Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum by Bretton Woods Project


  Two forces for change have converged on the IMF in recent years. The first is in relation to the financial crisis that swept across the globe in 1997 and 1998. In its aftermath, G7 finance ministers, spurred on by private financial interests, are pressing ahead to transform the IMF into a surveillance institution to assist private investors with making better investment in "emerging markets" and a quasi-lender of last resort to help manage financial crises.

  The second has arisen from the pressure for debt cancellation to be linked to poverty reduction objectives and the acceptance that structural adjustment policies have failed to achieve lower levels of poverty. Thus the IMF has accepted that poverty reduction should be an objective of its programmes, suggesting the need to re-examine its macro-economic policy prescriptions and operational procedures.

  Whilst these forces are already making changes, many critics are calling for the IMF to be structurally adjusted to focus on a limited number of core functions. In response, IMF Managing Director, Horst Koehler, has established a process to examine how the IMF's conditionality can be streamlined.

  Despite calls for a more streamlined IMF, there appears to be little coherence and co-ordination between the forum agendas. Rather than forcing its members to address this problem the IMF is simply endeavouring to placate both forces by accepting all roles assigned to it, whether it has that expertise to carry them out effectively or not. The result is that the IMF is becoming even more schizophrenic with conflicting priorities and inappropriate mechanisms to deal with a wide variety of financial problems.


  With aid levels declining and tax receipts and savings in developing countries stagnating, foreign private investment is regarded by the G7 and the IMF as the primary driving force for growth. Thus, the G7 governments are pushing the IMF to focus on enhancing the flow of information from governments to investors and to assist countries to open their capital accounts and liberalise their financial markets to facilitate private investment.

  To this end, the IMF's traditional surveillance function has been expanded. In addition to monitoring countries' macro-economic policies, the IMF is now monitoring countries' financial vulnerability and compliance with a host of international codes and data standards (and may enforce them through its conditionality). In addition it has been given the remit to advise countries on financial sector reforms.

  The problems are:

    —  many of the standards, which have been developed by the industrialised countries, are inappropriate for developing countries given their many different stages of development and differing priorities;

    —  it is doubtful whether developing countries have the capacity to implement many of the standards nor whether it should be a priority to do so given the pressing need to address poverty issues. The joint IMF and World Bank Financial Stability Assessments have already proven to be very expensive before the standards are even put in place; and

    —  the IMF is in danger of becoming an international rating agency, yet it is unlikely to perform this function better than private agencies and it certainly shouldn't be funded from the tax payers' money to do so.

  Although the IMF's articles of agreement have not changed it to give it an official mandate to facilitate Capital Account liberalisation (CAL), the IMF is implicitly supported by the G7 governments to "advise" countries how to do so. For example, the Government's White Paper on globalisation states that "The UK Government favours a more country-specific approach to capital controls, and a gradual approach to the opening up of capital accounts. An important part of this is to work with countries and international institutions to design `road maps' for the opening up of capital accounts".

  Whilst CAL brings ample benefits to foreign investors there is no evidence to show that poor people benefit. Indeed, since there is a high risk crisis from which the poor are often least able to recover, it is suspected that they will be relatively worse off. The concern is that the G7's emphasis on foreign private investment as the driving force for economic growth will make the IMF single-minded in its pursuit of CAL even if poverty objectives would suggest not to.

  Q: What research is the IMF doing to understand the impacts of Capital Account Liberalisation on poverty reduction?

  Q: How will the road maps identified in the Globalisation White Paper take into account poverty reduction considerations?

  Q: How will the UK Government take forward its "road map" approach with the IMF?

  Q: Does the UK Government agree that the IMF should be encouraged to give developing countries advice about what sort of controls are more market friendly and how to implement them efficiently?


  Whilst developing countries are being forced to make adjustments at the national level to address instability in the global system, the IMF has not been equipped (nor has any other institution) with the finance or debt workout tools to effectively assist countries that are hit by crisis. Whilst the Contingency Credit Line has been reformed to make it more attractive, it will only be accessible to a few "emerging", middle-income countries. There are no financing facilities from which the poorest can borrow to avert a financial/currency crisis (most of the poorest countries are unable to afford non-concessional loans, and those with IMF programmes or debt reduction programmes are not allowed to borrow from these sources).

  Yet even if they are not systematically important, relative to their size, some of the poorer countries are receiving large inflows of private investment and have liberalised quite considerably and more are looking to do so. As capital controls have been removed so have mechanisms for monitoring flows and many do not have capacity to regulate financial markets, making them very susceptible to sudden reversals.

  Q: What steps are being taken to provide appropriate short-term, concessional resources for the poorest countries faced with currency crises?

  Since the IMF does not have sufficient resources to act as an international lender of last resort, it has been suggested that the private sector should contribute to rescue packages. To date this has proved extremely difficult to achieve. The IMF has advocated that countries should agree credit lines with private banks in case of emergencies. However, the recent case of Argentina demonstrates that this approach is not working. Despite having negotiated credit lines with the private sector, when it came to need them the banks were only willing to extend finance at exorbitant cost to the Government. In other cases, such as Jordan, the banks have been unwilling to extend further finance. Insufficient resources for rescue packages means that crisis countries must adjust very rapidly, which can cause severe social and economic dislocation.

  The problem is that there are no rules governing the private sector's involvement, which means that the private sector does not have to play ball. Clear rules for private sector involvement should be developed with appropriate mechanisms for enforcement, including a debt standstill procedure.

  Q: What examples can the Executive Director give of successful cases of private sector involvement in crisis resolution in the past two years?

  Q: What is the UK's position on debt standstills to allow countries time to adjust more slowly to financial crises, with less negative impacts and to spread the burden of adjustment more fairly?

  Q: What progress has been made in discussions with the IMF Executive Board on the topic of debt standstills?

  Q: What is the Executive Board's agenda and timeline for taking this work forward and when will the staff report on progress?


  At its annual meetings in September 1999 the IMF announced that poverty reduction was to be a central objective of its lending to the poorest countries. The new approach is to be realised through the Poverty Reduction Strategy Paper (PRSP) and the Poverty Reduction and Growth Facility (PRGF). Whilst many welcome this new focus, so far there has been little evidence to suggest that the IMF is making any significant changes in its policy advice or operational procedures to accommodate this new objective. Some NGOs are concerned that it has simply extended the IMF's influence in national decision making by justifying its involvement in micro-managing public spending and taxation decisions.

  Other critics are arguing for the IMF to stop all medium-term lending and are calling for the PRGF to be closed or moved to the World Bank. Many sympathise with this stance, although there is a good case for the IMF to continue providing short-term finance for countries needing to stabilise. This suggests that there is a need to identify those countries that have short-term stabilisation problems and those that are effectively "post stabilisation" but chronically poor with limited capacity. In the latter, the IMF should continue to be responsible for giving advice on macro-economic policies but not loans (the IMF's loans are too short term and therefore too expensive to finance development). Instead, the World Bank should be allowed to provide more budget support lending, with the proviso that it applies appropriate safeguard policies to these loans, for example, social and environmental impact assessments.

  Given its new role, it is imperative that the IMF re-examines its Financial Programming Model and policy advice to ensure that it is poverty-focused. This is essential whether it is advising countries in crisis needing to stabilise or those that are "post stabilisation" and are focused on achieving sustainable growth. In particular, the model needs to be unpacked to understand the distributional implications of macro-economic policy. It is not sufficient to simply tack some analysis of pro-poor fiscal spending on the end of the model. Poverty reduction should be central to it. This is imperative if, as the Globalisation White Paper suggests, "the IMF [is] to take greater account of the relationship between stabilisation, structural issues, poverty and growth in programme design".

  A more doubtful role is its "seal of approval" function. The PRSP must be endorsed by the IMF before other donors will provide resources to fund it, thus the IMF stands in the gateway to all other finance. However, with the focus on poverty reduction it is less obvious that the IMF should perform this function. Some NGOs are critical that the IMF now has the potential to reject or accept an entire national programme, not just the macro-economic element, yet it does not have the expertise to do so.

  Q: What steps is the IMF taking to understand the distributional consequences of its macro-economic policy advice? Is it collaborating with the World Bank to do so?

  Q: What steps is the IMF taking to establish procedures with the World Bank to undertake ex-ante social and environmental impact assessments of its policy prescriptions?

  Q: Is the IMF taking any steps to reconsider its lending policies to the poorest countries?

  Q: What assessment has the IMF made whether countries are pre- or post-stabilisation and what its policy advice should be in each case?

  The PRSP process not only requires the IMF to address poverty issues in its policy advice, it signals a new approach to developing programmes. Unfortunately, to date, the IMF has not demonstrated that it is changing its operational procedures to reflect this change.

  Criticisms are that:

    —  the IMF has demonstrated little flexibility in its policy advice which limits the opportunity for ownership. Whilst there has been some shift in its willingness to consider grants in the budgetary process, the IMF has not demonstrated flexibility in other areas of macro-economic policy;

    —  the IMF's programmes still assume a three-year cycle, which is inappropriate. Programmes need to take a longer perspective and should work within each country's particular time-frame;

    —  the timing of staff missions still reflects the IMF's timetable and not that of individual countries. Thus country processes must still bend to accommodate the IMF; and

    —  IMF staff have not sufficiently supported participatory processes, for example, documents are often not made available in time and insufficient notice is given for meetings.

  Many NGOs are calling for the IMF to encourage a more participatory approach to macro-economic policy setting by providing alternative menus for macro-economic policies which would allow greater public (including parliamentary) debate.

  Many are also concerned that proper guidelines should be developed for staff and the public to enable effective participation. These should make clear what the public can expect to receive for the IMF and by when and how it will input into the process. For example, there should be clear guidelines indicating by when documents should be made available, what minimum time is needed to inform people of meetings and IMF visits, what the purpose of meetings is etc.

  Q: Will the IMF develop official guidelines which set out clearly what the IMF's role is in a participatory process and what actions staff are expected to take to facilitate a national level participatory process?

  Q: What examples can the Executive Director give, in addition to more flexible budgetary processes, to demonstrate that the IMF is becoming more flexible and poverty reduction focussed in its macro-economic policy advice?

  Q: What steps are being taken to reorganise the IMF's operational procedures to allow more flexibility to respond to countries' timetables?

January 2001

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