N K Singh, Chairman of the 15th Finance Commission and president of the Institute of Economic Growth, discusses the need to revisit and review many of the important roles of the International Monetary Fund (IMF). In an interview to Sunny Verma, he says the Article IV bilateral consultations of the IMF need to be restructured and sharpened. Edited excerpts:
The IMF came out of the Bretton Woods agreement with a great purpose. But there is a view that the quota system and the lending mechanisms do not reflect contemporary relevance and economic positioning of countries like India. What is your understanding of these issues?
So, yes, the issue of restructuring, the access to the resources of the Fund, just in accordance with the changing economic configuration has been an ongoing dynamic. It’s undoubtedly true that the quotas were fixed when the economic relevance of many of the developed countries was significantly higher than the developments over the last few decades. Some tentative attempts were made to recalibrate the quotas, which enables and determines in a mechanical way, the access to the resources of the Fund. These remain, however, incomplete. Moreover, the issue is not seeking a mechanical relationship between quotas and access, and the issue is not one of legal obligations. Yes, issue is one of needs with moral obligations. So countries, which are low, middle income countries in which category India is, have low levels of access, no doubt consistent with its quota, but nowhere commensurate. India may not need balance of payments support as, fortunately, today our foreign exchange reserves due to good governance and scientific and economic growth are adequate; but (funding support) to meet other compelling needs, particularly the needs of sudden pandemic and climate finance. The issue is whether this system of a mechanical co-relationship needs a basic restructuring. This issue needs much greater consensus, it requires cooperation of all major quota holders of IMF to recognise that given India’s population and low per capita income, it would be more appropriate to reconsider not merely our obligatory access but to consider our needs as well.
The IMF’s role has also sort of evolved over the years and from the issues of providing liquidity support to countries in a temporary crisis or to help them in the balance of payments mismatch to sort of designing policies for macroeconomic stability. So, has that design or these objectives met their purpose or do we need to review them now?
It is a complex question. From the very inception, it was understood that there was a broad demarcation of functions between the two Bretton Woods institutions. It was expected that the International Monetary Fund, which, consistent with its charter, would focus on macroeconomic parameters like fiscal deficit, current account deficit, levels of sustainable debt, seek to assess policies of member countries in that light. The World Bank’s, on the other hand, which is originally known as the International Bank for Reconstruction and Development, primary focus has always been issue of development and as it evolved focus is on issues of poverty redressal and proactive policies. So, while the focus is on macro parameters, focus on the latter is on structural and other changes, which would improve the pace of growth and will directly address the issues of poverty in a significant way.
Now, to the question of the IMF, right from the inception, therefore, access to resources of the Fund were contingent on adherence to some macroeconomic parameters and traditionally countries, which entered into agreements of this kind — either transitional financing mechanism like the CCFF ( the Compensatory and Contingency Financing Facility) and other short-term thing, and to upper credit tranche arrangement —have to undertake not only through letters of intent by the government to the managing director and subject to the approval of the board on the conditionalities for realigning their macro policies for continued access to this. These are also subjected to what are known as quarterly performance criteria, which is a powerful instrument with the IMF that deals with the adherence every quarter by the member countries for continued access to further resources. And, therefore, there is a system of quarterly management of the conditionalities being met. On the other hand, the programmes of the World Bank are largely designed into structural phenomena, and during whereas much earlier before the time of our own balance payments crisis of 1991, we had had access to the resources. But the 1991 crisis was of a nature which was far more serious than any previous transitional liquidity accommodation that was needed. So, around that time, they changed over the system to what are known as cross conditionalities. Cross conditionalities between the two Bretton Woods institutions, namely the IMF and the World Bank, with the IMF focusing on the macroeconomic behaviour of macroeconomic variables and the World Bank focusing on structural reforms designed to improve the overall rate of growth of the economy. So, consistent with this, your question is a relevant one, have these conditionalities, which have been placed on countries that have had access to the IMF programme, resulted in the objectives being served, opinion on this is very divided because many countries who have accessed believe these conditions are far too strenuous and far too rigorous. Of course, they are never likely to be popular, but the outcome is a very mixed one, whether they have served the intention or not. And therefore, the nature and framework of these quarterly performance criteria also needs to be evaluated in country-specific conditions. India was one of the countries where adherence to the programme did result in India getting out of its crisis, so to say rather quickly, beginning in 1989, and the arrangement beginning in 1991, but coming to an end in 1993, with all parameters having improved. This is far from the way to do cross country comparisons, we get very mixed outcomes and results.
The IMF’s Article IV consultations on countries also play an important role along with its financial sector assessment programme. Do these meet the specific purpose?
As you know, the Article IV consultations of the International Monetary Fund is one of the most important instruments for monitoring and surveillance of the behaviour of key economic variables in member countries. It is through this Article IV consultations that the Fund is expected to keep track of the behaviour of the economy of the member countries. There are three important infirmities. One, by hindsight, it has been repeatedly said that the Fund could never pinpoint an incipient crisis. It failed, for instance, to see the signs of the Asian currency crisis. So the question would be asked that why couldn’t they have foreseen with the high degree of technocracy which they have, the trends developing which will lead to such an important economic slowdown. So, their ability to therefore, in the Article IV consultations, both to detect, suggest and act, when incipient crisis is, has a very, very mixed analysis. Equally, the other big issue is whether the rigour of the Article IV consultations have been applied uniformly across countries. People would ask the question, that developing countries, particularly poor developing countries, many of them in Africa and Latin America, are they subjected to far more rigorous Article IV consultation process and scrutiny than, for instance, the more developed countries, and the most curious example is, that in Spain and Greece. More importantly, when the last global financial crisis took place, people asked the question, that just because the US is the biggest shareholder of the IMF and has the biggest quota, did the IMF fail in its surveillance to support the emergence of the crisis. So the issue of symmetry, equity and uniformity, and the quality of Article IV consultations is an open issue. In fact, some years ago, they also set up an independent evaluation office in the IMF, which was headed for the first time by (Montek Singh) Ahluwalia. And it was all in the background of the fact that the failure of the Fund to spot incipient crisis and to see symmetry of action. Nonetheless, I think that the issues which I have mentioned about the uneven rigour, and the uneven capability of the IMF Article IV consultations is an important matter. By the way, Article IV consultation is the most powerful instrument in making sure that the basic objective of the IMF to see the orderly development of world growth and trade is fulfilled. And therefore, this instrument needs to be restructured, sharpened, and I think that the enormous amount of data that technology makes available today can be utilised.
The World Bank has recently withdrawn its Ease of Doing Business reports because of controversy over data integrity. How do you see this development and its impact?
So, our Prime Minister, while addressing the last meeting of the United Nations General Assembly, did mention in his address the issue of the credibility of these global financing institutions, and also touched on the issue of data being manipulated, he did not use those words those words are mine, whereas the impairment of the data which really hurts the value and credibility of these institutions, there is no doubt that institutions are relevant and they are credible. Credibility depends on trust. This trust is infused by objectivity of action and analysis. So, the recent controversy, if I may say so, is unfortunate, and I think that the shareholders of these institutions need to do not only cleansing, but need to examine deeply within how damage to the credibility of these institutions can be repaired in a manner which would infuse global trust and confidence on the outcomes and analysis. After all, let us not forget that these institutions have a very important role to play. So, the International Monetary Fund’s analysis is an important prompter not only for the rating agencies but also the investor community seeking to make investment decisions. These investment decisions they believe are guided by the objectivity, which is exercised by both these institutions. So, I think that in order to enable global institutions to play a critical role, as in not only for purposes of public outlays, but more importantly, looking at the growing importance of private capital flows a large quantity, which will be needed for managing the transition to climate financing is important that the institutions do maintain their strictest vigilance and standards in repairing any damage to credibility, in ensuring that all such possibilities are eliminated to the extent possible.
What do you see as the future of these multilateral institutions?
The world certainly needs these multilateral institutions. They have rich experience and legacy and particularly developing and poor developing countries need them much more than the more developed countries or other developing countries, where development has gone up and who have sought to create alternative institutions to replace these institutions. Such exercise is embedded in avoidable geopolitics, the integrity and necessity of these institutions remain paramount for countries like India, which would like to strengthen rule-based multilateral system across the board, particularly the World Bank and the IMF. So, any infirmities need to be rectified, the institutions restored to their original intent and purpose and strengthened because the world including India is better off with these institutions than if they were to wither or sprout in other ways, which may not represent the object of stability and development.