Why is the IMF trying to be an aid agency? by Kenneth Rogoff

Much like the US Federal Reserve, the International Monetary Fund has subtly broadened its own mandate even though it has failed to adapt to changing economic circumstances. And, as with the Fed, higher inflation could damage the reputation of the IMF – and the savings the Fund is supposed to help.

CAMBRIDGE – Who will clean up the inevitable financial mess in emerging markets if persistent inflation forces the US Federal Reserve to start raising interest rates significantly? The International Monetary Fund, normally responsible for pulling countries from the brink, seems disappointed with the work. Rather than embrace its traditional role of helping struggling debtor countries help themselves, the IMF has attempted to transform itself into an aid agency.

Of course, being Santa Claus is more fun than Scrooge, and rich countries give far too little foreign aid. I have long advocated the creation of a world carbon bank to channel subsidies and technology. Likewise, the arguments in favor of funding a restructured World Health Organization to fight pandemics are compelling. But in a world where private capital flows far exceed official loans, traditional IMF programs still have a critical role to play in mitigating and managing financial crises.

This role was abandoned during the pandemic, and it will be difficult to restore it. Distributing funding with few conditions made sense in the initial phase of the COVID-19 crisis. But because the IMF is still very structured as a lending agency, it will eventually have to be repaid or go bankrupt itself. To get a sense of what that might look like, consider the tensions with Argentina, which received a massive $ 57 billion loan in 2018 with unusually low terms from the IMF and is now reluctant to repay.

The lack of conditionality in some recent cases has been appalling. Should the IMF really give virtually unconditional loans to a government that restricts food imports to an undernourished population, thereby exacerbating the problems caused by the government’s own exchange rate controls? It did so in Nigeria in 2020. In other cases, the Fund has been extraordinarily generous in its normally prudent surveillance assessments, giving its seal of approval to countries with skyrocketing debt-to-GDP ratios that only stabilize. under very optimistic assumptions.

The 2021 Article IV report for Ghana is a good example. And the Fund has been even more optimistic about large emerging markets such as Brazil and South Africa, reiterating that tackling the pandemic is the top priority, despite soaring levels of debt, rising inflation and latent banking problems.

This lack of conditionality was intentional. During the pandemic, the Fund massively expanded the use of its rapid financing instrument, a loan facility that does not oblige countries to engage in a “full-fledged” adjustment program (and which, in practice, requires few or no conditions). Most prominently, he persuaded its members to approve an emergency issue of $ 650 billion in Special Drawing Rights (SDRs, the Fund’s reserve asset), which are also virtually unconditional. SDRs are essentially direct aid that goes to all members of the IMF, including Russia and Iran. And yet, due to the instrument’s obscure structure, developing economies should receive only a small fraction of the pot.

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There is a strong case for overhauling the financial structure of the IMF and its sister organization, the World Bank, so that the vast majority of the financing they provide takes the form of pure grants, rather than loans. . I have advocated such a transformation for decades, and recently the idea has started to receive serious attention. Because the IMF is currently structured as a revolving fund, it would quickly run out if it gave up all of its loans, as some NGOs always ask it to. The only way that would not happen would be if the advanced economies agreed to replenish the well, which they seem to hate to do.

A key condition should be that IMF funds are not used simply to repay private creditors. Researchers have clearly shown that this happened during the 1980s, and even more recently. Chinese state-owned banks that charge interest rates in the private market are also now a factor to consider. There should be ways to ensure that IMF loans are not used to repay Chinese loans.

There are stark parallels between a well-meaning IMF and a well-meaning Fed that now wants to promote greater equality. After long arguing that the sharp rise in inflation was transitory, the Fed now faces a dilemma. Unless monetary policy is tightened enough over the next year (a risk far greater than official rhetoric acknowledges), inflation could set in. If it tightens too quickly, there will be a recession. Stagflation is also a real possibility.

The IMF also needs to pivot in its core surveillance functions. There is great sympathy for the desperate plight of emerging markets and developing economies, but the IMF is not the World Bank, which is really an aid agency. Instead, strong IMF conditionality is essential to establish financial stability and ensure that its resources do not end up financing capital flight, repayments to foreign creditors, or domestic corruption. The pandemic is not going to go away; neither should the traditional IMF.


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