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