The International Monetary Fund stands at the centre of the international financial system. It has the potential to play a key role in managing the risks to both the United Kingdom and world economies, including potential problems arising from the disorderly unwinding of global economic imbalances. At present, the IMF is not optimally organised to meet the challenges it faces.
The IMF is cognisant of these short-comings and has instituted its own reform agenda. We strongly support the idea of a focussed Fund, with a greater role in crisis prevention than crisis resolution. As part of this, we await with interest the review of the relationship between the World Bank and the Fund, and recommend that the Fund ensures concentration upon its core remit of crisis prevention. But we also recommend reforms to strengthen governance in order to ensure that the Fund is more representative of its stakeholders and accountable to them, including a more open selection process for the next Managing Director and greater representation for low-income countries and emerging market economies via a reform of the quota allocations. At the next autumn meeting of the IMF, in Singapore this September, we would encourage the United Kingdom Government to ensure there is no two-stage process for governance reform. Low-income and emerging market economies should both be included in the reforms. We consider the scope of the US veto, noting that any outcome must ensure that the USA remains engaged with the Fund. We also recommend that the Fund moves towards a more transparent decision-making process, especially around the workings of the Executive Board, to ensure the Fund remains accountable to its stakeholders. However, such transparency must not detract from the operational effectiveness of the Fund.
The IMF is seeking to ensure that its surveillance activities concentrate more on the effects of member states on the world economy as a whole, and we agree that balance sheet analysis should lie at the heart of its surveillance work. However, we note that the IMF needs to ensure that it appears independent in its analysis, both independent from the views of individual member states, and free from any potential bias based on its own lending programmes. The attainment of such independence in analysis is the best way to ensure that the IMF's analysis leads to effective and appropriate action by individual member states and the world economic community.
Although the IMF should not be seen first and foremost as a lender of last resort, the Fund will always have to retain some ability to lend to prevent crises or to promote crisis resolution. We therefore support the notion of the Exogenous Shocks Facility, which will provide assistance to countries suffering from events such as natural disasters. As part of its lending remit, the Fund will have to maintain some form of conditionality on its lending, but this must be both appropriate to the circumstances of the borrowing member state, and allow for a suitable input through local democratic processes.
The Fund's finances are also in need of reform. In promoting such reforms, the United Kingdom Government should seek to ensure that the Fund maintains both its independence in surveillance and its ability to support low-income countries.