The International Monetary Fund: Current Reforms

The International Monetary Fund: Current Reforms

Order Code RS21330
Updated April 14, 2004
CRS Report for Congress
Received through the CRS Web
The International Monetary Fund:
Current Reforms
Martin A. Weiss
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
In the wake of financial crises in Mexico (1994-1995), East Asia (1997-1998),
Russia (1998), Argentina and Turkey (2000-2001), the IMF has been challenged to
rethink both its core mission, its operations, and its lending activities. The IMF has
responded to its critics with numerous reforms. The reforms fall into three broad
categories: crisis prevention, crisis management, and the IMF’s role in economic
development. This issue is of ongoing interest to Congress, which plays an active role
in the reform agenda and periodically is asked to appropriate funds for the U.S. quota
in the IMF. This report will be updated as events warrant.
Background
The International Monetary Fund (IMF) is an international organization with a
current membership of 184 countries. Conceived at the 1944 Bretton Woods conference,
the IMF’s core mission is to foster economic growth and increased international trade by
supporting international monetary cooperation, exchange rate stability, and temporary
financial assistance to countries facing balance of payments difficulties.
IMF operations and responsibilities can be grouped into three areas: surveillance,
lending, and technical assistance. Surveillance involves monitoring economic and
financial developments and providing policy advice to member countries. Lending entails
the provision of financial resources under specified conditions to assist a country
experiencing balance of payments difficulties. Technical assistance includes help on
designing or improving the quality and effectiveness of domestic policy-making.
In the wake of financial crises in Mexico (1994-1995), East Asia (1997-1998),
Russia (1998), Argentina and Turkey (2000-2001), the IMF has been challenged to
rethink its core mission and how it operates its surveillance and lending activities. The
IMF has responded with numerous reforms. The reforms fall into three broad categories:
Congressional Research Service ˜ The Library of Congress

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! International financial crisis prevention;
! International financial crisis management; and
! Role in economic development and its relationship to the World Bank
After summarizing these reforms, a final section of this report will address other
proposals for changes to IMF policy and operations.
Crisis Prevention Reforms
Changes that focused on crisis prevention include IMF institutional reforms, the
creation of international standards and codes of good financial practices, and the active
promotion in developing countries of sound and robust financial institutions.
IMF institutional changes have centered on improving transparency and
accountability. As recently as ten years ago, IMF documents were not readily available
for public release. Now, almost all IMF documents, including Article IV Consultations,
are available on the IMF website. There are also calls for the IMF to release information
on board decisions and votes, and other documents relating to sensitive discussions
between the IMF and member countries. Proponents argue that greater openness might
lead to better compliance regarding loan arrangements. Critics, however, note that greater
openness might inhibit frank exchanges between the IMF and member countries.
Congress and the Administration played a substantial role in pressing for increased
transparency and accountability at the IMF. In November 1998, as part of legislation
authorizing the most recent IMF quota increase, Congress established the International
Financial Institutions Advisory Commission (IFIAC) to recommend future U.S. policy
towards the International Financial Institutions (IFIs). The commission submitted its final
report to Congress on March 8, 2000 and proposed numerous reforms to the structure and
operations of the IMF.1 In addition, congressional pressure during the 1998
appropriations hearings, and codified in the ensuing legislation, sought to make U.S.
support of the IMF and its quota increase conditional on numerous transparency and
accountability reforms. Later, to avoid undercutting the replenishment, Congress agreed
to make its policy demands advisory and not compulsory.
Other institutional changes have been suggested from within the IMF. The Quota
Formula Review Group, for example, was created in 1999 to address the shifting balance
in voting power among countries within the IMF.2
Another major initiative of the IMF, the United States, and other international
financial institutions is the Financial Stability Forum (FSF). Started in April 1999, the
FSF meets several times a year to promote international financial stability through
1 See CRS Report RL30635, IMF Reforms and the International Financial Institutions Advisory
Committee, by J.F. Hornbeck.
2 For a lengthier discussion of recent IMF institutional reforms, see: Houtven, Leo Van
“Governance of the IMF: Decision Making, Institutional Oversight, Transparency, and
Accountability.” The International Monetary Fund, 2002.

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information exchange and international cooperation in financial supervision and
surveillance. The FSF has issued a “Compendium of Standards” that “provides a
common reference for the various economic and financial standards that are
internationally accepted as relevant to sound, stable and well-functioning financial
systems.”3
The FSF highlights standards in three areas: Macroeconomic Policy and Data
Transparency, Institutional and Market Infrastructure, and Financial Regulation and
Supervision. Two IMF codes addressing monetary, financial, and fiscal transparency
and two IMF standards addressing the timely dissemination of accurate financial data,
comprise the first area of FSF standards, Macroeconomic Policy and Data Transparency.
While the benefits of accounting standards and information transparency may seem
apparent, some critics note that the implementation of these standards may be difficult.
Acceptance is voluntary, and there is no overt mechanism for enforcement. Countries are
free to meet standards or not; yet for those seeking access to global capital markets, there
is a strong incentive to be seen as making progress in standards such as data accuracy, its
timely dissemination, and macroeconomic transparency. These criteria are fundamental
for lending decisions in the private capital markets.
Crisis Management Reforms
In addition to preventing international financial crises, reforms have been targeted
at improving the way the IMF uses its resources in managing crises. The objective of
these reforms is to keep crises from spreading from country to country (contagion) and
to minimize their damage. Many economists stress that because financial crises are
unavoidable, the challenge is control and not their elimination.
Each financial crisis is different. There have been banking crises due to solvency or
liquidity concerns (Asia), debt crises due to unstable debt levels (Argentina), and
exchange rate crises due to macroeconomic difficulties (Turkey). While no general
standards or set of economic polices will resolve all financial crises, the IMF has
determined that excessive sovereign debt is a key cause of many crises.
Sovereign bonds (government issued debt) are the primary form of developing
country debt. These bonds are held by many types of investors, both large and small, and
represent a major shift in the types of developing country debt. When countries ran into
economic difficulties 20 years ago, their debt consisted primarily of bank loans, issued by
a small number of private banks. It was relatively easy for the banks to work together
with delinquent countries and arrange terms to restructure the debt. There is now a much
wider spectrum of investors in sovereign bonds, creating much costlier and more difficult
resolutions. For example, Argentina defaulted on its sovereign debt in the fall of 2002
and is still negotiating with the IMF and its debtors. However, there is no formal
mechanism to coordinate restructuring negotiations between bond holders and the
Argentine government.
3 More information regarding the Compendium of Standards can be found at
[http://www.fsforum.org/Standards/Home.html].

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To address these problems, both institutional and policy reforms have been proposed
and some have been implemented. The IMF has created two internal groups to conduct
research and explore issues in international capital markets: the International Capital
Markets Department and the Capital Markets Consultative Group. Both groups are
expected to deepen the Fund’s understanding of the international capital markets, the
forces driving the supply of capital, and the constraints these capital flows place on
economic policy makers. In March 2002, the IMF issued the first Global Financial
Stability Report, a quarterly publication on the state of the global financial markets.
The IMF has also proposed a type of bankruptcy procedure to address problems of
sovereign debt reform. Created by Anne Krueger, IMF First Deputy Managing Director,
the proposal involves the creation of a so-called Sovereign Debt Restructuring
Mechanism (SDRM). Her proposal would afford rights to defaulting countries similar to
those afforded bankrupt companies in the United States under Chapter 11 of the U.S.
Bankruptcy code. A standstill on debt payments would go in effect, while countries
renegotiate their debt contracts. Also, a dispute resolution mechanism would be created
under IMF auspices to coordinate debt restructuring. The creation of an SDRM could
lead to a significant change in the IMF’s role in the world financial system. However, its
implementation could be difficult, since it may involve an amendment to the IMF Articles
of Agreement, which requires an 85% special majority vote.
There are many other competing proposals for sovereign debt reform, the most
prominent being a plan put forth by John Taylor, U.S. Treasury Under Secretary for
International Affairs. Instead of creating a new body to resolve debt crises, Taylor’s
proposal would involve rewriting loan contracts to include collective action clauses.
These clauses are meant to resolve the difficulty in renegotiating contracts between the
issuer and a very large number of bond holders.4 These clauses would also specify the
procedure to be followed in the case of a default. Many commentators note that these
two proposals are not mutually exclusive. Anne Krueger has commented that the SDRM
and collective action clauses are the “two-track approach to improving sovereign debt
restructuring” that will dominate policy discussions.
At the 2002 IMF annual meetings, the IMF won tacit approval for the SDRM. In
its September 28th communique, the International Monetary and Financial Committee
called on the IMF to go further and draft a concrete proposal for the SDRM, in addition
to working with private sector and sovereign debt issuers to introduce collective action
clauses.
Role in Economic Development and Relationship to the World
Bank
While the first function of the IMF is macroeconomic stability, its second function
is the support of its sister organization, the World Bank and its mission of economic
4 For a more detailed analysis of the Krueger and Taylor proposals, see CRS Report RL31451,
Managing International Financial Crises: Alternatives to “Bailouts,” Hardships and Contagion,
by Arlene E. Wilson.

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development.5 This has manifested itself in recent IMF reforms that give economic
development and poverty relief heightened importance in IMF lending decisions.
Recent IMF reforms, such as the creation in 1999 of the Poverty and Growth Facility
(PRGF), a concessional loan facility, have been implemented to help the IMF deal more
effectively with its poorest members. The PRGF, an outgrowth of the earlier Enhanced
Structural Adjustment Facility (ESAF), resulted in a clear mandate for the IMF to make
poverty reduction a goal of its concessional lending. It was under this previous structural
adjustment mechanism that much of the lending to Africa occurred.
Some critics, such as the Meltzer Commission, argue that this new involvement
creates an overlap between the IMF and World Bank, and that the two institutions need
to restrict their operations to their core functions. Other analysts assert that IMF/World
Bank overlap is not only desirable, but necessary.6 These analysts argue that the joint
tasks of economic development and capital and currency markets integration necessitate
significant IMF/World Bank cooperation.
Another example of IMF involvement in economic development concerns the
promotion of financial institutions in developing countries. The IMF, through the FSF,
is promoting standards reform and the creation of sound financial institutions in
developing countries. The IMF often requires specific institutional policy reforms as a
condition for a loan. However, in many instances, the IMF lacks the capacity to help
implement these reforms. The World Bank and the multilateral development banks have
taken the lead through loans and reform programs to address these concerns.
A joint IMF and World Bank effort initiated in May 1999, the Financial Sector
Assessment Program (FSAP), aims to promote the creation of sound financial institutions
in member countries. These reforms most likely will be implemented by the World Bank
and the Multilateral Development Banks through IMF-sponsored adjustment programs.
In April 2004, the IMF created a new mechanism — the Trade Integration
Mechanism (TIM). This was designed in order to help developing countries resolve
balance of payments difficulties that may arise as many countries lose preferential trade
access to the rich countries as part of the Doha Round negotiations of the World Trade
Organization.
Finally, IMF/World Bank coordination was a major concern of a two-year review of
IMF conditionality that led to new guidelines on the design and implementation of
conditionality in IMF-supported programs approved by the IMF Executive Board on
September 26, 2002. During the review, directors noted that it would be useful to create
a “lead agency” in different policy areas that would design and monitor conditionality for
5 Kenneth Rogoff, IMF Economic Counselor and Director, Research Department,”Reflections
on One Year at the IMF,” Speech to the National Economists Club, Washington, D.C. September,
5 2002.
6 Bird, Graham. The International Monetary Fund and Developing Countries: A Review of the
Evidence and Policy Options. International Organization, Vol. 50, Issue 3 (Summer 1996), 477-
511.

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both World Bank and IMF programs. The IMF anticipates closer coordination between
itself and the World Bank will increase the effectiveness of PRGF arrangements.
The Future Reform Agenda
The IMF-initiated reforms discussed in this report address some of the principal
critiques of IMF activities. However, some major concerns remain. Prominent among
them is the need for the IMF to devise programs, on one hand, which meet the needs of
its borrowers, while retaining, on the other hand, the confidence and support of the major
countries that provide the hard currencies which fund its operations. In many cases, the
gap between the goals and expectations of the borrower countries and the donor countries
is great. For example, many of the major countries which finance the IMF’s operations
subscribe to the basic concepts embodied in the “Washington Consensus,” and make them
the core policy requirements for IMF assistance.7 Many borrower countries, by contrast,
believe that these policies are too narrow and lack sufficient appreciation for their real
needs and the limits of their political and economic situations. As developing countries
are now the primary recipient of IMF assistance and policy advice, divergence between
lenders and creditors has grown, with increasing protests against the IMF in general and
specific IMF loan programs.
A sizable number of the public in both the developed and developing countries have
strongly negative views of the IMF. This tends to both encourage and hinder the process
of reform by intensifying, polarizing and complicating public and official discussion of
these issues. Fundamentally, the IMF is an economic and financial institution. However,
many other issues also seem relevant to the issues its programs seek to address. A
challenge for the IMF in future years is to retain a sound financial and economic basis for
its operations while also responding to relevant social and political issues. In addition,
as a member-based organization, the IMF only has relevance and utility if member
countries view it as institution whose policy advice is appropriate and worth
implementing.
Politicians and scholars, both inside and outside the IMF, are currently debating
whether the policy tools and methods used by the IMF are appropriate for current world
conditions. As yet no consensus has developed for an alternative model which is likely
to be more effective in promoting stabilization and development in poor countries. At
least, no alternatives have been proposed that do not require some type of long-term
budget support and subsidies from the richer countries. Few developed countries seem
willing to make long-term unrestricted financial transfers of this sort. In the meantime,
controversy and debate about the IMF’s basic principles and the scope of its operations
will remain an ongoing concern.
7 “The Washington Consensus,” a term coined by International Institute for Economics Senior
Fellow, John Williamson, in 1989, refers to a set of policy reforms including fiscal discipline,
tax reform, interest rate liberalization, a competitive exchange rate, trade liberalization, open
capital markets, secure property rights, privatization and deregulation. For more information, see:
John Williamson, “What Should the World Bank Think About the Washington Consensus,”
available at [http://www.iie.com/papers/williamson0799.htm]