The Idle Fireman

WASHINGTON, DC – One of the IMF’s main purposes is to “give confidence to members by making [its] general resources temporarily available to them.” However, its members are increasingly facing capital volatility, and there is a sharp decline in the use of Fund resources. Ironically, this is happening at a moment when the Fund should want to be lending: it is awash in liquidity and has almost no sources of income other than repayment of its loans.

If the IMF had to live up to private-sector standards, it would create a new instrument that would meet members’ potential demand for short-term liquidity. Alas, there is no urge to do this. Until a year ago, the IMF used to congratulate itself for running out of clients. An idle fireman looked desirable. But the situation is different now. There is a fire out there, but no one is calling the fire brigade. Only Georgia, not surprisingly, is asking for help.

Potential borrowers have been accumulating massive reserves and pooling them regionally to protect themselves against shocks and speculative capital, but not at the Fund’s urging. On the contrary, accumulating reserves beyond a certain threshold carries a high opportunity cost and suggests the need to let the currency appreciate. The implication is that potential borrowers are not absorbing as many imports as they could and not relying, as they should, on the multilateral pooling of reserves that the Fund is meant to use to “give confidence” to its members.

So what’s wrong with the fireman? The traditional model of trading financial support for conditionality does not bode well with emerging economies that, despite having strong macroeconomic fundamentals, still need help to cope with external shocks. “Giving confidence” to this sort of customer requires the capacity to provide quick, automatic, meaningful, and front-loaded financial support; otherwise, accumulating reserves and pooling them in regional agreements will still look like a more reliable option. But the IMF is in no position to provide such support.