The IMF Is Receiving an Upgrade. Will it Work?

Not a long time ago, many investors were questioning the need of the International Monetary Fund. However, with the worsening of the global financial crisis, the need for a lender of last resort has emerged, bringing the organization to the light again. But, will the IMF be able to help the world’s economy and is the institution really necessary for overseeing the global financial system?
Anna Fedec, 4/28/2009 2:25:04 PM

The International Monetary Fund role has been very controversial since its establishment and at Trading Economics we think it may be difficult for the organization to regain its credibility. In fact, the IMF is considered a bureaucratic and overstuffed institution representing the interests of developed nations. Moreover, the reluctance of many emerging markets towards help from IMF has deep roots. Indeed, during the late Cold War period, the IMF policy makers supported military dictatorships friendly to American and European corporations. In addition, although the Fund says that economic stability is a precursor to democracy, there are examples in which democratized countries fell after receiving IMF loans.

However, there have been some attempts to reform the organization. In March, the IMF’s Executive Board approved a major overhaul of its lending and conditionality framework. It has created a new facility (Flexible Credit Line) aimed at helping countries with very strong fundamentals to overcome temporary funding problems and has negotiated Stand-By Arrangements with 13 countries. Also, the IMF has decided to discontinue the use of structural performance criteria (PC) in Fund programs. For example, in the past, the passage of a key legislation or specific government action would require a formal Executive Board waiver in order to get the program back on track and allow for the disbursement of the next tranche of funds. In contrast, the Fund will now broadly assess, in the context of regular Board program reviews, whether a country is taking the necessary steps to ensure macroeconomic stability. In addition, there are extensive talks over reforming the fund’s governance, giving more voice to the emerging markets. So, although there are plenty reasons to be cautious about the International Monetary Fund, one should expect to have a more responsive G20 next time we have a major recession.