Structurally Adjusting the IMF, Part III

♠ Posted by Emmanuel in , at 4/10/2008 02:46:00 AM
This is a sequel to my previous commentaries on the worsening plight of the International Monetary Fund [1, 2]. Like multinational corporations, the IMF is often regarded by the anti-globalization crowd as one of the Master Organizations for Global Takeover by Capitalist Imperialists (see not-so-subtle protesters to the right). I will concede this much: many past IMF policies were not designed with the best interests of borrowing states in mind. Still, notice the emphasis on borrowing states. This emphasis is important in that nowadays, the IMF has very few borrowers: many countries have become wary of its strict lending conditionalities. Windfalls from high commodity prices have also bolstered the efforts of many LDCs to avoid the IMF. After all, why resort to an institution that bosses your country around if you don't have to? As a result, the IMF is rather lame nowadays if you look at the cold, hard numbers instead of mindlessly recycling anti-globalization rhetoric.

Hence, the IMF itself is being forced to perform structural adjustment. In the absence of many countries encountering balance-of-payments difficulties, the IMF's income which mostly comes from lending has shrunken several times over. As with the structural adjustment policies it imposed on borrowing countries facing budget constraints, it is now being forced to live within its means. Among other things, it is firing staff, selling gold to finance its operations, and rethinking its future role as more of a "consultancy." The Financial Times has a pretty cogent summary:

The board of the International Monetary Fund voted yesterday to cut 15 per cent of its staff and sell about $11bn (€7bn, £5.5bn) in gold reserves in one of the biggest shake-ups of its funding since it was founded. The IMF plan to cut 380 jobs and sell 403.3 tonnes of gold, about an eighth of its reserves, still has to be approved by other authorities. The reforms have the support of the US Treasury, but the gold sales must be approved by the US Congress, which is unlikely to happen until after the presidential elections this year. Other changes in the IMF's funding structure would require legislation in some member countries. An IMF spokesman said the gold sales would be done in a way that would avoid disrupting the market. A spokesman for the World Gold Council, an industry body, said that "no one I've spoken to is worried" by the sales.

The IMF is seeking to stabilise its finances amid a sharp fall-off in lending to nations in financial crisis, which was its main source of income, after a period of greater global financial stability. The drying up of loans had set the organisation up for a $400m funding shortfall by 2010. Dominique Strauss-Kahn, IMF managing director, said it was "a landmark agreement that would put the institution on solid financial footing".

The rejig comes amid a broader reassessment of the organisation's aims. Established towards the end of the second world war, in part as a lender of last resort to struggling nations, the fund is edging towards a role more as an economic policy adviser and monitor. "We think it is time to retool and move away from pure lending towards a business model that offers a group of experts to help countries adopt the right policies," the IMF said.

The IMF has also sought to reduce its dominance by the transatlantic powers, in recognition of the growing importance of economies in other parts of the world. "The gold sale is . . . a very encouraging move if you think the problem is that it is a 20th century institution that is not adequate for dealing with 21st century problems," said Colin Bradford, a fellow at the Brookings Institution, a think-tank.

However, some nongovernmental organisations think cash from the gold should be directed to development rather than paying off administrative expenses. The IMF said money from the sale of 13m ounces of gold, at an estimated $850 an ounce, would be split between extending cash available for borrowing nations and a ramped-up endowment for investing. About $6.6bn would be added to $10bn held in a trust-fund-like vehicle to buy bonds and possibly stocks, with the income paying for costs such as staff and travel. Senior finance officials did not rule out creating a sovereign wealth fund.

The last point on the possibility of an IMF SWF is quite funky in that, er, the IMF is not a sovereign. That aside, the IMF site offers more on the planned restructuring. Note that some proposals are still in the cards and require approval from IMF member countries:

The Executive Board endorsed a new package of measures to set the IMF's finances on a sound long-term footing, in a move designed to end the institution's overreliance on income from lending operations to finance its work. Managing Director Dominique Strauss-Kahn applauded the decisions by the Executive Board to propose a new and sustainable income and expenditure framework for the Fund, calling it "a landmark agreement that will put the institution on solid financial footing and modernize the IMF's structure and operations. We have made difficult, but necessary choices to close the projected income shortfall and put the Fund's finances on a sustainable basis, but in the end, it will make the Fund more focused, efficient, and cost-effective in serving the needs of our members," Strauss-Kahn said.

In a discussion on the IMF's income and expenditure, the Executive Board agreed to revamp the Fund's income model from one that primarily relies on lending to one that generates funds from various sources. At the same time, the Board considered the institution's medium-term budget for the financial years 2009-11, which includes deep spending cuts, and approved the administrative budget for FY2009 (May 1, 2008-April 30, 2009). With these measures the IMF expects to close the projected income-expenditure gap of $400 million within a few years…

"The Fund's membership again proved its commitment to enhancing the institution's credibility and strengthening its efficiency," he added. "We agreed to replace an obsolete and unviable income model with a modern and more predictable model in line with other international financial institutions. We also agreed on a medium-term budget proposal with sharp spending cuts of $100 million over the next three years."

Key elements of the income proposal—in particular a proposed amendment of the IMF's Articles of Agreement to expand the Fund's investment authority—will require legislative action in most member countries. In addition, approval by the U.S. Congress is needed before the U.S. Executive Director can vote in favor of gold sales. Strauss-Kahn commended "Executive Directors for their commitment to seek expeditious approval by their legislatures to enable these important components of the new income model to come into effect."

• The IMF's unsustainable income model will be replaced with a model that is based on more robust and diverse sources of revenue in line with the Fund's multiple functions. If approved, the new model could generate an additional $300 million in income within a few years.

• An endowment would be created with the profits from the limited sale of 403.3 metric tons of the IMF's gold holdings. If approved, gold sales would be conducted in a transparent manner with strong safeguards to ensure that they do not add to official sales and avoid any risk of market disruption.

• The IMF's investment authority would be broadened to enhance the average expected return on the Fund's investments and enable the IMF to adapt its investment strategy over time. The investment policies would reflect the public nature of the funds to be invested and include safeguards to ensure that the broadened investment authority does not give rise even to perceived conflicts of interest.

• The long-standing practice of reimbursing the IMF's budget for the cost of administering the trust fund for concessional lending to low-income countries—the PRGF-ESF Trust, will be resumed in the financial year in which the IMF adopts a decision authorizing the gold sales. This cost recovery will not affect the Fund's ability to provide concessional lending to low-income countries.

• The strategic plan that forms the backbone of the budget is focused on five goals: strengthening multilateral surveillance, sharpening bilateral surveillance, refocusing work on low-income countries, streamlining capacity building, and modernizing the Fund. The budgetary strategy is centered on reshaping the institution so it delivers more focused and cost-effective outputs.

• The administrative budget proposal includes expenditure cuts of $100 million in FY2009-11. Including savings of $27 million already allotted in the budget plan for FY2008-10, real net administrative expenditures will decrease about 14 percent to $796 million in FY2011 from $922 million in FY2008.

• Even with sharp expenditure cuts, the budget allows for an increase in the level of resources allocated to multilateral and regional surveillance by shifting resources from non-core to core business of the institution.

The Board decision on April 7 marks the culmination of a two-year effort to reform the IMF's income model that began in May 2006 with the appointment of a committee of eminent persons to review the IMF's income base for financing its running costs. That committee, headed by Andrew Crockett, President of JP Morgan Chase International and former General Manager of the Bank for International Settlements, concluded in early 2007 that continuing to rely on income from lending was not a sustainable model.

The committee recommended that the IMF adopt a package of income-generating measures, including creating an endowment with profits generated from selling a limited portion of the institution's gold holdings.