IMF continues to face uncertain future

Singapore, September 20 :

With a sweeping reform plan the International Monetary Fund has restored some of its credibility but still faces questions over its relevance in a rapidly shifting economic landscape.

The revamp giving more voting power to fast-growing China, South Korea, Mexico and Turkey easily got more than the 85 percent of the vote needed for its adoption but splits emerged within member countries over the plan.

Many nations in Asia, Latin America and Africa remain deeply suspicious of the Fund and almost two dozen nations voted against the reforms.

“Let me say that the 23 countries — many of them large, emerging and well-performing countries — that voted against the resolution may have lost the vote but have not lost the argument,” Indian finance minister Palaniappan Chidambaram told the annual meeting of the IMF and World Bank. “What is at stake here is the credibility and legitimacy of the IMF,” he said.

The IMF, born in the ashes of World War II, is seeking to overhaul its governance and operations to bring it into the 21st century, including an increased focus on exchange rate surveillance and multilateral consultations. Even so there are question marks over whether the world still needs the IMF.

Asian nations, who borrowed heavily from the Fund after the 1997 regional financial crisis, have built up large foreign currency reserves to protect against possible future crises and avoid the need to turn to the IMF again. At the same time, they have pressed ahead with regional initiatives like the Chiang Mai currency swap arrangement.

“Globalization of finance, and the fact that Asian countries hold most of the world’s (forex) reserves, have lessened reliance on IMF resources by creditworthy countries,” said Professor Mukul Asher at the National University of Singapore.

“However, at the same time globalization has meant that many of the problems have global dimensions. So global institutions are more important than before,” he added.

With no major crises to manage, and many nations fearful of the Fund’s free-market policy prescriptions, the IMF has been deprived of regular income from lending repayments and now faces a financial crunch of its own. For their part, IMF officials warn of the dangers of forgetting about the debt crises that swept across developing countries from Mexico in 1994 to East Asia in 1997, Russia in 1998, and then Brazil and Argentina in the early 2000s.

Supporters of the Fund say it still has an important role to play as a forum for countries to work together.

“Of course, international institutions need to adapt to changes in the international economy,” said Anne Krueger, a prominent academic who was first deputy managing director of the IMF until August.

“But as calls are made for them to achieve those objectives, the message should be clear that changing roles are in the context of a multilateral system: and that multilateralism has been a success that must be fought for and preserved,” she said in a speech here.

While the IMF won approval for the first stage of its reform, Managing Director Rodrigo Rato could encounter more resistance to a second phase to establish a new formula to calculate the quotas that each IMF member contributes to the Fund and which determine their voting rights.