Global Policy Forum

Look Who Needs Austerity Now


By Mojmir Hampl

Wall Street Journal
July 16, 2007

The leadership contest for the International Monetary Fund took another unexpected turn last week, with the Fund's board deciding to accept nominations from outside Europe for the first time. This came on the heels of France's swift maneuver days earlier to make former finance minister Dominique Strauss-Kahn Europe's pick for the job. But whoever ends up as the successor to Managing Director Rodrigo de Rato will face one clearly pressing task: Put the Fund on a diet.

Though one of the IMF's key purposes is to promote global exchange stability, the financing of its own operations is somewhat paradoxically dependent on the existence of instability, economic crises and exchange turbulence. This curious or even perverse motivation is due to the fact that the Fund's current income consists mainly of interest income on loans and other credit granted to distressed countries. This lending is financed from quotas, or "membership fees," paid by the 185 countries that currently belong to the IMF, giving the Fund roughly $315 billion at its disposal at the moment. The interest income rises with the number of loans the IMF makes. At quiet times, the Fund's main source of income runs dry. And that is what is happening now. After the relatively turbulent 1990s, when the Fund was heavily involved in Mexico, Russia and Asia, the first decade of the 21st century has been far calmer financially. This is fortunate for the world of finance, but unfortunate for the IMF administration.

The IMF's number of staff and operating budget have risen significantly over the past decade as its activities have expanded. The Fund currently employs around 2,700 people, most of whom are highly specialized economists, financial experts and managers -- in other words, very expensive employees. The number of IMF staff members increased by more than 35% from 1995-2005. But the demand for IMF services isn't keeping pace with its own growth. The experience of the 1990s, when many countries -- especially in Asia -- felt that the IMF did not treat them with the same, or at least similar, generosity as it did Mexico, led a number of states to build up their own reserves for times of trouble. Moreover, the development of private financial markets has provided different sources of funding.

As a result, the IMF now has basically only one "big client," Turkey. It is the recipient of roughly two-thirds of all currently used IMF lending facilities, making it the main source of financing of the Fund's operating budget. This client, however, is not big enough to maintain the bloated organization. This is because the IMF has many other "non-Turkish" activities -- for example, a large amount of technical aid provided through missions of experts to individual countries -- that swallow money but do not generating revenue.

Continuing quiet on the global financial market is bound to widen the IMF deficit. The deficit has already reached some $106 million as of this April and might triple between now and 2010 unless measures are taken on the income or expenditure side. Compare that to the "golden year" of 1999, when the IMF's net income reached roughly $600 million. A report by Sir Andrew Crockett, former head of the Bank of England and the Bank for International Settlements, which the IMF commissioned this year, says the deficit problem must be urgently addressed. Together with experts including former Federal Reserve Chairman Alan Greenspan and European Central Bank President Jean-Claude Trichet, Sir Andrew defined several ways for the Fund to generate higher income in future years to cover its operating expenses, of which a full 70% goes to wages and salaries. The Crockett report discusses selling a share of the gold owned by the Fund and more aggressive investment of its financial reserves, but it also raises the possibility of increasing members' contributions.

Surprisingly, neither the report nor the Fund's own management has publicly commented on how the IMF's expenses might be cut. No suggestions for reducing its work force and administrative expenses have been voiced so far. However, at quiet times the Fund must simply be streamlined. The Fund has no doubt correctly prescribed austerity measures for many governments around the world. Its new managing director, whether Mr. Strauss-Kahn or someone else, should give the Fund a taste of its own medicine.

About the Author: Mr. Hampl is a board member of the Czech National Bank.

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