Its existing customers have been paying back their loans and new customers are failing to materialize to generate interest income. The poor IMF is now thinking about selling some of its gold stock to generate additional revenues instead of cutting down on its expenditures, finding it hard to practice what it has for years preached to developing countries that came to it hat in hand for advice and support. But the IMF’s fiscal crisis is not my topic here. Instead I wish to discuss the findings of a study released last week that is highly critical of the foreign exchange (FX) rate policy advice that the IMF has dispensed to its members. FX rate policy advice refers to any IMF advice on FX rate-related issues, in particular to the choice and management of FX regimes, effects of currency misalignment on international competitiveness, and ways of dealing with current account imbalances.The 211-page study, titled “IMF Exchange Rate Policy Advice, 1999-2005: An IEO Evaluation,” (available at http://www.ieo-imf.org/eval/complete/eval_05172007.html) was prepared by a group of IMF researchers, assisted by outside consultants, on behalf of the IMF’s Independent Evaluation Office (IEO). The IEO was created in 2001 to evaluate the IMF’s policies and activities independently and objectively. Since its creation it has issued several reports on various IMF activities, including a preliminary report last year on the IMF’s FX rate policy advice. The IEO’s latest and most ambitious effort focuses on finding out how successful the IMF has been in meeting its core responsibility: its effectiveness in exercising surveillance over the international monetary system and the FX rate policies of its members. The IEO, after noting that for years the IMF’s work on FX rate policies has faced sharp outside criticism, concludes that “…the IMF was simply not as effective as it needs to be in both its analysis and advice, and in its dialogue with member countries.”
The IEO attributes this “effectiveness gap” to several causes: 1 - IMF confusion surrounding the myriad FX rate regimes that have evolved since the collapse of the Bretton-Woods fixed FX rate regime in 1973 and the resulting inconsistencies and ambiguities over classifying these regimes; 2 -- failure of the IMF’s Executive Board to provide adequate leadership and incentives for the IMF’s management and staff for high quality analysis and advice; 3 -- weakness of the analytical work, based often on poor data and marred by an inadequate understanding of financial markets, offered by the IMF staff, to back up the IMF’s advice on FX rate regimes to its various members, without paying sufficient attention to their unique circumstances; 4 -- lack of evenhandedness in the IMF’s dealing with developing versus developed countries; 5 -- lack of effective dialogue between the IMF and many of its members. As a specific example of ineffective advice, partly due to the IMF staff’s lack of expertise and experience, the IEO cites the IMF’s failure to fully realize the harmful macroeconomic effects of nominal and real FX rate appreciations, often fueled by speculative capital inflows; its patchy and incomplete analyses of FX market interventions; and its lack of clarity on what the maximum level FX reserves should be for different purposes, especially in the aftermath of the back-to-back FX crises of the late 1990s in many emerging market economies.
The IEO report does not explicitly refer to and discuss the IMF’s controversial FX rate policy advice to Turkey during 1999-2001. It is evident however, judging from the several tables that list Turkey, among many countries, as a receiver of such advice that was surveyed by the authors, that the IMF’s failed advice to Turkey then was considered and evaluated by the authors of the report.
I cannot help but commend the IMF for its newly developed capability for this type of rare and frank self-criticism. Although the executive directors of the IMF have accepted the major findings of the IEO report, the IMF’s highly paid and extraordinarily privileged staff does not seem to have taken the IEO’s sharp criticisms of their performance graciously, judging from their defensive responses made public on the IMF’s Web site. But why? Those who are so used to boldly dishing out criticism and advice to others should learn to be able to receive the same, now coming from their own midst.
