The IMF’s Response to the Global CrisisRemarks by IMF Deputy Managing Director Takatoshi Kato
At the Eighth Annual Regional Conference on Central America, Panama, and the Dominican Republic
Antigua, Guatemala, June 25, 2009
As Prepared for Delivery
Let me first begin by expressing my thanks to Governor Maria Antonieta de Bonilla and to the Central Bank of Guatemala for hosting the Eight Annual Regional Conference. Let me also thank all of you, presidents of central banks, ministers of finance, financial sector superintendents, heads of regional institutions, other senior officials, and representatives of international financial institutions, for your participation in this conference. It is a distinct pleasure to be here in this historic and magnificent place.
Today we are coming together to discuss a rather sober topic, namely, the effects of the unprecedented global financial and economic crisis of 2008 on the region. Over the next two days, we will take stock of the effects of the crisis on the countries of the region, assess the near-term outlook and risks, and exchange views on the appropriate macroeconomic and financial sector policies for the period ahead. We will also have an opportunity to review the lessons for financial sector regulations and policies that are being drawn in the aftermath of the global crisis, and discuss their possible implications for Central America, Panama, and the Dominican Republic.
These are challenging times for all of us. In the past weeks, we have seen the first signs of a moderation in the rate of decline in global output. While this is encouraging, the road to recovery is nonetheless likely to be a long one, and governments around the globe and the international financial community need to prepare accordingly.
The current crisis has affected the world and the region and, as a consequence, has had a profound impact on the work of the IMF. Since the onset of the crisis, the IMF has responded on many fronts to support its member countries, using its cross-country experience to advise advanced countries at the center of the crisis on policy solutions, modernizing its lending operations and, more generally, becoming more responsive to member countries’ needs. Taking this opportunity, let me highlight some of the changes that have taken place at the IMF. In particular I would like to focus on (i) the strengthened global financial safety net; (ii) the added flexibility of IMF lending; (iii) enhanced surveillance; (iv) governance reform; and (v) increased emphasis on protecting the most vulnerable.
Strengthened global financial safety net. Last April, the G-20 governments supported broadening the global financial safety net through a trebling of the IMF’s lending capacity (to US$750 billion). As of today, the IMF has received pledges from its members totaling US$340 billion [from Japan, European Union, Norway, Canada, Switzerland, Korea, Australia and the United States]. In addition, countries like China, Brazil, and Russia have announced their intention to purchase new IMF notes upon the Executive Board’s approval of the note issuance framework for a total of US$70 billion. We are hopeful that other Fund members will join this effort and help with a sizable increase in the lending capacity of the IMF.
The global financial safety net also will be strengthened with the upcoming general allocation of SDRs (for a total of US$250 billion). This allocation will be distributed among all Fund members in proportion to their quota, and will help strengthen the external financial position of every member country. For example, the seven countries represented in this conference will receive a total allocation of SDRs equivalent to US$1.4 billion, which represents about 7 percent of the current international reserves of this groups of countries. We hope that this allocation will become effective before the 2009 Annual Meetings.
More flexible IMF lending. As a result of a major overhaul, IMF lending has become more flexible, has fewer conditions than before, and can be better tailored to individual country circumstances. The high access precautionary Stand-by arrangements with El Salvador, Costa Rica and Guatemala approved in early 2009 are good examples of this increased flexibility. In addition to streamlining the conditions it attaches to its loans, the IMF has increased the size of its “normal” loans, has broadened the circumstances under which it can approve large loans, and has simplified the structural component of its lending arrangements. The IMF also has created a new facility for economies with sound policies that are well integrated to global financial markets and face contagion from external events outside their control (the Flexible Credit Line (FCL)). Once approved, the resources from the FCL are available for drawing in full at any point during the life of the credit, without having to undertake pre-agreed policy measures or meet policy targets. Mexico was the first country that took advantage of this new facility and, of course, Agustin Carstens is in a better position than me to comment on its usefulness. The other two countries that have requested this credit line are Colombia and Poland. These three countries combined have received about US$78 billion from the Fund from this new credit line in the last 3 months
Enhanced surveillance. The IMF is also providing more effective and independent surveillance over the global economy. Our economic and financial sector diagnosis and forecasts have been the central reference point for countries planning how to respond to the crisis, and we have been outspoken in pressing for a coordinated response to the crisis from the large economies. Going forward, the so-called Early Warning Exercise, aimed at assessing vulnerabilities to unexpected shocks and to draw connections to global and systemic risks, will be launched at the 2009 Annual Meeting in Istanbul. The Financial Sector Assessment Program will become more flexible, targeted and better integrated with macroeconomic surveillance. The Fund is also playing a role in the ongoing debate on the design of a new global system of financial regulation, including on legal and operational issues related to cross-border bank insolvencies.
Governance reform. Progress continues on reforms aimed at strengthening the IMF’s legitimacy and effectiveness in the world economy. Reforms on quota and voice agreed in April of 2008 will raise quotas of 54 members, including Brazil, China, India, Korea, and Mexico, once they become effective. But this is just a first step. The next general review of the IMF quota, which will be completed by January 2011 (two years ahead of the schedule previously agreed), will assess the appropriate overall increase in quotas and strive to further realign members’ quotas with their weight in the global economy. Other aspects of the governance structure of the IMF will also be reviewed, taking into account inputs from many stakeholders, including civil society.
Protection of the most vulnerable. In close coordination with the World Bank, regional development banks and donors, the IMF has stepped up efforts to minimize the effects of economic adjustments prompted by the global crisis on the most vulnerable. For example, in its new programs, the IMF is making sure that social spending is preserved or increased wherever possible, and that key structural measures are aimed at protecting the most vulnerable. The IMF is also committed to strengthening its concessional lending capacity. Last April, the G-20 supported using part of the prospective sales of IMF gold to increase the funding available for the poorest countries by about US$6 billion over the next 2 to 3 years. In addition, the Fund recently doubled the maximum size of the “normal” loans under the poverty reduction and growth facility (PRGF) and exogenous shocks facility (ESF), and will shortly adopt a more flexible and strengthened framework for concessional lending.
All in all, while these times are challenging, they also provide us with an opportunity to move the reform agendas forward. Let me assure you that the IMF will do its best to continue supporting its member countries in these efforts, including by continuing to provide financial resources when these are necessary. The current crisis has demonstrated once more that the world needs a collaborative approach to solving the global economic problems. I want to assure you that the IMF stands ready to be a partner in this endeavor.
I am looking forward to a very productive conference. Thank you very much.