Body
The current debate over the International Monetary Fund's (IMF) exceptional access policy centers on a precedent that was establish in 2010 with respect to Greece. In May of that year, when the Greek program was presented to the executive board, the IMF staff stated that it considered Greece's debt to be sustainable, but the "significant uncertainties associated with that judgment make it difficult to state categorically that this is the case with a high probability" [emphasis added]. However, the staff justified the program on the grounds that "Fund support at the proposed level is justified given the high risk of international systemic spillover effects" (IMF 2010, 19–20). Thus, a "systemic exception" was added to the second criterion for exceptional access to IMF resources.1
There are three principal objections to this policy.
First, critics argued that the 2002 exceptional access policy was a set of immutable rules not subject to modification. This argument is specious because IMF policies are always open to revision as they have been throughout its 70 years.
Second, the IMF program for Greece used the systemic exception and the program failed; therefore, the exception was a mistake. But the systemic exception was also invoked in the programs for Ireland and Portugal, which were reasonably successful. Two out of three is not bad.
Third, the systemic exception is said to be inequitable because it supposedly favors large countries and violates the IMF principle of equal treatment for all members. This argument is fallacious. It ignores the need to prevent adverse effects of policies on other members. The systemic exception was motived by the expected benefits for all members of the IMF, not just the member in need of large scale financial assistance. The primary objective of the IMF and its lending is to contribute to global economic and financial stability. In that sense, Greece, Ireland, and Portugal were not the principal beneficiaries of the systemic exception—the rest of the world was. Their required fiscal adjustments were substantial and likely larger than would have been necessary if they had had debt operations early in their IMF programs.
Nevertheless, in response to these criticisms and general unease about the lack of success of the Greek program, the IMF staff (IMF 2013 and 2014) has proposed that the systemic exception be eliminated and that the Fund explicitly reincorporate into its toolkit an approach used in the 1980s and also to a limited degree in recent years: the possibility of reprofiling a member's debt as a condition for access to IMF financing in cases where there is doubt about the sustainability of the member's debt.
The general assumption is that the Ukraine case will involve some reprofiling of its debt. Thus, the Ukraine case implicitly will test the view that (a) the IMF can successfully revert to the earlier version of its policy on exceptional access and (b) where there are significant uncertainties about a country's debt situation, whether reprofiling will help to resolve them.
If the Ukraine debt operation is market oriented—in others words voluntary with substantial IMF and governmental coaxing—it is likely to be too small to alter the underlying trajectory of Ukraine's debt. Ultimately Ukraine will probably have to suspend payments on its debt, and any subsequent debt operation will be involuntary (not market oriented). Even with a suspension in payments, if completion of the debt operation is delayed, Ukraine will have serviced more of its debt than was anticipated. As a result, at the first review of Ukraine's program in June, the IMF will be confronted with the same issues about Ukraine's debt as in March: The uncertainty about the sustainability of Ukraine's debt will not have been removed. The IMF will have to decide whether to delay completion of its review, jeopardizing the Ukrainian program, or implicitly or explicitly make another adjustment in the application of its framework for exceptional access.
If I am approximately right in my expectations, what lessons should be drawn for the IMF's exceptional access policy?
First, the IMF framework for exceptional access to its financial resources should not be rigidly constrained. Uncertainty will always be present, and judgments will have to be made in the face of uncertainty. The exceptional access policy should allow the IMF to be flexible in pursuing its objectives. Requiring clear explanations before and after this flexibility is exercised will help to constrain discretion.
Second, IMF policy on exceptional access should be reconsidered from the bottom up. The current policy is grounded on article V, section 3(a) of the IMF's charter: "The Fund shall adopt policies on the use of its general resources … to assist members to solve their balance of payments problems in a manner consistent with the provisions of this Agreement and that will establish adequate safeguards for the temporary use of the general resources of the Fund." Until 2002, the IMF interpreted this provision in terms of prospects for the overall success of the program: the fourth criterion in the current exceptional access framework.2 That should remain the overriding criterion. In reaching such a judgment, the IMF should consider the member's medium-term debt sustainability (currently the second criterion), its prospect for market access (the third criterion), its adjustment program and capacity to implement that program (the fourth criterion), as well as systemic considerations. No one element should trump all the others.
This approach would help introduce an appropriate balance in judgments when there are uncertainties. This approach would force the IMF management and staff as well as the executive board to consider some of the tradeoffs between, for example, the requirements for fiscal adjustment and the associated impact on GDP—the denominator of the debt ratio.
See also Part I of this post.
References
IMF (International Monetary Fund). 2010. Greece: Staff Report on Request for Stand-By Arrangement. IMF Country Report 10/10 (May). Washington: International Monetary Fund.
IMF (International Monetary Fund). 2013. Sovereign Debt Restructuring: Recent Developments and Implications for the Fund's Legal and Policy Framework (April 26). Washington: International Monetary Fund.
IMF (International Monetary Fund). 2014. The Fund's Lending Framework and Sovereign Debt: Preliminary Considerations (May 22). Washington: International Monetary Fund.
IMF (International Monetary Fund). 2015. Ukraine: Staff Report on Request for Extended Arrangement under the Extended Fund Facility. IMF Country Report 15/19 (March). Washington: International Monetary Fund.
Notes
1. The exception reads, "However, in instances where there are significant uncertainties that make it difficult to state categorically that there is a high probability that the debt is sustainable over the period, exceptional access will be justified if there is a high risk of international systemic spillovers" (IMF 2015, 35).
2. The four criteria are listed in Part I of this post.
