As developing countries prosper, IMF influence wanes

28 May 2008

The International Monetary Fund (IMF) lending is at an all time low, and the institution is forced to redefine its role as developing countries benefit from the availability of other sources of finance.

A recent article in the Washington Post highlighted the International Monetary Fund's (IMF) struggle to stay relevant during a time in which it has seen its loan portfolio shrink by $100 billion since 2003. This steep decline in IMF lending is attributed to the ability of developing nations to capitalize on surging commodity prices, and the availability of other lenders such as India and China whose loans do not come with strict demands or conditionalities. Furthermore, many past recipients of IMF lending such as Brazil and Argentina have re-payed their IMF loans early and now enjoy booming economies, which no longer need the help from the IMF.

To cope with this significant changes, the IMF has cut its workforce by 13 percent and will sell $6 billion worth of gold reserves to to create new long-term sources of income. But the IMF will not go down easily. The institution's role as overseer of structural adjustment and temporary lender is changing with the times. In Africa, the Washington Post describes the IMF's role as shifting into more of an advisory role on economic policy. Top Fund officials were quoted as saying that the new IMF would be "less focused on forcing nations to adopt tough cost-cutting measures" and more on "ensuring that they don't make mistakes" that could lead to financial crises not unlike those which occurred in Asia in the late 1990s and South America in the early 2000s.

Though some of the poorest countries, particularly in Sub-Saharan Africa are still beholden to IMF and its conditionalities, even in more prosperous countries the IMF still wields its influence through it's "signaling" power; other lending institutions such as the World Bank, and bilateral aid from the United States and the European Union defer to the IMF to certify a country's level of fiscally responsibility before lending money. Despite this influence of power, however, the IMF is clearly fighting a battle of relevance. While in the past a country would have to make painful cuts to social services such as health care--as was the case with Argentina in the early 2000s--a country such as Ghana now has the ability to "accept the policies it likes while reject those that it doesn't."

Source:

As Global Wealth Spreads, the IMF Recedes, by Anthony Faiola, The Washington Post, May 24, 2008 (Washington Post website)