IMF ‘must reform to remain relevant’.
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The US stepped up its call for reform of the International Monetary Fund on Monday, calling for a shake-up of its executive board as well as a deal on increasing the relative weight of emerging markets in the multilateral body.
The call marks an effort to renew the momentum for governance reform at the IMF, which faltered following the early departure of the former managing director, Rodrigo Rato. Dominique Strauss-Kahn, the new managing director, favours governance reform but has been focused on the credit crisis and, internally, on the need to find $100m ( 67m, GBP51m) in budget cuts - including a 15 per cent reduction in the number of IMF employees.
David McCormick, the undersecretary for international affairs at the US Treasury, told the Peterson Institute: “The IMF must reform to remain relevant.” He said the fund had to modernise on each of three fronts - its mission, its governance structure and its financial model - in order to be effective.
Mr McCormick pressed the IMF to make use of its recently enhanced mandate to monitor exchange rates - code for putting pressure on China and some other emer-ging economies to allow their currencies to appreciate more rapidly.
“The IMF must now step fully through the door it has opened and make exchange rate issues the priority they deserve to be,” he said. Mr McCormick warned that “if the IMF fails to shoulder this fundamental responsibility, all other reforms will be called into question.”
He also called on the IMF to make “meeting the unique challenges posed by sovereign wealth funds” a second priority. Mr McCormick urged rapid progress on an IMF voluntary code of best practice for sovereign wealth funds, which he said would “help push back against the calls for increased restrictions on sovereign investment”.
The Treasury undersecretary said the other core responsibility of the IMF was to promote financial -stability. He said the proposal by Gordon Brown, the UK prime minister, to give the IMF a key role in providing an “early warning” of financial crisis was a “laudable goal”, but he sounded sceptical on whether this should be the IMF’s core task.
“We must also be realistic about our ability to predict crises,” he said, adding that the “foremost challenge” was to develop financial market frameworks that would be “able to withstand risks and losses” when crises did erupt.
In the early phase of the credit crisis, the IMF was largely sidelined by the US and other industrialised nations, which give the lead role in developing the global regulatory response to the Financial Stability Forum.
However, IMF insiders believe that the Group of Seven leading economies now recognise the importance of giving a more prominent role to the fund, which has a wider global membership and involves finance ministries.
Filed by Anita Li under International Financial Architecture Reform