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IMF Survey Vol.30, September 2001
Article

IMF’s role: Good governance is essential to countries’ continued economic prosperity

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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Good governance has been found to have a direct impact on economic efficiency and growth, which the IMF promotes as part of its mandate. Although the IMF has traditionally focused on encouraging countries to correct macroeconomic imbalances, reduce inflation, and implement market reforms, it has increasingly found that countries must adopt broader institutional reforms if they are to establish and maintain private sector confidence and lay the foundation for durable economic growth.

The responsibility for governance issues lies primarily with the national authorities, and the IMF has supported their willingness and commitment to address such issues. The IMF has contributed to good governance through its policy advice, technical assistance, and dissemination of codes and best practices aimed at strengthening institutions and systems and the functioning of markets. Through its technical assistance, the IMF

  • helps improve the management of public resources through reforms of public sector institutions (the treasury, the central bank, public enterprises, and the official statistics function), including such administrative procedures as expenditure control, budget management, and revenue collection; and

  • supports the development and maintenance of an open and stable economic and regulatory environment–for example, price systems, exchange and trade regimes, and banking systems and related regulations–conducive to efficient private sector activities.

IMF borrowing: GAB and NAB

The quota subscriptions of the IMF’s member countries are the primary source of financial resources for the IMF. Some members, however, have committed to lend the IMF supplementary funds when needed to avert or cope with damage to the international monetary system. Two sources of supplementary financing exist: the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB). Total resources available to the IMF under the GAB and the NAB combined are up to SDR 34 billion (nearly $45 billion).

General Arrangements to Borrow

Under the GAB, 11 participants (industrial countries or their central banks) have agreed to lend specific amounts of currencies to the IMF in certain circumstances at market-related interest rates. The GAB have been activated 10 times, most recently in 1998 (the first time in 20 years) to finance an augmentation of the Extended Fund Facility Arrangement for Russia. The IMF repaid these drawings in early 1999 after receiving the bulk of quota payments under the Eleventh General Review. Established in 1962, the GAB have been renewed every four or five years, most recently in 1997.

New Arrangements to Borrow

Following the Mexican financial crisis in December 1994, it became clear that substantially more resources might be needed to respond to future financial crises. Participants at a June 1995 meeting of the Group of Seven called on financially strong countries to develop financing arrangements that would double the amount available to the IMF under the GAB. The outcome was the NAB, consisting of credit arrangements between the IMF and 25 member countries and institutions. The NAB were approved in January 1997 and entered into force in 1998. Participants in the NAB commit amounts based primarily on their relative economic strength, as measured by their IMF quotas. The NAB are now the borrowing facility of first and principal recourse, unless a GAB participant (all GAB participants are also participants in the NAB) requests the use of IMF resources, in which case a proposal for drawings may be made under either the NAB or the GAB. The NAB were activated for the first time in December 1998 to help finance a Stand-By Arrangement for Brazil. The IMF repaid these drawings in March 1999, following the increase in IMF resources resulting from Eleventh Review quota payments.

In July 1997, the Executive Board adopted guidelines for the role of the IMF in governance issues (see the IMF website: www.imf.org). The IMF would pay greater attention to governance issues, in particular through

  • a more comprehensive treatment, in the context of Article IV consultations and IMF-supported programs, of those governance issues that fall within the IMF’s mandate and expertise;

  • a more proactive approach in advocating policies and the development of institutions and administrative systems that eliminate opportunities for profit seeking, corruption, and fraudulent activity in the way public resources are managed;

  • an evenhanded treatment of governance issues in all member countries; and

  • enhanced collaboration with other multilateral institutions, in particular the World Bank, to make better use of complementary areas of expertise.

The IMF limits its involvement in governance issues to economic aspects that could have a significant macroeconomic impact, with prevention at the center of its strategy. To determine whether IMF involvement is appropriate, an assessment is made as to whether poor governance would significantly affect both a country’s macroeconomic performance in the short and medium term and the government’s ability to pursue policies aimed at external viability and enduring growth.

In February 2001, after reviewing the IMF’s experience in governance issues, the Board concluded that the guidelines adopted in 1997 remained appropriate. It reaffirmed that the IMF’s involvement in governance is founded on its mandate to promote macroeconomic stability and sustained noninflationary growth through surveillance, financial support, and technical assistance. The Board noted that the IMF’s increased involvement has been facilitated by the growing consensus in the international community on the importance of good governance. Currently, the IMF’s approach allows the institution to apply judgment within relatively broad boundaries. Some Directors thought the boundaries for IMF involvement should be more narrowly defined to reduce the risk of straying too far from the IMF’s mandate and to ensure that the IMF remains focused on its core areas of expertise. Further reviews of the IMF’s experience with governance are expected to be integrated into future reviews of surveillance, technical assistance, and conditionality.

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