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IMFSurvey Magazine: Policy

GLOBAL ECONOMIC CRISIS

World Faces Crisis Crossroads at G-20 Summit, Says IMF

IMF Survey online

March 27, 2009

  • Financial sector cleanup seen as top priority
  • Stimulus should be carried into 2010 to sustain recovery
  • IMF head hopes for substantial increase in Fund resources

Leaders of the Group of Twenty (G-20) advanced and emerging market economies gathering at a summit in London next week face a crossroads in the global economic crisis, with the opportunity to spur a recovery next year if they take the right action, IMF Managing Director Dominique Strauss-Kahn said.

In a video conference with journalists based in London, Paris, and Washington, Strauss-Kahn outlined five key subjects on which the IMF wanted to see progress at the summit to combat the worst economic downturn in 60 years, in addition to considering how to improve regulation of the fractured global financial system.

    • Cleanup of the financial sector. Strauss-Kahn said cleaning up the balance sheets of banks and getting the financial sector working again was critical to reviving world growth. “Countries can do it in different ways, but they have to do it and do it now.”

    • Ensuring fiscal stimulus is available for next year. Strauss-Kahn said that governments around the world had done very well in announcing stimulus plans to counter the downturn and create jobs. But they now needed to ensure that efforts were sustained in 2010.

    • Helping emerging markets hit by the crisis. Although the crisis did not start with emerging markets, the collapse of trade finance and the drying up of capital flows is hurting many emerging markets. The IMF needs enough resources to assist emerging markets, otherwise a collapse in emerging economies would have a devastating impact on developed economies, reinforcing the crisis.

    • Aiding low-income countries. Some of the world’s poorest countries are being affected by the slowdown in world growth, with exports “falling off a cliff” and the prices of commodities and flows of aid falling. Strauss-Kahn said he wanted to ensure a doubling of IMF concessional lending to low-income countries to safeguard them during the crisis.

    • Boosting IMF resources. The IMF hopes to at least double its lendable resources to more than $500 billion so that it is ready to help out and provide confidence that economies will have access to funds during the crisis. Japan has provided $100 billion in extra money and the European Union has committed EUR 75 billion.

Crucial meeting

Strauss-Kahn said that it was vitally important that the G-20 leaders reach agreement at the April 2 meeting in London. “If there’s a big clash it will not be good for confidence,” he declared.

He hoped that the meeting would show unity and leadership. Although the world faced a different situation from 1944, the changes agreed in London could amount to the same strategic shift that took place with the creation of the IMF and the World Bank at Bretton Woods, New Hampshire toward the end of World War II.

In addition to endorsing his five-point IMF agenda, he wanted to see steps agreed to start reforming the international financial system, including regulation of tax havens, rating agencies, and hedge funds.

“I’m not expecting something very new. What I expect is the commitment of world leaders to take a step forward and to make it rapidly.”

Global activity is now projected to contract by to 1 percent in 2009 on an annual average basis—the first such fall in 60 years, the IMF has said. Global growth is still forecast to stage a modest recovery next year, conditional on comprehensive policy steps to stabilize financial conditions, sizeable fiscal support, a gradual improvement in credit conditions, a bottoming of the U.S. housing market, and the cushioning effect from sharply lower oil and other major commodity prices.

As the crisis gets prolonged, emerging market and low-income countries are suffering more. So far the IMF has lent $50 billion to help a number of crisis-affected countries and is in talks to lend far more, which is why the multilateral institution is attempting to dramatically increase its lendable resources.

Big overhaul of IMF lending

To complement the proposed big increase in IMF resources, the Fund has announced a major overhaul of how it lends money by offering higher amounts and tailoring loan terms to countries’ varying strengths and circumstances.

The IMF announced on March 24 the creation of a new flexible credit line for countries with very strong fundamentals, policies, and track records of policy implementation. Once approved, these loans—a type of insurance policy for strong performers—can be fully disbursed when the need arises rather than being conditioned on compliance with policy targets as in traditional IMF-supported programs.

The 185-member institution also announced that it would double nonconcessional loan access limits, enhance its traditional Stand-By facility, and simplify lending terms. Complementary reforms of concessional lending instruments for low-income members are also in train.

Huge change in philosophy of IMF

Strauss-Kahn said the lending overhaul amounted to a huge change in the philosophy of the IMF because of the shift away from insisting on sometimes onerous terms for lending which had resulted in a stigma attached to borrowing from the IMF, particularly in Asia and Latin America.

IMF loan conditionality is being adjusted so that economic structural reforms agreed with a country will be monitored in a broad context. The change is also applicable to low-income countries.

The Managing Director said that lending reforms would be followed by further changes to country representation at the Fund, with emerging markets and low-income countries being given a bigger say. He expected the G-20 summit to bring forward the process of reform of the quota systems that determines country representation.

Together, the G-20 represents around 90 percent of global gross national product, 80 percent of world trade (including trade within the European Union), as well as two-thirds of the world's population. It comprises 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States, plus the European Union, represented by the rotating Council presidency and the European Central Bank. The Managing Director of the International Monetary Fund and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate.

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