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FINANCE: IMF Taps Economic Gurus for Budget Rescue

Emad Mekay

WASHINGTON, May 18 2006 (IPS) - Snubbed by a growing number of its former client countries, the International Monetary Fund (IMF) turned Thursday to some of the world’s top economic luminaries to solve a budget crunch that threatens its role as a key architect of the global economy.

The IMF said in a statement that a new committee of “eminent persons” was being set up to provide an independent assessment of how it can maintain “a durable source of income” to cover its running costs, which include its role as a monetary watchdog and economic counselor to borrowing nations.

The committee, which is entrusted with finding a “new financing model for the IMF”, will be chaired by Andrew Crockett, president of JP Morgan Chase International and former general manager of the Switzerland-based Bank of International Settlements.

Other members include Alan Greenspan, chief executive officer of Greenspan Associates and former chairman of the U.S. Federal Reserve Board; Mohamed El-Erian, president and CEO of Harvard Management Company; Jean-Claude Trichet, president of the European Central Bank; and Zhou Xiaochuan, governor of the People’s Bank of China.

The move comes after the public lender announced last month that it was using its reserves to create an 8.7-billion-dollar account to invest in member-country bonds as a way to generate income.

The 184-member IMF reported that its net income for last year was only 167 million dollars, 109 million dollars less than expected. The deficit is forecast to reach 116.3 million this year and could increase further in 2007.

The 61-year-old institution, which under the direction of the world’s richest nations in the 1980s shifted the cost of its operations to borrowing countries, has been losing its clout and, some say, relevance as borrowers increasingly snub both its policy advice and its loans.

Major clients like Russia, Brazil and Argentina have repaid their loans to the Fund, at times ahead of schedule, to free themselves of its influence. And since the Asian financial crisis in 1997, countries like Thailand, the Philippines, China and India have all balked at taking out new loans from the IMF.

They cite the liberalisation programmes that many Asian countries adopted at the behest of the Fund in the early 1990s and that led to their subsequent economic meltdowns.

Other countries say they can now tap loans from the private sector, which come without the IMF’s stringent conditions and policy advice and which many view as primarily serving the Fund’s largest shareholders in the Group of Seven (G7) most industrialised nations.

The IMF’s current loans portfolio of only 34 billion dollars, owed by 75 countries, is one of its smallest ever. The end result has been a shortfall in the budget of the Washington-based institution and feverish efforts by its officials and the rich nations to salvage its role.

“As a result of declining lending, the Fund faces in the coming years a potential annual income shortfall on its current administrative budget,” said the Fund’s statement.

The IMF’s sister institution, the World Bank, faces a similar problem but because of wiser investment decisions, it is forecast to be only a short-term one.

“The problem now is that having become so dependent on income from lending to borrowing countries, each institution is facing a lack of borrowers or, in the Bank, a slackening off from major borrowers and, in the Fund, a walkout from the largest borrowers and a clear determination, certainly among its Asian members, that they will not use the IMF’s resources,” said Ngaire Woods, a professor at Oxford University.

“And that quite simply means the tap is turned off on the incoming income for each organisation,” Woods, who is an expert on the Fund and the Bank, added during a recent seminar in Washington on the future of the two lenders.

In its statement Thursday, the Fund denied that it is facing imminent crisis. It says that it has a strong balance sheet and reports that its current level of reserves of about 8.8 billion dollars can finance budgetary shortfalls “well into the next decade”.

During the IMF and the World Bank’s semi-annual meetings in April, rich nations, which dominate the two organisations, approved a sweeping plan by IMF Managing Director Rodrigo de Rato, called the Fund’s Medium-Term Strategy (MTS), to recommend measures to restore the IMF’s role in the international economy and shore up its loans.

But IMF spokesperson Masood Ahmed told reporters on Thursday that the new committee will neither audit the IMF’s current operations nor vet its lending portfolio. He said the IMF was not short of lending money, which comes from members’ quotas and contributions, adding that those funds now stand at a record high of 200 billion dollars.

“What this committee will look at is what (are) the longer-term options for addressing those running costs which do not rely as we have done in the past primarily on the returns on the charges paid by members who borrow from the fund to finance those (running) costs,” Ahmed said.

The IMF will receive recommendations form the committee in the first three months of next year.