This month, the annual meetings of the World Bank and the International Monetary Fund will take place in Washington DC. With finance ministers and central bankers from all over the world gathering, the annual meetings are a time to review the international economic policy-making process.
The IMF is one of the most impactful elements of the global financial system, so it’s important to reflect on how to make it work even better. There are five aspects of governance for the Fund to consider.
1. The IMF is too polite
John Maynard Keynes is reported to have said that the IMF had to serve as a ‘ruthless truth teller’. I agree that it should do so even when it is uncomfortable.
The Fund often lends based on promises made by official bilateral creditors to forgive debt or to offer new financing, promises referred to as financing assurances. But the details on financing assurances are not always publicly disclosed.
This politeness can obscure key factors determining a programme’s success. It also reduces the incentive for creditors to deliver their assurances in a timely manner. The IMF has taken some big steps to fix this. Reviews of financing assurances will now be more intensive in programmes involving debt restructurings. This is an important improvement, but a clear articulation of the details around financing assurances makes sense in all programmes.
Another area where brutal honesty will be increasingly important is the IMF’s precautionary lending programmes, notably the flexible credit line. Countries that the IMF judges to have strong macroeconomic fundamentals, with sustained track records of sound policies, can pre-qualify for access to financing. Those countries can then draw down that line without undertaking any required reforms, akin to a credit line from a bank.
Last year, IMF staff recommended that, up to a size limit, these FCLs be treated as permanent, subject to periodic board renewal, with no expectation for qualifying countries to drop their credit lines. It is good economics for countries to be able to purchase insurance in this way, and it is appropriate for the IMF to be the institution to provide it. But this new policy will only constitute an improvement if the IMF does not politely rubber stamp requests to renew these credit lines and, instead, seriously assesses whether the country remains qualified.
2. The IMF is sometimes too risk averse
Given the IMF’s role as a global lender of last resort to troubled economies, it may not shock to learn that it has a very conservative approach to risk. However, by slightly relaxing its approach, the Fund may be more effective in accomplishing its mission.
One example is the Fund’s perspective on the possibility of having to tolerate some period of arrears. If the alternative is making disbursements to an off-track programme where a country has not completed needed reforms, the IMF must choose arrears – the threat of arrears should not outweigh the need to maintain high standards. Only by designing strong programmes and standing firmly behind required conditions can the IMF credibly affirm that countries are on a sustainable path.
Another example is the Fund’s heavy reliance on co-financing from official bilateral creditors and multilateral development banks rather than having larger exposures on its own. Co-financing certainly has benefits – it can help share risk and marshall pressure and advice from other creditors to help the borrowing country adjust. But there are downsides too. Countries on the brink of macroeconomic disaster are sometimes forced to go hat-in-hand to bilateral creditors, which are often hesitant to lend more. In the worst cases, creditors use their significant leverage over the debtor, which correctly views the creditor’s co-financing as key to advancing their Fund programme.
3. Not all financing flows supporting IMF programmes are created equal
In April, Treasury Under Secretary Jay Shambaugh spoke about the US vision for global debt and development finance. He called on the official creditor community to provide net positive financing flows on a coordinated basis in support of borrower countries with IMF programmes. If resources flow out of countries trying to pursue appropriate reforms, they may have to forgo needed investments for their development and will have a harder time keeping their programmes on track.
The vision specifically calls for new support to be transparent and readily accessible. The reason this is so important is that not all financing flows are the same. In particular, the purchase of strategic assets or opaque project lending with conditions attached are generally not in line with the vision, even though they may technically result in net inflows.
Bilateral swap lines that carry onerous use restrictions or where the terms are not publicly disclosed are also not generally in line with the vision. And IMF data on gross reserves often include the value of People’s Bank of China swaps, even though such swaps frequently come with opaque restrictions on their use and potentially do not satisfy the IMF’s rule that reserve assets must be ‘readily available and controlled by the monetary authorities’.
IMF country teams have approached this issue in different ways. But the IMF’s treatment of swaps should be consistent and compliant with its stated policy when it calculates reserves, analyses debt sustainability and secures financing assurances.
We should continue to secure commitments from the official sector to invest in Fund programmes. But we must make sure the result is the expansion of transparent, credible and on-budget financing flows or debt relief to countries undertaking reforms, not potentially damaging forms of lending.
4. Third-party providers can sometimes help IMF programmes, but sometimes can’t
Supporting low-income countries is one of the most important things the IMF does. But programmes in these countries are often also the most difficult because the IMF must minimise any chance of unwittingly abetting the drivers of corruption, violence or illegal activity.
In these cases, the IMF has sometimes appealed to third-party implementation as a way to spend funds or administer reforms without overly relying on the government or other risky actors. This is generally a good idea. But we must remember that money is fungible and this means that third-party implementation is no panacea. Imagine the IMF wishes to support a country where it worries that the government might misdirect IMF resources to buy weapons. Giving money to a third party may not help, even if it faithfully and transparently implements as promised. With that social spending now off the government’s budget, the government’s fiscal constraint will be relaxed. It can simply reallocate that amount of money however it wants.
Third-party implementation will be most effective when it is designed to perform a service that the government would otherwise not be doing, rather than simply substituting funds so the government can shift its spending. Given the importance of the IMF’s work in fragile and conflict-affected states, the IMF should consider developing a policy on when and how best to use third-party implementation.
5. The IMF has got a really tough job
Each issue outlined above is tricky. The IMF has a really tough job. Luckily, the Fund’s staff are passionate, hard-working, well-trained, and dedicated caretakers of the international financial order. While preparing to visit a country, I find the advice of the experts at the IMF and its Article IV surveillance reports to be an obvious first stop and an indispensable resource.
I can’t think of another institution as successful as the IMF in promoting stability and growth and spreading macroeconomic expertise. I am confident that, with continued support and commitment to the institution, and with occasional tweaks to its policies and governance, the IMF will continue to do so for a long time to come.
Brent Neiman is Assistant Secretary for International Finance, US Treasury.
This is an edited and abridged version of a speech given by Brent Neiman at an OMFIF event. Watch the speech here. Read the full speech here.
Image source: World Bank