The International Monetary Fund is going through interesting times. It is in the process of reforming a number of funds, core functions and aligning itself to the current economic realities. The IMF says it wants to turn its focus to surveillance. CNBC-TV18 caught up with Masood Ahmed, chief spokesman of the IMF.
Excerpts from an exclusive interview with Masood Ahmed:
When is the second phase of reforms going to kick off?
Well the first thing I should say is that the G20 meeting is a very good opportunity for finance ministers and governors from 20 of the largest countries in the world to come behind the programme of reforms, that the fund has already begun.
That programme of reforms started in Singapore in September. Now we are in the second phase and the objective of the second phase which is to be completed in two years, is to do another round of increases for countries that are under-represented.
To do this, we need to agree on how you measure what is under representation and look at the relative economic weight of countries.
The other objectives over the same two year period is to make sure that as we re-align the fund with the relative economic weight of countries in the world economy today, and not the world economy of 20 years ago. We do so in a way that protects the vote and voice of the poorest countries, particularly small countries in Africa.
So, the second track on which the reform is progressing is to do an amendment of the articles of the fund, which would increase the votes of the poorest countries and at the same time re-align the votes for the countries that have grown faster, since many of which are emerging markets and this is a programme that we hope to complete in 2 years. But actually, we hope to make quite a lot of progress even during this coming year.
Is there consensus now on who the other countries are going to be, you said in September that just four countries are being given more representation, is there a list now of countries that are likely to see enhanced representation?
No, that is what the next phase is about. So, the next phase is to agree on how you define the relative weight and that you might think is fairly straightforward.
We'll look at size of economies' GDP and use that as a measure of weight and that number is fairly easily available. But there is also a question of whether you should include in the calculations about how open economies are because if they are more open, then they are more likely to need help from the fund if they have a problem and they have more of a stake in the world economy.
So, we are going to work to define a formula which everybody can agree on and there will be a lot of discussion on it. People come at it with different points of view and that will then throw up a list of countries that will be under-represented, which is when we will have to take action.
Will you be able to bridge the democratic deficit that everybody has been talking about?
I think the important point is that everybody recognises that the world is changing. Some countries are growing faster than others, and their relative weight in the world is growing more and many of them are emerging markets.
For the IMF, which is a global institution that represents 184 members, it is important that our governance is updated to reflect how the world looks today. That is what this programme, is about and that is why we actually are very happy with the fact that in Singapore, we managed to get strong support of over 90% of the votes of the fund, even though there were a few countries that felt that tactically, that wasn't the best way to go about it.
Maybe we should have done it all in one go, since others worried about whether the second stage would actually get done on time.
I haven't heard anybody saying that they disagree with the direction and the purpose of the reform, the question is how quickly, how far and how fast.
Where does India figure in all of this because it is one of the fastest growing economies in the world, growing at about 8% plus I know you don't track India very closely, but for the IMF in the larger scheme of things, in the post reform phase of the IMF where do you actually see India fitting in?
India is and will continue to be a major player in the IMF, as a major economy that is growing very fast now. Its share in the world is increasing because it is growing faster than the world rate of
Other emerging markets, including India, have a key role to play in the governance of the fund to ensure that they can bring their perspective and their voice to the table, in discussing issues that matter to all of us.
One of the other areas that the IMF seems to be interested in getting into is the entire business of surveillance. Is it going to be restricted largely to the currency markets and how is it all going to really work?
Surveillance is the core business of the fund. It is something we have been doing for a very long time and the purpose of surveillance is really two-fold. One is that the IMF has an annual consultation with each of its members - large, small, rich, poor - and all other countries. We have this process where we work with the country to identify what are the risks to macro economic, financial and external stability.
We see whether those risks come from within the country in terms of economic policy or development or whether there are risks that comes from international economies and that is a process that we are continuing to do.
The other part of surveillance which we are also strengthening is looking at international economic issues.
Specifically as far as the emerging markets are concerned, because we have been seeing them at all-time highs whether it is FII inflows, FDI inflows, forex reserves specifically from an emerging market point of view, what would be the key challenges and the risks at this point in time?
The first thing that emerging markets will need to manage in terms of risks is that if there is a faster than expected slowdown in the US economy. For many of them, that would feed its way through their own export channels because the US is a big trading partner for them.
The second risk that they need to manage is that if there is a volatility in asset markets that frequently feeds through, and we saw earlier on in this year, the spring and early summer volatility in asset market that affected some emerging markets.
So, emerging markets need to take advantage of this benign period. This is really quite a remarkable benign period to strengthen their own fundamentals and of course many of them have been doing precisely that, but the financial sector is looking at flexibility in their exchange rates and trying to make sure that they have the resilience to be able to cope with less benign periods.
Something that is worrying policymakers and economists is the sort of protectionist approach that most governments seem to be taking at this point of time. In India, there is a possibility of a National Security Exception Act, which will identify certain strategic sectors and will not allow FDI into those particular sectors or from particular countries. Is this a concern?
The fund has come out quite strongly and said that as far as we are concerned, we see first of all the successful completion of the current trading rounds as being the key contributor to continued sustained growth and also as a manifestation of a continued commitment to the kind of open rule based trading system and a multilateral approach to dispute resolution, which we think is in the interest of all the countries large and small.
We have also pointed out in this context, that it is in the interest of all countries to try and make markets work effectively.
But do you actually see the deadlock breaking anytime soon?
A lot has already been agreed and achieved in the negotiations of the Doha round. What remains to be done in relative terms is small, in relation to what has been achieved.
Just want to get your comments on the spate of free trade agreements that we are seeing in many countries.
Our view has been that we have seen a big increase in both bilateral and regional trading agreements and they have a lot of advantages.
But we don't think that they are a substitute for moving forward with multilateral agreements in the context of the WTO because we do believe that, it provides an opportunity for all countries, not just those which organizes bilateral regional agreements to take advantage in the same rule-based system. And it is particularly important for smaller countries for whom rule-based systems are really a key.
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