The Hindu Business Line : IMF's new role in the global economy

The RBI Governor was dismayed that while the international community had been commending India's contribution to world growth and stability, there was a decline in India's share of the IMF quota.

The IMF's 184 member-countries endorsed the new consultative mechanism to enhance the Fund's relevance and credibility. But the modalities of consultations with country authorities aimed at encouraging the actions needed to reduce imbalances are yet to be worked out.

The 2006 Spring meetings of the IMF and World Bank in Washington (April 22-23) have set the stage for a new "multilateral consultation" process in which the International Monetary Fund will involve all principal economic players — developed and emerging, deficit and surplus nations — for consensus-building on reducing global imbalances, now acknowledged as a "shared responsibility".

The imbalances are broadly reflected in the deepening US current account deficit of around $800 billion, or 6-7 per cent of GDP in 2005, and the substantial trade surplus and reserve build-up by China and other Asian emerging economies, totalling over one trillion dollars, raising fears of a disorderly adjustment that could lead to a sharp rise in interest rates and, possibly, recession.

Finance Ministers representing the IMF's 184 member-countries on the International Monetary and Financial Committee (IMFC) endorsed this new consultative mechanism, proposed by the Fund's Managing Director, Mr Rodrigo de Rato, in a medium-term strategy setting out the IMF's future directions in order to enhance its relevance and credibility. But the modalities of consultations with country authorities aimed at encouraging the actions needed to reduce imbalances are yet to be worked out.

Regional groupings too

Besides leading developed and emerging market economies, the consultations will cover regional bodies and groupings, such as oil-exporters.

For the first time, the Fund's traditional Article IV consultations with individual countries will be supplemented by "multilateral surveillance" of issues related to global imbalances, especially in trade, so that hopefully it would result in "multilateral action" on a co-operative basis to lessen the risks of any abrupt shifts in financial market conditions.

The IMF, in its twice-yearly World Economic Outlook reports, has been drawing attention to the risks of allowing imbalances left unattended and underscoring the importance of a coordinated package of policies for an orderly global adjustment of imbalances involving policy measures by important players. But there has been no meaningful response from major economies.

These policies are for the US to cut its fiscal deficit and raise savings; for the EU and Japan to undertake further structural reforms and fiscal consolidation, and promote more domestic demand growth; for surplus emerging market countries in Asia to make exchanges rates more flexible; and for oil exporters to promote efficient absorption of petrodollar surge with sound macroeconomic policies.

But many economists are sceptical whether the new procedure, while giving more power to the IMF and making it more relevant for a globalised economy, with unprecedented capital flows across the borders, would make a difference in the near future.

It is likely that the whole process will not get into motion until after the Fund-Bank annual meetings next September.

Challenge of imbalances

The Finance Ministers could not have met at more opportune moment than when the world economy looks to keep expanding at 4-5 per cent for the third year in 2006, according to an IMF forecast, but it was an equally grim setting in which oil prices hit $75 a barrel and there was an urgent need for confronting the challenge of burgeoning imbalances that could throw the world economy out of gear.

How to rebalance growth among the major industrial countries and lower the trade divergences that pose risks of protectionism against growing competitiveness, became the central issue.

However, the IMFC mandate for the Fund was not without reservations from some of the Finance Ministers/Governors of central banks, especially from China and India, in regard to the procedure and documentation of the outcome of the Fund's consultations with leading countries, individually and collectively.

For the US, running big trade deficits with China and not making headway with its calls for revaluation of Chinese currency, multilateral intervention seemed the best solution. The Treasury Secretary, Mr John Snow, said that global imbalances reflected multilateral conditions and the US could not, and should not, by itself be expected to resolve the problem, though it had, like other major participants in the world economy, an important role to play.

What seems to bother China, which has withstood strong pressure from the US on letting its renminbi appreciate significantly in relation to dollar, is the Fund's proposed surveillance focussing on monetary, financial, fiscal and exchange rate policies, and the "spillovers" from one economy to the other.

The People's Bank of China Governor, Mr Zhao Xiachuan, told the IMFC that the procedure must be "defined properly and widely accepted by member-countries" and that Fund surveillance should "respect the autonomy of exchange rate systems" granted to all countries under the IMF Articles of Agreement.

Each country was entitled to choose its exchange rate system "consistent with its own economic development", he said. It thus remains to be seen how this will play out as the Fund consultations get under way.

India's stand

India saw merit in the proposed multilateral surveillance but the RBI Governor, Dr Y. V. Reddy, took the stand that given sensitivity of exchange rates for emerging markets, the Fund has to balance its role as a confidential adviser on such issues and it would be highly premature to consider publication of exchange rate assessments in the World Economic Outlook.

In his view, effective multilateral surveillance would depend crucially on its coverage of spillovers from industrialised countries, which accounted for significant share of global financial flows.

Mr Gordon Brown, British Chancellor of Exchequer and Chairman of IMFC, however, summed up the outcome as one making it a "year of reform for the international economy," which would enable the IMF to address challenges different from those of the world of the l940s, when it was created.

The global economy remained vulnerable to volatile oil prices, he said, and called for greater investments, both up and downstream, to reduce supply uncertainties.

Quota increase

The World Economic Outlook noted that oil price increases had been widening current account imbalances, which could persist for a long time.

The other important proposal of the Managing Director, aimed at endowing the IMF with legitimacy, was limited to providing for an ad hoc increase in the quotas of "most under-represented members"(China, Korea, Mexico and Turkey) in the near future, which could be followed at a later stage with increase in basic votes of developing countries.

IMF quotas have not been revised since l998. While approving the ad hoc increase on which concrete proposals would go before the Fund's annual meeting in September, the IMFC said there was need for fundamental reforms for giving fair voice and representation for all members.

Dr Reddy was dismayed that while the international community had been commending India's contribution to world growth and stability, there was a decline in India's share of the IMF quota.

He wondered whether the Fund's legitimacy would be enhanced if three of the four rising powers of BRIC (Brazil, Russia, India and China) get their quotas reduced, even if for a brief period.

(The author, a former Chief Editor, PTI, is a freelance writer.)

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