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IMFSurvey Magazine: Policy


World Finance Chiefs Back Moves to Support Recovery from Crisis

IMF Survey online

April 25, 2009

  • IMF policy committee backs moves to recover from global recession
  • Supports big boost in IMF’s resources to combat economic crisis
  • IMF considers bond issue as vehicle for countries to contribute to Fund

World financial leaders said they are committed to taking the needed action to ensure recovery from the deepest global recession since the Great Depression and backed moves to greatly expand the lendable resources of the International Monetary Fund (IMF) to combat the crisis and provide a social safety net for the world’s poorest.

The IMF’s policy steering body, the 24-member International Monetary and Financial Committee (IMFC), underlined the central role of the Fund in helping to restore growth and in regularly monitoring the policy actions taken by governments around the world to assess if more action is needed.

IMFC Chairman Youssef Boutros-Ghali, the Egyptian Finance Minister, said participants could see signs of future recovery. "We have serious problems. We are taking very serious measures. But things are beginning to look up. Carefully, cautiously, we can say that there is a break in the clouds."

IMF Managing Director Dominique Strauss-Kahn said the pace of global recovery depends significantly on the effectiveness of measures to dispose of bad loans currently on the books of major banks.

Unprecedented policy response

Finance ministers, central bank governors, and development ministers gathered in Washington for the Spring Meetings of the IMF and World Bank amid the worst crisis to hit the global economy since the twin institutions were established toward the end of World War II.

An unprecedented policy response to the global economic crisis—including the recent expansion of resources for international institutions and the IMF’s enhanced lending framework—is gradually beginning to restore market confidence, the IMF said.

But in its semiannual Global Financial Stability Report, released April 21, the IMF warned that the challenges to restoring financial stability remain significant.

“Continued decisive and effective action is needed to preserve and strengthen these first signs of improvement, and to help provide a more stable and resilient platform for sustained global growth,” José Viñals, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department, said.

Growth to reemerge next year

The latest forecast by the IMF in its World Economic Outlook shows the global economy contracting in 2009 by 1.3 percent. While the rate of contraction should moderate from the second quarter of 2009 onward, output per capita is projected to decline in countries representing three-quarters of the global economy. Growth is projected to reemerge in 2010, but at 1.9 percent it would be sluggish relative to past recoveries.

IMF Chief Economist Olivier Blanchard told reporters that the world economy was being battered by competing crosscurrents, with the collapse in confidence and demand continuing to pull the economy down and government stimulus measures and natural stabilization mechanisms pulling the economy up.

“This is not the time for complacency, and the need for strong policies, both on the macro and especially on the financial fronts, is as acute as ever. But, with such policies in place, there is light at the end of this long tunnel. World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year.”

IMF head Strauss-Kahn (r) with IMFC Chairman Boutros-Ghali (c), IMF First Deputy Managing Director Lipsky at IMFC press briefing (photo: IMF)

The meeting of the IMFC and the Development Committee followed the forceful action agreed in London on April 2 by the leaders of the Group of Twenty (G-20) industrialized and emerging market economies to combat the crisis, which has also started to affect the world’s poorest countries.

In a communiqué issued on April 25, the IMFC made the following key points:

    • Ensuring recovery. Fund members are committed to taking additional action to ensure economic recovery, including restoring the financial health of banks, taking cooperative action to ensure the soundness of systemically important institutions, and maintaining expansionary policies.

    • Assessing policy action. The IMFC reiterated an earlier call by G-20 leaders for the IMF to regularly assess the actions taken to restore global growth and recommend what still needs to be done.

    • Avoiding protectionism. The IMFC called for an urgent conclusion to the Doha Round of trade talks, which will help boost recovery in the global economy, and stressed the importance of avoiding protectionism.

    • Improving IMF economic surveillance. The committee stressed the need for both the IMF and its members to enhance the effectiveness of Fund surveillance, including paying attention to sources of systemic risks.

    • Boosting IMF resources. The committee backed moves to triple IMF lendable resources to $750 billion, initially through bilateral loans from member countries and later through an expanded and more flexible New Arrangements to Borrow (NAB).

    • Backing reform of IMF lending and conditionality framework. The IMFC welcomed the overhaul of the IMF’s lending framework, including the creation of a new Flexible Credit Line and the doubling of access limits for all borrowers.

    • Supporting low-income countries. To strengthen what the IMFC termed the global financial safety net, the committee supported a doubling of concessional lending capacity for low-income countries and moves to look into making loans to the poorest more concessional. The IMFC also urged major donor countries to live up to past aid commitments.

    • Issuing SDRs. The committee called for rapid approval of a one-time allocation of Special Drawing Rights (SDRs), the IMF’s quasi-currency, and a general allocation before the October IMF Annual Meeting in Istanbul of a $250 billion SDR allocation. This would also provide low-income countries an extra $19 billion.

    • Encouraging quota and voice reform. The IMFC supported moves to improve representation of dynamic emerging markets and low-income countries, including through prompt ratification of quota and voice reforms agreed in April 2008 and begin work on a new quota formula before the 2009 Annual Meetings.

    • Reforming Fund governance. The committee called for broader reforms to ensure the active participation of the IMFC in the Fund’s strategic decision making process.

The IMFC has 24 members who are governors of the Fund, ministers, or others of comparable rank. The membership reflects the composition of the IMF's Executive Board.

Possible bond issue

The IMF is seeking ways to augment its resources so that it can lend more during the current crisis. So far it has lent, or committed resources through lines of credit, more than $100 billion to help countries get through the crisis and combat the global economic slump.

Some countries or regions, such as Japan and the European Union, have committed resources directly to the IMF. Strauss-Kahn told reporters that another way to raise resources was for the IMF to place bonds with several countries, such as China.

Strauss-Kahn said the IMF’s Executive Board has already been briefed on the possibility and “now we are discussing with the different creditors the way to implement, the amount they will put in.”

“I'm sure that this vehicle will be used since it provides flexibility. And, it is interesting for many countries,” he added, saying the Fund had prepared a template for the standard form of the agreement with countries that would invest in these notes.

Apart from China, he did not say which countries might be interested, but said there would be quite a few. These bonds would be placed directly with the interested members rather than in private capital markets.

‘Exit Strategy’

Strauss-Kahn also told reporters while there is broad agreement among IMF members that fiscal stimulus measures in individual countries were necessary, they differed on the need now for an “exit strategy” from their emergency moves for when the crisis passes.

But he said that from the IMF’s point of view, “the exit strategy has to be taken into account as soon as possible.”

Early warnings

The IMF and the Financial Stability Board have started joint semi-annual Early Warning Exercises, aimed at identifying emerging risks and highlighting essential preemptive policy actions. As input to this work, the IMF has expanded its vulnerability analyses to include advanced as well as emerging economies, the Managing Director told the IMFC.

Development Committee

At the Development Committee, which advises the Fund and the World Bank on issues relating to developing nations, ministers warned that the crisis in developing countries could turn into “a human and development calamity.”

“Hard-earned progress toward the Millennium Development Goals (MDGs) is now in jeopardy,” the committee said in a communiqué. “The crisis has already driven more than 50 million people into extreme poverty, particularly women and children. We must alleviate its impact on developing countries and facilitate their contribution to global recovery.”

The committee urged donor countries to translate their commitments into concerted action and additional resources.

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