Is the IMF at all relevant? It's probably a relic of the past

By Paranjoy Guha Thakurta

The Union cabinet on Tuesday (25 October) approved a proposal to increase India’s contribution to the International Monetary Fund (IMF), making the country the eighth largest shareholder in the Washington-based multilateral funding agency. India’s “quota” in the IMF will now go up from 2.44 percent to 2.75 percent.

There is more than a touch of irony in this move. Over two decades ago, in July 1991, the Indian government had gone to the Fund with a begging bowl to negotiate what was called a “standby arrangement” loan of one-third of a billion US dollars to stave off an impending default on the country’s external financial obligations.

Not just India, the world too has changed dramatically over the last 20 years. There was a time not very long ago when the IMF was feared in the developing world. It would “dictate” economic policies that were unpalatable to those leading governments in Third World countries, policies which made incumbent regimes unpopular and often led to their fall.

Those days have gone, unlamented, thankfully.

The Fund is today a pale shadow of its once-venerable self. Financial assistance by the IMF used to be linked to policy conditions - the most controversial of which were the structural adjustment programmes - that were insisted upon to rescue countries in acute financial distress. These conditions entailed a lowering of import barriers and the initiation of “neo-liberal” market-friendly measures that often wreaked havoc on the economies of poor countries.

After the Asian financial crisis of the late-1990s and, more recently, after the Great Recession that intensified from September 2008 onwards, developing countries had become rather wary of blindly following the Fund’s policy prescriptions - based on what was often called the “Washington consensus”. The multilateral body too has willy-nilly had to change its ideological positions in recent years.

The IMF employs battalions of highly-paid economists. But they goofed rather badly in anticipating the scale and intensity of the recession.

Here’s the evidence. The following growth estimates were made at different points of time by the Fund for the US economy for the 2009 calendar year: 0.6 percent (in April 2008), 0.1 percent (in October 2008), minus 0.7 percent (in November 2008), minus 1.6 percent (in January 2009), minus 2.8 percent (in April) and minus 2.6 percent (in July). This was one agency that certainly failed to read the writing on the wall.

For decades, critics of the IMF have pointed out the gross inequity in the manner in which it works. Out of its 180-odd members, seven countries dominate the decision-making process - these are the United States, Japan, Germany, the United Kingdom, France, Canada and Italy. A major decision by the IMF requires 85 percent voting support. This implies that one country, the US, has veto power since it has 17 percent voting power.

In 2008, the IMF approved an increase in the voting rights of all developing countries put together from 31.17 percent to 34.49 percent, much of it by increasing the voting rights of emerging economies from 23.88 percent to 25.64 percent. Consequently, the share of the affluent countries in the aggregate voting rights of the IMF came down from 60.57 percent to 57.93 percent. It was a baby step, but a move forward nonetheless, for an institution that has staunchly resisted change for over six decades.

The total vote share of the 80 poorest members of the IMF used to be just about 10 percent, while five rich countries - the US, the UK, Germany, France and Japan - together controlled around 39 percent of the total vote and had permanent seats on the Fund’s governing board.

The managing director of the Fund has always been a European (just as the World Bank has been headed by an American) because of an internal understanding among developed countries. The increase in the combined voting quotas of China, South Korea, Mexico and Turkey by a niggardly 1.8 percent in 2006 had been preceded by two years of negotiations. Despite the changes that took place, the big picture did not alter substantially.

What is even more significant is the fact that the developing world does not need the IMF any more. Most emerging economies, notably China and India, have accumulated huge reserves of foreign exchange to ensure that they do not have to knock on its doors. The Fund’s assistance is today required to bail out the highly indebted countries of Europe. Before 2008, the IMF as the “lender of the last resort” was perceived to be itself in need of intensive care as it was no longer a net lender of funds; in fact, it became a net recipient of funds.

In 2003, the IMF had loaned more than $100 billion to various countries to “assist” them with their financial constraints, including problems they were facing in managing their external balance of payments. This figure came down three years later to less than $20 billion a year. The IMF thereafter became a net receiver of funds with an inflow in excess of $20 billion in the form of repayments of past loans, much of it from developing countries.

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Despite the weakening of the influence of the Fund in the world economy, there are many - including an influential section in the government of India, and no prizes for guessing their names - who still love the IMF and have firm faith in the ability of this multilateral financial institution to pull the world out of recession.

Established in 1944 in Bretton Woods, US, just before the end of the Second World War, the Fund was meant to foster global economic stability and help countries facing financial crises.

Over the years, many developing countries have been rather unhappy with what the IMF euphemistically calls “reforms”. Until recently, financial assistance from the IMF would be linked to stringent conditions that entailed a lowering of import barriers and a movement towards capital account convertibility.

Who remembers July 1991? Manmohan Singh certainly does. As finance minister, he devalued the Indian currency by close to 30 percent that month from roughly Rs 17 for one US dollar to Rs 22. That month, the government negotiated a “standby arrangement” loan of US $ 330 million from the IMF, an amount that appears piffling today.

But India desperately needed the money at that juncture as it was on the verge of defaulting on its external financial obligations. The total foreign currency reserves with the Reserve Bank of India (RBI) had plummeted to an all-time low of less than $1 billion, barely enough to meet import requirements for a fortnight. A few months earlier, the country’s official stocks of gold had been mortgaged to the Bank of England to stave off a balance-of-payments crisis.

Two decades down the line, India’s foreign exchange reserves are at more than a “comfortable” level. Foreign currency assets with the RBI (excluding gold and special drawing rights or SDRs - a form of international currency issued by the IMF that is sometimes called “paper gold”) has often exceeded the $300 billion in the last three years.

Against this huge cache of hard currency with the country’s central bank, the total value of India’s imports during 2010-11 stood at around $350 billion, oil imports accounting for around one-third of the total import bill.

The wheel turned full circle in November 2009 when the IMF sold 200 metric tonnes of gold to India for $6.7 billion. The transaction, equivalent to eight per cent of the world’s annual mined production of the yellow metal, was the IMF’s first such sale in nine years, accounting for almost half the 403.3 tonnes that the Fund sold as part of a plan to shore up its finances and lend at reduced rates to low-income countries.

Tuesday’s decision by the Cabinet to increase India’s quota in the IMF follows what is called the Fourteenth General Review of Quotas of the Fund. India’s quota gain is the seventh largest and will more than double in terms of SDRs from 5.82 billion to 13.12 billion. After the review is completed, the four BRIC (Brazil, Russia, India and China) countries will all be among the ten largest shareholders of the IMF.

The Fund is slowly waking up to the changed global economic reality. It’s about time it did.

(The writer is an independent educator and journalist based in Delhi whose work cuts across different media - print, radio, television, documentary cinema and the internet.)