[stop-imf] Deficit forces IMF to rethink role

[robert weissman]

Deficit forces IMF to rethink role
By William McQuillen
BLOOMBERG NEWS
Published February 6, 2006
http://washingtontimes.com/business/20060205-100348-9575r.htm

Early repayments from fund's biggest borrowers leave shortfall

     The International Monetary Fund's loss of two of its biggest
borrowers last month has left the lender with a widening budget
shortfall and renewed questions about its role in the global economy.
     In the past six weeks, Brazil made early repayment of $15.5 billion
it owed and Argentina repaid $9.5 billion in debt two years ahead of
schedule, closing the accounts of the International Monetary Fund's
first- and third-largest borrowers.
     The enticement to pay the debt -- foreign reserves that have
swelled as Latin American economies rebound from recession and
investors' appetites for government bonds grow -- is present in other
large borrowing nations, including Pakistan, Serbia and Ukraine, which
have hinted that they, too, may sever ties to the lender.
     "In good times, nobody goes to the IMF," said Liliana Rojas-Suarez,
a former International Monetary Fund (IMF) economist who is now at the
Center for Global Development in Washington.
     The result is a loss of interest income that prompted the IMF to
lower its earnings forecast by about 40 percent for the fiscal year
ending in April. The fund now expects a budget shortfall of more than
$116 million this year, emboldening critics who have called on the
Washington-based fund to scale back its lending and focus more on
dispensing economic guidance.
     "This should force the fund to ask what they are doing and what
they should be doing," said Allan Meltzer, a professor at Carnegie
Mellon University in Pittsburgh who led a 2000 U.S. congressional
commission that examined the IMF. "If it is just business as usual, the
fund will be becoming less relevant."
     The fund may invest some of its reserves as it looks for ways to
make up for the decline in net income, said Thomas Dawson, a spokesman
for IMF Managing Director Rodrigo de Rato.
     The IMF was founded at the end of World War II to promote global
economic stability. The fund typically makes loans to countries on the
condition that the borrowers undertake economic policy changes such as
adjusting their balance of payments or reducing inflation.
     With elections nearing, those conditions grew unpopular in
Argentina and Brazil, where the public has blamed their countries'
economic crises on IMF-mandated changes. Those countries aren't alone.
     Pakistan, the IMF's third-largest debtor now that Argentina has
walked away, is carrying $1.51 billion in debt and says it is seeking to
cut its dependence on the fund; Ukraine, the fourth-largest debtor, said
in 2004 it probably would decline any additional assistance; and Serbia,
which owes the IMF about $874 million, said last month that it wouldn't
borrow any more.
     A year ago, Russia repaid early its $3.3 billion debt to the IMF
after seven years of economic expansion; in 2003, Thailand finished
paying off its obligations two years ahead of schedule.
     "This plays very well politically in those countries," said Desmond
Lachman, who spent 24 years as an IMF economist and is now a senior
fellow at the American Enterprise Institute, a Washington think tank.
"Prepaying the IMF is declaring independence."
     Greater liquidity in capital markets has given nations other places
to go for loans, while low interest rates have made financial
emergencies less likely. There hasn't been a worldwide economic crisis
that has required the IMF since the Asian and Latin American turmoil of
the late 1990s.
     The IMF's projected budget shortfall for fiscal 2006 has increased
to $116 million from $26 million as a result of the interest-payment
revenue it will lose because of the early debt repayment by Brazil and
Argentina. Its total operating budget is $2.3 billion, almost all of
which is funded by interest income.
     The IMF is hardly going broke: The lender can access about $139
billion, mostly through the financial commitments of its member
countries, a November financial statement showed. The fund also has
stockpiled more than 100 million ounces of gold, which would be worth
more than $56 billion at today's market prices.
     In a cyclical world economy, there will probably be a time when
governments again rely on the IMF for loans, Mr. Dawson said. Until
then, the IMF is content with less influence, he said.