It's been a tough year, and IMF still faces a rough ride

WHAT A difference a year makes. Twelve months ago, the International Monetary Fund was caught in the crossfire as the United States Congress, economists, development organisations, Asian governments, bankers and just about everybody else attacked its handling of the Asian economic crisis.

Now, as the organisation prepares for its annual meetings in Washington, things have settled, but there are plenty of indications that it still faces huge challenges. As international capital flows explode, the Fund increasingly finds itself policing an increasingly complex financial system. But it is also confronting a role that is more and more overtly political.

There is no doubt that last year was a tough one, not just because Fund staff were living out of suitcases on frequent flights to Asia or sleeping on sofas in their offices, but because the criticism hurt.

Morale of staff members was badly affected, says Thomas Dawson, the IMF's new external affairs director. "There was a strong belief that they were being unfairly criticised." Now the IMF feels vindicated as many of the Asian economies recover.

"The Fund's support for those countries has proven to be beneficial and not the wrong medicine as many argued at the time," he says. "Fundamentally, the Fund's approach has been proven to be the right approach."

Critics contend that this view is complacent and has derailed a necessary hard look at the Fund and the international financial system. "The fact is that although millions of people in emerging markets have suffered horribly ... the crisis wasn't long enough or deep enough to result in the kinds of corrective measures that would result in a less risky global economy," wrote Jeffrey Garten, Dean of the Yale School of Management, in the New York Times.

But work on the agenda set out last year goes on, and the Fund will be able to claim results at its annual meeting next week. It has become notably more transparent, as Mr Dawson's appointment and his very active performance in the past month shows.

Morris Goldstein of the Institute for International Economics noted that progress had also been made on a new contingency facility proposed by the US last year, on financial standards, and monitoring capital flows. Discussions are still under way on changing the status of the Interim Committee, now headed by Gordon Brown, to give it more clout, but with US opposition it is unclear how far these ideas can go. Perhaps most importantly, "They're taking a tougher line on private sector burden sharing," says Mr Goldstein.

The organisation is making new moves to make private creditors part of the solution to debt problems, by "bailing in" the banks, and the handling of Ecuador's problems is emerging as one possible benchmark. The country announced last month that it would defer a late $94m (pounds 59m) debt payment. Renegotiations are taking place on $6bn in Brady debt, which amounts to half the country's public debt, and $1bn in Paris Club debt. No country has previously restructured Brady debt. "The notification of the possible default of interest payments to Brady bond holders, that is a first. That will get peoples' attention," says Mr Dawson.

Clearly, more work is needed. "Serious moral hazard arises when the private sector ignores the risks of lending to a country because it believes that the country would be bailed out by the international community in the event of a liquidity crisis," said Mervyn King, Deputy Governor of the Bank of England, in a speech in New York last week. "And investors are encouraged to lend to emerging markets in forms - short-term debt - which are more likely to be bailed out."

The largest problem on the IMF's horizon at the moment, and which will overshadow the annual meeting, is Russia. When criticism started of the IMF's handling of relations with Russia and alleged laundering of its funds last month, it was quick to respond to the criticism. In part, it had an easier task than last year: this was more specific, but also, in the case of the alleged money laundering, there was no evidence that IMF cash was involved. John Odling-Smee, the IMF official in charge of relations with Russia, wrote articles for USA Today and the Wall Street Journal rebutting the charges against the Fund.

This reflects the Fund's more forceful approach to criticism, the counterpart to its greater transparency. "We felt we were being unfairly treated," says Mr Dawson. "It is incumbent on us not just to be reactive but to be proactive, to be aggressive in putting out our message."

On the substance of the charges, the Fund is reasonably clear that its money has not been illegally diverted. "We don't track every cent but we have tough rules, auditing requirements, and we monitor on a daily basis where the money goes," says Mr Dawson. An investigation into Moscow's use of IMF funds has also been commissioned from PriceWaterhouseCoopers, a follow-up to earlier surveys which were a condition of a $4.5bn loan in July.

But the broader problem of Russia remains. The Fund is uncomfortably aware that Moscow has deceived it before, and is taking no chances this time. The second installment of the loan is due to be made later this year, though when exactly has become a subject of debate. The next payment could slip into October for "technical reasons", said Stanley Fischer, the IMF's First Deputy Managing Director, last week. The money is in any case being paid into an account which is used to repay previous borrowings.

There are signs, however, that the issue is becoming a matter of greater political concern, and is being drawn into the 2000 presidential election. "We need to conduct a hard look at IMF operations and how foreign assistance gets funnelled and what system of accountability they have,'' Condoleezza Rice, foreign policy advisor to Governor George W Bush told Reuters in an interview last month.

There are good reasons to exploit the issue: Mr Bush is the most likely Republican candidate; and his chief opponent, Al Gore, has become identified with the cause of US-Russian co-operation. But the row over Russia also symbolises many of the questions posed about the Fund last year: about its accountability and methods as well as its goals and role.

The problem of Russia is a delicate one which has more to do with governance than economics. The Fund is wary of being drawn on to such ground, where it lacks expertise. But as in the Asian crisis, questions of governance - transparency, corruption and the regulation of the financial sector - are unavoidable. Indonesia, too, presents as many political as financial problems. And as the criticisms of the Fund last year and again over Russia show, it is the IMF's own governance which is also under scrutiny. Tugged in different directions by private-sector investors, governments in the US, Europe and developing countries and its own innate caution, the IMF faces a continuing rough ride.