The International Monetary Fund is in a tough spot these days. The US, the world’s largest economy and the IMF member with the largest share of board votes, no longer seems to believe in the rules-based, multilateral economic order set up at the end of the second world war. It is pursuing or threatening to pursue actions that go against the grain of mainstream economic advice, notably launching an unprecedented tariff war on its trading partners, pursuing rampant fiscal expansion and threatening steps to curtail central bank independence.
Such policies have negative immediate spillovers for trading partners and potentially undermine the longer-term prosperity of the global economy, which the IMF was set up to protect. Does the IMF have any tools to respond? In principle, yes.
The Fund prepares an economic report each year on virtually all of its members. Initially, these reports were established to check whether member countries were meeting their obligations set out in Article IV of its Articles of Agreement, which aimed to ensure orderly payments under the fixed exchange parity system.
When the Bretton Woods system broke down in the early 1970s, the IMF pivoted to prepare a more wide-ranging report on each of its members that assesses their economic and financial conditions. These reports make policy recommendations on how to best promote economic stability and growth for the member and also to avoid actions that would damage the broader economic interests of the membership.
How effective are these reports?
It has to be acknowledged that IMF surveillance does not have a great track record. I say this as someone who spent many years writing such reports (including on the US itself), spent some years on the other side of the table at the US Treasury reading these reports, and spent some more years running an independent office tasked with evaluating how much impact the IMF had in its policy advice as well as its lending operations.
One fundamental problem is that in writing these reports, the IMF staff tries to achieve multiple, often conflicting objectives. It aims to provide balanced, technically grounded analysis, ideally as a ‘ruthless truth teller’ as Stanley Fischer and Mervyn King both urged. But at the same time, the Fund wants to be viewed as a trusted adviser, with whom country policy-makers can have candid conversations about their problems without being exposed to politically awkward public criticism. And the Fund does not want to offend the large countries whose votes and support it needs to secure adequate financing and set sensible rules for lending to countries in balance-of-payments distress.
As a result, the IMF is often viewed as not being evenhanded: too gentle with its large shareholders while not hesitating to criticise countries with less influence, particularly those that need IMF money to fill a financing hole. Not surprisingly, the Fund’s voice has typically been fairly muted with little domestic influence in a country like the US, while being quite capable of making headlines and shifting the policy debate in countries with less clout.
Trump’s tariffs have put the IMF in an awkward position
So, what has the launch of aggressive tariffs against virtually all of the US’s trading partners meant for IMF surveillance? From the IMF’s point of view, the timing was bureaucratically awkward – the annual Article IV consultation with the US typically begins around May and is concluded in July. In the highly volatile circumstances, the Fund decided to delay starting the US consultation to the end of the year, hoping that the scene would be calmer.
The US review is now being wrapped up. The IMF staff have delivered their concluding statement to the authorities, have held a press conference on the main findings and are writing their report to the board for discussion on April 1. The concluding statement is even more low-key than usual. It does make many critical points in line with the views of mainstream economists, but not with the Donald Trump administration.
In particular, the report concluded that there is limited further room for reducing interest rates. Last summer’s big fiscal package has contributed to a trajectory of rising fiscal deficits and public debt, representing a stability risk and having a negative impact over time on the real disposable incomes of lower-income groups. Higher tariffs and tighter immigration controls are supply-side shocks that lower potential growth.
The statement also highlights the need to preserve the independence of monetary policy and to protect and adequately fund the institutional framework for policy-making. In the past, such concerns did not need to be expressed.
What has been left unsaid?
However, in other important respects, the statement is quite muted. It could have raised greater alarm about the cross-border spillovers from the imposition of high tariff barriers and the related uncertainty. While the turbulence has lessened since the tariffs were partly wound back from August, the underlying uncertainty remains, and has been given another stir by the February Supreme Court decision to invalidate tariffs under one legal justification and the administration’s immediate response to replace them with tariffs under another.
Similarly, the statement could have flagged much greater concern with the consequences of spiralling government debt, including the upward pressure on term premia and spilllovers to foreign bonds. Moreover, the risk that market indigestion from financing the huge deficit could cause financial market turmoil continues to rise, especially in the absence of any clear, politically viable path to bring the fiscal deficit down to a sustainable path in the absence of a real crisis.
The statement also shies away from critiquing the shift towards fossil fuels and away from renewables, grouping this shift as part of administration initiatives aimed at ‘supporting greater economic dynamism’. But cancelling already approved major investments, changing rules midstream and leaning against high tech sectors of the economy are not usually recipes for economic dynamism.
Does this all matter? It’s not as if what the Fund says will have much influence on decisions made in the US even if more forthrightly expressed. But when the Fund is seen as being soft on its largest shareholder, it loses some of its sway with other members by casting doubt on its evenhandedness and the rigour of its analysis. This would seem particularly problematic where the IMF’s reticence relates to policy areas that are central to the large US impact on the global economy.
Charles Collyns is a Senior Adviser at EconoFact. He formerly was Director of the Independent Evaluation Office and Deputy Director in the Western Hemisphere and Research Departments at the IMF and Assistant Secretary for International Affairs at the US Treasury.
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