Updates from the International Monetary Fund
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The IMF is having an identity crisis. Its traditional role of last resort lender has been usurped by the central banks who have pumped trillions into the financial markets. Two of its largest shareholders – the US and China – are at odds. And the reputation of the Unscrupulous Data Fund is jeopardized by a scandal that gripped its managing director Kristalina Georgieva from her previous tenure at the World Bank. In fact, the fund can never be the same again.
For most rich and middle-income countries, the IMF had long since lost its importance – also thanks to the quantitative easing measures since the financial crisis in 2008. Why take out IMF loans at stiff conditions when income-hungry investors want to borrow just as much, almost as cheaply and unconditionally? As a senior IMF insider puts it: “The central banks have thrown us out of business.”
Covid-19 money printing has only accelerated this trend. During the pandemic, the IMF provided emergency aid to 100 countries. The aid, while effective, was small, as all beneficiaries were among the smallest and poorest economies in the world.
Still, a more developmental role for the IMF could match Georgieva’s capabilities. As a former head of the World Bank, she is considered a progressive economist compared to some of her rather hairy predecessors in the fund. “Spend what you can and keep the receipts,” was her pandemic mantra. However, this represents a major change from the normal role of the IMF in providing emergency liquidity support.
An example of the change was the creation of $ 650 billion in SDRs last month. The Fund distributed these Special Drawing Rights, a quasi-currency, as free money to all of its members for whatever purpose they saw fit. For some, the pandemic called for such a response. For others, rules were bent in order to distribute a fiscal boost through the back door – even to unsavory authoritarians like Alexander Lukashenko, President of Belarus.
Critics say the SDR program also marked the end of the IMF’s usual country programs, carefully crafted into a path to recovery, detailed debt analysis, and other aspects of public policy. Payments to Ukraine under an IMF program amounting to 5 billion
Instead, there is now a risk of a dangerous expense for everyone. World Bank chief economist Carmen Reinhart said of some of the IMF’s recent borrowers: “In some cases, the evidence will be overwhelming that this is not a liquidity problem, but a solvency problem.”
In the midst of this identity crisis, a scandal has landed that threatens to destroy one of the Fund’s most valuable remaining assets: credibility. According to an independent investigation, Georgieva, while the CEO of the World Bank, allegedly led efforts to artificially improve China’s ranking in the lender’s influential annual Doing Business report. Worse still, she was trying to raise capital for the bank from China and others at the time.
The IMF board is conducting an investigation. Meanwhile, officials say the scandal jeopardized the IMF’s ability to tell the truth to power. If Georgieva manipulated data at the World Bank at the behest of China, couldn’t the IMF bow to other governments under her leadership?
In the end, neither supposedly dubious data nor the change of direction by the IMF can determine their fate. If it goes, it will likely be because Georgieva was on the wrong side in the battle between the US and China, the fund’s largest and third largest shareholders.
It is significant that last week both US Democrats and Republicans on the House of Representatives Financial Services Committee cited the World Bank investigation and questioned their suitability to run the fund. Georgieva has denied the allegations and came out fighting. But whoever emerges victorious from this increasingly less edifying affair, it is unlikely to be the IMF.