from Follow the Money

If the IMF wants to be relevant in the debate on global rebalancing ….

July 17, 2006

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It needs to be willing to issue yellow—and even red – cards to countries running a balance of payments surplus, not just countries running a deficit.

I applaud the IMF’s willingness to criticize Hungary, a big deficit country, publicly.   It gave Hungary the equivalent of a yellow card on the front pages of the FT.

I don’t necessarily think the IMF should tell countries how much social spending is right – that strikes me as a national policy choice.   But social spending generally should be financed out of current taxes, not future borrowing.   And it is the IMF’s role to highlight the risks associated with large balance of payments deficits, particularly if that deficit reflects a big budget deficit and is increasingly financed by households borrowing in foreign currency (See Lex) … The IMF should highlight the risks of balance sheet mismatches every bit as much as risk from too much spending. 

Mohsin Khan of the IMF also gave the countries of the Middle East a green card to spend a bit more a few weeks ago:

"What we want them to do is go ahead and spend money on infrastructure, the social sector and help the private sector to create jobs, and that will help in the global imbalances and the world economy," says Mohsin Khan, director of the Middle East and Central Asia department at the IMF. 

That too was the right call – though it shouldn’t really be a hard call (despite what Standard Chartered says).  With oil now approaching $80 and futures markets predicting that oil will remain high, most oil exporters probably don’t need to budget for $20 to $25 oil … and stock away the difference in offshore government savings accounts.

If oil exporting countries export around 40 mbd, and on average get $70 a barrel for their (exported) oil and spend around $30 – more than most are budgeting for now -- simple arithmetic suggests their combined current account surplus will still be around $600 billion.   They ran a trade surplus of $450b in 2005, and oil is a wee bit higher now. 

But when it comes to the Gulf’s exchange rate regimes, the IMF is still silent when it counts.  The IMF’s regional outlook highlighted the problems pegging to a declining currency, so that the Gulf’s real exchange rate depreciated even as their real export earnings soared.    Yet the Article IV on the Emirates talks of the Emirates’ 25% real appreciation since 1990, not its 15% real depreciation since 2002 (see p. 20).   The IMF staff – and the IMF board (see p. 56) – basically endorsed the Emirates plan to keep a dollar peg through 2010, when in theory the GCC will form a currency union.  The board stated that it “agreed that the fixed exchange rate policy had served the UAE well” … while welcoming the UAE’s openness to options for the exchange rate regime of the GCC in 2010.    

That basically takes any contribution from the exchange rate off the global rebalancing table until then, doesn’t it?

Consider the following graph, taking from this Menegatti/ Setser RGE paper (subscription required for the paper, sorry), which plots Saudi Arabia’s real effective exchange rate against the spot price of oil and the real exchange rates of several other countries.   I didn’t deflate oil by CPI inflation, so it isn’t a real price.  But the difference isn’t big.  It is also about a month out of date - so the oil price is a bit too low.  The UAE's real exchange would look similar. 


If the IMF is going to have a role in resolving global imbalances, its role will come from helping to bring global concerns to bear on national policy decisions.  And to highlight when individual countries decisions work against global rebalancing – and may have implications that the countries themselves haven’t fully thought through. 

I am pretty sure that the IMF’s forecasts for the US have a built-in long-term depreciation of the dollar.   Otherwise it is hard for me to see how the US current account deficit stabilizes (as a % of GDP) in the IMF’s latest forecast for the US balance of payments (see p. 11 of the US article IV/ p. 12 of the .pdf) .  Remember, keeping the current account deficit constant in the face of rising interest payments implies the trade deficit needs to fall, as the IMF’s chart clearly shows.

The IMF’s also forecasts that oil prices will remain relatively high – though perhaps not quite as high as they are right now – for some time. 

That implies that the IMF just endorsed a plan that implies further real depreciation of the currencies of countries with very large external surpluses.

To me, the IMF’s board deserves a yellow card for lacking the courage to speak out against the GCC’s insistence on pegging to a depreciating currency.  And for failing to insist that the IMF staff doing article IVs bring a global perspective to their bilateral surveillance even when it means challenging the country’s current policy. 

Every country in the IMF has the right to peg its currency if it wants to do.  But as Morris Goldstein has noted, the level at which is pegs its currency is a subject of international concern.  And if the GCC wants to keep on pegging to the dollar, they need to allow for some periodic revaluations.

And the revaluation needs to mean more than shifting to a policy of keeping one key exchange rate in a band between 7.999 to 7.991, with forays to 7.9999 and 7.9899 just to keep speculators honest …

p.s. I think it is particularly important that the IMF -- not the US --take an active role in making the case for exchange rate reform in the Gulf, for reasons that are are rather obvious right now.   The United States' political capital in the region is limited, and I am not sure this is the place to spend it -- or a place where it could be spent effectively.  Those lectures on the need for democracy haven't been all that effective. 

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