IMF macroeconomic advice: “thanks, but no thanks?

News|Bretton Woods Project|23rd November 2006|update 53|url

The IMF?s ability to dictate economic policy to member states is fraying because of lost credibility in the wake of its failures in East Asia, Argentina and Russia (see Updates 8, 10, 28). Smaller developing countries are now joining the larger ones such as Brazil and Indonesia in rejecting the Fund’s interference in their economies.

In the midst of Ecuador’s presidential election in October, the IMF reportedly recommended in private that the government accumulate reserves to guard against a drop in the oil price and a possible adverse ruling in an investment arbitration case with a multinational oil company. The September 2006 World Economic Outlook (WEO), a semi-annual IMF report, criticised Ecuador’s energy investment policies.

Ecuadorean economy minister Armando Rodas called the WEO "a poor report filled with fallacies". The advice on reserves prompted the minister of foreign affairs Francisco Carrion to state "Ecuador will act according to its own interests rather than upon the recommendations of international institutions." Rodas demanded that the IMF stop "meddling in the legal and internal affairs of Ecuador and respect its sovereignty." One candidate in November’s presidential run-off, Rafael Correa, has flirted with declaring a unilateral moratorium on repayment of Ecuador’s debt to the IMF to free up resources for social programmes.

South Africa has also publicly refused the IMF?s advice. The central bank in South Africa has a relatively broad band for its inflation target of three to six per cent. In the Fund’s 2006 Article IV consultation, an annual economic report produced for each Fund member, staff suggested that the bank explicitly target the midpoint of the band. Central bank governor Tito Mboweni rebuffed the IMF and declared that both he and the finance minister Trevor Manuel agreed that the IMF should "avoid anything that would appear to be policy prescriptive for countries which are not borrowing from [it]".
Rates, reserves policies in flux

The industrial world, increasingly concerned over Chin trade surplus growth, is pushing for the IMF to increase its surveillance of exchange rate regimes. This has been bolstered by an Independent Evaluation Office report that criticised the Fund's surveillance efforts (see Update 51). One idea floated by US researcher John Williamson, among others, is for the IMF to publish equilibrium exchange rates for each member country regardless of the currency regime in use. It is widely viewed that this suggestion is targeted at China, whose currency is considered undervalued by the United States and Europe.

However, an October Fund working paper by Dunaway, Leigh and Li casts doubt on this exercise, concluding that "small changes in model specifications, explanatory variable definitions, and time periods used in estimation can lead to very substantial differences in equilibrium real exchange rate estimates. Thus, such estimates should be treated with great caution."

The executive board is still reviewing the IMF?s policy on exchange rate surveillance, which was last revised in 1977, but it is unlikely to reach consensus on this topic. In his statement to the IMFC, Nor Mohammed Yakcop, Malaysi finance minister, argued against the review of the policy, saying “we do not support the proposal for the Fund to determine and make public whether a member’s exchange rate is misaligned. It is widely known that the estimation of equilibrium exchange rate levels is highly sensitive to the underlying assumption.” Similar resistance was expressed by ministers from Argentina and Nigeria.

A recent Fund working paper on the optimal level of foreign exchange reserves by Jeanne and Ranci