strong fundamentals require or need instruments that will send the right signals in terms of automatic response, in terms of front-loading.
"The current medium term strategy ... it's reasonable," said Roubini. "The Fund could be a little more aggressive than it has been on this issue of exchange regime... It's up to the Fund to be more vocal," he added.
It is not clear whether change can happen as fast as the sellside wants. "The Fund is predicated on lending," said a senior IMF insider. "For surveillance, the Fund has to change," he added, predicting this would only happen slowly. Others doubt that it has the leadership or structure to succeed.
Best of times, worst of times
As de Rato himself recently pointed out, this year has been the most free of financial problems in the last 25 years, while 2003 was worst for turbulence, so things can change very quickly. Emerging markets have made fundamental strides, but it pays to be vigilant.
"I don't see a world in which the lending role of the IMF will disappear," said Roubini. "Eventually down the line, emerging markets countries will get into trouble and will need the IMF," he added, referring to EM volatility of May/June as a sign of what may come.
"The idea that emerging markets are not going to get into trouble any more and no-one will have to borrow from the fund is a bit far-fetched," said Roubini.
"The Fund bailed the capital markets out regularly in the 1990s," said Philip Suttle, head of EM research at Barclays Capital. "It's kind of scary how short memories are."
He added that there was a need for some sort of international monetary fund, and that the IMF should move to better its data collection.
"It should model itself on the BIS . . . the BIS has done a very nice job of finding a new niche," said Suttle.
Like the BIS, the IMF is seen as something quite different to what it was formed for. To have any lasting significance, it requires a more relevant and effective operating structure and a more representative shareholder composition. It also needs to claw back the credibility needed to apply the only negotiating tool it has left: moral suasion.