Global Policy Forum

Early Repayments From Fund's Biggest Borrowers Leave Shortfall

By William McQuillen

The International Monetary Fund's loss of two of its biggest borrowers last month has left the lender and renewed questions about its role in the global economy. In the past six weeks, Brazil made early repayment of $15.5 billion it owed and Argentina repaid $9.5 billion in debt two years ahead of schedule, closing the accounts of the International Monetary Fund's first- and third-largest borrowers. The enticement to pay the debt -- foreign reserves that have swelled as Latin American economies rebound from recession and investors' appetites for government bonds grow -- is present in other large borrowing nations, including Pakistan, Serbia and Ukraine, which have hinted that they, too, may sever ties to the lender.

"In good times, nobody goes to the IMF," said Liliana Rojas-Suarez, a former International Monetary Fund (IMF) economist who is now at the Center for Global Development in Washington. The result is a loss of interest income that prompted the IMF to lower its earnings forecast by about 40 percent for the fiscal year ending in April. The fund now expects a budget shortfall of more than $116 million this year, emboldening critics who have called on the Washington-based fund to scale back its lending and focus more on dispensing economic guidance.

"This should force the fund to ask what they are doing and what they should be doing," said Allan Meltzer, a professor at Carnegie Mellon University in Pittsburgh who led a 2000 U.S. congressional commission that examined the IMF. "If it is just business as usual, the fund will be becoming less relevant." The fund may invest some of its reserves as it looks for ways to make up for the decline in net income, said Thomas Dawson, a spokesman for IMF Managing Director Rodrigo de Rato.

The IMF was founded at the end of World War II to promote global economic stability. The fund typically makes loans to countries on the condition that the borrowers undertake economic policy changes such as adjusting their balance of payments or reducing inflation. With elections nearing, those conditions grew unpopular in Argentina and Brazil, where the public has blamed their countries' economic crises on IMF-mandated changes.

Those countries aren't alone. Pakistan, the IMF's third-largest debtor now that Argentina has walked away, is carrying $1.51 billion in debt and says it is seeking to cut its dependence on the fund; Ukraine, the fourth-largest debtor, said in 2004 it probably would decline any additional assistance; and Serbia, which owes the IMF about $874 million, said last month that it wouldn't borrow any more. A year ago, Russia repaid early its $3.3 billion debt to the IMF after seven years of economic expansion; in 2003, Thailand finished paying off its obligations two years ahead of schedule.

"This plays very well politically in those countries," said Desmond Lachman, who spent 24 years as an IMF economist and is now a senior fellow at the American Enterprise Institute, a Washington think tank. "Prepaying the IMF is declaring independence." Greater liquidity in capital markets has given nations other places to go for loans, while low interest rates have made financial emergencies less likely. There hasn't been a worldwide economic crisis that has required the IMF since the Asian and Latin American turmoil of the late 1990s.

The IMF's projected budget shortfall for fiscal 2006 has increased to $116 million from $26 million as a result of the interest-payment revenue it will lose because of the early debt repayment by Brazil and Argentina. Its total operating budget is $2.3 billion, almost all of which is funded by interest income. The IMF is hardly going broke: The lender can access about $139 billion, mostly through the financial commitments of its member countries, a November financial statement showed. The fund also has stockpiled more than 100 million ounces of gold, which would be worth more than $56 billion at today's market prices. In a cyclical world economy, there will probably be a time when governments again rely on the IMF for loans, Mr. Dawson said. Until then, the IMF is content with less influence, he said.

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C íŸ 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.