Simplification of IMF lending

Miguel de Las Casas and Xavier Serra

Economic Bulletin, 2008, issue JAN, No 6, 155-168

Abstract: The International Monetary Fund (IMF) is currently conducting an ambitious strategic review, prompted by a perception that the institution has become less relevant in the international arena. The current levels of Fund lending, which are at all-time lows, have been interpreted as a manifestation of this situation. Apart from the current absence of crises in emerging countries, some members have repaid loans early and the possibility of resorting to alternative insurance mechanisms that may displace IMF lending, such as the Chiang Mai Initiative, is increasingly being considered. The paltry levels of fi nancing granted are, moreover, insuffi cient to enable the IMF to cover its operating costs, since the revenues of the institution depend almost entirely on its volume of lending. The IMF is considering alternative sources of fi nancing to break this strong link between lending and revenues. In recent years, the IMF has made a signifi cant effort to adapt to a continuously evolving international economy, but the changes made have not been suffi cient. Certain aspects of the institution still need reviewing, such as its role in the surveillance area, the best way of responding to the needs of its members, especially the emerging economies and low-income countries, and how to improve countries’ representation in its decision-making bodies. These are all priority reforms and constitute the main objective of the strategic review currently under way. Along with the search for a fi nancing model that is not so dependent on credit, the strategic review offers an excellent opportunity to re-examine the IMF’s lending activity, and that is the aim of this article. Study of the IMF’s lending apparatus and its use during the present and the last decade provides arguments for the introduction of a number of improvements. The current range of fi nancial facilities is not the result of systematic planning, but of a process of adaptation to the different types of balance of payments need and crisis that have arisen during the IMF’s existence. The introduction of new lines in response to new fi nancial challenges has given rise to a proliferation of instruments that appears to be excessive. Indeed, some of these facilities have been used only temporarily and others have never actually been used at all. The IMF has successively eliminated the most obsolete instruments, but there is still room to simplify the current lending mechanism. At the same time it could also be made more fl exible, to enable the adaptation to possible crises to be more rapid and effective, and its incentive structure could be improved, to ensure that countries make the best possible use of the institution’s resources. This would involve precise adjustment of the volume and duration of credits, with the twofold aim of preserving resources and increasing their availability to members. With these considerations in mind, this article refl ects upon the possibility of replacing the IMF’s current credit lines by a single one that would incorporate the improvements mentioned above, while also eliminating the risk of arbitrage across instruments, for which the Fund has been criticised. In order to develop these issues, this article begins by analysing the IMF’s present lending mechanism and its use over the period 1990-2006. It goes on to explore the advantages of merging all the ordinary credit lines into a single credit line or fi nancial facility and then considers the main features that such a mechanism should incorporate, its impact and its interaction with other elements of the IMF’s lending framework. The article ends by drawing some conclusions.

Date: 2008
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