IMF body seeks role in averting future crisis

MUMBAI: A report by the IMF independent evaluation office, or IEO, has called for a more active role for the multilateral body in preventing future crisis in the global economy. IMF "needs to take measures to prevent or mitigate future crises, as much as to address the weaknesses that were uncovered by past crises," the report released last week said.

"To this end, it should continuously scan for risks and emphasise vulnerabilities, rather than play the role of uncritical enthusiast of authorities and the economy." Among other things the IEO has suggested that the multilateral body actively seek alternative or dissenting views by involving eminent outside analysts on a regular basis in the board and/or management discussions.

Besides, the management should clarify the rules and responsibilities for the internal review process, it said. In its analysis of IMF's failure to anticipate the global financial crisis of 2008, the report has attributed IMF's inability to detect important vulnerabilities and risks and alert the members to a complex interaction of factors.

"Weak internal governance, lack of incentives to work across units and raise contrarian views and a review process that did not 'connect the dots' or ensure follow-up also played an important role while political constraints may have also had some impact," said the report, which has among others, incorporated inputs from former RBI governor YV Reddy. Reacting to the report, IMF MD Dominique Straus Kahn said the Fund has previously acknowledged that it had not warned of the crisis "in a sufficiently early, pointed, and effective way".

He also noted that the IEO report is consistent with the Fund's own analysis, in a release posted on the IMF website. The IEO has also suggested that the IMF should ensure that the assessment of the global economy is consistent and comprehensive, taking a stance on a central scenario with clear specifications of risks and vulnerabilities around this scenario. This assessment should be transmitted to the membership in a clear fashion.

It also suggests that the management should encourage staff to ask probing questions and challenge the management's views and those of country authorities. "Wellfounded analysis should be supported by management and the board even when the diagnosis might not be shared by country authorities," it said.

Though it welcomes the recent board decision to make the financial stability assessment component of the financial sector assessment program, or FSAP, a mandatory part of IMF's bilateral surveillance for the world's top 25 financial centres every five years, the IEO has said it is necessary, however, to ensure that the coverage, periodicity and participation in the mandatory financial stability assessments reflect new developments in the rapidly changing financial markets and institutions.