IMF overstated risks of piling up reserves-watchdog

Wed Dec 19, 2012 12:29pm EST

* Fund should have focused on cause for build up - auditor

* Desire to pressure China on FX skewed IMF advice, some say

By Anna Yukhananov

WASHINGTON, Dec 19 (Reuters) - The International Monetary Fund in recent years has overemphasized the risks to countries amassing big reserves and has not focused enough on why nations were stockpiling gold and currencies, the Fund's internal auditor said on Wednesday.

The IMF should have done more to examine countries' concerns about global liquidity or international capital flows, the Independent Evaluation Office said.

"The report argues that the IMF's emphasis on reserve accumulation as a risk ... was not helpful in that it stressed the symptoms of problems rather than the underlying causes," the office said.

Global reserves have ballooned in the last decade as countries, primarily emerging economies, sought to build up a financial buffer to protect themselves against volatile capital flows, and ensure they would not have to rely on outside aid to get through a crisis.

Non-gold reserves at emerging market central banks swelled to $6.7 trillion in 2011 from about $800 billion in 2002, IMF data shows.

Fast-growing developing countries such as China have also bought vast amounts of dollars and euros to keep their own currencies from getting so strong that they would make exports too expensive and subsequently slow growth.

In 2009, the Fund began to criticize these policies as destabilizing to the international monetary system, and warned countries building up large reserves could create persistent current account surpluses and "dampen the global recovery."

RESERVES AS PROXY

But some countries felt that the Fund only began focusing on reserves as a proxy for not being able to do more about China's currency manipulation, under pressure from large shareholders like the United States, the auditor said in its report.

IMF managers and country officials "considered that the views of influential shareholders regarding the IMF's inability to influence China's exchange rate policy in the last decade were an important factor explaining why concerns ... were expressed in terms of excessive reserve accumulation," the report said.

The IEO said the actual size of reserves in the global economy -- $10 trillion in 2010 -- was not excessive, especially compared to the $117 trillion managed by global funds, or the $105 trillion held by banks.

There was also scant academic evidence for setting upper or lower limits to countries' reserve levels, as the IMF suggested.

The auditor recommended the IMF consider reserves as part of a broader analysis of what risks countries face.

IMF Managing Director Christine Lagarde said she agreed with the report's recommendations, but not with the Fund's motivations for focusing on reserves.

"Holding excessive reserves is subject to diminishing returns and can be costly both to the domestic and global economy," she said in a letter accompanying the report.

In another statement accompanying the report, IMF executive directors said the watchdog's analysis focused only on those countries with large reserves, which may have skewed the conclusions.

But some directors said the IMF also needs to do a better job of explaining its decisions on what reserves are "adequate."