The Hindu Business Line : The funding of the Fund

The news that the International Monetary Fund (IMF) is facing financial difficulties in managing its current expenditure must bring perverse satisfaction to many who have received advice on austerity from missionaries of this august institution. It would, however, be uncharitable to take delight in the travails of a venerable institution such as the IMF, which has done a great deal of good to many countries, including India. But the unpleasant fact is that the Fund is now facing the prospect of a financial crisis.

The IMF has excess of expenditure over revenue, which it is meeting out of its reserves — a course that is not sustainable — and the Fund's Managing Director set up a Panel headed by Mr Andrew Crockett, General Manager of BIS and earlier Executive Director of Bank of England. The panel includes the former Chairman of the US Federal Reserve, Mr Alan Greenspan, the President of the European Central Bank, the President of the People's Bank of China, and a few others.

This panel of eminent persons has, inter alia, advised that the IMF may have to sell its stock of gold, estimated at 6.6 billion dollars worth, invest the proceeds in high-yielding assets and increase its revenue. The panel has recused itself from consideration of whether the IMF is spending too much. It feels that the IMF board is the appropriate body for exercising control on expenditure.

Borrowers turn lenders

The panel has not, however, recommended any solution to the basic problem the institution faces — that its "credit" market has shrunk. Most of the erstwhile crisis-hit countries — China, Indonesia, Korea and India — have graduated to the level of lenders from borrowers. While this may be too good to last too long, the present medium strategic plan of the IMF estimates that the borrowals will shrink in the coming period. The IMF's principal source of revenue is the difference between the interest it charges on borrowers and the money it pays to its quota holders.

Perhaps, the IMF has been too successful with its reform proposals. A less charitable view is that global capital flows, such as FDI and FII have increased the available resources substantially so that countries like China and India have been able to build additional reserves, instead of borrowing from IMF.

The experts recommend that the IMF should, as a part of the strategy of revenue diversification, invest its resources in a less restrictive manner than hitherto — that is, it should invest in stock markets and in deposits of commercial banks.

The multilateral development banks, such as the World Bank, are doing this and getting a much better return than the measly amount the IMF gets. This is advice similar to that which the Singapore model has been offering the central bankers of the world. The panel estimates that this will yield an additional 50 basis points of return, which will amount to roughly $300 million a year.

Similarly, if the IMF sells its stock of gold and invests the proceeds in stock markets, it will get a substantial additional revenue. The panel is conscious of the risk that this may depress the price of gold too much. In this context, the experts advise that the world's central banks should decrease their sale of gold stocks to an offsetting extent so that the IMF's gold sales do not affect the price too much.

It is also fair to comment that the Fund may be thrusting its large quota resources on the stock markets, thus feeding a boom and an asset price inflation, which its experts advise against.

Charge for advice

One of the recommendations of the experts panel is that the IMF should levy a charge for its technical advice. There can be two views on this. One, that consultants will be held responsible for the advice they give and for the adverse consequences, if any, of advice followed. The IMF may have been in a spot of trouble for the kind of misguidance it gave during the years following the Asian crisis and its insistence on its being followed. But, by and large, the IMF has been more useful as a repository of information and has a storehouse of experience in different countries in matters relating to taxation, central banking, fiscal management, budgeting and the like.

The IMF has brilliant economists who bring to bear on their work a remarkable objectivity, independence and innovative approach. This is not to ignore the frequently expressed grievances, which the developing countries have had against the IMF — that its sharp-shooters cared little for the adverse consequences of the recommended measures on the poorer sections in the countries affected.

This brings to mind an incident when I was Finance Secretary in Rajiv Gandhi's regime. I was sent to Tanzania with a draft worth about $20 million to assist that country in its financial crisis.

The Finance Minister of the country, to whom I offered the draft, pointed out that his problem was not only with the Western powers, who offered conflicting advice, but also with a visiting IMF expert of an Indian origin, who was preventing the country from using the fuel resources available in a ship anchored outside the harbour on a L/C basis.

The country had a problem running its water supply system as there was a shortage of power. The Finance Minister asked if I could, as an Indian, prevail on my countryman to relax his conditionality. I had to plead helplessness in the matter, as he was dancing to a different drumbeat — that of the Bretton Woods twin, the IMF.

But whether the IMF will be in a position to charge for its advice depends very much on whether the countries themselves value the advice of the Fund's experts. It is also difficult to put a price on the advice. But it is an experiment worth initiating as countries will anyway only take such advice as is valuable to them.

Role in problem-solving

The panel's advice has to be considered by the IMF's Board of Governors. The decision will depend greatly on what the principal shareholders, including the US, decide. But the experts have made a useful start. We have to grant that the situation in which the IMF finds itself is not completely of its own choosing. The economies of the world, especially the emerging countries, have raced ahead and have shown that they can manage without the IMF machinery. But that is not to say that they can do so forever without the institution, such as Keynes' brainchild. It may still have a future in the surveillance of various economies and in resolving problems of global imbalances, which are still as scary as ever.

It is for this reason, if not for any other, that the IMF expert panel `rescue mission' deserves to be supported. By all means, let the IMF increase its revenue so that it can keep offering its advice to countries, both rich and poor. But let the experts of the IMF avoid the smirk on their face when they comment on how badly, in their view, countries manage their finances. "Physician heal thyself" may be a worthwhile retort!

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