:: Paranjoy Guha Thakurta

Buy IMF bonds, but let it first regain credibility

By Paranjoy Guha Thakurta

May 03 : An influential section in the outgoing Government of India loves the International Monetary Fund (IMF) and firmly believes this multilateral financial institution can help pull the world out of economic recession. But India and other developing countries should proceed carefully before enhancing the capital base of this institution that was established in 1944 in Bretton Woods, United States.

The Fund, set up before World War II ended, was meant to foster global economic stability and help countries facing financial crises. Over the years, many developing countries have been rather unhappy with what the IMF euphemistically calls "reforms". Until not very long ago, financial assistance from the IMF would be linked to stringent conditions that entailed a lowering of import barriers and the initiation of "neo-liberal" market-friendly measures that often wreaked havoc with the economies of poor countries and their ability to implement welfare schemes.

Especially after the Asian financial crisis of the late-1990s, developing countries had become rather wary of blindly following the Fund’s policy prescriptions — often dubbed the "Washington consensus". At a time when the economy of the world is going through a crisis the likes of which have not been witnessed since the Great Depression of the 1930s, criticism of the policies prescribed by the IMF has become even more strident.

But not all sections of elites that rule developing countries are wary of the IMF, in which 186 countries are currently represented. On the contrary, there are some who are wildly enthusiastic about IMF-style economic "reforms".

Consider, for instance, our own Prime Minister Dr Manmohan Singh and his right-hand man, Dr Montek Singh Ahluwalia, who worked with the IMF till he became deputy chairman of the Planning Commission.

April 3, 2009: After meeting with Group of Twenty (G-20) leaders in London, Dr Singh said he did not visualise any need for India having to borrow from the IMF in the near future. On the contrary, India could contribute to the Fund, he stated, adding: "I am happy to say that the G-20 have agreed to expand the resources of the IMF… and to also bring forward the quota review in the IMF". (India and other developing countries have, for long, been arguing that the voting rights or quotas of developing countries in the Fund need enhancing to reflect the changing economic equations of the planet — India’s quota is at present around two per cent.)

April 25, 2009: Reserve Bank of India governor D. Subbarao said in Washington at a six-monthly meeting of the Fund and the World Bank that the IMF should quickly assist developing countries to cope with a crisis that has not been of their making. "Emerging and developing economies should have substantially greater voice and representation in the Fund… We now expect that the quota review will result in a comprehensive ‘reform’ of the governance of the Fund," he said.

The RBI governor said the quota "reform" package should be ratified at the earliest followed by "advancing the completion of the (quota review)… from January 2013 to January 2011".

He said this "quota review should, at the minimum, aim at doubling the quota resources".

Mr Subbarao called for the introduction of an open, merit-based process, irrespective of nationality and geographical preferences, for the selection of the senior management of the Fund. "The next managing director of the IMF should be selected in this manner", he said. (Over the last 65 years, the IMF head has been a European while the US has nominated the World Bank’s president.)

The RBI governor wanted the IMF to have a more focussed surveillance mechanism and added: "The Fund’s capacity to deliver is ultimately connected to how-much and how-soon we empower it with resources, better governance, greater accountability and a redefined mandate that keeps pace with the requirements of the changing world".

He said that within the IMF, a radical shift in approach, culture and strategy is urgently warranted so that it divests itself of its past and much of the fallibility that goes with it. "The world we will emerge into after the crisis will in all likelihood not be the same again, and the challenge is to re-fashion the IMF so that it becomes more relevant, useful and effective in the future," Mr Subbarao bravely remarked.

April 26, 2009: Dr Ahluwalia told the Wall Street Journal that India was ready to buy around $10 billion or Rs 50,000 crore worth of IMF bonds.

"If the IMF can issue the securities, it’s an easy way for us to make a contribution", he said in Washington. The IMF is reportedly finalising plans of its first bond offering and is lining up countries including Brazil, Russia, India and China (Bric) as purchasers. He added that buying bonds is a better alternative for India than making a loan to the IMF as Japan has done. Dr Ahluwalia said the RBI could purchase the bonds, hold these as reserves and that this would not require separate government approval.

April 28, 2009: Speaking to a television channel, Dr Ahluwalia said that if the RBI bought Special Drawing Rights-denominated IMF securities, this would not impact the fiscal deficit as the money would be paid out of the RBI’s dollar reserves. (SDRs are international assets whose value is based on a basket of international currencies; these were created by the IMF in 1969 to supplement the foreign currency reserves of member countries and are sometimes called "paper gold".)

April 29, 2009: Senior RBI officials were quoted by the same television channel arguing that the funds for recapitalising the IMF should come out of the coffers of the Union government and not the country’s central bank and apex monetary authority. If indeed the national exchequer pays out this Rs 50,000 crore from taxpayers’ money, the already widening fiscal deficit would go up by roughly one per cent of the country’s gross domestic product.

No decision on recapitalising the Fund should be taken before a new government is in place in New Delhi and before a national debate takes place on the precise nature of the "reforms" the international "reformer" needs to undertake.

Paranjoy Guha Thakurta is an educator and commentator based in New Delhi