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Bad marks for the IMF
10/2004
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[ Argentine crisis ]
Bad marks for the IMF
The International Monetary Fund (IMF) has been given a bad report by its own evaluation department for handling the Argentine financial and economic crisis. According to the recently published report of the Independent Evaluation Office (IEO), the Fund was too optimistic in its assessment of the crisis and not strict enough in imposing conditions for new loans. In the years prior to the crisis, the IMF ignored warning signals and supported for too long the convertability regime under which the Argentine peso was pegged at parity with the US dollar. The IEO stresses, however, that the principal blame lay not with the IMF but with the Argentine government. The IEO was set up in 2001 in reaction to criticism heaped on the IMF’s handling of the Asian crisis in the late 1990s. The majority of the IEO staff comes from outside the Fund; the office works at arms’ length from the Executive Board.
In the first half of the 1990s, pegging the peso to the dollar played a significant role in helping stabilise Argentina's economy, the report says. At the end of the decade, however, growth sharply decreased and the government took on more and more debt and thereby curtailed its scope for economic policy. In that situation, the Evaluation Office says the IMF ought to have insisted that annual budgetary targets be met. It should also have paid more attention to the total stock of public debt and not just to the government's annual new borrowings.
Apart from that, the IMF failed to discuss an appropriate exchange rate regime for Argentina with the government. There were always doubts about the long-term viability of pegging the currency to the dollar. Only when direct trade rival Brazil devalued the real at the beginning of 1999 the relevant IMF staff seriously considered strategies to unhitch the peso from the dollar. By then, however, it was too late. For fear that such a move could cause a self-fulfilling speculative attack on the Argentine currency the matter was not discussed with the IMF Board and the peso remained pegged, the IEO report says.
In the ten months prior to Argentina's political and economic collapse at the end of 2001, the IMF increased its total loan commitments to the country to 22 billion dollars. The Fund wrongly assumed that Argentina basically faced a liquidity crisis, which could be swiftly brought under control. However, the biggest problem was not that the situation was misjudged but rather the fact that the IMF had no alternative strategy when its assumptions proved flawed, the evaluators say.
Among the conclusions the IEO draws, two merit special attention: first, the IMF can only help manage a crisis if the country in trouble cooperates. The leeway the IMF allowed the Argentinian government in 2001 drew mixed comment at the time from observers. In the eyes of the IEO, it was a definite mistake. Secondly, the IMF Executive Board needs to be in a better position to assume responsibility. During the Argentine crisis, it was not always able to do so because it was not well enough informed. Some matters were decided without the Board's involvement because they were considered by the management to be too delicate politically. (ell)
Website:
http://www.imf.org/External/NP/ieo/2004/arg/eng/index.htm
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