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There is no positive role for the IMF in its current guise

Most of my blogs are about advanced nations. Many of these nations are being plunged back in time by misguided applications of fiscal austerity and even when growth returns they will take a decade or more to get back to the per capita income levels that prevailed prior to the crisis. Many children and teenagers in these nations will be denied essential education, training and workplace experience by the deliberate choice by their governments to entrench long-term unemployment and to starve their economies of jobs growth. But it remains that these nations are not poor in general and while people are losing houses and other items on credit only a small proportion will starve. Not so the poorer nations that I rarely write about. These are the nations where a high proportion of the citizens live below or around the poverty line. These are the nations that are at the behest of the IMF and suffer the most from their erroneous policy interventions. Today I reflect on how those nations have been going during this crisis. The bottom line is that the way the Fund reinvented itself and reimposed itself on the poorer nations after the collapse of Bretton Woods in 1971 has damaged their growth prospects and ensured that millions of people around the world have remained locked in poverty. Along the way … children have died or have failed to receive the levels of public education that any child anywhere deserves. There is no positive role for the IMF in its current guise.



1. (Law) the act of attempting to obtain money by intimidation, as by threats to disclose discreditable information
2. the exertion of pressure or threats, especially unfairly, in an attempt to influence someone’s actions


1. (Law) to exact or attempt to exact (money or anything of value) from (a person) by threats or intimidation; extort
2. to attempt to influence the actions of (a person), especially by unfair pressure or threats

In yesterday’s blog – The dead cat bounce – Latvian style – I noted that the Latvians are reprising the “old IMF austerity doctrine that failed in the developing world”. In terms of the IMF “internal devaluation” approach I reminded readers that since the late 1970s, the overwhelming evidence is that these programs increase poverty and hardship rather than the other way around. Latin America and Sub-Saharan Africa (which dominates the low income countries) were the regions that bore the brunt of the IMF structural adjustment programs (SAPs) since the 1980s. And low income countries actually became poorer between 1980 and 2006.

In general, the IMF operates by offering financial support to poor nations to bail them out of a crisis as long as the nation “accepts” harsh macroeconomic policies which worsen poverty.

What used to be called SAPs are now marketed by the IMF as a poverty reduction and growth facility (PRGF) – yes, serious. The way the IMF operates fits the definition of blackmail in my view and makes the Fund a criminal organisation.

In October 2010, UNICEF released a report – Prioritizing Expenditures for A Recovery for All – which reviewed public expenditure trends in 126 low and middle income countries.

You can download the UNICEF datasets that were used in the report.

Their aim was to assess “expenditure projections over the near term and their potential implications for children and poor households during the economic recovery”.

UNICEF noted that:

For most low and middle income countries, the incipient revival in economic activity appears to be fragile and uneven, as many remain vulnerable to volatile commodity prices, shortfalls in external finance and investments, and, in some instances, financial system weaknesses. More importantly, according to the United Nations … and the World Bank … the social impacts of the global crisis continue to be felt in terms of rising hunger, unemployment and social unrest. On top of the millions already pushed into poverty in 2008-09, an additional 64 million could fall into extreme poverty during 2010 as a result of the combined, lingering effects of the crisis …

In this context, on November 1, 2010, the Executive Board of the IMF met to discuss “macroeconomic challenges facing low-income countries as they exit from the global crisis”.

They produced this document – Emerging from the Global Crisis: Macroeconomic Challenges Facing Low-Income Countries which restated the organisation’s neo-liberal mantra.

The IMF paper perpetuated the myth that the previous policies which emphasised fiscal consolidation (austerity) had provided the poor countries with more room” to respond to the crisis and allowed them to “let their fiscal automatic stabilizers operate”. In other words, the IMF was applauding the fact that many poor countries didn’t engage in discretionary cuts in spending and just allowed the cycle push the budget outcomes into small deficits.

Meanwhile unemployment and poverty rates rose and could have been attenuated by a more vigorous discretionary fiscal response, which the IMF discouraged.

But the overall lie that the IMF promotes is that a nation with budget surpluses (or very small deficits) have more fiscal space to meet a cyclical downturn. For a truly sovereign nation that is a total fabrication. Whether they have been running deficits or surpluses does not influence the capacity of such a government to increase its net spending in response to a private spending collapse.

In the case of the poorer nations that had been bullied by the IMF into adopting flawed export-led growth strategies, the global financial crisis led to “a sharp contraction in export demand, foreign direct investment, and remittances” as recognised by the IMF itself. In that situation, discretionary expansion of net public spending was required.

Merely relying on the automatic stabilisers to put a “floor” into the downturn is not the same thing as aggressively combatting the job loss with discretionary public spending increases.

The IMF didn’t waste any time considering the huge increase in poverty that the GFC wrought on the poor nations. It claimed that among the key challenges facing the poor nations is the need:

… to rebuild the policy buffers … strengthen domestic revenues beyond the cyclical rebound to help create fiscal space while preserving debt sustainability …[and to] … advance structural reforms … [read: further deregulation, privatisation and concessional benefits to private sector firms]

So will these nations meet their Millennium Development Goals? Not likely. The crisis has set them back and even before the downturn the austere anti-growth policies that these nations were being forced by lending agencies to follow were already undermining their capacity to meet the goals.

It is interesting that the IMF noted – without much emphasis – that the poorer nations were helped by the fact that they:

… reacted to downward exchange rate pressures mostly by letting the exchange rate depreciate rather than allowing losses in reserves as in the past …

This is a crucial aspect of the way these nations moderated the severity of the crisis. In the past, the IMF has insisted on maintenance of various peg arrangements which have caused the relevant nations considerable hardship as they run out of reserves and have to borrow funds to just maintain imports.

In the current crisis, there has been more evidence that nations have allowed the flexibility provided by nominal exchange rate movements to work in their favour and free up domestic policy to target better domestic outcomes.

Compare this to the discussion in yesterday’s blog – The dead cat bounce – Latvian style – where I noted that the ECB and the EU bosses had pressured Estonia and Latvia to maintain the Euro-peg as a pre-condition for entering the EMU in the coming years (Estonia in 2011). Those nations have been pilloried by this sort of policy failure.

Then compare that to the nations now trapped in the Eurozone austerity prison! They cannot enjoy the benefits of nominal exchange rate depreciation.

The other problem with the IMF approach is that they argue that maintenance of real public spending levels is appropriate whereas there is a urgent need for the poorer nations to expand the public share of spending – that is, increase the real levels.

But the main problem is that a significant number of poorer nations were pressured into cutting public spending during the crisis. Please read my blog – IMF agreements pro-cyclical in low income countries – for more discussion on this point.

The October 2010 UNICEF report (noted above) found:

… that nearly half of the sample (44 percent) is expected to reduce aggregate government spending in 2010-11 when compared to 2008-09. This is of concern both in terms of GDP – where the average reduction is 2.7 percent of GDP – as well as in the real value of total government expenditures-where about 25 percent of the sampled countries is expected to make reductions of an average of 6.9 percent of expenditures.

So a substantial number of poor nations were proposing pro-cyclical fiscal contractions. Further, spending cuts are often targetted in terms of “pro-poor” areas of social expenditure which reinforces poverty.

Please read my blog – The absurdity of procylical fiscal policy – for more discussion on this point.

UNICEF concludes that:

… a significant number of low and middle income countries is tightening or planning to tighten public expenditures in 2010-11. Common adjustment measures considered by policymakers during the period 2009-10 include wage bill cuts or caps, limiting subsidies (e.g. on food) and further targeting social protection. Fiscal consolidation is now being pursued in a greater number of countries when the recovery is still fragile and uneven, and vulnerable populations continue to suffer from the cumulative effects of the food/fuel price increases and the global economic slowdown…. Many of those likely to be hardest hit are poor, marginalized children and their families. The limited window of intervention for fetal development and growth among young children means that their deprivations today, if not addressed promptly, will have largely irreversible impacts on their physical and intellectual capacities, which will in turn lower their productivity in adulthood-this is a high price for a country to pay.

Why would any national government be doing that given that when an economy is contracting fiscal support should be adding to aggregate demand rather making it worse?

Why would this fiscal purge also be concentrated on areas of spending that most benefit the poor and the long-term growth prospects of the nation?

Why would a poor nation deliberately cut public spending that was supporting employment when such employment is often the difference between the relevant family living above the poverty line (with work) or being in abject poverty (with unemployment)?

Answer to all questions: the domination of neo-liberal budget myths which are continually pushed by our friends the IMF.

A related problem is that so-called “progressive” agencies like UNICEF seemed to be buying these fiscal myths. In accounting for why nations would endanger growth and poverty reduction by cutting public spending in a recession, the UNICEF report says:

Developing countries’ ability to apply fiscal stimulus or sustain expenditure patterns depends on a number of factors, such as revenue generation capacity, initial debt burden, access to capital markets and/or macroeconomic fundamentals.

None of these things constrain the ability of a nation (poor or rich) which is sovereign in its own currency, floats it on international markets and has a central bank which sets its own interest rate (independent of any currency board arrangements).

There is no such thing as fiscal policy being constrained by a lack of “revenue generation capacity”. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency.

The initial debt burden (as long as it is denominated in local currency) does not constrain current spending. A sovereign government can always service such debt obligations as well as maintaining essential spending growth to ensure employment growth is strong.

Access to capital markets is also not essential because such a government does not need to issue debt in the first place.

The things that constrain poor nations are currency arrangements (pegs, etc); borrowing denominated in foreign currencies; poor resource usage which do not eliminate inflationary bottlenecks; dependence on imports for essentials (such as food etc).

The role of international organisations should be to reduce the impact of these sort of constraints rather than impose mythical constraints which reinforce poverty.

In October, Oxfam wrote to the IMF about the Fund’s lending program in Sierra Leone. The government of Sierra Leone was forced by the IMF as part of their January 2010 intervention to introduce a regressive consumption tax and to abandon plans to increase the salaries of health care salaries (which was part of a new initiative to reduce the child mortality rates by providing free health care to pregnant and nursing mothers).

In their March 2010 statement after visiting Sierra Leone, the IMF concluded:

The fiscal policy response to the effects of the global economic downturn in 2009 was appropriate. However, the main challenge facing the authorities continues to be the creation of fiscal space to finance investment in basic infrastructure and implement structural reforms to promote higher sustainable private sector-led economic growth. To this end, the authorities are committed to strengthening tax administration in order to raise tax collections.

The Fund was running its usual line as noted above. It also supported the government of Sierra Leone (pressured them?) into negotiating secret (not available for public scrutiny) mining lease deals with a British multinational company that essentially granted them tax relief for 15 years and insured the company against adverse movements in global commodity prices.

The point was that while the IMF was forcing (blackmailing) the government to impose a harsh and regressive consumption tax they were also supporting very beneficial tax treatments for an iron ore mining operation which would repatriate profits to its foreign owners.

Oxfam demanded that the IMF “make a clear public statement that increased revenue collection from the mining sector should account for appropriate levels of revenue effort, and that extractive industries agreements should be available to the public” saying that:

Such as statement would dispel concerns that the Fund is prepared to serve as an aggressive advocate for regressive consumption taxes through application of lending conditionality, while maintaining silence on those issues needed to ensure progressive revenue generation for poverty reduction.

The IMF pressure to resist wage rises for health care workers in Sierra Leone generalise into demands for public wage bill caps in most poor nations that the IMF deals with.

This 2006 Report from the Dutch-based organisation Wemos – IMF Macroeconomic Policies and Health Sector Budgets – is scathing of the way the Fund operates in poor nations.

The Wemos report notes that:

… a government’s overall budget is seriously constrained … by the IMF’s cautious macroeconomic policy stance, which focuses on macroeconomic stabilisation goals rather than growth objectives, and, therefore, favours minimal budget deficits financed by international rather than domestic means, sustainable levels of international and domestic debt, low rates of inflation and so on … The IMF argues that wage spending must be cut to create resources to spend on fighting poverty. However, one of the most effective means to fight poverty is to employ more health workers, but they cannot be employed because IMF wage ceilings inadvertently restrict the hiring of health professionals.

The IMF have had a history of blocking essential spending on education in the poorest African countries. This 2007 Report from the British charity organisation Action Aid notes that:

In the world’s poorest countries many children have gone without quality education for far too long, and as a result, the human capital that these countries need to grow and develop sustainably is still in desperately short supply. One reason is that the key ingredient to learning is missing: there are not enough trained teachers. Our research in Malawi, Mozambique and Sierra Leone shows that a major factor behind the chronic and severe shortage of teachers is that International Monetary Fund (IMF) policies have required many poor countries to freeze or curtail teacher recruitment.

The IMF delegations have infused their idea of fiscal sustainability on the governments of these poor nations not via any intellectual process – where the arguments win the day – but by straight bullying blackmail – either do as we say or go without our assistance.

ActionAid reports that the officials said that extra outlays on education in their nations could not be “at the expense of macrostability”.

When quizzed about what what this meant, “it became clear that few government officials had a sense of what macrostability meant, other than meeting” the IMF-imposed targets.

The IMF define this in terms of tight fiscal settings, stable inflation controlled by tight monetary policy and export revenue growth (without regard for natural resource exhaustion).

Quite apart from whether the concept is valid, the IMF focus is short-term and by denying essential public investment in health and education their policy regimes undermine the growth potential for these nations.

Please read my blog – Bad luck if you are poor! – for more discussion on this point.

If you are well-read in terms of the relevant literature covering developing countries you will know the following:

First, there is no convincing evidence that says that countries with low inflation grow more quickly over time than those with higher inflation. The IMF demand that tight monetary policy maintain low inflation in order to grow more quickly is not based on any robust evidence. This is not to say that low inflation is not desirable but if it comes at the expense of real development then questions have to be asked.

In 2005, the World Bank produced a report – Economic Growth in the 1990s: Learning from a Decade of Reform – that concluded:

... the search for macro stability, narrowly defined, may in some cases have actually been inimical to growth. Preoccupation with reducing inflation quickly induced some countries to adopt exchange rate regimes that ultimately conflicted with the goal of outcomes-based stability. Others pursued macro stability at the expense of growth enhancing policies such as adequate provision of public goods, as well as of social investments that might have both increased the growth payoff and made stability more durable.

Second, in general, any observed inflation in these poor nations has usually come from supply-side shortages arising from drought (failure of agricultural output) or oil price rises. The IMF typically insists of public sector wage freezes as part of their demands for fiscal austerity. However, there is very little evidence that public sector wage demands have been instrumental in driving inflation in these nations.


I would close the IMF forthwith. It now functions differently to its original charter which became irrelevant once the Bretton Woods fixed exchange rate system collapsed in 1971. The way the Fund reinvented itself and reimposed itself on the poorer nations has damaged their growth prospects and ensured that millions of people around the world have remained locked in poverty. Along the way … children have died or have failed to receive the levels of public education that any child anywhere deserves.

There is no positive role for the IMF in its current guise.

That is enough for today!

This Post Has 20 Comments

  1. Estonian Finance Minister Jurgen Ligi has been writing in local newspapers that government must have surpluses in good times and he considers good times when there is any growth in economy. So there are good times right now 🙂 Recently he said that Estonia is too small to have It’s own currency. The population of Estonia is 1,35 million (work force much less, aging population). Recently there was a survey that concluded: 77 000 Estonians want to leave the country to work aboard. It is estimated that 100 000 Estonians work in Finland already(for example my sister works there as a doctor, she is never coming back, a lot of people take the ferry and return on the weekends) The government considers Itself successful because of the coming euro. Most of the population is against government intervention. Estonia comes from communinism and they consider It if not communist than far left. President of the Bank of Estonia Andres Lipstok recently said that there is no crises in euroland just few problems with certain countries.

  2. I find your blogs about poorer nations especially fascinating. I’ve wondered whether wealth inequality within a nation could actually be a driver of impoverishment of a nation as a whole. The typical African scenario seems to be that commodities are exported and the revenue goes to a tiny number of extremely wealthy Africans. They have much more money than they can ever spend so they invest it in Switzerland, UK, USA etc. They do not invest it in their own countries because there is no domestic customer base able to pay for any goods or sevices. With no domestic consumer market the only viable industries are those producing commodities for export. The net result is that the rich countries get commodities and all Africa gets in return are bank statements sent to the wealthy elite. In the developed world we seem hell bent on emulating this African model with increasing wealth for the richest and reducing income for the bulk of the population. The tragectory seems to be that increasing wealth inequality in Europe and the USA will lead to our wealthy elite investing their money in emerging markets in the hope that decreasing wealth inequality there will lead to their consumers syphoning real resources from us in the way we have from Africa.

  3. I’m curious as to the distribution of wealth in both rich and underdeveloped countries say 50, 200 and 500 years ago compared to now. Granted that passed down wealth over time by definition must lead to some ultra billionaires that wouldn’t have previously occurred however is it also granted that wealth distribution is worse now than at these previous times?
    Given most countries have pretty progressive taxation systems I wonder if the failure to create more equality is a failure of the tax enforcement system rather than any clandestine secret handshake down the ages of those neoliberal bogeymen who always seem to rule the world.

  4. Ray, here’s an interesting quote from a study of the Netherlands 16-20thC;

    “Only in the Post-War period has the positive connection between economic growth and inflation on the one hand, and income inequality on the other, been broken by 1) the indexation of wages and social benefits and 2) the growth of the Welfare State, expressed by the increase in social premiums and benefits. In the 1960s and early 70s economic expansion was clearly accompanied by a fall in income inequality (for the 1950s this link is less clear). Finally in the 1980s and the 1990s we seem to have returned to the classic pattern, in which economic growth leads to greater inequality. The bacground to this is complex, the erosion of the welfare state, expressed by lower benefits and the lower minimum wage, the strongly decreasing influence of the trade unions on economic decision making…”

    There’s an interesting table for post war here…

    France, Norway has decreased the UK, US increased

    Latin America/Sub-Saharan Africa are worst, Europe Canada Australia the best…the US registers a bit like a middle income country Mexico/Argentina/China! 😉

    My general economic historical overview observes that civilisations initially work to benefit many/most of its citizens but then social entropy sets in with growing economic inequality viz Rome’s sinking decline into a massively slave based civilisation…those who read such things may recognise underlying source/s of this analysis…

    As I understand it the success of Western political socio-economies is in institutionalising change/adaptability, surely rights base rule of law democracies have it within their wit and intelligence to design a system that counteracts this social entropy? It seems to me government’s meeting the private/foreign savings gap/desires stops the debt dynamic of this politico-socio-economic entropy?

  5. Fed Up,

    The IMF is a central bank without land and government and citizens.

    IMF can be called self funding (whatever that means). Since its a (central) bank, it purchases assets by increasing its liabilities. A simplified balance sheet of the IMF would be

    Assets – Marketable securities such as government bonds; Loans to Governments, Accounts at CBs.
    Liabilities – Deposits

    The IMF may pay interest on the deposits. The numbers are in “Millions of SDRs”. The currency is pegged to a combination of some major currencies by brute political force and nobody can break this peg.

    The IMF makes money by interest income from the government bonds and the loans.

    Its profits are distributed to all the nations (in some pre-negotiated proportion)

    If loans go bad, the IMF may become critically undercapitalized and has to be capitalized by the nations.

    The currency is made acceptable by brute force – fiat.

    Now if the IMF bails out a nation, it simply creates deposits out of thin air and credits the bailed out nation’s government’s account. This government (possibly the central bank) may exchange the SDRs for another international currency.

    I do not know the last detail and who purchases it and why would anyone purchase it and so on. Would like to know – perhaps by dilution ? Whatever the case may be, if lets say the Fed purchases the SDRs, the Fed’s account at the IMF is credited and the bailed out govt/CB account is credited and the Fed would credit the bailed out govt/CB’s account at FRBNY.

    Thats what I think – the details can be converged to by a few iterations.

    Having said that, the IMF may also do transactions on marketable securities such as US Treasuries.

  6. “Whatever the case may be, if lets say the Fed purchases the SDRs, the Fed’s account at the IMF is credited and the bailed out govt/CB account is credited and the Fed would credit the bailed out govt/CB’s account at FRBNY.”

    Ok – that should be .. the IMF crediting the Fed’s account at the IMF, the IMF debiting the bailed out govt/CB’s account at the IMF and the Fed crediting the bailed out govt/CB’s account at the Fed.

  7. Ramanan said: “If loans go bad, the IMF may become critically undercapitalized and has to be capitalized by the nations.”

    And is this “capitalization” done with other countries’ gov’t debt, making other citizens bail out other nations that should not be bailed out and not be producing so much debt?

    Notice it is all about debt and more debt and more debt probably owed to the rich.

  8. Thanks bill, but I can’t read legalese that well. Is the quota in currency, in debt of that currency, or both? Thanks!

  9. Dear Fed Up (at 2010/12/29 at 13:17)

    This link – – tells you about the funding:

    The IMF’s resources are provided by its member countries, primarily through payment of quotas, which broadly reflect each country’s economic size … Historically, the annual expenses of running the Fund have been met mainly by interest receipts on outstanding loans, but the membership recently agreed to adopt a new income model based on a range of revenue sources better suited to the diverse activities of the Fund.

    To read about the quota system go to

    When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members that are broadly comparable in economic size and characteristics. The IMF uses a quota formula to guide the assessment of a member’s relative position …

    A member’s quota subscription determines the maximum amount of financial resources the member is obliged to provide to the IMF. A member must pay its subscription in full upon joining the Fund: up to 25 percent must be paid in Special Drawing Rights or widely accepted currencies (such as the U.S. dollar, the euro, the yen, or the pound sterling), while the rest is paid in the member’s own currency.

    You can learn about SDRs from here –

    IMF members often need to buy SDRs to discharge obligations to the IMF, or they may wish to sell SDRs in order to adjust the composition of their reserves. The IMF acts as an intermediary between members and prescribed holders to ensure that SDRs can be exchanged for freely usable currencies.

    best wishes

  10. R,

    My impression of the SDR was that it was not a currency, but a notional unit of payment, to facilitate lending and repayment in a multi-currency context. It’s just an administrative convenience.

    SDRs can only be created by the approval of the member nations of the IMF, the IMF cannot create them “ex-nihilo” as a bank can.

    The IMF can only credit as many SDRs as the member nations approve, because the borrowing nations will want to convert their notional SDR credits for actual currency when they take a loan.

    For example, if an SDR was to consist of 50% of the currency of member nation A, and 50% of the currency of member nation B, then saying that the IMF “credits” a borrowing nation to have 1 Billion in SDRs just means that the IMF is brokering a loan from nation A and nation B to nation C, in which nation A and nation B both supply an equal amount of the financing.

    The SDR is a convenient way to keep track of this. By authorizing (and funding) the creation of X units of SDRs, the member nations are a priori allowing the IMF to grant that much credit. Then some SDRs will be lent out to some nations and repaid by other nations as needed, with a total of X SDRs outstanding at any given time.

    And this is why there is no issue with “keeping” the peg.

    There is no peg, because the SDR is not a currency. It’s a basket of currencies supplied by the member governments and therefore the peg always holds by definition.

    This is completely unlike a modern central bank, which creates its own currency.

  11. RSJ,

    Yes I agree. The IMF is just a platform for many nations bailing out one. The IMF needs to take approvals and cannot do “Large Scale Asset Purchases” (QE) without anyone’s permission.

    When I said “crediting accounts” I didn’t mean it can behave as it wishes – it is doing so after member approvals which comes after some politics.

    So one may look at it as not a central bank and one may look at it as a central bank.

    One can think of a system where nations directly help a bailed out nation by taking the loans on their books directly. In that case there are no SDRs.

    The IMF is just a formal way to do this systematically I guess. I called SDR a currency, because the IMF calls it so – i.e writes its balance sheet in SDRs. Others also call it “paper gold”.

    One reason why it may make sense to think of it as a currency is when one starts thinking of transactions which happen when the IMF lends someone. Its equivalent to the case where A and B lend C but in the latter case, the transactions happen in the books of A and B.

    So one can think of the IMF as a special purpose vehicle.

    A weak analogy would be currency boards – they were created when Britain was ruling the world – so a country X where Britain had a rule would have a currency board and it would make people transact in the local currency instead of using Sterling directly. This was done in order to be more efficient.

    So the country X’s currency is still sterling, but the setup is such that a new “currency” has been created which is fully tied to the pound.

  12. So if every country ran an all currency economy with no debt, can the imf be put out of business?

    Why would any country want to join the imf?

  13. Kristjan,

    The facts you’ve cited there (i.e. Estonia’s misguided crusade against social democracy) is further evidence why Estonia should NEVER EVER be part of the Nordic group / Council. Social democracy should be a prerequisite 🙂 Although perhaps Estonia should consider being the 51st state of the US?

  14. Ramanan,

    Here’s the IMF: //

    “The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR, serves as the unit of account of the IMF and some other international organizations.”

    Now if you want, you can view the IMF as a bank, but in that case, it is a 100% reserve bank, so that it cannot create deposits out of thin air, and has no issue with maintaining a “peg”. You only have to maintain a peg if you are not 100% reserve backed. I was objecting to the specific comments:

    “Now if the IMF bails out a nation, it simply creates deposits out of thin air and credits the bailed out nation’s government’s account.”

    Perhaps some IMF experts will chime in here, but my understanding was that say you have 10 nations. They agreed at time 0 to create 5 SDRs each, for a total of 50 SDRs. They did this by supplying their own currency (in our example, an equal amount) to the IMF in exchange for the SDR. At time 1, one of these nations needs a loan of 9 SDRs. The IMF adjusts the accounts of the 9 creditor nations to have only 4 SDRs, but they were allocated 5, so that they have 1 net allocation on which they receive interest. The IMF adjusts the debtor nation’s account to have 9 more SDRs and also owe a debt to the IMF — this is the “IMF designation” story. The debtor nation repays its debt to the IMF, which pays interest to the creditor nations on their allocations, and receives interest from the debtor nation, with the difference going into its own capital.

    Because of all the above, deposits are not created out of thin air, nor is there any issue with maintaining a peg.

  15. RSJ,

    Maybe the IMF can say its not a currency at one place. Get down to formal matters such as publishing an audited balance sheet, you get numbers in “millions of SDRs”

    The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

    In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.

    The IMF publishes the “exchange rate” of the SDR every day. The fact that the fx markets doesn’t trade them is a different thing.

    The SDR has an interest rate as well.

    The IMF is like a central bank so can’t have “reserve requirements” like an ordinary bank.

    One can make similar arguments with a currency board arrangements where the liabilities of the monetary authority is said to be backing the currency notes. One may look at it as currency and one may not.

    According to Wikipedia

    SDRs are the International Monetary Fund’s unit of account[1] and are denoted with the ISO 4217 currency code XDR.

    I am not sure what you mean by deposits not getting created out of thin air. At the act of lending, new SDRs are created.

    Let us say a Nation N is bailed out and the IMF lends it 100.

    The changes IMF balance sheet change are:

    Loans +100
    Deposits +100.

    You mention “supplying currencies”. Charles Goodhart wrote this in the 1980s. “‘In what manner do banks supply demand deposits?”

    The scenario presented by you seems like a scenario where the IMF is lending out deposits – the usual story presented about banks lending out deposits.

    The lending activity cannot happen like that. Instead I believe, its as direct as a bank or a central bank.

    The System of National Accounts 2008 11.47-11.49, page 225 says:

    Special Drawing Rights (SDRs) are international reserve assets created by the International Monetary Fund (IMF) and allocated to its members to supplement existing reserve assets. The Special Drawing Rights Department of the IMF manages reserve assets by allocating SDRs among member countries of the IMF and certain international agencies (collectively known as the participants).

    The mechanism by which SDRs are created (referred to as allocations of SDRs) and extinguished (cancellations of SDRs) gives rise to transactions. These transactions are recorded at the gross amount of the allocation and are recorded in the financial accounts of the monetary authority of the individual participant on the one part and the rest of the world representing the participants collectively on the other.

    SDRs are held exclusively by official holders, which are central banks and certain other international agencies, and are transferable among participants and other official holders. SDR holdings represent each holder’s assured and unconditional right to obtain other reserve assets, especially foreign exchange, from other IMF members. SDRs are assets with matching liabilities but the assets represent claims on the participants collectively and not on the IMF. A participant may sell some or all of its SDR holdings to another participant and receive other reserve assets, particularly foreign exchange, in return.

    Also page 378, 17.246 says

    SDRs are allocated to the countries and authorities participating in the SDR Department of the IMF. Countries must be members of the IMF; other participants include a number of central banks, intergovernmental monetary institutions and development institutions. Participants may hold more or fewer SDRs than their allocation as a result of transactions in SDRs between participants. SDRs attract interest but no service charge as interest paid by participants holding more than their allocation exactly matches the interest owing to participants holding less than their allocation. Data on the interest rates payable are available regularly from the IMF. Since the value of the SDR is based on a basket of four key currencies, the value of SDRs is always subject to nominal and real holding gains and losses. From time to time, new allocations of SDRs may be made; when this occurs the allocation is recorded as a transaction.

    A3.118, page 592 says

    The 2008 SNA recommends to treat special drawing rights (SDRs) issued by the International Monetary Fund as being an asset of the country holding the SDR and a claim on the participants in the scheme collectively. Further, it is recommended that the allocation and cancellation of SDRs be recorded as transactions. The asset and liability aspects of SDRs should be recorded separately. As a result of the changed treatment of SDRs, it recommends that monetary gold and SDRs be shown as separate subitems.

    At some level its equivalent to direct lending to a bailed out nation. However, by going through these procedures, the IMF acting as a special purpose vehicle, creates a bit of difference. For example, loans to others are not marketable securities. In this system, SDRs can be traded. Its a bit like securitization.

    Also, what I am saying is that the “amount of SDRs in circulation” is not fixed, just like the central bank’s liabilities is not a fixed amount.

  16. R,

    The “X” means that it is not a real currency, but is defined from other currencies. There is a difference between *defining* something to be another currency, and trying to keep your own currency pegged to another currency. The latter operation takes effort (e.g. buying and selling your own currency in order to keep the peg) whereas the former automatically holds.

    Nothing that you’ve cited contradicts that.

    I can tomorrow create my own unit of account, called the “elephant”, and define it to equal $100. Then, instead of lending you $100, I can lend you an elephant. My balance sheet can be rewritten in terms of elephants. My balance sheet can be re-written in any units that I want.

    None of that makes it a currency.

    I can also “create” an elephant by borrowing $100 from you and then lending this elephant to someone else.

    Still, the elephant is not a currency, but is defined as some other currency.

    Now if you want to think of me a as a bank, then I would be a 100% reserve bank, which is not the normal way that banks function, but all that means is that you shouldn’t think of me as a bank.

  17. As an aside, I can also define interest rates on my elephant — it would in this case be the interest available on USD. The SDR “interest rate” is exactly the weighted average of interest rates on the constituent currencies.

  18. RSJ,

    I understand its not a currency in the usual sense, but what I am saying is consistent with having a currency code XDR for the SDR.

    Also, my emphasis was more on balance sheet changes rather than worrying about the currency status of the SDR. I like the description of looking at balance sheet changes, transactions flow etc. So I was merely trying to give a description starting from the event where a government is bailed out and this happens directly through the creation of SDRs i.e. increase of the liabilities of the IMF in the first step and then move on to describe how this nation exchanges the SDR for a currency, say the USD.

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