The Expert Explains: Do IMF consultations matter?
An International Monetary Fund (IMF) mission hold discussions with key ministers, officials and stakeholders under the so-called “Article IV” consultation for 2015, as part of the IMF’s surveillance function, and set out its views on the key challenges for Mauritius in 2016 and how they should be addressed. So how does the IMF’s “Article IV” consultation process work, and does it matter? For those who wish to dig deeper, here’s the explanation, straight from the desk of our expert guest contributor, Samantha Seewoosurrun, a reputed professional consultant in the financial services sector.
An International Monetary Fund (IMF) mission, led by Mauro Mecagni, visited Port Louis from 2-16 December 2015, to hold discussions under the so-called “Article IV” consultation. The mission met with Prime Minister Sir Anerood Jugnauth, Vice Prime Minister and Minister of Tourism and External Communication Xavier-Luc Duval, Minister of Finance and Economic Development Seetanah Lutchmeenaraidoo, Governor of the Bank of Mauritius Rameswurlall Basant Roi and other senior officials as well as the private sector, academia and civil society.
At the conclusion of the visit, Mr Mecagni issued a statement saying that the main challenges for Mauritius for 2016 and beyond pertain to reducing public debt through a growth-friendly and pro-poor medium-term fiscal consolidation effort; further increasing the resilience of the financial sector by strengthening the macro-prudential oversight framework; and addressing the reforms needed to transition to high-income status, in particular with a view to improving productivity and competitiveness. He commented that addressing infrastructure bottlenecks, skill mismatches and gender inequality in the labour market will also be important.
Over the medium term, the IMF predicted that international reserves would strengthen, supported by continued capital inflows as Mauritius seeks to leverage its financial sector as a hub to channel significant investments to Africa and Asia.
So what role does the IMF play in economic policy making? It was set up in 1945, following the so-called Bretton Woods conference, to try to avoid, collectively, the bad policies which had occurred in the 1930s. Its main two functions are to lend money to countries that enter into crisis situations and need bailouts, and to exercise surveillance and offer policy recommendations, which may or may not be accepted. It is funded by all the member countries, with the amount based on the country’s size.
What is the “Article IV” process which has led the IMF to draw conclusions regarding the position of Mauritius? Mauritius has been a member of the IMF since independence in 1968, when it agreed to subject its economic and financial policies to the scrutiny of the international community. The “Article IV” consultation process refers to the ongoing country surveillance exercise which is required by Article IV of the IMF’s Articles of Agreement, which typically looks at exchange rate, monetary and fiscal policies; financial sector issues; assessment of risks and vulnerabilities; and institutional and structural issues, with the emphasis varying according to a country’s individual circumstances. It culminates in regular (usually annual) comprehensive consultations with individual countries, with discussions in between as needed.
Each mission is conducted by an IMF team of economists, which reports its findings to the IMF’s management and then presents them for discussion to the Executive Board, which represents all of the IMF’s member countries. A summary of the Board’s views is then transmitted to the country’s government, so that the views of the global community and the lessons of international experience are brought to bear on national policies. A summary of the IMF’s conclusions and report would normally be published.
How well does the process of IMF “Article IV” consultations work in practice? In reality, if we look at the IMF’s record over past years, it has been somewhat chequered, mainly because the process has been far more political than it should have been. For example, in the case of China there was a disagreement over exchange rate policy which meant that no report was completed for 2007 and the 2008 staff report never reached the board.
There have also been problems with the completion and publication of reports in relation to Argentina and Brazil. IMF advice has suffered from a stigma in some parts of the world, particularly in Asia, where it was criticized for imposing austerity measures on countries from South Korea to Indonesia during the crisis of the late 1990s.
How effective has the IMF surveillance process been in acting as an early warning system of problems to come? Some of the most interesting insights, and criticism, on this point come from those who have worked as senior officials inside the IMF system.
One former official, Desmond Lachman, who served Deputy Director in the Policy Development and Review Department, has claimed that the IMF has emphasised its surveillance role in order to justify its continued existence, after the failed Asian and Latin American economic adjustment programmes, and that it “failed miserably to remotely anticipate the two largest and systemically most important economic and financial crises of the post-war period”, namely the US housing market and sub-prime mortgage debacle, and its damaging spillover effects, and then the European sovereign debt crisis.
Furthermore, if we look at the case of the Ireland, the former IMF Deputy Director Dr Donal Donovan, speaking in a personal capacity to the Irish Parliament’s Committee of Inquiry into the Banking Crisis earlier this year, has commented that the IMF’s surveillance of the Irish economy before the crash gave “no inkling” that Ireland faced a downturn and had “failed”.
So as the Mauritian Government looks ahead to 2016, to what extent should it heed the IMF’s advice? If we look back to the last report on Mauritius, published in April 2014, it is interesting to note that their ‘heatmap’ on bank health already flagged that the financial ratios of the Bramer Banking Corporation were less healthy than average, and that certainly turned out to be a major problem. While the IMF has no specific tool to guarantee the effectiveness of its surveillance process, it would nonetheless be wise for the Mauritian Government and Bank of Mauritius to carefully review its detailed recommendations and to take action as needed.