Sunday, October 26, 2008

Aziz Leads IMF Criticism as Crisis Grows

The International Monetary Fund has come under severe criticism as the financial crisis that started on Wall Street is spreading to the developing world. IMF is the most important multi-lateral financial institution. It is responsible for overseeing the global financial system and the economic policies of its 185 members. The IMF is supposed to act as an early warning system for markets and economies. The institution is also charged with diagnosing economic problems and proactively regulating and stabilizing the international financial system to prevent and manage the kind of financial crisis the world is facing now.

Pakistan's former Prime Minister Shaukat Aziz, credited with reviving Pakistan's economy, is taking the IMF to task for being absent, or at least tardy. Mr. Aziz accused the International Monetary Fund last week of failing to show leadership during what he described as a "historic" global financial crisis.

As world leaders met to shore up distressed financial institutions, Mr Aziz charged that "this global institution which is supposed to look at everything going on was not even in the room where meetings are going on."

Speaking at an international business conference in Manila, the former Wall Street banker said interest rate cuts, recapitalization of banks and liquidity injections, while helpful, would not be sufficient to solve the problem.

"The very fabric of the global financial system is under threat," Aziz said, according to AFP.

Mr Aziz suggested there was a need to boost the IMF's regulatory powers and create a more powerful body.

"The world is becoming increasingly specialized," he said, adding that existing systemic threats beyond the agency's traditional monetary policy role must be addressed. "A robust regulatory regime must touch all the stakeholders," he said, with reference to the credit rating agencies that have come in for criticism amid the crisis.

Mr. Aziz was pointing out the fact that the banks and capital are now global. Most major financial institutions operate in multiple countries on different continents, and it is hard to draw national boundaries on regulation. In such an environment, international regulatory regime and international action to correct problems are required.

In its defense, it can be said that the IMF is not alone in being taken by surprise by the depth of the crisis, said Mr. Michael Mussa, IMF's former Chief Economist. Even Alan Greenspan, the former US Federal Reserve Chairman, has expressed shock and disbelief at the extent and the speech at which the crisis has grown.

The Bank for International Settlements, which groups the world's central banks, and the Paris-based Organization for Economic Cooperation and Development did not fully realize the gravity of the situation either.

"The explosion of the crisis, particularly in the past few weeks, is something that was not anticipated by anyone in official circles," Mr Mussa says, according to a BBC report.

As the unprecedented credit crunch hits even the countries with a good record of managing their economies, the IMF is considering urgent measures and reforms to rapidly respond to the developing crisis. According to the Associated Press, among the ideas under discussion is to provide a credit line in hard currency to countries that otherwise would have no access to foreign capital.

The IMF's 24-member executive board is expected to meet next week to examine the various proposals under consideration.

The immediate beneficiaries would be developing nations with good economic track records such as Turkey, Brazil and South Korea that normally have no difficulty borrowing but have seen access to money dry up as Western banks simply stopped lending.

Another idea under consideration is to let member countries borrow against the amount they have contributed to the fund, known as a quota. For example, if South Korea borrowed against its quota, it could obtain almost $22 billion.

The IMF already is discussing loan packages with close to a dozen countries and is examining ways to speed up the process in line with instructions it received this month from its policymaking committee.

IMF loans often serve as an incentive to other lenders, generating other financing from private and public sources such as the multilateral development banks.

The loans also come with stringent conditions that involve budget cutting and other belt-tightening measures that some governments have said should be eased in the current crisis. Many developing nations and NGOs have criticized the IMF for its insistence on cuts that hurt the poor the most. IMF supporters counter that the developing nations require close IMF supervision because they have not been good stewards of their economies.

A case in point is Pakistan. It has just returned to ask for IMF's help after a break of several years when its economy was considered one of the fastest growing in the world. But times are different now. The country's economy is in freefall. Inflation is running at about 30%. The rupee has devalued by about 25% in just three months. The fiscal deficit is a whopping 10% of GDP. Foreign-exchange reserves cover just six weeks of imports. A $500m Eurobond matures next February, but the market has already decided it is junk. The country needs at least $3 billion immediately, and a further $10 billion over the next two years to plug a balance-of-payments gap. Without it, default abroad might well coincide with political anarchy at home.

In the first loan made in the current global economic turmoil, Iceland and the IMF tentatively agreed to a $2 billion loan over two years in response to the collapse of the country's banking system.

The government said the deal, which still must be approved by the IMF's board in Washington, also will give Iceland immediate access to $830 million to head off the financial threat to its entire economy.

The IMF has helped several troubled developing economies earlier this decade. IMF was also very active during the Asian financial crisis of 1997-98. In the current financial crisis, Iceland became the first Western country to borrow from the IMF since Britain in 1976.

Other countries thought to be close to reaching a loan agreement with the IMF include Hungary, Ukraine and Pakistan, even though Pakistani government publicly denies it.

The head of the IMF, Dominique Strauss-Kahn, said this month that the fund has more than $200 billion available for bail out and could obtain additional resources quickly if needed. The consensus among the experts is that IMF will need a lot more than $200 billion as the list of countries lining up for IMF help grows longer by the day, including non-traditional borrowers such as Iceland.


BRADEN said...

ya the IMF operates on a 1950's platform. Belgium has more voting power than China. It has lost its capabilities too even view the entire spectrum of global finance let alone governing it. also it raises doubts as to whether or not a new world bank can even be effective. this reminds me of another old model established after world war 2 the U.N. and we see how often governments listen to them

Mayraj said...
The Road to Tahrir
The roots of Egyptians' rage can be traced back to bad economic advice from the IMF -- and the crony capitalism it left behind.
We've yet to kill off the Washington consensus
The Washington consensus is alive and well and will continue to be so unless we lobby our governments to stop pushing the failed policies of the World Bank and the IMF, argues Rick Rowden