IMF at the Crossroads

After the clamour for reforms in the global economy, it is indeed a welcome change that the International Monetary Fund (IMF) has recognised that reforms, like charity, have to begin at home. The Washington-based institution seems to have also realised that a hard budget constraint can hit both economies and organisations. The new managing director of the IMF, Dominique Strauss-Kahn from France, was presumably appointed with the mandate that the Fund needs to become a lean and thin organisation with improved bottom lines. While the IMF may not exactly file for US-style chapter 11 bankruptcy in the near future, there are indications that it is living beyond its means.

It is worth recalling that one of the crucial purposes for which the IMF was established was: “to give confidence to members by making the general resources of the Fund temporarily available” to the members “under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity” (Articles of Agreement). In fact, the basic model of the IMF was based on meeting the requirement of member-countries for various loan facilities in a situation of balance of payments crises, which have become few and far between in the past decade. But what was fortunate for the global economy (viz, the absence of a crisis since Turkey) has turned out to be a source of discomfort for the IMF. Admittedly, a doomsday organisation like the IMF is seeing “business” shrinking in a world that has not been afflicted by national financial crises since the late 1990s. Besides, the Fund seemed to have little of a functional role in the ongoing turmoil in the financial markets. The advanced world is taking care of itself with the concerted liquidity support from a number of group of seven (G-7) central banks, and the US fiscal package, with their banks being rescued by the sovereign wealth funds of China, Singapore and the oil exporting countries of Asia. (As an aside, it is interesting to note that contrary to its professed position on fiscal affairs, the IMF had endorsed the recent US fiscal stimulus package, thereby, perhaps casting doubt on the views such as those of former US treasury secretary, Lawrence Summers, who dubbed the IMF as “It’s mostly fiscal”.)