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IMF struggles for relevance

A sin of omission: the agenda for the annual meeting in Washington DC this week fails to take sufficient account of the fears of emerging-market (EM) policymakers.

The annual IMF pilgrimage has begun in earnest with a decidedly gloomy backdrop for market players. 

In its economic and capital-market outlooks, published this week, the Fund sounded the alarm over the elevated prospect of a eurozone recession, asset bubbles, global banks’ broken business models, lack of regulation over the shadow-banking system and rising leverage in EMs. Market players are also grappling this week with the consequences of US dollar strength as well as a repricing of eurozone-recession risks. 

However, fears are growing the IMF and World Bank are in danger of serving as a talking shop for the world’s leading policymakers, rather than playing a leading role in economic and financial policy coordination.

Take the debate about central bank-driven currency devaluations, which took a twist after the US Federal Reserve warned about the negative-growth impact of excessive dollar strength, according to minutes released this week from the September 16 to 17 Federal Open Market Committee meeting.

The G20 has dethroned the IMF – an institution created in 1945 to stabilize global monetary regimes – as the principal forum for global exchange-rate issues. Bilateral discussions – particularly, the US-China Strategic and Economic Dialogue – have also disintermediated the IMF’s role. 

Political stigma

In recent years, there have even been calls, from the Brazilian finance minister Guido Mantega, most notably, to bestow the World Trade Organization with a mandate to impose punitive sanctions on trading partners judged to have distorted their exchange rates, citing the political stigma attached to assigning the IMF with this role.

The “competitive monetary-easing wars” among G7 central banks in the post-crisis era, as Reserve Bank of India (RBI) governor Raghuram Rajan puts it, has also reinforced the IMF’s legacy challenge: its crisis of legitimacy in EMs. 

The Fund’s discredited role in combating the crises in Asia and Latin America of old and its governance structure that is heavily weighted to developed markets continues to undermine its moral authority.

What’s more, loose G7 monetary policy trigger boom and bust cycles in EMs. In turn, the IMF launched a charm offensive in 2009 with a flexible credit line (FCL) facility, designed to provide emergency assistance during bouts of market contagion to well-governed sovereigns. 

In addition, an agreement was reached in 2010 to boost the representation of EMs in its governance structure, while the IMF softened its opposition to capital controls as a means of barricading developing countries from financial storms. These moves boosted the IMF’s moral authority in the eyes of EM policymakers.

These calls have largely fallen on deaf ears, with scant debate about the IMF’s role in helping EMs…

Fast-forward to the 2014 annual meetings: the FCL’s restrictive criteria for access and stigma attached to the policy lender has capped adoption, with only Mexico, Poland and Colombia applying for access. Meanwhile, the US has failed to-date to ratify the 2010 agreement to boost the IMF’s resources and modernize its governing structure.

Frustrated by the lack of reforms in the international financial architecture, as Euromoney has reported, RBI governor Rajan has called on developed countries to generate multilateral sources of liquidity to boost safety nets for developing countries held hostage to boom/bust credit cycles. 

Rajan also says the IMF should publicly call for the Fed to take into account the negative international spillover effects of its monetary cycle.

Meanwhile, Brics countries established the New Development Bank in July, a flawed institution that mimics the IMF’s aims with a $100 billion central bank swap loan, known as the contingent reserve arrangement. In theory, the NDA one day could generate an international liquidity backstop to combat a crisis, disintermediating the IMF.

What’s more, financial-sector policy is the purview of the Financial Stability Board, rather than the Washington-based institution, while EMs continue to beef up cooperation initiatives – with the recently established $100 billion China-backed Asian Infrastructure Investment Bank another such example.

The Fund then is struggling for relevance, according to Bill Rhodes, the veteran Citi banker. He says it should further develop the FCL facility, beef up its crisis-prevention role and strengthen partnerships with the private sector.

These calls have largely fallen on deaf ears, with scant debate during the meetings in DC this week about the IMF’s role in helping EMs to barricade to navigate capital storms, aside from its surveillance role and capacity as lender of last resort.

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