IMFSurvey Magazine: Interview
The Changing IMF
IMF's Lipsky Sees Tentative Signs Of Crisis Turnabout
June 4, 2009
- Signs of slowing downturn in advanced countries
- Lipsky details IMF's new lending framework
- IMF funding becomes more flexible
The International Monetary Fund's First Deputy Managing Director, John Lipsky, says he sees cautious signs of a possible turnaround in the global economic crisis, but stresses the need to restore the workings of the financial sector in advanced economies for recovery to take hold.
In a wide-ranging interview, Lipsky discusses possible reasons for optimism, the Fund’s recent overhaul of its lending facilities, and its strengthened system of surveillance of global and country economies.
Below is an edited transcript of his video interview with the IMF Survey's Archana Kumar
IMF Survey online: Lately, there has been a lot of talk about “green shoots” or very early signs of global economic recovery. Do you agree with this assessment?
LIPSKY: There are reasons for optimism. The unprecedented policy response, both fiscal and monetary, as well as the support being provided to financial systems are all starting to show results.
In some areas, there are even some tentative signs of a turnaround. We are expecting that the emerging economies will return to positive growth and perhaps even begin to accelerate in the second half of this year.
So, it’s too early to say we can see the green shoots of recovery in the advanced economies. What we do hope to see, or what we think we can see, are signs that the downturn is de-accelerating in advanced economies. This would be a pre-condition for a real emergence of green shoots and a return to positive growth next year.
But, as we’ve been emphasizing, what remains is the challenge of restoring financial sector functionality in the advanced economies.
IMF Survey online: You have mentioned prospects for “emerging economies.” What is the IMF doing to assist these emerging and developing countries?
LIPSKY: Even though the crisis began in the advanced, industrial economies, it is clear that it is the emerging economies and developing economies that are being hit the hardest. They are being hit both by the sudden halt in capital flows and by a dramatic slump in their export markets.
We’re trying to act on both sides. We are helping to guide, promote and encourage appropriate policy action in the advanced economies to hasten the recovery. But, there was also a very urgent need to counteract this sudden halt in capital. We are also trying to insure that emerging countries and developing countries continue to have access to a plausible amount of external resources. In this effort, we’ve received the backing of our members with an increase in resources.
In addition, we’ve made some important changes to the range of our lending facilities that are going to be extremely powerful and useful, not only now, but in the future.
IMF Survey online: What’s different?
LIPSKY: I’m referring to the creation of the Flexible Credit Line (FLC), and the High Access Precautionary Arrangements (HAPAs). These new facilities will allow us to provide financial insurance to countries that are—in the case of the FCL—following good policies, but perceive a threat from external capital markets. Or, in the case of the High Access Precautionary Arrangements— the IMF will provide funds to those countries that need to change policies, want to have a program, but don’t necessarily need funding to accomplish their goals.
The tools we had previously, were designed in an era of bank lending with slow-moving capital strains and current account crises. Our pre-existing facilities were simply not well suited for the demands of crisis prevention. So the creation of these new instruments is an important step.
In fact, they are breakthrough developments that I hope will prove their worth in coming months and years. For now, it’s the increase in our available resources that is going to prove crucial, together with our new facilities; that will help the emerging market and developing economies to resist this crisis.
We’ve also agreed with our members on a streamlining of conditionality. We have focused our performance criteria on those elements that are critical to the overall success of the program.
At the same time, we have converted structural performance criteria into structural benchmarks. These two changes, taken together, should make our programs better understood and give them a greater chance of success.
In the broad history of the Fund, the last two months will be viewed as ushering in critical and powerful improvements in the Fund’s ability to support its members.
IMF Survey online: And what about the low-income countries. What is the Fund doing to actively deliver on this very important front?
LIPSKY: Our low-income members have been, in a certain sense, the most innocent victims of this crisis. By and large, they have not been hugely involved in international financial markets but nevertheless they’re being severely hit by the economic downturn.
We are taking many actions to try to protect and improve the outlook for our low-income members. We are particularly concerned about the social impact of this crisis. In program countries, we are taking special care to make sure that social spending support for the poorest is protected.
We have also made a series of changes and continue to make changes. We have increased access to our concessional facilities for low-income countries providing broader financial support. At the same time, we are reviewing our facilities for low-income country members. We have held initial discussions with the Board and we are going to bring forward specific proposals that will allow us to fine-tune our facilities to make them particularly useful and well-suited to the demands and challenges facing our low-income members.
IMF Survey online: Surveillance is one of the most important ways in which the Fund serves its membership. How can the Fund become more candid and even-handed in carrying out surveillance?
LIPSKY: Well, I believe—and I think the record will show—that we have effectively established external stability as the focus of bilateral surveillance [in the Decision on Bilateral Surveillance over Members’ Policies, 2007. The first major overhaul of the IMF’s work on surveillance in over 30 years ]. Although that Decision created some problems, in many ways, it is serving its essential purpose, by giving greater clarity and focus to our surveillance. Thus, bilateral surveillance reports have become more insightful, more incisive, and more candid.
At the same time, we have added emphasis on multilateral surveillance.
Our two flagship multilateral surveillance vehicles, the World Economic Outlook and the Global Financial Stability Report, have become benchmarks at a global level—and deservedly so. Their quality is exceptional, the insightfulness is widely recognized and they have become reference documents for understanding the global economy.
But we’re not stopping there, of course. The creation of the Macro Financial Studies Group in the Research Department promises to create new advances in the quality of our multilateral surveillance.
More recently, we’ve been tasked by the G20 Leaders Summit and by the International Monetary and Financial Committee to collaborate with the new Financial Stability Board (the successor to the Financial Stability Forum) to produce an early warning exercise. This is set to be delivered for the first time in Istanbul (at the 2009 Annual Meetings of the Boards of Governors of the IMF and World Bank Group).
We also have other developments in progress. The reform of the internal review process, I believe, holds great promise of making the bilateral surveillance process more effective, more timely and more impactful than it has been in the past.
So I think we’ve come a long way, but there’s still more to accomplish, and I think we have a clear roadmap of what we need.
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