It became almost fashionable to criticize the International Monetary Fund (IMF) as being insensitive to social problems or just the opposite, much too eager to help countries in order to keep them addicted to borrowing. Critics also accuse the IMF of offering the wrong medicine in South East Asia and for not going far enough in becoming more transparent in its operations. Stanley Fischer, First Deputy Managing Director of the IMF, responds to these charges and explains recent policies of the organization in the following interview with Transition editor Richard Hirschler.  

Q. Now that the agreement with Indonesia finally has been worked out, can you explain why the IMF successfully opposed the setting up of a currency board there? After all, currency boards—with the support of the Fund—are functioning usefully in several transition economies, such as Bulgaria and Lithuania.... 

A. As you say, we have supported currency boards in some countries. The introduction of a currency board can stabilize a currency—provided certain preconditions are satisfied. Essentially the preconditions boil down to the arrangement being credible. Otherwise the first thing that will happen when the currency board is introduced is an attack on the currency. With the corporate debt issue at that point unresolved in Indonesia, with a weak banking system, and with a ratio of broad money to GDP of about 50 percent—meaning that there were a lot of rupiah claims that could have been converted into claims on the Indonesian reserves, we didn’t think a currency board would have been credible. There is an additional element needed for credibility: namely, that market participants have to believe that if the currency is at-tacked, it will be de-fended. That means high interest rates, possibly—as in the Hong Kong case—extremely high interest rates. Nothing that had happened in the past few months made us confident that an Indonesian currency board would be defended in that way. Currency board is a monetary institution that issues money with 100 per-cent backing of a chosen foreign reserve currency—thus the domestic currency (and the deposits it accepts) is fully convertible on demand—on a fixed or pegged exchange rate—into the reserve currency. Money supply is directly dependent on the demand of the market participants. (See also page 34). Two other points. First, to say that a currency board could stabilize the currency is not to say that it is the best possible monetary arrangement in all circumstances. It might however be the best arrangement for a country that has been through severe monetary instability and needs a simple and clearly under-stood rule that will minimize political interference and maintain stability. Second, we were careful not to rule out the possibility that a currency board could make sense for Indonesia somewhere down the road, when the major uncertainties have been dealt with. Of course, by that stage there would be less need for a currency board. 

Q. Changing the topic, the IMF’s Rus-sia policy is often criticized from two sides: some say the Fund is too lenient toward Russia, others say that it is too tough. Those demanding a firmer position, bring up that the IMF went ahead in January and disbursed a tranche of $690 million from the three years, $10 billion EFF (Extended Fund Facility) loan program, despite Russia’s poor tax-collection record in 1997. For example, in 1997 cash rev-enues for Russia’s federal budget were expected to reach 9.1 percent of GDP, much less than the projected figure of 13.7 percent. For 1998 the Fund rather relaxed the fiscal revenue tar-get, not to risk Russia’s success to meet them, claim these critics.  

A. The $690 million tranche that was disbursed in January was originally scheduled for November 1997. It was delayed because fiscal revenues were off track. We agreed to disburse it after the Russian government had presented a plan and implemented some of its measures that we believed would increase government revenues. Now the next tranche is also being delayed, as we re-view the outcome for the first quarter, and the plans and commitments of the new government. We have agreed with the Russian government on cuts in government spending as well as lower revenue targets. Of course we have modified the fiscal targets over the past few years as the extent of the collapse of the Russian revenue system has become clearer, but we are working with them to try to restore revenues. The new tax code should help in that regard; and so will stronger efforts to collect taxes that are owed. The indications are that cash revenues will be higher in 1998 than in 1997. 

Q. Other critics blame the IMF for push-ing for an overzealously restrictive fiscal policy that prevents—among other things—Russian enterprises from pay-ing wages and contributes to social tension in the country.  

A. Unfortunately, Russian fiscal policy—measured by the government deficit—has been too lax, not too tight. Russia’s excessive dependence on deficit financing, past and present, has built up the government debt and left the economy vulnerable to shifts in external confidence. And the root cause of Russia’s fiscal problems is the failure to collect taxes. The most important thing that needs to be done to begin getting wages paid is to stop the general culture of nonpayment in Russia. That’s a large part of the problem in collecting taxes, and one reason we have continued to emphasize the need for monetary payments of taxes rather than tax offsets and other barter-related means of payment. The sooner the Russian government begins to collect taxes, the tougher it will be in insisting that firms meet their obligations to the government, to workers, to other creditors, the better it can deal with the social problems confronting the country, and the more likely it is that wages will be paid on time. 

Q. During the Asian crisis, the IMF has been again criticized as being insensitive to the severe consequences of its prescribed medicines—devaluation, higher interest rates, higher prices, bank closures, unemployment...  

A. By the time Korea and Thailand turned to the Fund for assistance, they had come close to exhausting their foreign exchange reserves. As soon as that was understood by investors, domestic and foreign, it was inevitable that there would be a sharp currency depreciation and major economic disruptions in those countries. The first task was to restore confidence in the currencies. That required a sharp increase in interest rates, to stem the outflow of capital and to encourage domestic residents and corporations, including the banks, to bring money home. Confidence in the Korean and Thai currencies is now being restored, as they carry out their programs. Each has appreciated by 25-30 percent relative to their low points in January. The rupiah too has appreciated relative to its low point, but it has a long way further to go. Provided Indonesia implements the pro-gram it has agreed with the Fund and the Bank, the rupiah will strengthen.   Of course, higher interest rates made the situation of weak banks and corporations more difficult. But they were al-ready in difficulty, and the alternative of a larger devaluation would have been worse, both for the countries and for the international economy. The argument that there was some alternative policy, with low interest rates, that would have been better seems to overlook the inter-national context. A country in external crisis has limited access to foreign borrowing, and the official sector does not have enough money to enable a country that has lost essentially all its re-serves to replenish them and restore confidence without a major change in policies. As to whether the restructuring is being done too quickly, that is a matter for both economic and political judgment. Much restructuring is needed in both the financial and corporate sectors. It will take years to complete. It is most unlikely that going slow at the beginning would have reduced the total amount of dislocation and distress suffered during the process; the opposite is more likely. 

Q. Some members of the U.S. Congress question the IMF’s "raison d’etre".... To ask a profane question, why does the world need the IMF? 

A. In the first instance, the Fund is the vehicle the international community has chosen to deal with international finan-cial crises when they occur—and they will continue to occur, though we must try to make sure they are as infrequent as possible. In the well-chosen words of our Articles of Agreement, we make our resources temporarily available to members "under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity." In the East Asian crisis, the inevitable economic slowdown would have been more profound, the fall in living standards steeper, the extent of contagion of the crisis wider without the assistance of the international community— provided by the IMF, the Bank, the Asian Development Bank, and bilateral contributors. The IMF, with its nearly global member-ship, can provide conditional lending and policy recommendations, as well as technical assistance when a bilateral approach would be less acceptable. We have done that in the East Asian crisis, in Mexico a few years ago, in the 26 transition countries in this decade, and in many other circumstances. And I hope we will have the resources to be able to continue to do so, together with the World Bank and other institutions. A major challenge right now is to improve our surveillance, to try to avert crises by keeping close watch on member countries’ economies and, through discussion with them and other member governments of the Fund, try to ensure that emerging problems are dealt with in time. Often we see problems and the country takes action and a crisis is averted. That does not get headlines. Sometimes—as in the case of Thailand —we see problems and are unable to persuade the country to take action; sometimes, as in the case of Korea, we see parts of the problem, such as the weakness of the financial sector, with-out drawing the full implications. That is why we were not fully prepared for the ferocity of the East Asian crisis. We face a dilemma in deciding whether to go public when we believe a crisis is likely. The problem is that we could be wrong, and could be precipitating a crisis that would not otherwise have happened. 

Q. The IMF encourages member countries to introduce greater transparency and fuller disclosure. But many experts urge more transparency also in the Fund’s operations to improve its efficiency. 

A. The management of the Fund favors greater transparency, and the Board has been moving steadily in that direction in recent years. Provided the country agrees, we publish background papers about recent economic developments in member countries; many countries now agree to the publication of a PIN—press information notice—that summarizes the Board’s discussion of the Article IV surveillance report on that country; and letters of intent for the recent Asian programs have been published. This all sets an important trend, and I hope especially that the precedent of publication of letters of intent will be followed in future years. This material is available on the Fund’s website (www.imf.org). This is a gradual process, and I hope we can do more. That is not only be-cause the public, including the investing public, can do a better job when it is better informed. It is also because it will be good for us, for staff and management, to have our recommendations presented to the public and debated by a wider audience. 

Q. The need of monitoring capital flows became a major issue. Will the IMF play a central role in this? 

A. The Interim Committee did ask us at the April 1998 meeting to play a larger role in monitoring international capital flows, and we will. This must be a central element in our overall surveillance of the international economy. To do that, we will need better data on debt exposures, especially short-term foreign-currency denominated debt, both interbank and corporate. The BIS is already planning a major improvement in those data. One of the lessons of the Asian crisis is that countries need to be careful how they liberalize capital flows. By liberalizing at the short end, both Korea and Thailand increased the vulnerability of their economies to change in investor sentiment. I believe countries should and will liberalize their capital accounts. But they need to do so carefully, once their macroeconomic policies and their financial systems are strong enough. As they open up, they will have to be sure that they have the right prudential controls in place to ensure their economies do not become vulnerable to short-term capital flow reversals. It may also be necessary for countries to impose market- based (not administrative) controls on short-term capital flows, a la Chile. In addition, countries should be encouraged to adopt international standards in areas such as bankruptcy codes, securities market regulation, and corporate governance, including accounting. The IMF, as well as the World Bank, would help monitor the implementation of these standards.