Battling stigma

Mar 26th 2009 From Economist.com The IMF is in search of a role, and a happier reputation AP THE International Monetary Fund has been finding more to do in recent months, as various countries—including Hungary, Ukraine, Pakistan and Iceland—have come cap in hand in search of emergency aid. The fund has lent some $50 billion so far, and yet still has about $200 billion in its kitty. To some outsiders’ puzzlement, however, the fund has been scrambling to double its resources to $500 billion, and has succeeded in getting commitments for around $100 billion each from the European Union and Japan. Having addressed the supply side, it is now turning to stimulating demand for its resources. On Tuesday March 24th it announced increased borrowing limits on existing loan instruments. It has also rethought the way it monitors how countries fare in meeting conditions attached to its crisis-mitigation loans. But its biggest announcement was that it would create a new lending facility, the “Flexible Credit Line” (FCL). This would allow countries that are suffering from a worsening external environment, but whose macroeconomic policies are generally satisfactory, to draw on money from the fund in a precautionary manner. The idea would be to prevent, rather than mop up after, economic crises. The IMF hopes that this pre-approval feature, and the lack of conditions attached to the loan, will remove stigma that is usually associated with approaches to the fund. Yet much about the new facility sounds oddly familiar, because it shares many features with a Short-term Liquidity Facility, which it replaces. The IMF unveiled the previous facility with much fanfare at the end of October, around the same time that it made the first big loans to crisis-hit countries. Then the idea was to provide quick, no-strings-attached funding in the early stages of a crisis. As with the new facility, loans were only available to countries which the fund deemed to have sound macroeconomic policies but which were affected by factors outside their control, so to be stigma-free. One would have expected, then, that countries would queue up to be certified eligible for a loan. But it was never used in the five months of its existence. The IMF says that the problem with the previous facility was that borrowing limits were too low, and repayment periods were too short. The new facility tries to remedy all this by removing borrowing limits and extending loans for longer periods. But little new has been done to address the stigma concern. The fund is softening its stance on conditionality more generally, saying that it wants to rely more on ex-ante conditions (that is, qualifications to get a loan) rather than on forcing countries to adopt unpopular policies (such as curtailing public services) after they take a loan. Yet it seems unlikely that countries will, as a result, worry less about the stigma attached to IMF loans. The fund argues that it has designed the new facility in consultation with its members, who should therefore be less reluctant to apply for loans. It also points to the eagerness with which the Federal Reserve’s precautionary swap lines with some big emerging economies, unveiled in October last year, were taken up. But critics, while conceding that countries have sought loans elsewhere, point to the fund’s particular unpopularity. The reason for this is that most emerging and developing countries see it as unrepresentative and the fief of Europe and America, its largest shareholders. Unless this changes, and by more than the small reforms that are in the works now, the countries that could benefit from new loans will continue to be reluctant to turn to the fund. Some countries such as South Korea, a possible client, have reportedly already said that they are not interested in the new facility. If more countries share the scepticism, the new facility may not be much longer lived or widely used than the one it replaces.