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The International Monetary Fund

Ved Gandhi

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The IMF and the Environment

The IMF has the responsibility for international monetary stability, and it helps member countries attain orderly exchange relations through the adoption of sound macroeconomic policies. Domestic macroeconomic stability is good for the protection of the environment in every country. However, macroeconomic stability alone is not enough for environmental protection, and other complementary policies are also needed. Recent country studies conclude that the macroeconomic stability in a country is a necessary, but not a sufficient, condition for the protection of the environment.

In addition to sound macroeconomic policies, countries need to adopt appropriate environmental policies if they wish to protect their environments. Among other things, these policies must include

(a) taxation of consumption and production of goods and services causing negative externalities;

(b) subsidies for consumption and production of goods and services with positive externalities;

(c) the imposition of appropriate user charges and fees for natural resources and other environmental assets; (d) definition and assignment of land property rights; and (e) the imposition and monitoring of pollution standards and the implementation of other relevant command and control mechanisms.

The IMF as a part of its consultation and advice attempts to cover some of the foregoing environmental measures that also relate to the Fund's general tasks. For example, typically the IMF recommends, in most countries, the removal of implicit and explicit consumer subsidies to energy and water, producer subsidies to fertilizers, insecticides, pesticides and other harmful chemicals, and, in the case of labourabundant developing countries, the elimination of budgetary and nonbudgetary subsidies to capital and machinery. The IMF does not normally review or comment on environmental policies systematically or comprehensively.

There are some fundamental reasons for this. The primary reason is that the Fund's concern is mainly with those aspects of the environment that have a bearing on macroeconomic developments. There are three additional reasons. First, many Fund member countries do not want the IMF staff to be reviewing and suggesting changes in their environmental strategies and objectives, for fear that it may lead to environmental conditionality. Second, given the complexity and multidisciplinary character of environment, and the lack of expertise of Fund economists to deal with environmental objectives, the IMF staff feels somewhat inadequate for the immensity of environmental tasks at hand. Third, given the competence of the World Bank and other specialized agencies dealing with the environment, the Executive Board of the IMF has felt that its active pursuit of environmental objectives would be overlapping, and may even dilute its efforts in the area of its primary mandate (i.e., monetary and exchange stability).

Hence, the decision of the IMF Executive Board with regard to its mandate in the area of environment has been for the staff to (a) get a better understanding of the interrelations, if any, between macroeconomic policies and the environment; (b) become aware of major environmental problems of member countries, as well as of environmental consequences of other policy advice, and bring that knowledge to bear wherever relevant in our policy discussions; and (c) assist countries in analyzing and dealing with macroeconomic implications of the environmental plans and strategies as and when requested by the authorities.

The IMF staff's work on the environment, since 1991, has essentially been guided by this mandate. Annex 2 describes some of the past and ongoing work that the IMF has been doing in the area of the environment.

What is missing from this work at this stage is serious involvement in the environment area at the individual country level. The main reason for this is that not many member countries have asked the Fund staff to examine the macroeconomic implications of their environmental policies.

In light of the primary purposes of the IMF, the Executive Board's mandate to the staff on the environment, and the staff work program in this area, Annex 3 revises somewhat the draft NRTEE proposals concerning the IMF. In the first paragraph the word "continue", has been added because the IMF is already concerned about macroeconomic stability and its positive impact on the environment

In the second paragraph,"ecological fundamentals" should be replaced with "maintaining ecological balance" with the help of the World Bank and the concurrence of the country authorities. This is because the IMF is a monetary institution and not an environmental and ecological organization. It can work in the environment area only with the help of the World Bank staff and other specialized institutions. Moreover, the agreement of the country authorities is an essential prerequisite for the

Fund staff even to consider the subject of the environment.

In the third paragraph, "ensure" should be replaced with "encourage" because the member countries are sovereign and the IMF cannot compel them to do anything they do not wish to do. In fact, with macroeconomic stability, debt relief, and additional foreign capital flows, the IMF considers that countries will not need to overexport their natural resources.

In the fourth and final paragraph, the revision reflects the fact that the IMFsupported adjustment efforts consist of much more than simply subsidies and apprising policies. The IMF always attempts to minimize the effects on the environment and the social 2wellbeing of countries of all of its economic reform policies.

Finally, the IMF is not an environmental organization, and it has no intention of doing what the World Bank and other multilateral development banks are charged to do on the environment through their programs and project lending. Therefore, the creation in the IMF of an environmental auditorgeneral or a commissioner for sustainable development makes little sense (see Annex 4).

The role of the IMF within an effective network of international organizations is, and should continue to be, to help countries achieve macroeconomic stability, which is one of the most crucial ingredients of sustainable development.

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