THE

DAILY
NEWSPAPER

Reformer needs reforms

The global financial crisis has laid bare not only the flaws of the financial
system but also the loopholes of the mantra preached by the
international financial institutions, particularly the International Monetary
Fund. Although recommending reforms of the financial system across the
world, it is time that this agency undergoes some substantial reforms of
its own, writes Meer Ahsan Habib

WHEN the monitor fails to

monitor, it certainly leads the
system to catastrophe or even to
collapse. As readers might agree,
there was hardly any projection
by the International Monetary
Fund, or by any other monetary
watchdog, about the ongoing
recession. Did they really know
anything or did they remain silent
despite knowing that a financial
tsunami was likely to hit the
world economy that started
rolling down from the heart of
market economy? During April
2009, when the recession had
already emerged with its real look, the International Monetary Fund slashed growth
forecasts for every major country and urged governments to take forceful action to
recover from the recession.
Now let us have a look at the International Monetary Fund’s role here in
Bangladesh. The last caretaker government planned to impose safeguard duties
aimed towards supporting local industries by restraining import surge. It was halted
by International Monetary Fund’s intervention and disapproval which it apparently
claimed was against WTO rules. For least developed countries like Bangladesh,
safeguard duty has been a recognised instrument, to protect local industries. In
July 2007, the monetary fund welcomed Bangladesh Bank’s contractionary
monetary policy which was an outcome of repeated IMF pressure. Needless to
mention, the International Monetary Fund has always advocated for similar policies
for other Least Developed Countries. In a bid to further strengthen its control over
policy formulation, in September of the same year, the multilateral agency
proposed to introduce joint audit system for income tax and value added tax which
was refused by the National Board of Revenue. Back in April this year, the
monetary fund recommended devaluating the taka against the dollar which elicited
sharp criticism from different quarters. In a statement in May 2009, the IMF’s
Bangladesh Resident Mission termed Bangladesh Bank’s decision to administer
lending rates as ‘regrettable’ and said that such ‘rates should be determined
through market-based policy interest rates influenced by the central bank’. Such
observation is contradictory to the IMF’s policy suggestion that governments should
take forceful actions to combat global recession. John Lipsky, the IMF’s First Deputy
Managing Director, in a speech in Paris on June 26 said that ‘monetary policy
should remain accommodative for the time being’ and recommended clear exit
strategy ‘for government intervention in both the fiscal and monetary areas’. The
IMF has always sought for contractionary monetary policy for countries like
Bangladesh. But when it fails, they seem to come up with a common idea of being
‘accommodative’ for all.
Just a few days back the Sri Lankan trade minister GL Peiris accused the
monetary fund for politicising financial aid when the latter’s executive board was
delaying a $1.9 billion bailout fund. Sri Lanka, in a bid to meet her balance of
payments deficit in four years, negotiated the deal with the International Monetary
Fund. The agency did not make any comment on Peiris’s claim that the bailout was
being delayed on the issue of Colombo’s all out war against the Tamil separatists.
Now let us look back to the mid 1990’s when the soviet communist bloc finally
collapsed and the International Monetary Fund took the driver’s seat in priviatising
the soviet industrial machine. This was viewed by the IMF and its major
shareholders as a success as they only wanted Yeltsin to be re-elected. The election
was highly controversial which later awarded the capitalist backed oligarchs to own
Russia’s industrial assets. This resulted in the emergence of a mafia syndicate
which controlled everything. Corruption scheme nearly cut national output by half
causing hunger and despair.
In April 2006, the IMF and the World Bank jointly commissioned an external
review committee headed by Pedro Malan, former Brazilian finance minister to
evaluate the relationship between the two Bretton Woods institutions. The report
stated that the IMF was not well equipped as a development institution and
therefore, suggested that the IMF should stop making development loans to low-
income countries, leaving that responsibility to the World Bank. The Malan
committee report justifies IMF’s reform movement that started through initiation of
policy support instrument in late 2005. The IMF initiated the instrument at a time
when many low income countries were about to complete their ongoing
arrangements and the third world countries had a relatively abundant stock of
foreign exchange. Needless to mention, the Poverty Reduction Grant Facility and
the Poverty Reduction Strategy served as useful tools for the monetary fund to
intervene into the policy making process of low income countries. Bangladesh was
also offered to enter into an agreement to initiate the policy support instrument but
both the government and the fund apparently backed due to the sharp criticism
across the country. Finally in September 2007, the caretaker government
announced that it was of the view that there was no such need for policy support
for Bangladesh at that time.
In May 2006, the IMF commissioned a committee comprising of eminent persons
that included among others Alan Greenspan, former chairman of the US Federal
Reserve Board, Guillermo Ortíz, governor of the Bank of Mexico and Jean-Claude
Trichet, president of the European Central Bank. This committee was headed by
Andrew Crockett, president of JP Morgan Chase International. The objective of this
committee was to study ‘sustainable long-term financing’ of the multilateral lending
agency i.e. to suggest alternative income sources for the crisis-torn IMF with a
projected budget shortfall of $370 million by 2010. It is to be mentioned here that
in 2007, the IMF had an operational cost of about $980 million. Large borrowers,
for example Brazil, Argentina and Indonesia have cleared their dues indicating no
further inclination to renew their arrangements with the agency. The only large
borrower is Turkey with two-thirds of IMF’s total lending. The IMF, as the Economist
referred to it, has now virtually become ‘The Turkish Monetary Fund’. The Latin
American countries are planning to set up a new bank ‘Banco del Sur’ —Bank of the
South— under Venezuelan leadership. Thailand and the Philippines have said ‘NO’
to IMF and aim to form Bank of Debtors by excluding the IMF; China and India
hardly have any relation with the IMF. Rejecting the IMF and World Bank’s
prescriptions, Asian countries like Malaysia, Thailand, South Korea, and the
Philippines have been very successful in shaping their economies.
The IMF needs to remain relevant in the changing global financial system and
needs to redefine its role as an international financial institution. China has
emerged as a major player in the global economy and even making investments in
many countries. With an aim to find alternative to the international financial
institutions, particularly the International Monetary Fund, fast growing economies of
Brazil, Russia, India and China have formed BRIC, aimed at finding alternative
instruments or modify the existing ones. BRIC in a recent move announced that
they were ready to buy a total of $60 billion worth of IMF bonds that would boost
the role of Special Drawing Rights in international finance. There is, therefore, a
solid risk that international financial institutions will lose their control over
borrowers, particularly the least developed countries.
In September 2006, Nouriel Roubini, a professor of the Stern School of Business
at New York University delivered a lecture at the IMF where he warned that the US
consumers were about to ‘burn out’. The IMF in an in-house newsletter covered the
story under the headline ‘meet Dr Doom’. Again in September 2007, the IMF
organised a seminar on ‘The Risk of a US Hard Landing and Implications for the
Global Economy and Financial Markets’ which was addressed by Dr Doom among
others. However, Roubini has by now become a prophet for the fund and not quite
the Dr Doom as he was initially slated to be. Even after being cautioned about a
probable recession, the IMF did not make any indication that a financial tsunami
was likely to hit the global economy. Particularly the IMF failed to foresee and
prevent outbreak of major financial crisis. The self correcting mechanism theory of
the IMF which has always avoided the avenue of stronger market regulation has
failed. Yet it is too early to say whether the IMF will lose its relevancy. If the IMF
wants to remain relevant in the global economy, however, it must reform itself and
reform without delay.