x Abu Dhabi, UAEWednesday 26 July 2017

IMF's defining moment as annual meeting begins

Analysis It is safe to say that Dominique Strauss-Kahn is not a household name.

It is safe to say that Dominique Strauss-Kahn is not a household name. But if the next two days go his way, the managing director of the IMF may soon rank alongside Ben Bernanke, the chairman of the US Federal Reserve, and Jean-Claude Trichet, the president of the European Central Bank, as one of the most recognisable names in global finance.

Today is the opening day of the two-day annual meeting in Istanbul of the IMF and the World Bank. Having concluded that the global recession has been extinguished by the co-ordinated actions of governments and the IMF, the key question facing the estimated 13,000 finance ministers, central bank governors and other delegates at the meeting is how they might wean the global economy from the US dollar and with it the dominance of the US economy and its financial institutions.

Doing that will require new forms of transnational supervision and governance, a role the IMF hopes to play alongside the Group of 20 (G20) leading and developing economies. But it will also require that the fund gain greater legitimacy, something it hopes to do by accommodating demands for a greater say in how it operates from developing economies that have accumulated massive, but economically destabilising, hordes of US dollars.

"The past crisis was partially driven by the fact that central banks have been trying to basically bypass the IMF as a lender of last resort," said Daniel Tenengauzer, the head of global emerging markets fixed income strategy at Bank of America Securities Merrill Lynch. A meeting better known for the protests outside it than the decisions made inside, it has long served as a barometer for the relative prominence of the two organisations. This year finds the IMF and Mr Strauss-Kahn in ascendancy, vaulted into the headlines by an economic crisis it failed to foresee or forestall, but which has nonetheless given new relevance to the fund.

Analysts and economists remain sceptical that the meeting will produce much in the way of concrete results. Most agree though that the meeting has been lent extraordinary urgency by taking place so close to the anniversary of the collapse of Lehman Brothers, the US brokerage whose demise touched off the global financial conflagration. The meeting therefore provides a convenient bookend for the crisis, particularly since it coincides with the release of the fund's annual world economic outlook.

This year's outlook offers some room for optimism, saying the global economy has returned to growth and that fears of a modern-day version of the Great Depression have proved unfounded. The fund now forecasts that global GDP will shrink by 1.1 per cent this year, but grow by 3.3 per cent next year, led by China and other emerging economies. But the fund also warns that the recovery could stall if government lifelines are withdrawn too soon. At the same time, the massive government borrowing and spending that have produced the rebound will have to be withdrawn, at which point the real economy will have to take up the slack, something most economists believe has yet to happen.

Perhaps more importantly, the fund and economists agree, steps need to be taken to reduce what they refer to as global imbalances; the massive accumulation of foreign currency reserves by exporting nations in Asia, Germany and the Gulf and correspondingly massive trade and current-account deficits among importers, the US in particular. Unwinding these imbalances will take time, economists say, particularly as emerging nations achieve levels of prosperity and development necessary before domestic demand can replace exports as a driver of economic growth.

Another impediment, though, has been the IMF's representation, economists say. The IMF is pushing to get members to ratify a new formula for determining voting rights that would give emerging economies a greater say in how the fund operates. It is also trying to get members to advance the timetable for a regular review of those voting allocations to 2011, two years earlier than scheduled. warnold@thenational.ae

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