Select Committee on Treasury Ninth Report


Conclusions and recommendations


A clear role for the IMF

1.  The Committee supports the move to focus the IMF's work on crisis prevention, rather than crisis resolution, as well as the decision to make sure the Fund can fulfil its new role. (Paragraph 5)

Global economic imbalances

2.  A disorderly unwinding of global imbalances poses a real risk to the UK economy. It is therefore important that the IMF take an active part in providing both independent analysis of, and potentially a solution to, the risks posed by a disorderly unwinding of global imbalances. (Paragraph 9)

Reducing the number of extraneous roles of the IMF

3.  The IMF has, in recent times, taken on too many roles. As part of the need to create an IMF able to meet its responsibilities, we recommend that the UK Government support a greater focussing of the IMF's work, which may entail identifying another organisation or body better suited to carry out certain activities, including work on terrorist financing and money laundering. (Paragraph 10)

The World Bank and the IMF

4.  We welcome the IMF Managing Director's announcement of a review to examine the relationship between the World Bank and the Fund. Given the concerns expressed to us by NGOs, we recommend that the UK Government ensure that the Fund utilises the expertise of the World Bank in social and poverty issues, to augment the Fund's more macro-economics based analysis. The IMF should remain within its remit of crisis prevention, not extend its activities into areas of social policy and development it does not appear to be equipped to deal with. (Paragraph 15)

Quotas

5.  The Committee regards it as important that the governance of the Fund is made more accountable and transparent if it is to be able to meet the challenges of the changes in the world's economy. While we note that changing the quotas may have no discernible effect on how the Fund operates, there is a good case for reforming the quotas to improve the Fund's governance by increasing the accountability to its members and the wider international community. There is a balance to be struck between the rights of those that provide the Fund's resources, and the needs of those that utilise those same resources. We recommend that the UK Government should look at whether any more innovative solutions, beyond reform of the quota system, are possible to try ensure the competing needs are met. (Paragraph 20)

6.  We note the political difficulties in achieving reform of the voting structure, bearing in mind the need to maintain a close US involvement with the IMF, but the current voting arrangements do not sit well with an international organisation that sees itself providing impartial worldwide economic advice in the future. We recommend that the UK government seek a reduction in the scope of the veto so that surveillance matters are no longer included. (Paragraph 21)

7.  There are two issues involved in European representation at the IMF. Although not a matter directly for the UK government, it appears sensible that the UK should encourage its euro area partners to combine their representation at the IMF. More importantly for the UK, the UK government should actively seek to try and ensure there is a harmonised EU view when dealing with IMF matters, where this is possible. (Paragraph 23)

8.  The Committee is encouraged by the view of the Chancellor of the Exchequer that there may well be quick progress in the reform of the quota system. However, we note the concerns expressed by African representatives about being left behind in a two-stage process, and call on the UK Government to ensure that all countries are better represented in the governance structure of the IMF after the Singapore meetings. (Paragraph 25)

Appointment of the Managing Director of the IMF

9.  The Committee notes the Chancellor of the Exchequer's view that the selection of the current managing director was more open. However, even the Chancellor stated that not all that was done in selecting Mr Rato was recorded, suggesting the process in future could be less opaque. We therefore support the Governor's request for an open selection process for the IMF's managing director, and recommend that the UK Government prepare, publish, consult on (including with its European partners) and then support at the Singapore meeting a transparent process for selecting the next IMF managing director. While this may mean that the IMF has a more transparent procedure than other international organisations, we believe that it is right that the Fund, with its new focus, should be the first in achieving reform in this area. (Paragraph 26)

The Executive Board

10.  On the representation of the IMF's members on the Board, the Committee stands with its earlier conclusions on quotas, in that there should be movement to allow a fairer representation of the newly emerging economies, as well as the main recipients of the Fund's expertise and resources. We support the Chancellor's view that there needs to be a resident board, to allow effective oversight of the Fund's activities. This underlines the need to ensure proper representation of all the Fund's members. We also note the Governor's concern as to excessive information flow through the Board, and therefore recommend that the UK Government try and ensure that there is reform of the processes of the Fund, which would then allow the Executive Board members to properly discharge their duties in overseeing the Fund. In the area of surveillance, and given the need for independence, we would not expect there to be heavy influence from the Board in this area. (Paragraph 29)

The International Monetary and Financial Committee (IMFC)

11.  We welcome the moves to make the IMFC more effective. It is important that, as a high level body of the IMF, it is particularly cognisant of its role in providing guidance and oversight of the work of the Fund. We therefore recommend that the UK Government do it all it can to ensure that the procedures of the IMFC are effective in helping the IMF develop its role in the global economy, and in ensuring that it provides significant oversight of the work of the Fund, especially considering the IMFC's new remit in setting the surveillance objectives for the year. (Paragraph 31)

Transparency within the IMF

12.  Transparency is a necessary part of any public institution's maintenance of accountability to its stakeholders. We recommend that the UK Government work with other member countries to persuade the Fund to release more material, including Executive Board minutes. We would like to see the IMF publish the Board's minutes as soon as is advisable. In doing so, the UK Government should bear in mind the view of the Governor of the Bank of England that transparency, has to be 'designed carefully' if it is not to prevent free and frank discussion. (Paragraph 34)

Multilateral surveillance

13.  We welcome the renewed commitment of the IMF to multilateral surveillance, and to surveillance overall. Given that a major risk to the UK economy at the moment stems from global imbalances, it seems entirely appropriate that the IMF, as the guardian of the global financial system, should seek to redouble its efforts in assessing the effects of the interplay between the world's economies. In doing so, the Fund should utilise the overall "balance sheet analysis" called for by the Governor. We recommend that the UK Government supports these moves, while seeking to ensure that there is broad consensus for this change in focus of the surveillance across all members of the Fund. (Paragraph 41)

14.  We welcome the IMF's new approach to multilateral consultation, given the Fund's new focus on crisis prevention. However, we note that in order for the findings of such consultations to be effective, member states must feel that the actions that may be required from the conclusion of this process will be broadly beneficial. We therefore recommend that the UK Government encourage the Fund's development in a manner which reinforces its neutrality and authoritativeness and that the UK Government support measures to strengthen the Fund's governance. (Paragraph 45)

The role of the Independent Evaluation Office (IEO)

15.  The Independent Evaluation Office (IEO) has been a significant success. However, it still has scope for further development, especially given the International Monetary and Financial Committee's recommendation to include the IEO within the oversight of the surveillance remit. We recommend that the UK Government set out in its reply to this report whether the IEO's remit should be set out clearly within the articles of agreement or by-laws of the IMF, allowing for its independence of governance and financing. The IEO's remit may be about to widen should it also take on a role within the oversight of the surveillance work undertaken at the IMF. We recommend that the UK Government consider whether the IEO will require further resources to fulfil its extra responsibilities. (Paragraph 48)

The IMF as a ratings agency

16.  We agree with the view that the IMF should not become a ratings agency, especially considering the potential distortion of the financial system. However, we also recognise that the IMF has a significant role as a gatekeeper for low-income countries. With IMF approval, low-income countries are far more easily able to access development aid and lending, both from international institutions and individual donor countries. The Policy Support Instrument (PSI) extends this role. We therefore recommend that in its response to this report, the UK Government sets out its views on whether the existence of this instrument will penalise countries that do not wish to be involved with the IMF by preventing them accessing aid. As well as this, the UK Government should also consider whether the conditions attached to the PSI are consistent with its own policy paper on conditionality, and how the instrument will interact with the UK Government's own development policies, including the meeting of the Millennium Development Goals. The Committee notes the increase in development assistance provided by donors other than traditional donors. (Paragraph 53)

The independence of surveillance

17.  The IMF must be seen to be provide independent surveillance analysis, especially where it has lent to a country. There is an obvious moral hazard in that the IMF may wish to use its surveillance analysis to support a country it has lent to, purely to protect its own investment. This is especially important given the IMF's 'gate keeper' role. The other element of independence is that no single member country, or group of member countries, should hold sway over the surveillance analysis of the IMF. While the IMF must, of course, remain accountable, it should also be encouraged to provide an independent voice on the interactions of the world economy. We therefore recommend that the UK Government do it all it can to arrange that there is a separation of the surveillance analysis from the analysis undertaken for the purpose of the Fund's lending activities. We further recommend that the UK Government seek to ensure that a framework develops in which the IMF, while ensuring adherence to the principles of accountability, provides an independent voice, able to offer unbiased advice on the world economy. (Paragraph 56)

Conditionality of IMF lending

18.  The Fund will have to maintain some form of conditionality on its lending. We support the Government's policy paper, and its focus on poverty reduction, human rights and stronger financial management. We recommend that the UK Government lend its support to reforms to the Fund that ensure that democracy is protected, conditionality is appropriately designed for each individual country and solutions are not driven by a single economic philosophy. (Paragraph 62)

New facilities

19.  We note the Governor's remarks on the need to limit new facilities, and therefore recommend that the UK Government exercise caution before recommending any new facilities at the Fund. However, we support the notion of the Exogenous Shocks Facility, though we recommend that it be designed so as to ensure that all member states that require it are not dissuaded by onerous conditionality. (Paragraph 65)

20.  We note the lack of take-up by member states of the contingent credit lines facility. We understand that a balance has to be struck given the need to protect taxpayers' money. We recommend that the UK Government continues to take an active part in ensuring that the facility for contingent financing for crisis prevention is capable of ensuring that the Fund can fulfil its remit to prevent crises developing. (Paragraph 69)

Debt restructuring

21.  While the Fund has a desire to move towards a greater focus on crisis prevention, there will always remain a need for crisis resolution. Debt restructuring will sometimes be an integral part of this. The Fund, as a potential creditor in these situations, seems inappropriate as the organisation to oversee such restructuring. However, this does not preclude the IMF from taking an active part in the discussions over the design of the framework. We acknowledge the political difficulties of creating a final consensus, but we recommend that the UK Government continue to promote collective action clauses. We further recommend that the UK Government consider what role the IMF should play in any future debt restructuring mechanism. Though previously not followed up by the Fund, a statutory system may be appropriate, and may be similar to a Chapter 11-style system where the day-to-day business continues while a restructuring of ownership occurs under a bankruptcy court. (Paragraph 73)

The funding of regular IMF activities

22.  The search for a solution to the long-term financing of IMF operations should be considered against two criteria. The first is that poorer nations should not have to pay to gain access to the range of services the IMF can provide. The second is that funding for surveillance should be seen to be as independent as the actual analysis, especially where the IMF may also be a lender to a specific country. We therefore recommend that the UK Government further consider and report on the feasibility of the different options for the funding of an endowment for the financing of surveillance activities, as an endowment would ensure both the actuality and perception of the independence of surveillance. (Paragraph 78)

Transparency of the UK Government's position towards the IMF

23.  To enhance transparency, we recommend that the UK Government disclose further information on the Executive Director's dealing with the Executive Board, and its views of recently published IEO reports. We further recommend that the UK Government report on its view of the surveillance remit of the IMF, prior to this being set by the IMFC, to allow discussion of this view before it is put forward at the IMFC. (Paragraph 82)


 
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