IMFSurvey Magazine: Interview
Lessons from the crisis
Changing IMF Works Hard To Combat Global Crisis
By Camilla Andersen
IMF Survey online
February 26, 2009
- IMF to publish analysis of crisis lessons for policymakers, regulators
- Increased focus on critical conditions and protecting social spending
- IMF helping G-20 effort to respond to crisis, reform international financial system
The IMF is fighting at the front lines of the financial crisis. In recent months, it has provided loans worth more than $50 billion to emerging market countries hit by faltering demand for their exports, the drying up of capital in financial markets, overextended banks, and wary consumers.
Its lending to low-income countries has also been stepped up, as these countries start to feel the effects of the crisis. And it is providing policy advice to advanced countriesl for instance on how to address problems in their financing and banking sectors, and how to design effective stimulus packages.
The Fund is also closely tracking economic and financial developments worldwide so that it can provide policymakers with the latest forecasts and analysis of developments in financial markets. And it is engaging with the Group of 20 (G-20) leading economies and other stakeholders on issues related to the evolution of the international financial system.
In a wide-ranging interview, Reza Moghadam, head of the IMF’s Strategy, Policy and Review Department (SPR), talks about lessons learned from the financial crisis, the G-20’s work on reforming the international financial system, and the IMF’s new approach to lending. SPR is responsible for developing the policies and strategy established by the IMF’s management and Executive Board.
IMF Survey online: What were the root causes of this crisis? A failure to regulate financial markets or a failure to take action on global macroeconomic imbalances?
Moghadam: Being in the middle of the crisis, it’s easy to forget that prior to this crisis the world economy went through the longest period of high growth, low inflation, and low interest rates in post-war history.
Reza Moghadam: “The Fund can bring an international perspective and international support to the table.” (photo: IMF)
At the root of the crisis was the optimism that was brought about by this long period of prosperity. That optimism led to risks in the global economy not being assessed as carefully as they should have been.
These risks go across financial markets, across macroeconomic policy, and across the global economic architecture. For example, financial regulators did not pay sufficient attention to the concentration of risk associated with financial innovation. Monetary policy did not take into account fully the risks associated with high asset prices and increased leverage. Benign neglect of global imbalances contributed to the build-up of risk in the system. And risks across borders were not looked at carefully in a fragmented global architecture.
Now, there are lessons in each of these areas. Regulators need to determine the new perimeter for regulation. Monetary policymakers generally need to take account not simply of where inflation is and the prospects for it, but also of asset price inflation and leverage. And our global architecture needs to be reformed to address some of the shortcomings that the crisis has highlighted.
The IMF is working on a wide-ranging assessment of what needs to be done in all of these areas. This work will be discussed by our Executive Board in late February 2009, and will be published soon after.
IMF Survey online: The IMF has been called in to help many emerging market economies weather the financial storm. What are the advantages of borrowing from the Fund?
Moghadam: First of all, we have an obligation to work with those countries, our members, that require financial assistance. But there are also broader advantages.
IMF policy head
Reza Moghadam, a national of the United Kingdom and Iran, holds degrees in mathematics and economics from Oxford University and London School of Economics. He completed his PhD at University of Warwick.
Moghadam, who joined in the IMF in 1992, took over the reins of the Strategy, Policy and Review Department in June 2008. Before that, he served as Senior Advisor to the IMF’s Managing Director, Dominique Strauss-Kahn.
Prior to joining the IMF, Moghadam worked at the National Institute for Economics and Social Research, and for the consultancy firm Coopers, Lybrand & Deloitte.
The Fund works on behalf of the international community. Therefore, it can bring an international perspective and international support to the table. The Fund can also help countries put together a policy framework which is consistent and enhances the credibility of policy-making. All this helps address the problems in the country.
Finally, of course, the Fund’s financial assistance helps reduce the impact of the crisis on the citizens of the country by making adjustment less severe.
IMF Survey online: In the past, the Fund was criticized for its stringent lending conditions. Has the institution learned the lessons from the Asian crisis?
Moghadam: We have changed a lot since then. We have reviewed the way we work many times and there has been continuous improvement in how the Fund deals with crisis countries.
For example, since the Asian crisis, we have had much more targeted structural conditionality. Conditionality in Fund programs now has to be “macro-critical”: any condition in a program has to meet the test of criticality from a macroeconomic perspective.
We are continuously assessing how the programs are evolving, how conditionality is evolving, and how the general framework of the programs is evolving. Even in the current crisis, a month or so after we had approved several programs, we assessed how these programs compared to past programs.
"Benign neglect of global imbalances contributed to the build-up of risk in the system."
The early lessons for us are rather positive. For example, conditions in non-core areas of the Fund are almost nonexistent in the new programs. They are all very focused on those key issues that need to be addressed in the short run to get over the immediate crisis. And the overall number of structural conditions in design of the initial programs has gone down.
The Managing Director told staff at the outset of the crisis that he wanted conditionality in new programs to be targeted on the problems at hand. The evidence is that this is indeed happening.
IMF Survey online: When there is a crisis, vulnerable groups in society are the first to feel the effects. What is the IMF doing to help shield the poor, the elderly, and those without work?
Moghadam: The Managing Director feels strongly about this issue, and he has directed staff to pay due attention to social spending. So you will find that most of our new programs protect expenditure to address the social needs during the crisis.
This is really a key issue for the Fund, both in terms of gaining acceptance of our programs, and in terms of making them sustainable. You could say that our new programs now have a degree of social conditionality attached to them.
IMF Survey online: Is it true that the IMF is mulling a radical rethink of its approach to lending, possibly doing away with program conditionality as we know it today?
Moghadam: There are two strands of work that are relevant in this area. At the outset of the crisis we put in place a new facility, which basically was based on ex-ante conditionality (essentially the member’s good track record of sound economic management), and had no ex-post conditionality (ongoing conditions) when it went into effect. This short-term liquidity facility is aimed at countries with a good track record that face difficulties in the financial markets. For those countries the Fund is prepared to provide rapid financing on a large scale based on their track record without the conditions that countries normally must meet during the programs.
We are now carrying out a more generalized review of conditionality. We are looking to see how far we take the concept of ex-ante conditionality, and how more generally we can make program conditionality less intrusive.
We are also looking at the broad range of facilities the Fund is offering to member countries, whether they are low-income or middle-income countries. And we are looking at ways of providing crisis prevention instruments and, in particular, at facilities that provide precautionary help to countries. This is an option for countries that may not need immediate help but would like a safety net, should a need arise.
IMF Survey online: Will the Fund run out of resources to help its members? Would it, for instance, have enough resources to help if an advanced country got into trouble?
Moghadam: We have just had a discussion in the IMF’s Executive Board on the adequacy of Fund resources. Our resources are currently adequate for what is on the horizon, but we need to be prepared in case the crisis is worse than we expect.
"Most of our new programs protect expenditure to address the social needs during the crisis. "
In the short run, we have more than enough resources to assist our members, regardless of their income level. That said, the Fund wants to be prepared for any eventuality, and we are looking to double the IMF’s resources. Japan has already extended a loan worth $100 billion, and we are hoping to add an additional $150 billion. There is strong support within our membership for this, and the process for taking our usable resources up to something like $500 billion is well underway.
I don’t actually think we will need all that financing. In a way, we have to hope for the best, but prepare for the worst. And that’s what we are doing.
IMF Survey online: What steps has the Fund taken to improve the quality of its policy advice and make sure its warnings are heard loud and clear?
Moghadam: A review last year told us that our surveillance is generally regarded quite highly by those who use it, whether they’re country authorities or people in financial markets.
The focus of surveillance has also improved. We focus more on issues within our core mandate. And we are doing a better job on financial sector surveillance and multilateral surveillance.
But of course, there are a number of areas where we need to improve. We talked about risks in the global economy: we need to do a better job of assessing such risks. And while we have improved our exchange rate analysis, we can do better here too.
There is an area where we have a comparative advantage, but we do not use it as much as we should: cross-country analysis. We deal with almost all the countries in the world and there is an expectation that we should be looking at issues which go across more than one country in our surveillance work.
IMF Survey online: The Group of Twenty has taken the lead on efforts to fix the international financial system. What is the IMF’s role?
Moghadam: The IMF, as you know, is represented in the Group of 20. The Managing Director is invited to the meetings of the G-20 leaders and ministers, and IMF staff and other members of our management team participate in the ongoing work of the G-20, which is aimed at coming up with ideas and recommendations, and eventually build consensus on how to move forward on regulation, on financial architecture, on the role of the Fund, and on the roles of multilateral development banks and the World Bank.
Currently, the G-20 has set up four working groups, and the Fund is represented on all of them. The IMF’s work program, which the Managing Director submitted to the Executive Board after the Annual Meetings, is broadly consistent with the issues that are being addressed by the G20.
And across the board, whether we are talking about IMF financing, IMF facilities, or macroeconomic analysis needed to deal with a current crisis, the Fund is providing input to the G-20 for the Group’s consideration as well as concurrently submitting those issues for consideration by the IMF’s Executive Board, which ultimately is the decision-making body at the Fund.
IMF Survey online: Calls to rethink the IMF’s governance have intensified. What needs to happen to ensure that the views of emerging markets and low-income countries are heard?
Moghadam: We have already made progress. The package of quota and voice reforms that was approved by the Board and by the Governors of the Fund in 2008 took us an important step forward in that regard. For example, we have had a rebalancing of the quota shares that increases the quota ratios of emerging markets and developing countries relative to the advanced economies. That’s an important step.
The package also tripled the basic votes given to the membership, which boosted the representation of those countries with the lowest quota share, primarily low-income countries. The package also guarantees that this share will not decrease in the future.
Finally, the reform package also increased the resources available mainly to the low-income chairs of the IMF’s Executive Board.
Now, that was the first step. One needs to go beyond that. How to do so is a question for the membership at large. It’s an issue currently being considered at the Board and elsewhere, for example in the G-20. I think the membership as a whole is likely to decide on additional steps in the coming years to build on the package that has already been approved.
IMF Survey online: What impact will the crisis have on low-income countries? How can the IMF help?
Moghadam: Low-income countries are less integrated in the global financial markets. Therefore, the impact of the crisis has been slower to materialize in this part of the world. But they are also impacted by the crisis through trade, remittances, and foreign direct investment. We have already seen that the growth of low-income countries has almost halved between 2007 and 2008, and it is very likely it will slow down even more this year.
So we are very concerned that low-income countries will face a much more severe environment in the coming year. We already, to some extent, see evidence of that: demand for our Exogenous Shocks Facility has increased over the last six months. We need to be prepared to help low-income countries with greater financial assistance in the coming year.