Paulson sets tough goals for IMF on sovereign wealth funds, currency, spending

Paulson sets tough goals for IMF on sovereign wealth funds, currency, spending

	Published : Sat, 20 Oct 2007 13:53 By : Agencies Print this Story

WASHINGTON (Thomson Financial) - US Treasury Secretary Henry Paulson today assigned the International Monetary Fund several ambitious tasks, including taking the lead on setting up guidelines for how sovereign wealth funds should deploy their massive investment reserves, stepping up currency monitoring, and reducing its own budget in light of a revenue stream that has become 'unsustainable.'

At an opening session of the IMF's International Monetary and Financial Committee meeting this morning, Paulson said the IMF is best suited to the task of ensuring that sovereign wealth funds (SWFs) operate transparently, and that countries allow these funds to invest freely.

'The United States believes a multilateral approach to SWFs that maintains open investment policies is in the best interest of countries that have these funds, and countries in which they invest,' Paulson said.

'The IMF is uniquely positioned to identify best practices for SWFs, building on the existing guidelines for foreign exchange reserve management.'

After yesterday's meeting of G7 finance ministers, Paulson said SWF investors and recipients of that investment both have issues with the growing use of these funds. While he said countries should remain open to investment by these funds, many countries want to ensure that these funds, controlled by foreign governments, do not use their investment capital for political purposes.

He also said many want countries that have these SWFs to open their own markets to investment before they are allowed to make massive investments overseas.

Paulson and other finance ministers met with China, Saudi Arabia and other governments that control large SWFs at a dinner last night, which Paulson said is the first step toward a possible agreement on best practices for SWFs.

'Last night's G7 outreach dinner with countries that have sovereign wealth funds was an important initial step in the process of developing consensus and collaboration around this important issue,' he said.

Paulson also today warned the IMF that it must make every effort to ensure its members' currency regimes are market-oriented, and warned that failure to do this would cost the IMF its relevance.

'The IMF's ability to carry out this priority function will define its relevance in the global economy in the years to come,' he said. 'Discussion of exchange rate regimes and rates, and the spillover effects of members' economic policies on other members, is the one area over which the Fund can claim a unique purview, which it should not sacrifice by failing to meet is own responsibility for surveillance.'

The IMF earlier this year fleshed out its currency surveillance mandate, primarily by listing new factors that could lead to consultations over currency. These new factors include sharp increases in foreign reserve accumulation and signs that currency values are misaligned compared with historical norms.

While the IMF reported this week that China's foreign reserves have topped 1.3 trillion usd, IMF officials declined to say whether this has led to increased scrutiny of China. However, the IMF is in the midst of Article IV consultations with China on currency, which could wrap up by the end of the year.

Elsewhere, Paulson warned this morning that because IMF lending to developing nations has dropped, its source of funding has become 'unsustainable.' As a result, he said, the IMF needs to cut spending quickly.

'Part of the solution must be to seriously reduce spending by re-aligning staff and expenditures to focus on the IMF's core mission,' he said. 'It is time to roll up our sleeves on the expenditure side.'

Paulson said incoming IMF Managing Director Dominique Strauss-Kahn must make expenditure reform a top priority when he arrives, and said the US and others would work on longer-term funding options for the IMF.

Paulson said another solution is for the IMF to return to its 'core' mission, and avoid duplicative work on long-term development issues, which he said are better left to the multilateral development banks.

Specifically, he said the IMF is best suited to helping countries achieve macroeconomic stability and debt sustainability by emphasising the 'importance of responsible borrowing and lending decisions' in low-income countries.

Finally, Paulson said the IMF needs to continue work on ways to give developing countries a greater voice at the IMF, and must continue its work to combat money laundering and terrorist financing.

pete.kasperowicz@thomson.com

pik/wash/ro

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