IMF Models Its Own Uncertain Future

A new study by IMF researchers supports speculation that we offered back in January:

Is this merely a cyclical downswing, driven in part by global liquidity and economic activity? Or is this a dinosaur institution being forced to contemplate its fate? We tend to think it’s the latter…

From the IMF study:

…two approaches to modeling the use of IMF resources in order to gauge whether the recent decline in credit outstanding is a temporary or a permanent phenomenon…yield the same conclusion: the use of IMF resources is likely to decline sharply. Specifically, credit outstanding is projected to decline from an average of SDR 50 billion over 2000-05 to SDR 8 billion over 2006-10.

That’s an 84% drop between two five year periods, equating roughly to a 30% annual rate of decline. And where we offered caveats and hedges to our assessment, the IMF researchers are much more pessimistic:

Alternative scenarios assuming a weaker economic performance or a less benign global environment do not alter these results.

We’ll stick with our more intuitive hedged argument for the time being, that if central banks overshoot significantly in the future, the IMF might see its balance sheet expand as it is invited to help clean up the wreckage. The probability of chronic overshoot appears to be very low, however.

The full paper is available here: http://www.imf.org/external/pubs/ft/wp/2007/wp0770.pdf