NEW DEVELOPMENTS AT THE INTERNATIONAL MONETARY FUND XXXIV Course of International Law Organization of American States Rio de Janeiro, Brazil August 14,

NEW DEVELOPMENTS AT THE INTERNATIONAL

MONETARY FUND

XXXIV Course of International LawOrganization of American States

Rio de Janeiro, BrazilAugust 14, 2007

Nadia Rendak Senior Counsel

Legal DepartmentInternational Monetary Fund

The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

2

Outline

I. 2005 Medium-Term Strategy (MTS)II. Voice and Quota ReformIII. Strengthening IMF Surveillance IV. Trade Integration Mechanism (TIM)V. Strengthening IMF’s Crisis Prevention ToolsVI. IMF and Low Income Countries VII.Reform of the Fund’s income model

3

New Developments at the International Monetary Fund

I. MD’s Medium-Term Strategy Announced in September 2005 by the IMF Managing

Director. Why a new strategy?

Globalization and the challenges of the past decade have pulled the Fund in too many different and new directions

Taking up new mandates without eliminating old ones has made it difficult to allocate resources and stay ahead of emerging challenges

Questions as to whether the Fund is prepared to meet the great macroeconomic challenges that lie ahead

4


Objective of the Strategy – for the IMF to stay ahead of the changing world, identify an organizing principle that defines the Fund’s mission, and to prioritize the elements of the Fund’s mandate

Some of the key elements of the Strategy:1. More effective surveillance: strengthening global, multilateral, regional and bilateral surveillance; improving financial sector surveillance in the context of globalization of capital market

2. Fund’s role in advanced and/or systemic economies: enhancing the relevance of Fund’s policy advice by integrating country surveillance with global surveillance

3. Fund’s role in emerging market economies: crisis prevention and crisis resolution

4. Understanding capital account liberalization

5. Fund’s role in low income countries: more focus and flexibility; more emphasis on Millennium Development Goals; less procedure

6. Building institutions and capacity

7. Governance: the current allocation of quotas and voting rights put the Fund’s legitimacy at risk in many regions

5


II. Quotas and voice reform Why are reforms needed?

MTS: “Fair weight and voice are crucial to the legitimacy of a universal institution. ... The current allocation puts the Fund’s legitimacy at risk...” Governance reforms are essential for effectiveness and credibility of the Fund.

What is proposed: A three-stage reallocation of quotas (i) ad hoc quota increases for most

unrepresented members; (ii) agreement on a new quota formula and (iii) further ad hoc quota increases

An increase in basic votes – the central aspect of ensuring the adequacy of LIC’s voice and representation

Developing a transparent procedure for the selection of the Managing Director

Other measures to ensure adequate voice for low-income countries – a central element of the package, including an increase in the number of Alternate Executive Directors

6


The central objectives of the reform package: To make significant progress in realigning quota shares with economic weight in

the global economy, and to make quota and voting shares in the Fund more responsive to changes in global economic realities in the future

To enhance participation and voice for low-income countries, whose weight in global economy may be small, but for which the Fund plays in important advisory and financing role

Proposed reforms are expected to be completed within a two year period, by the 2008 Annual Meetings

Reallocation of quotasStage I

Initial ad hoc quota increases for most unrepresented membersStage II

Agreement on a new quota formula, to provide the basis for further rebalancing of quotasStage III

Second round of ad hoc increases: once a new quota formula has been agreed, a second round of ad hoc quota increases is envisaged, to include a broader range of countries.

Large members with sizable voting power may be willing to consider foregoing, or at least limiting, the increases they request. This would augment quota increases available for other unrepresented members for a given aggregate increase in quotas.

7


Increasing the number of basic votes

Each member has 250 basic votes (Article XII.5(a)) Significance of the basic votes has diminished from their

original level of 11 percent of total votes to approximately 2 percent because of the entrance of new members and quota increases

An increase in basic votes reflects the principle of equality of States and is a mechanism to give the smallest members a greater voice in the Fund

Executive Board's proposal calls for at least a doubling of the basic votes that each member possesses

The proposed amendment to the Articles will include a mechanism for safeguarding the proportion of basic votes in the total voting power

8


Implementation

Implementation of the proposed basic votes reform would require amendments to the Articles of Agreement:

Approval by the Board of Governors, and Acceptance of the amendment by three fifth of the members, having

eighty five percent of the total voting power (Article XXVIII)

Quota increases: implemented through resolutions of the Board of Governors – an eighty five percent majority of the total voting power required for any change in quotas (Article III.2(c))

No changes can be made to a member’s quota without the

member’s consent (Article III.2(d))

Initial ad hoc increases for China, Korea, Mexico and Turkey

Approved by the Board of Governors on September 18, 2006 and became effective after each member has consented to and paid the full amount of the increase This ad hoc increase has resulted in an aggregate increase in quotas of SDR 3.81 billion (about US$5.66 billion), or 1.8 percent of IMF's total current quotas of SDR 213.48 billion (about US$317.26 billion)

9


Table 1. Previous and New Quotas for China, Korea, Mexico, and Turkey

Previous Quota(in millions of

SDRs)

New Quota (in millions of

SDRs)

Previous Quota (in millions of

US dollars)

New Quota (in millions of

US dollars)

China 6,369.2 8,090.1 9,465.5 12,023.0

Korea 1,633.6 2,927.3 2,427.7 4,350.4

Mexico 2,585.8 3,152.8 3,842.8 4,685.5

Turkey 964.0 1,191.3 1,432.6 1,770.4

10


Developing a transparent procedure for the selection of the IMF Managing Director

The Articles of Agreement provide limited guidance on how an MD shall be selected. Article XII, Section 4: “The Executive Board shall select a Managing Director who shall not be a Governor or an Executive Director”.

Traditionally the President of the World Bank has been an American, while the Managing Director of the IMF – a European. Should/will this change?

The selection process should be

open and transparent based on merit, i.e., the ability to do the job

11

The Executive Board adopted on July 12, 2007 a process for selecting a successor to the MD:

(a) Qualifications

Distinguished record in economic policy making at senior levels An outstanding professional background, managerial and diplomatic skills Capability to provide strategic vision for the work of staff Committed to advancing the goals of the Fund by building consensus on key

policy issues in close collaboration with the Board

(b) Process

Any Executive Director may nominate a candidate Nominee should confirm willingness to be considered for the position The Board will consider the candidate(s) nominated on the basis of the

established profile Distinguished record in economic policy making at

senior levels An outstanding professional background, managerial and diplomatic skills Capability to provide strategic vision for the work of staff Committed to advancing the goals of the Fund by building consensus on key

policy issues in close collaboration with the Board Although the MD may be selected by a majority of votes cast, the objective is

to select the MD by consensus

12


III. Strengthening IMF Surveillance 1. Multilateral Consultations

The first multilateral consultation was launched, on an experimental basis, in 2006. Its purpose – to gather members that are party to a global problem around one table to debate issues of systemic importance and to catalyze a consensus on policy actions.

Focus of the first multilateral consultation was on facilitating the resolution of the current global imbalances while maintaining robust global growth.

Legal basis – Article IV, Section 3(a) - “The Fund shall oversee the international monetary system in order to ensure its effective operation.”

Participants in the first consultation – China, the EURO Area, Japan, Saudi Arabia, the United States

Procedures: (i) bilateral discussions with top policy makers followed by multilateral discussion with the five countries/areas; (ii) multilateral discussion by the MD with participating countries to come to understandings on the direction of policy actions, possible immediate steps, and a process to monitor progress; (iii) a report for formal discussion by the Executive Board to assess the outcome of the consultation; (iv) follow-up, including on the initial commitments, in the context of bilateral and multilateral surveillance

13


2. Bilateral surveillance

The legal foundation for Fund surveillance was laid in the Articles of Agreement (Article IV) and the 1977 Decision on surveillance over member’s exchange rate policies.

The 1977 Decision was adopted shortly after the collapse of the par value system when there was considerable uncertainty as to how the new system would work.

Over time, it became clear that the 1977 Decision had to be updated to reflect developments in theory and practice of surveillance since 1977 and to provide better guidance to the Fund and its members on bilateral surveillance

On June 15, 2007 the Executive Board adopted, with broad support, a new Decision on Bilateral Surveillance over Members’ Policies (the “2007 Surveillance Decision”)

14


Overview of the new 2007 Surveillance DecisionKey features:

Based on the 1977 Decision but designed to address its gaps

No creation of new obligations for members

Introduction of the concept of the member’s “external stability” as an organizing principle for surveillance. External stability is best achieved by promoting domestic stability.

Better guidance to members’ on exchange rate policies that may result in external instability, regardless of the purpose

Principles for the guidance of members’ policies under Article IV, Section 1 and principles for guidance of the Fund in its bilateral surveillance

Clarification of the concept of “exchange rate manipulation”

Modalities of effective surveillance with emphasis on collaboration, dialogue and persuasion, need for candor and evenhandedness, respect for countries’ circumstances

15


Principles for guidance of members' exchange rate policies (PMGs)

A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.

B. A member should intervene in the exchange market if necessary to counter disorderly conditions, which may be characterized inter alia by disruptive short-term movements in the exchange rate of its currency.

C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.

D. A member should avoid exchange rate policies that result in external instability.

16


What is currency manipulation?

Article IV, Section 1(iii) of the Articles of Agreement provides that member countries shall "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."

Until recently little guidance was provided by the Fund on the meaning of exchange rate manipulation prohibited under the Articles. The 2007 Decision clarifies the meaning of “exchange rate manipulation” for the purposes of determining compliance with the Articles and with PGM A

A member would be "acting inconsistently with Article IV, Section 1 (iii)," if the Fund determined it was manipulating its exchange rate or the international monetary system and such manipulation was being carried out for one of the purposes identified in Article IV, Section 1(iii)

“Manipulation” of the exchange rate is only carried out through policies that targeted at-and actually affect-the level of the exchange rate - either causing the exchange rate to move or preventing it from moving

A member will only be considered to be manipulating exchange rates in order to gain an unfair competitive advantage over other members if the Fund determines both that: (A) the member is engaged in these policies for the purpose of securing fundamental exchange rate misalignment in the form of an undervalued exchange rate and (B) the purpose of securing such misalignment is to increase net exports.

17


Developments/indicators for surveillance:

(i) protracted large-scale intervention in one direction in the exchange market;

(ii) official or quasi-official borrowing that either is unsustainable or brings unduly high liquidity risks, or excessive and prolonged official or quasi-official accumulation of foreign assets, for balance of payments purposes;

(iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;

(iv) the pursuit, for balance of payments purposes, of monetary and other financial policies that provide abnormal encouragement or discouragement to capital flows;

(v) fundamental exchange rate misalignment;

(vi) large and prolonged current account deficits or surpluses; and

(vii) large external sector vulnerabilities, including liquidity risks, arising from private capital flows.

18


IV. Trade Integration Mechanism

Despite the generally positive impact of trade liberalization time, opening the world trading environment further would require countries to adjust. Under certain circumstances, these adjustments could temporarily reduce export revenues, increase import bills, or cause other shortfalls in the external balance of payments.

The Trade Integration Mechanism (TIM) was introduced in April 2004 to assist member countries to meet balance of payments shortfalls that might result from multilateral trade liberalization

The TIM is a policy designed to make resources under the existing lending facilities more predictably available; it is not a special lending facility

19


How the TIM works:

The member can request consideration under the TIM if it expects a net balance of payments shortfall as a result of measures implemented by other countries that lead to more open market access for goods and services

Upon such request the IMF would:

stand ready to discuss with countries facing such balance of payments shortfalls ways to address them within its existing lending facilities;

take into account the anticipated impact of the trade adjustment on the member’s balance of payments in determining the appropriate size of access under both new and existing arrangements (the “baseline feature”); and

be prepared to augment arrangements under simplified procedures if the actual balance of payments effect turns out to be larger than anticipated (the “deviation feature”)

The TIM does not cover the implications of “own liberalization” measures, e.g., any deterioration in a member’s balance of payments that results from a reduction in domestic import tariffs. However, assistance may be available under other Fund facilities

20


V. Strengthening IMF’s Crisis Prevention Tools

IMF crisis prevention tools: surveillance, lending, debt relief, TA

IMF has been working to create a new instrument that would provide high access contingent financing for crisis prevention. Potential users: members with strong macroeconomic policies, sustainable debt, transparent reporting, but which still face balance-sheet weaknesses and vulnerabilities

Any new instrument should strike an appropriate balance between ensuring predictable access to Fund resources to help members avert financial crises, and providing adequate safeguards for Fund resources and minimizing potential moral hazard

Outreach and consultations with other stakeholders are important for designing an effective instrument.

21


Designing a new instrument raises challenging design issues some of which are:

Qualification criteria should be established to allow access only by countries with sound fundamentals and policies, and a credible forward-looking commitments to policies that will reduce vulnerabilities, and sustainable debt. Objectivity and flexibility need to be balanced.

Designing an appropriate access framework. Proposals: 300+ percent of quota, immediately available upon approval; a subsequent review.

A monitoring structure should balance the benefits of predictable access with strong safeguards of Fund resources. Conditionality would target policies to maintain macroeconomic stability and reduce vulnerabilities.

Financial terms should reflect appropriate considerations for the Fund but not discourage potential users

Other issues: length of the arrangement, adequacy of access

22


VI. IMF and Low Income Countries Multilateral Debt Relief Initiative (MDRI)

The MDRI comes out of the proposal by the G-8 in June 2005, for the IMF, the International Development Association (IDA), and the African Development Fund (AfDF) to cancel 100 percent of their claims on countries having reached, or upon reaching, the completion point under the HIPC Initiative.

The debt eligible for 100 percent relief under the MDRI consists of the repayment/repurchase obligations to the Fund on debt disbursed before a certain date that remains outstanding at the time the member is determined to qualify for such relief

As of January 6, 2006 – 19 countries were immediately eligible for MDRI debt relief. Eligible as of March 2007 – 22 HIPCs + 2 non-HIPCs; others HIPC countries may become eligible once they reach the completion point under the HIPC Initiative.

The MDRI is financed with a combination of IMF own resources and resources from PRGF Trust Fund. The total cost of the MDRI for the IMF is estimated at SDR 3.5 billion (about US$5 billion), excluding HIPC countries and the protracted arrears cases.

Resources freed up by the MDRI relief to be used for poverty reduction expenditures, including Millennium Development Goals (MDGs)

A big challenge in Fund’s debt relief operations – achieving comparable relief from other official and private sector creditors

23

Debt sustainability framework for LICs

The DSA framework for LICs is a joint Fund-Bank initiative aimed at helping to guide countries and donors in mobilizing financing for LICs’ development needs, while reducing the chances of excessive built-up of debt

The main objectives are to guide the borrowing decision of LICs that match their financing needs and their ability to pay, and to provide guidance for creditors’ lending

IMF’s role in the poverty reduction strategies’ (PRS) process and

collaboration with other donors

Review of the implications of the planned scaling up of aid and aid flows’ volatility for the Fund and for the design of Fund-supported programs

Malan report on Fund-Bank collaboration

Helping LICs to improve frameworks for public finances and debt management

24


VII. Reform of Fund’s income model

A new income model for the Fund is being developed, as the current income model is no longer sustainable. One of the reasons – the contraction of Fund credit.

The “Crocket report” on sustainable long-term financing of the Fund (January 2007): http://www.imf.org/external/np/oth/2007/013107.pdf

Some of the proposals in the report:

Investing a portion of Fund’s quota resources

Selling a limited part of Fund’s gold

Broadening the Fund’s investment mandate

Breaking the link between the rate of charge and the Fund’s administrative expenses

Establishing a dividend policy

25


“As we address the challenges of our rapidly globalizing world, further evolution is essential. Future crises will almost certainly be different from previous crises. The IMF needs to be ready, and flexible enough, to help the world face the unpredictable.”

Rodrigo de RatoManaging Director

of the IMF

NEW DEVELOPMENTS AT THE INTERNATIONAL MONETARY FUND XXXIV Course of International Law Organization of American States Rio de Janeiro, Brazil August 14,

Documents

funds legitimacy

funds role

new strategy

funds mission

funds mandate

international monetary

new quota formula

new mandates