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Friday, October 9, 2015
- The International Monetary Fund (IMF)’s internal auditor has criticised the Fund’s recent policy on foreign currency reserves, and has offered an implicit warning that the United States’ outsized influence within the institution has resulted in policy that was insufficiently evidence-based.
The findings, which were publicised in an unusually narrow report on Wednesday but follow months of discussion, are seen as a victory for a bloc of “middle income” developing countries, particularly China, that have advocated hoarding larger stockpiles of foreign currency as insurance against the effects of the international financial crisis.
Starting in 2009, the IMF began advising governments around the world not to depend too greatly on such reserves, anxious over the potential impact on the global economy. The Washington-based Fund offers yearly inspections on – and in certain cases nearly oversees – economies around the world, and remains one of the most powerful forces in defining the functioning of the international financial system.
That system has been upended in the aftermath of the 2008-09 financial meltdown, however, and some key IMF tenets have increasingly been called into question, particularly by fast-rising economies such as Brazil, China, India and others. The IMF itself has realised that the Fund now needs to offer advice on finance rather than just macroeconomic policy, a new focus for which it is still strengthening its capacity.
Now, auditors with the Independent Evaluation Office (IEO) of the IMF have suggested that the Fund’s spotlight on reserves was “not helpful”, criticising its economists for focusing on symptoms rather than on underlying causes of financial instability.
Around the world, the analysts point out, foreign reserves amount to only around 10 trillion dollars – a large amount, thought not when compared to, for instance, the 105 trillion dollars in the banking system or the 117 trillion dollars in the fund management industry.
Plus, the governments and central banks that hold these reserves are relatively more interested in maintaining the stability of the international monetary system than are private-sector interests, seemingly further decreasing the potential for reserves to upset the global financial equilibrium.
Many officials, the report states, feel that IMF advice would have been better served by focusing instead on “other developments … that they considered to be of more pressing concern than reserves”.
The IEO investigators hint that the IMF may have chosen to follow such a policy approach for less than apolitical reasons.
“The evaluation found a broadly held view that (the IMF management’s) emphasis on excessive reserve accumulation was a response to frustration among some member countries with the IMF’s inability to achieve exchange rate adjustments in Asian countries with persistently large current account surpluses,” the audit states.
This has struck many as a direct reference to longstanding frustrations voiced by the IMF’s single largest shareholder, the United States, about a chief economic rival, China.
“When the IMF talks about imbalances, that’s generally code for China and the United States,” Jo Marie Griesgraber, executive director of New Rules for Global Finance, a Washington-based international network, told IPS.
“While the United States is desperately trying to jumpstart its economy, policymakers are holding interest rates low, but this is trashing other countries’ attempts to hold down the appreciation of their own currencies. Brazil is perhaps the most prominent example in this regard.”
Brazil has been at the forefront in pushing up its foreign reserves, continuing to increase this cushion as the world economy has continued to roil.
While Griesgraber suggests that powerful countries such as China and Brazil will increasingly get away with flouting IMF diktat, she warns that smaller countries continue to get squeezed by overlapping responsibilities imposed by the World Trade Organisation and various bilateral treaties – responsibilities often, and still, demanded by Washington.
Meanwhile, with the largest trove of international reserves in the world, estimated at some three trillion dollars, China is given special attention in the IEO report. Washington has long accused Beijing of holding down the yuan’s exchange rate in order to keep exports cheaper. (Significant reserves can be one result of an artificially low exchange rate.)
The exchange-rate issue even became a central point during the recent presidential election here, with President Barack Obama’s Republican opponent, Mitt Romney, pledging that he would formally declare China a “currency manipulator” on his first day in office.
And while many analysts have suggested that Beijing’s currency manipulation isn’t really much of a factor anymore, the 2012 presidential election saw both candidates trying to take a harder line on the issue.
IMF managers, meanwhile, have rejected several of the audit’s findings, warning that the IEO investigators have understated the potential disturbances caused by excessive reserves and have misconstrued the breadth of the Fund’s response in dealing with the global economic downturn.
While IMF staff did not respond specifically to any broader accusation of politicisation, others have urged caution in this regard.
“Reserves have multiple purposes,” Dev Kar, lead economist with Global Financial Integrity, a Washington-based watchdog, and a former senior economist at the IMF, told IPS in an e-mail. “While a large accumulation serves the insurance purpose … such an accumulation can impose a cost on other countries (for example, inhibiting corrective action on the exchange rate).”
He continued: “So research cannot be seen as kowtowing before any country’s economic or political agenda. The facts are what they are. The interpretation lies in the eyes of the beholder.”
On the other hand, Griesgraber emphasises that the fact that countries are feeling the urge to build up the cushion of significant reserves in the first place underscores a broader problem facing the IMF, which was originally created to offer just this type of insurance for economies facing uncertainty.
“If the IMF is not fulfilling the purpose for which it’s designed, it makes sense to have some form of self-insurance,” she says. “At the same time, we can’t forget that this has a high opportunity cost for many countries, which are forced to use their own money for interest payments rather than using it to build roads, strengthen health systems, and other social expenditures.”