IMF Staff Rejects Audit Findings on Foreign Reserve Focus

The International Monetary Fund staff rejected criticism by an internal auditor that the organization focused too much on countries’ foreign assets accumulation and said the report “misconstrues the motives of the fund.”

The audit by the Independent Evaluation Office, which was reported by Bloomberg on Dec. 7 and made public today, said that the IMF overemphasized the risks posed by countries amassing reserve assets. The staff response was published with the report today, along with a summary of the board’s discussion that reveals divisions between executive directors.

The report “incorrectly suggests that the discussion on reserves was merely a way to reopen the debate on global imbalances, or that it was focused on symptoms of problems rather than the causes,” the IMF staff wrote.

“We cannot support the implication of much of the analysis in the IEO report that countries should feel free to accumulate reserves in a manner consistent with ‘keeping up with the Joneses,’ ignoring any potential consequences for others,” staff members wrote.

The report may embolden economies such as South Korea or China, which has the world’s largest stockpile of reserves amounting to $3.29 trillion as of Sept. 30 and has been accused by the U.S. of keeping its currency weak to promote exports. Developing nations buffeted by the financial turmoil of the late 1990s have defended their accumulation of reserves as buffers that helped them weather the global crisis of 2008.

Diverging Opinions

Diverging opinions and interests within the fund’s 188 members also showed in the Dec. 7 debate at the board.

IMF directors “held different views on the analytical underpinnings of the report, in particular on whether the membership is adequately represented in the sample chosen by the IEO,” according to a summary of the deliberations.

The audit report also mentioned a “broadly held view” among the people it interviewed that the recent focus on reserve accumulation was a response to the frustration of some member countries over the IMF’s inability to get “Asian countries with persistently large current account surpluses” to adjust their exchange rate.

IMF Managing Director Christine Lagarde wrote in a separate statement that the audit report “errs when it considers the rationale of the Fund and its membership” for the work on reserves. At the same time she said she agreed with most of the recommendations, “which are remarkably congruent with a number of recent Fund policy positions and new surveillance initiatives.”

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