from Follow the Money

If the IMF wants to remain relevant …

October 10, 2007

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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IMF lending has already shrunk to the point where the IMF is little more than the Turkish monetary fund, and Turkey could easily decide to repay the fund.   Right now, Turkey isn’t exactly suffering from a shortage of capital inflows.   

Of course, the world could change and demand for Fund lending could reemerge.  Commodity prices could fall, putting pressure on a few commodity-exporters that have increased spending rapidly or current wave of private capital flooding emerging economies could come to an end, making it harder to finance Eastern Europe's large external deficits countries – creating new demand for fund lending. 

Then again, the IMF might go some time before any large emerging economy call on its resources.   A firefighter shouldn't always be busy.

However, the IMF doesn’t just exist to lend to crisis-prone economies short on reserves.   It also was set up to help avoid conflict over exchange rates.   Exchange rate policies tend to have large external spillovers.   A country cannot hold its exchange rate down without holding someone else’s exchange rate up.   The IMF has a mandate to exercise firm surveillance over exchange rates, and to identify misalignments that inhibit global balance of payments adjustment.  

Alas, the IMF’s executive board doesn’t yet seem willing to call out countries with fairly clear exchange rate misalignments – countries like the United Arab Emirates

The IMF board indicated: 

Directors agreed that the current peg of the dirham to the U.S. dollar has served the U.A.E. well. They considered that the exchange rate of the dirham is in line with fundamentals, and noted that further structural reforms would help to sustain the U.A.E.'s competitiveness. (emphasis added) 

Really?   $80 a barrel oil isn’t one of the UAE’s “fundamentals”?  I would love to see the analysis that supports the board’s assessment that the dirham is in line with fundamentals, especially as the dirham -- according to the data the IMF released -- depreciated in real terms from the end of 2003 to the end of 2006 and oil rather obviously didn't.   The IMF doesn't expect the increase in the price of oil -- relative to say its 1990s average -- to be temporary either. 

The nominal depreciation of the dirham at a time when the increase in the real price of oil calls for a real appreciation has contributed to the large increase in inflation in the UAE – and, given the dirham’s peg to the dollar, very negative real rates.   That isn’t exactly a policy I would expect the IMF’s Executive Board to endorse.

A few bold members of the IMF’s executive board did see “value in some flexibility” going forward.  Good for them.  The UAE should be an easy case with oil close to $50 a barrel, let alone with oil close to $80 a barrel. 

Former Treasury Under Secretary Adams argued two years ago that: 

the perception that the IMF is asleep at the wheel on its most fundamental responsibility—exchange rate surveillance—is very unhealthy for the institution and the international monetary system. 

I agree.    

And yes, I fully recognize that the United States didn’t exactly set the best of examples by criticizing the Fund’s conclusion earlier this year that the dollar was over-valued on the grounds that the dollar’s exchange rate was “market-determined” despite record intervention in the foreign exchange market by emerging economies.

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