Discussions on a strategic review of the IMF will bring into sharp focus crises of identity, management and morale, Washington insiders have told Emerging Markets. It could also face financial problems in future, they warn.
The review, which this week goes to the International Monetary and Finance Committee (IMFC), aims to chart a clearer course for the Bretton Woods institution in coming years. It was launched by managing director Rodrigo de Rato shortly after he took office a year ago and was published last week.
The IMF had been pulled away from its original focus on monetary stability by the need to respond to crises, and by a shift toward poverty issues, the review argues. The Fund 'must identify an organising principle that defines its mission and prioritizes its elements,' it says.
Finance ministers attending Saturday's meeting of the policy-making IMFC will be guided by the strategic review when they give the IMF its 'marching orders' and decide how its funds should be allocated over the next five years.
But this may not be enough to give the Fund a new sense of direction, informed sources say. That may require more fundamental changes.
Criticisms of de Rato and his management style persist within the IMF, even though his tenure is defended at an official level.
Some insiders say that the former Spanish finance minister's lack of experience in administering an international bureaucracy before he came to the IMF, and his limited knowledge of development issues, has exacerbated the sense of drift within the Fund. This has rubbed off on staff morale.
But the problems are institutional as well as individual, they say. These will be high on the IMFC finance ministers' agenda this week: how to increase the sense of 'voice' and representation by developing country members of the IMF, how to reduce a perceived overlap between the functions of the Fund and the World Bank, and whether the IMF should remain heavily engaged in capital market development activities.
The first is especially critical because Asian countries are seen to be 'retreating' from the IMF after the trauma of the 1997 regional financial crisis when many of them were angered by what they saw as over-strict conditionality on emergency loans. Latin America too is seen to be lukewarm in its embrace of the IMF after suffering its own crises. This could leave the Fund 'focusing primarily on Africa,' one former official suggested.
As a result of such fears, the Bush administration has begun to pay serious attention to the representation issue. There will be discussion at the annual meetings on the vexed question of how IMF quotas can be enlarged and redistributed to give more say to Asia and other developing regions.
'The US has realized that its ability to use the IMF as an instrument of foreign policy is growing weaker by the day,' one source said.
A fourth issue, that is not flagged in the strategic review, is that of IMF finances. An accelerating disengagement of major former borrowers such as Brazil, Turkey, Argentina and Indonesia has depleted the income that the Fund receives from standby and extended fund facilities, and earnings from poverty-related loans to poorer countries have not compensated.
This worries the IMF, which has an annual operating budget approaching $100 million, Emerging Markets was told.
The strategic review suggests that 'an accumulation of mandates over the years has greatly reduced the flexibility in the Fund's budget to respond to new challenges' and warns that this problem is likely to get worse.
'The main task is to use the organising principle of meeting the challenge of globalisation to set priorities for the next few years from the bottom up,' based on individual countries' needs.