What a difference a year makes in international finance. Ten years ago, the International Monetary Fund was at the height of its powers doling out its money and its boiler plate remedy of fiscal rectitude to troubled emerging market economies in East Asia, Eastern Europe, and Latin America. Today, as those same emerging market economies find themselves booming and awash with global liquidity, it is the bloated IMF whose finances are in deep trouble and it is the IMF which looks like it could do with a helping hand.
Yet, perhaps not too surprisingly, the IMF displays the greatest reluctance to apply to itself the same belt-tightening remedies it so readily prescribed to its many emerging market clients living beyond their means. Instead, it is now looking to the easy way out of selling part of its large gold holdings to balance its books without having to resort to its own belt-tightening nostrums.
At the heart of the IMF's medium-term income problem is the precipitous decline in its lending operations, which is the primary source of its income. Compounding the IMF's income problem is the fact that the decline in its lending is occurring at the very time that its administrative expenditures remain at the bloated levels they reached at the peak of its earlier lending cycle. Indeed, while IMF administrative expenditures are now approximately double their 1998 level, IMF credit outstanding has fallen from US$100 billion in 2003 to under US$30 billion at present. One has to go back to the early 1980s to find as low a level of IMF lending activity.
The IMF's markedly reduced lending activity is in large measure the result of a marked improvement in the balance of payments position of many of the IMF's traditional client countries, which have succeeded in taking measures to improve their economic fundamentals. Those countries are also presently benefiting from buoyant growth in the industrialized countries, from favorable international market prices for their commodity exports, and from unusually easy global financial market conditions.
The IMF's reduced credit book also importantly reflects the prepayment of exceptionally large IMF loans by Argentina, Brazil, and Indonesia. These erstwhile large IMF clients seemingly could not wait to throw off their IMF shackles at the first opportunity and to forswear for ever more having again to borrow from the IMF.
On the basis of the present level of IMF loans outstanding and no change in IMF policies, the IMF staff has estimated that for the fiscal year ending in April 2007, the IMF's income will decline by almost one third to around US$780 million. Such an income level would cover only around 75 percent of its estimated US$1,020 million in administrative expenditures and it would result in a net income shortfall of US$240 million. Further, in the absence of any significant pick up in IMF lending activity over the next few years, the IMF staff estimates that IMF losses could increase to around US$400 million by 2009.
In recognition of the seriousness of its longer run income problem, the IMF has appointed a panel of financial experts, including former Federal Reserve chairman Alan Greenspan, to examine the IMF's options and to come up with specific recommendations by the middle of next year. In the meantime, in an effort to strengthen its cash flow position, the IMF has already stopped adding to its precautionary reserves and it has sought to obtain higher returns on its existing reserves by lengthening their maturity.
Anticipating the expert panel's report, six IMF Executive Board Directors, representing 39 countries including the Netherlands and the Nordic countries, are proposing that the IMF sell at least a part of its large gold holdings. They argue that such sales would free the IMF from otherwise having to seek handouts from its member countries, which might compromise the IMF's independence. The scope for IMF gold sales is amply illustrated by the fact that the IMF presently holds some 103 million ounces of gold, which are valued on its books at US$8.8 billion but which now have a market value of around US$65 billion.
There is little doubt that IMF gold sales could be used to plug the IMF's expected losses. However, this ducks the more basic questions that should now be asked. Is plugging the losses of a bloated IMF the best use to which one could put the IMF gold, which after all belongs to the IMF's member countries? Should the IMF's administrative expenditures not now be severely pruned to bring them more into line with the IMF's diminished role in today's global economy? It would seem highly unlikely that the IMF will be in the lending business to its former large emerging market clients any time soon or on anything like its previous scale. And it would seem that the IMF is now shirking from assuming the responsibility of multilateral surveillance to help resolve today's large global payment imbalances, which after all was the primary reason why the IMF was originally set up in 1944.
If the IMF were a troubled emerging market economy seeking a bail out loan, the IMF would have little trouble in recommending belt tightening measures. However, when looking for remedies for its own troubled finances, belt tightening measures could not be further from the IMF's mind.