The Hindu Business Line : IMF-World Bank Annual Meet: Will it be exciting or a damp squib?

At the IMF/World Bank annual meetings about a month away, the Finance Minister will have to tread carefully when such key issues as the world economic outlook, the nature and scope of IMF's surveillance, aid to poor countries, and the `strategic direction' for the Fund are discussed, says A. Vasudevan.

IN LESS than four weeks, Finance Ministers of the world will congregate in Washington D.C. for the annual meetings of the International Monetary Fund (IMF) and the World Bank (WB). These meetings are often used by most Finance Ministers to make statements about their own countries' progress.

The Development Committee, which should focus on development needs and policy requirements, ends up as a well-intentioned set-up with no agreed strategies for implementation of the declared policies.

What commands attention is the International Monetary and Finance Committee (IMFC) consisting of Finance Ministers of 24 members equivalent to the number of Executive Directors at the IMF. While the IMFC is supposed to be advisory, its influence on the decision-making Executive Board of the IMF is almost total as most Finance Ministers are Governors of the Fund.

This year the IMFC will take a customary look at the world economic developments based on the IMF's in-house World Economic Outlook (WEO). The WEO is presented to the Executive Board weeks in advance for discussion. This helps the Finance Ministers focus on the Outlook in a more meaningful manner than would be the case if the document were to be presented just at the time of the meeting.

Besides the WEO, at least three aspects will come up. One would be the nature, scope, content and effectiveness of Fund's surveillance.

Next would be the enormously important issue of aid to poor countries, especially those in Africa.

Finally, there would be a critical look at what the Fund should do in the medium term — what the international technocrats with their flair for linguistic sophistication call the `strategic directions'.

The Indian position

Let us discuss the positions our own Finance Minister could take on these areas, keeping in view the interests of the constituency consisting also of Bangladesh, Bhutan and Sri Lanka.

On the WEO, the views of the constituency will not be very different in substance from those of the other constituencies. From the reports appearing in financial dailies, it appears that the international policy-makers are seized with three critical issues: The uncertainty surrounding the availability and pricing of oil; the global saving-investment imbalances; and currency alignments.

The oil uncertainty will affect all countries that have a huge oil demand relative to the internal supplies as the case is with India and the US. However, the American consumers are still tolerant of petrol prices now at around $2.75 a gallon.

But the Indian consumer — a householder or a business entity — would find it difficult to bear large price hikes. Some subsidisation is inevitable since nominal incomes cannot go up in the immediate term; forget for the present the political consequences of full cost pricing.

Given the already high demand for petrol and the projections of further growth in demand in the medium term, India's policy-makers are trying to find ways of having strategic supplies continually in the pipeline. Whatever the final outcome, the fact is that the uncertainty would impact on costs and the consumption-saving profiles.

If oil prices turn out to be eventually high and the supplies constrained, the medium-term growth and inflation outlook for India and similarly placed emerging countries would be bleak. Since this would slow world growth, the Finance Minister should be forthright on this issue. The message should go that scarce endowments should not be used to jeopardise international cooperation.

Global imbalances

The issue of global imbalances has always existed because it represents in part a statistical problem of timing and valuation. Its aggravation, however, is largely a reflection of the policies that are being pursued by industrialised countries. It is difficult to agree with the claim that its resolution lies only in fiscal tightening or tax reforms in these countries. For, there are many institutional and structural issues that need to be resolved as well.

The Finance Minister , however, should call for a resolution that results in soft landing. On currency alignments, the Minister has to be careful not to be drawn into the battle over the China's exchange rate policy. It is best to reiterate that exchange rate policies should be flexible and not guided by any bands.

The surveillance issue has become vital since the eruption of the recent currency and financial crises. It is also intertwined with the IMF's medium-term role. With the IMF flush with liquidity, it is in a position to provide financial support for adjustment for either stabilisation or comprehensive structural change.

Industrialised countries, however, would like the Fund to waive what the poor countries' owe it.

Shadow programme

They would, in fact, prefer the Fund to provide countries that approach it for support (implicitly those that do not fall under the category of poor countries) with only non-financing help like technical assistance and drawing of adjustment programmes in concert with the countries' technocrats.

The latter, a kind of shadow programme without any IMF financing, was deemed as `enhanced' surveillance in the latter part of the 1980s when one of the Latin American countries required adjustment.

The shadow programme is supposed to help countries to access the financial markets. It is possible that the industrialised countries' strategy is to abort any future attempts at quota increases and to ensure that the international financial centres in the industrialised countries get good clientele.

Public policy observers, however, are aware that the financial centres represent a lobby and wield enormous influence in the capitals of rich nations. In the circumstances, the Finance Minister must caution that surveillance to be effective should be a combine both adjustment or reform programmes and financing.

He should also remind his colleagues that in view of the existence of the World Bank's policy-based lending, the need for another instrument of non-financing programme-based assistance would be wholly unnecessary.

Aid to poor nations

On aiding poor countries, the Finance Minister has to be firm and yet subtle. He would have to see that funding for poverty reduction and growth facility (PRGF) is not reduced to protect the interests of the other members of his constituency.

He would have to give full throated support to financing of all the African countries that have unsustainable external debt burden and that are willing to undertake comprehensive structural adjustment. This could result in pressures being applied on India and other countries with large international reserves to provide financing for such poor countries.

In effect, this would mean enhancement of funding to HIPC (highly indebted poor countries).

He should ask the IMF staff to come out with a paper on the criteria for sharing the required funding of poor countries. He should resist any proposal that undermines the financial integrity and strength of the IMF including the use of proceeds of the sale of gold at the turn of the 21st century.

Such a step would help promote India's foreign policy interests especially with Africa.

If necessary, India can offer to have counter trade agreements (like the Indo-Russian rupee trade agreement) with countries that are poor but whose debt position is determined to be sustainable under the HIPC framework.

The Finance Minister's challenging task deserves support of all those who care to enhance India's image in the comity of nations.

(The author, a former Executive Director of the Reserve Bank of India, can be accessed at asurivasudevan@hotmail.com)

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