The IMF and World Bank are meeting in Prague at a time when the Fund is reinventing itself. The problem is that it is not sure in what guise it should now appear. Anthony Rowley reports.

Prague will see the launch of the new IMF – a streamlined, more focused and transparent institution that will be more private sector-friendly and more accountable to its member governments and the public.

This, at least, is the hope of the designers of the new financial architecture. But with a multiplicity of reform plans being presented, some fear the revamped IMF could end up embodying all the worst features of design by committee.

Calls for IMF reform multiplied when former managing director Michel Camdessus – whose tenure was marred by the IMF’s questionable performance during the Asian crisis and who was criticised for pushing it too far into “the poverty business” – announced his retirement late last year.

By the time Horst Köhler, who was a compromise candidate after Germany’s original choice of Caio Koch-Weser was rejected, took over a few months later the reforms seemed almost cut and dried. First, US Treasury Secretary Lawrence Summers weighed in with demands for a more market-oriented and slimline IMF with fewer lending facilities.

He called for a return to promoting macro-economic stability and wanted the business of economic development to be left to the World Bank and other institutions. Then came the Meltzer Report from the US Congress which proposed that the IMF be restricted to short-term lending to “solvent” governments and that it should “serve as a quasi lender of last resort to emerging economies”.

The Group of 20, established as an “informal mechanism for dialogue among systemically important countries within the framework of the Bretton Woods system”, had its say in Berlin last December. However, this was nothing compared with the highly detailed (17-page) reform agenda which the G-7 finance ministers issued for the IMF at their meeting in Fukuoka in July, which was endorsed by the G-8 summit in Okinawa.

All this interference provoked anger in the IMF. In a speech shortly after his appointment, Mr Köhler said: “I consider it very important that the discussion about the reform of the IMF is conducted within the Fund itself.” Meanwhile, the detailed G-7 prescription for remodelling the IMF annoyed even European countries that are not members of the group, which felt a small but powerful group of nations was hi-jacking a process which should be decided by all 182 members of the Fund.

Mr Köhler says that in Prague: “I will outline my vision for the future role of IMF.” There have been strong indications, however, that this will be not so much his own plan but a composite vision, stitched together from a combination of his own ideas and those of the IMF’s most powerful shareholders, including the US, Japan, Germany, France and the UK. For example, he is expected to emphasise the need for the IMF to focus on promoting macroeconomic stability and growth and to create a clearer division of labour by allowing the World Bank to take the lead in the direct fight against poverty.

This has been a constant refrain from the US Democrat administration, the (Republican-controlled) Congress and from the G-7. Mr Köhler has publicly acknowledged, too, what Mr Summers and other Treasury officials have been saying for some time: that “the Fund has been overstretched in the past and needs to refocus.”

The IMF had “learned a key lesson from recent crises: to focus more on crisis prevention. My ambition is not to have more and more programmes for more and more countries”, he said, apparently to counter a charge levied against Mr Camdessus’ IMF and thereby to make peace with critics of the Fund.

In another key area – that of co-operation between the IMF and private capital markets – Mr Köhler appears eager to satisfy the US and other countries in which it is taken for granted that private capital markets will continue to be the principal means of channelling funds to developing countries, and that the role of the IMF will be to ensure a safe and stable environment for such flows.

One of his first actions in office was to establish a Capital Markets Consultative Group which was due to have its first meeting in London on September 12. One senior IMF official told The Banker: “The new managing director has a vision of the centrality of the private sector in the financing of the membership which was not so obvious under the previous managing director.”

Mr Köhler’s background as former head of the European Bank for Reconstruction & Development (EBRD), which has achieved closer co-operation with the private sector than any other development bank, may help to explain this emphasis.

However, some IMF officials believe he might be building up “unrealistic and unrealisable” expectations about what degree of co-operation can be achieved between the Fund and capital markets. Mr Köhler believes the IMF should focus on identifying problems early through the use of better data and try to prevent crises by promoting “internationally agreed standards and codes for sound monetary and fiscal policy”.

Neither fiscal nor monetary policy defects were at the heart of the Asian crisis, however, and he has acknowledged that “the Fund’s surveillance must pay much closer attention to financial sectors in member countries to identify vulnerabilities and to provide advice on improving their soundness”.

Despite his apparent desire to make peace with the IMF’s most vocally critical shareholders, there is at least one area in which Mr Köhler may be on a collision course with some of them. This is in the sensitive and controversial area of the conditions that are attached to IMF loans and which have been criticised in the wake of the Asia crisis as being ill-designed and over-burdensome in some cases.

In the case of Indonesia, IMF conditionality is blamed by some for the country’s economic and political disintegration. While acknowledging that “conditionality is indispensable for IMF lending”, Mr Köhler says: “Adjustment and reform programmes are more likely to be successful on a lasting basis the more that countries identify themselves with these programmes.” He believes the IMF should “have respect for the sovereignty of countries to define their own adjustment and reform paths”.

Such words may have gone down well in the 15 developing and emerging market economies he visited when he took office. However, some sources suggest they will not do so with some powerful IMF shareholders who wish to continue using the Fund as an instrument to bring developing countries into line with the market-oriented “Washington Consensus” on financing and development.

This, plus his insistence that “the Fund should clearly stay engaged” in poor countries, may point to confrontation in Prague, not only between Mr Köhler and some IMF shareholders but also among some IMF governors. Mr Summers has urged a sharp retreat from the pro-poor route down which Mr Camdessus sought to take the IMF. And the Meltzer Report was blunt on this issue, saying: “The IMF should cease lending to countries for long-term development assistance (as in sub-Saharan Africa) and for long-term structural transformation (as in post-Communist transition economies).”

But by the time G-7 finance ministers met in Fukuoka this summer, a softer tone had begun to emerge, reflecting the strong view in Japan and some European members of the group that the IMF must stay engaged. The G-7 communique said the IMF “has a critical role in supporting macro-economic stability in the poorest countries through the poverty reduction and growth facility (PRGF)”.

This was formerly known as the Extended Special Assistance Facility or ESAF and Mr Camdessus reportedly angered the US when he insisted on giving it a specific poverty orientation role.

While Mr Köhler has apparently sought to be all things to all people and to appeal to all constituencies during his honeymoon period at the IMF, differences are likely to begin emerging in Prague over the scope and orientation of the Fund.

“The consensus is likely to favour preserving many of the IMF’s existing facilities, but with some changes,” deputy managing director Shigemitsu Sugisaki told The Banker.

“The Fund has already streamlined some of the facilities by eliminating them [such as one related to commodity buffer stocks and a currency stabilisation fund, which was not used]. We are reviewing various aspects of existing facilities and we will modify some aspects including the rate of charge and maturity and some eligibility criteria.

“The standby arrangement is the central pillar of IMF facilities and also we have the extended fund facility (EFF) and, in addition, we have introduced a few other instruments for use at the time of crisis. There is the supplementary reserve facility (SRF) and the contingent credit line (CCL).

The SRF was first used for Korea and it is at a higher rate of charge and with shorter maturity than other facilities. It has also been used by Brazil. Another important facility is the CCL, which has not been used so far and we are reviewing it to make it more attractive to potential borrowers.”

The IMF is unlikely to become simply the central bank-like provider of short-term liquidity in times of crisis that was called for in the Meltzer Report. It must be equipped to mount a credible response in times of financial crisis, Mr Köhler insists.

But at the same time he is unlikely to push for any augmentation of its financial muscle. “Creditors and borrowers must know that the Fund’s resources are, and should remain, limited,” he says. Not all shareholders may agree – Japan for one. “As far as the IMF is concerned, the total size of the quotas is now somewhat smaller in relation with world GDP or world trade,” says Japan’s minister of finance for international affairs Haruhiko Kuroda.

“In the past 50 years, every five years quotas have been reviewed but the general tendency has been for somewhat smaller quota increases over time. In relative terms, IMF quotas have shrunk in relation to GDP and trade, and certainly in relation to overall capital flows they are now fairly small. So there can be a case made for significant quotas increases.”

The question of quotas is also closely linked to the sensitive issue of voting rights in the IMF. “The core of the problem is the [IMF] quota share,” says Mr Kuroda. “The IMF was established more than 50 years ago and from time to time quota shares have been adjusted. However, the speed of adjustment has been rather slow so that in the case of some Asian countries actual current quotas are small compared to their appropriate ‘calculated’ quota share [based on a formula which takes economic and other factors into account].

“There are two ways to review quotas: one is the general review which has to be made every five years according to the Articles of the IMF; also, special quotas increase can be made. In the past, these two measures have been used but I think the next General Quota Review, which should be completed by 2003, must be such that significant quota share adjustment be made so as to reflect more closely the changing realities of the world economy. If possible, the General Quota Review should be made before that time.”

Another Japanese official says: “This is a key issue because the share of the US and Japan is very much undervalued and the European share very much overvalued. There is a 24-member executive board at the IMF and eight or nine of them represent European countries [including Spain which is grouped with central American countries],” he points out. “The Netherlands, Belgium and Switzerland are very much over-valued [in the IMF]. Our major concern is not to increase our quota share but to adapt the actual situation, especially for the Asian countries.”

The IMF executive board has commissioned a group of experts – headed by Harvard professor Richard Cooper – to study the quota formula issue.

One IMF official says: “There are various formulas but the final decision will be made by the executive board and the board of governors, taking account of all the considerations. “We will have a discussion on it but that does not mean we will proceed to a quota increase. Theoretically there can be a redistribution of votes without a quota increase but in practice it is quite difficult.”

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