The Business Times

IMF accused of bowing to political pressure in Ukraine support

Published Fri, Dec 11, 2015 · 02:27 AM

[WASHINGTON] Has the world's crisis lender become politicised?

The International Monetary Fund has been accused of giving in to political pressure in dropping a long established rule on prudential lending on Tuesday so that it can proceed with assistance for Ukraine.

That follows similar charges that the fund, the world's essential backstop in financial crises, bent its rules to support a bailout of Greece, and most recently to admit China's renminbi (or yuan) currency into the IMF's basket of elite reserve currencies.

The newest move on Ukraine drew a rare, virulent outburst from Moscow, which said it "seriously undermines" its confidence in the IMF's decisions.

On Tuesday, the IMF board voted to drop a rule that forbids the fund from lending to member countries that are in arrears on loans to other official lenders, including sovereign governments.

That move opens the door for the IMF to release new funds for Ukraine even if it misses payments on a US$3 billion loan from Russia.

An impasse in talks over the loan - which Kiev wants Moscow to partly write off - threatens to block the IMF proceeding with a US$17.5-billion rescue plan for Ukraine.

The IMF "has for the first time in its history taken a decision aimed at supporting a borrowing country counter to existing agreements, solely for political reasons," said Russian Prime Minister Dmitri Medvedev.

And, writing in the Financial Times on Thursday, Russian Finance Minister Anton Siluanov said the decision "may raise questions as to the impartiality of an institution that plays a critical role in addressing international financial instability." "Its well-founded principles should be changed only after due consideration, and not in response to the politics of the moment."

The IMF stressed that the rule revision had been in discussion since 2013, well before the eruption of the Ukraine crisis.

"The need for this reform has been evident for some time now," said Hugh Bredenkamp, an IMF official.

Changing the policy, he argued, effectively strengthens the incentives for official creditors to a country to work together to solve its problems.

Even so, the timing raises questions.

"It was right to move, but the timing is not right," said Andrea Montanino, Italy's former representative on the IMF executive board.

"This was a mistake to do it in a rush, and that gives the impression that this was an ad hoc decision," he told AFP.

For several months the leading Western countries which dominate IMF policy had been searching for a way around Russia's refusal to renegotiate its loan to Ukraine.

"We will find a way," a senior European official told AFP recently, insisting on anonymity.

But does that mean the IMF was giving in to pressure from its main shareholders, the Europeans and Americans? It isn't that simple, according to experts on the issue.

The Ukraine case "was a catalyst to galvanise membership consensus on a policy change," said Domenico Lombardi, a former IMF staffer who works on the Ukraine crisis.

"The IMF seized the right momentum and moved ahead to close a gap." It is not the first time that the Washington-based IMF, which has 188 member-states, has found itself target of such criticism.

When Greece fell into deep trouble and required extraordinary IMF support in 2010, the institution grit its teeth and changed certain rules in order to step in to address a "systemic risk" to the global economy.

Some emerging economic powers, whose small voting power at the fund is disproportionate to their new power in the global economy, saw the hand of the over-represented Europeans, those most threatened by a Greek implosion.

More recently, in November, the fund's move to add China's currency to its own reserve basket, which had only included the US dollar, the euro, the yen and the pound, was seen by some as a stretch of the rules to gratify Beijing, which despite being the world's second largest economy still only has a small voting weight at the fund.

"It was a smart move but it was of course very much political," said Mr Montanino. "There was the need for the IMF to send some signals to China which doesn't have the right recognition at the fund." The fund, though, has vehemently defended its moves as rule-based.

The decision on the renminbi "was a technical process that went on over an extended period of time, and the decision is firmly based in technical criteria," spokesman Gerry Rice said.

But experts on the fund's operations say it has to operate in a gray zone.

"The IMF is a political institution which takes its decisions on a technical ground," said Mr Lombardi.

"It's not always black and white and there is room for interpretation and judgment."


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