The cow dried up! IMF in dilemma as new loans decline. New loans in the last financial year, at $2.5bn (€2.1bn, £1.4bn), were the lowest since the late 1970s, even before adjusting for inflation. Brazil, Argentina, Turkey and Indonesia account for more than 70 per cent of total outstanding loans -which have fallen from $90bn in April 2004 to about $66bn at the end of November.
IMF in dilemma as new loans decline.
By Andrew Balls in Washington
Published: December 28 2005 02:00 | Last updated: December 28 2005 02:00
A decision by Brazil and Argentina to repay their loans to the International Monetary Fund ahead of schedule raises the question of whether the institution needs a new business model.
Brazil also paid the Paris Club in advance and has alreay the USD5.6bn to pay the debt maturing in 2006 1st semester
The IMF, like any financial institution, lends at a slightly higher interest rate than the one it borrows at, using the proceeds to cover its operating expenses and add to its reserves. Yet for now, at least, its borrowing customers are drying up.
New loans in the last financial year, at $2.5bn (€2.1bn, £1.4bn), were the lowest since the late 1970s, even before adjusting for inflation. Brazil, Argentina, Turkey and Indonesia account for more than 70 per cent of total outstanding loans - which have fallen from $90bn in April 2004 to about $66bn at the end of November.
it's never good to depend in too few customers
Brazilian and Argentine repayments of about $15.5bn and $10bn respectively will wipe out another big chunk. Those repayments mean that Uruguay's much smaller loan will be the fund's largest exposure in Latin America. In Asia, following the financial crises of the late 1990s, governments built up huge financial reserves, in part to ensure that they never again had to go cap in hand to the IMF, which sets tough conditions for loans.
"With two of the big borrowers repaying, their loan book is going to be really rather small," says Desmond Lachman, a fellow at the American Enterprise Institute. "For a certain period of time there will be little income."
this may call for some should we say "structural reforms"?
Low demand for IMF credit is mainly the result of emerging market countries' good economic performance, and very favourable conditions in international financial markets. Brazil's programme and early repayment can be seen as a great success for the fund - Argentina cannot.
Argentina sold bonds to Venezuela's Chavez to pay their bit. Which means oil money being used to try to bankrupt the IMF
But lower lending raises the questions of how the fund is going to pay its annual expenses of close to $1bn in the most recent financial year.
Uhm! Perhaps they'd need some advice on painful adjustments!
The interest rate it charges to borrowers is based on covering those costs, and a target for reserve accumulation set by the fund's board. In the short term, there is a danger that Brazil and Argentina's move will force the IMF to increase sharply the interest charged to its other borrowers.
with capital spreading more evely, there won't be too many takers.
Some quick fixes are possible. The board could cut the target for reserve accumulation. It could also reduce the interest rate it pays to member countries on their contributions to the fund. And the multilateral lender can pay its bills for several years out of its reserves, which stand at $6.8bn - something it did in the 1950s and the 1970s in periods of low demand for its loans.
"The fund has the reserves to pay for its operations for the next several years," says Kenneth Rogoff, Harvard professor and former IMF chief economist. "It is only if the good times go on for another five to seven years and there are no major financial crises, then it is going to become a significant issue."
With external conditions for emerging market countries so favourable, many observers predict another turn in the cycle, in a few years' time, when less favourable external conditions lead to a greater demand for IMF assistance, particularly in Latin America.
While the precise timing of the two big early payments was a surprise - particularly in the case of Argentina - prospects of a shrinking loan book are not new. The IMF's accountants have for some time been working on a plan to cope by boosting its income from other sources - a plan flagged by Rodrigo Rato, the IMF managing director, as part of a strategic review.
One possibility is earning a better return on the reserves, by investing a portion in longer-dated government securities, rather than in the shortest-term instruments.
Jay watch out!! There is also the undervalued gold on the fund's books - a source of potential income though equally a source of political strife given controversies over potential sales of the gold to fund debt relief for the IMF's poorest borrowers.
Another option would be to levy charges for some of the other services the fund provides.
no! I want see cuts! Deep and brutal cuts! And the electricty utility should not be kind and their lights heating and ok, just let them die :-)
These include a broad array of work in fiscal and monetary policy and the financial sector, national statistics and data standards. Any new charges could target the fund's richer members: donor countries could be encouraged to pay the bills of poorer members directly or by agreeing to receive lower interest rates on their deposits at the fund.
Some within the IMF see this as an opportunity to explain to the world the work it does, above and beyond crisis-lending to emerging markets.
And at a time when the IMF's lending is shrinking, many observers see the fund's most important challenge as making its voice heard in countries that do not need to borrow from it, most importantly the US, its largest shareholder, and China, the biggest developing country.
The IMF was set up after the second world war to deal with global payments imbalances and exchange rate misalignments.
At the moment, the fund's own analysis suggests the biggest problem facing the world is precisely such global imbalances.
The IMF's solution is to call for slower growth in domestic demand in the US to address its huge trade deficit, and for faster domestic-led growth elsewhere to keep the world economy turning.
The fund's biggest shareholders - the Group of Seven leading industrialised countries - have embraced this approach on paper but done little in the way of implementation.
A big challenge lies in persuading Asian governments to play their part in such an adjustment, both in their own economic self-interest and to promote more balanced trade flows.
This would involve allowing their currencies to rise against the dollar rather than building up ever higher foreign exchange reserves to keep exports to the US cheap.
"There is no question that the biggest issue before the fund is dealing with global imbalances," Mr Rogoff says. "The fund is not just about emerging market bail-outs." |
