Stefania Palma talks to the International Monetary Fund’s senior management, including managing director Christine Lagarde, about its latest programmes and future direction.

Lagarde Lipton

In a post-financial crisis world, the International Monetary Fund (IMF) has played a key role in supporting countries hit by the 2008 global financial meltdown – most recently with a €1.6bn programme announced for Greece – while ramping up its surveillance work to prevent another crisis.

But the IMF also prides itself on the manner in which it has transformed itself. If it were once perceived to be focused purely on promoting fiscal discipline and maintaining global macroeconomic stability, it is now keen to broadcast the third pillar of its mandate – capacity development – as well as building on newer policy work, including promoting gender equality and environmental sustainability.

Greek saga

At the end of July 2017, the IMF approved a €1.6bn agreement for Greece, which becomes effective only after the European Commission, the European Stability Mechanism and the European Central Bank give reassurances on the sustainability of the country’s debt, and only provided that the Greek economic reform programme remains on track. This is an older type of agreement and has been chosen by the IMF due to Greece’s unsustainable debt load, which stands at €315bn.

“We have always said that [the Greek] programme had to walk on two legs. One leg is reforms, which the Greek authorities have certainly been willing to legislate, [and] of which they are considering implementation. The other leg is debt sustainability, for which we believe that some debt restructuring is needed,” says IMF managing director Christine Lagarde. “Any programme we put in place requires the debt be sustainable. If the debt is too large then it has to be restructured, and that is certainly something that we are seriously requesting in the case of Greece.

“This negotiation has begun. There has been some degree of restructuring. We believe that more is needed and we will see in the coming weeks where that is taking the European partners.” 

Aside from lending, surveillance is a second traditional IMF mandate, which it is expanding. “[This] is all spurred by the fact that there are macro-financial linkages that have become clear. If banks get in trouble, the economy is in trouble. If the economy is in trouble, public finances end up in trouble,” says David Lipton, first deputy managing director at the IMF.

The China question

In 2011, the IMF started publishing annual spillover reports analysing cross-border financial risks. In the same year, it announced the Integrated Surveillance Decision, which promotes broader surveillance analysis, including macro-financial linkages. Every five years, the IMF also publishes Financial Sector Assessment Programmes (FSAPs) for the world’s most systemic economies. In September 2017, it will publish its latest FSAP for China – a country whose debt accounts for more than 250% of its gross domestic product (GDP). This ratio could reach almost 300% of GDP by 2022, according to the IMF.

“China’s is a financial system that has evolved a lot in five years. There are more financial institutions, more sophisticated institutions, new capital market features and inter-connections among all of the above that make it both interesting and a source of vulnerability,” says Mr Lipton.

Ms Lagarde adds: “We are pleased to see that [the Chinese] authorities at the highest level are looking at [the debt] issue very seriously and are proposing measures that we very strongly welcome in order to address the excessive debt, in order to exercise more controls over the lending terms and conditions between banks and state-owned enterprises and provinces.”

Indeed, in 2017 Chinese regulators clamped down heavily on financial sector malpractice and shadow banking. “China is extending the perimeters of regulation to make sure that all relevant institutions are covered, that enough capital is held against [new financial products] and that the web of interconnectedness between banks, non-bank institutions and security houses is properly monitored,” says Mr Lipton.

The question, however, is whether the country will sustain this crackdown if it dents its economic performance. “We will have to see how they handle that when the time comes. Right now there appears to be a determination at the highest level of leadership,” says Mr Lipton.

Asia-Pacific and the IMF

The IMF is also renewing its focus on smaller economies in the Asia-Pacific region. In 2017, it increased the level of assistance available to countries hit by significant natural disasters. Small island economies in the Pacific often fall within this category.

A problem for small economies hit by natural disasters is that if they have a high GDP per capita, they do not have access to some multilaterals’ concessional lending. But this is not the case with the IMF. “We have a special type of instrument that allows members, including small island economies, to access resources more rapidly,” says IMF deputy managing director Tao Zhang.

More broadly in the region, the fund is keen to erase some of the negative perceptions that still linger from the 1997 Asian financial crisis. “I understand that parts of south-east Asia thought our advice came from principles and not [from] paying enough attention to realities. [But now] they recognise that we try to adapt to a new environment. Any guiding principles need to be tailored to countries’ expenses, and flexibility is needed together with basic rationale,” says Mr Zhang.

Since the turmoil of 1997, Asia has turned around, however, by developing some of the world’s strongest financial markets. “Having gone through the [crisis], and having gone through the restructuring and the very harsh measures that were taken, that were very front-loaded at the time, [Asia’s] financial sector is much stronger. In many instances the banking sector has been strongly consolidated; many of the zombie banks have been eliminated,” says Ms Lagarde.

While recognising the resilience of Asia’s banking and financial sectors, IMF deputy managing director Mitsuhiro Furusawa highlights the uptick in leverage as a potential risk. “We should always be vigilant of growing risk, [such as the] rapid growth of credit and debt, especially the foreign currency denominated debt,” he says.

The third pillar

The third key mandate of the IMF is capacity development, which takes up about one-third of the IMF’s budget and aims to build institutions and talent that will help sustain long-term economic development. The IMF is now keen to highlight this constituent, which has gone largely unnoticed for decades.

The IMF’s capacity development ranges from training government officials to helping a central bank set up an inflation-targeting framework or a country set up a tax collection agency. “[Our tax work] is something that makes a difference because we had experiences with other countries with similar environments so we can see what worked and what didn’t. Results can be very good and fast,” says Carla Grasso, deputy managing director and chief administrative officer at the IMF.

A key challenge, however, is retaining government staff trained by the IMF. “We deliver technical assistance, we train [staff], and then a few years later we have to do it all again because people go work in the private sector. These countries must invest in ways to retain their staff but it’s difficult to compete with the private sector,” says Ms Grasso. The institution has trained more than 80,000 government officials since 2008, and in 2013 it launched online training programmes that have so far been taken up by 34,000 individuals.

Today, Myanmar is the country receiving most capacity development services, while Africa is the top regional recipient. In 2017, the IMF set up a new training and technical assistance centre for south Asia in New Delhi and is in the process of opening one in China to cover north Asia as well as countries along China’s Belt and Road initiative. “We would like to open it in 2017,” says Ms Grasso.

Gender equality

Today, the IMF stresses that it is expanding beyond the three pillars of lending, surveillance and capacity development, a change that has largely materialised under Ms Lagarde’s leadership.

“I am very attentive that the fund be aware and ahead of the curve in relation to anything that is macro-critical. We have taken an interest in issues of inequality, gender participation, climate change, governance and corruption. It is also critically important that we understand technology and sciences and the impact that [these] will have on the economy at a macro level,” she says.

Indeed, the IMF now produces extensive literature on the impact of women’s exclusion from the labour force and the formal financial sector. “It has macro-critical impact, particularly in [countries with] ageing populations, where giving [women] better and more access [to work and financial services] would address some of the issues these countries are facing. If it is not a moral issue, it is an economic no-brainer, in my view,” says Ms Lagarde.

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