GLOBAL FINANCIAL SAFETY NET
Post-Toronto, IMF Sets Out Ideas to Build On Crisis Response
IMF Survey online
June 30, 2010
- IMF says mutual cooperation will yield stronger world growth
- Fund looking at how to strengthen its lending, surveillance
- Governance reforms under way key to legitimacy
As the world edges toward recovery, IMF Managing Director Dominique Strauss-Kahn briefed economists, analysts, and reporters at the Peterson Institute for International Economics, a Washington think tank, on the main outcomes of the weekend meeting of the leaders of the Group of Twenty (G-20) in Toronto--and looked ahead to a new round of reforms at the IMF to enable it to be even more effective for its member countries.
He said that the Toronto summit of leading industrialized and emerging market economies showed that the “spirit of international collaboration is still alive.” In the run-up to the meeting, he noted that there had been reports of disagreement within the G-20 over whether the priority facing the world now was for fiscal consolidation or growth. In fact, he said that while it was agreed at the summit that policy responses should be tailored to individual country circumstances, it was also agreed that what the global economy needed is “fiscal consolidation and growth.”
The Managing Director also noted that IMF analysis underpinning the G-20’s Mutual Assessment Process (MAP)—aimed at achieving balanced and sustainable growth—showed clearly that even greater policy collaboration could lead to an increase of 2.5 percent in global growth and 30 million new jobs.
Strauss-Kahn said that the summit had also agreed on the need for further reform of the financial sector. He added that while there had not been consensus on the need for a “global” financial tax, it was encouraging that several major countries had decided to move forward with their own versions of this measure.
The Toronto meeting had recognized the effective role played by the IMF during the crisis—including over $200 billion in lending to help contain the spread of the crisis and soften its impact on the populations affected. Strauss-Kahn said that now was the time to think about how the IMF can be even more effective in the future—by clarifying and improving its “mandate” and approach to its work in several areas. He focused his remarks on lending, surveillance, and governance.
Strengthening IMF Lending
Noting that there are still gaps in the “global financial safety net,” Strauss-Kahn said that further reform of the IMF’s lending instruments to make them more flexible could provide another step in this direction. He said that ideas being discussed included:
Enhancing the Flexible Credit Line. Introduced during the crisis, the credit line is available for “platinum customers” without preconditions. Strauss-Kahn said the IMF was considering enhancing the FCL by expanding its duration and removing the cap on access.
Introducing a new Precautionary Credit Line. The IMF is thinking about this new instrument for countries with similar needs as for the FCL but that do not quite meet the qualification criteria— but in return, some limited ex-post conditionality would be required.
Establishing a mechanism to address systemic crises. To deal with systemic crises, it might be possible to establish a coordinated mechanism to proactively channel large-scale liquidity to countries under pressure. To be effective, these resources would need to be deployed quickly, and focus on countries that might propagate the shock, whatever its origin, across the world—to stop the falling dominoes. To get around the problem of countries not wanting to be first to borrow from the IMF, the Fund might proactively invite a group of countries to use this facility, or even publicly offer the assistance to a set of qualifying countries at the same time.
Synergies with regional arrangements. The IMF is also exploring ways of cooperating more closely with regional financing arrangements, including in the context of global liquidity provision. The IMF’s recent partnership with Europe represents a new and innovative mode of cooperation which might be applicable in other regions.
While it was still too early to get into details, Strauss-Kahn said that these were the kinds of ideas being discussed by staff at the Fund—and would, of course, be subject to approval by the IMF’s Executive Board.
Strengthening IMF economic surveillance
“We need a new surveillance toolkit for a new era,” Strauss-Kahn said. To improve its oversight at the global, regional, and country level and strengthen its early warning capabilities, the IMF is planning to enhance its efforts in the following areas:
• Understanding macro-financial risks. Strauss-Kahn said macro-financial stability should be front and center of IMF surveillance. While the IMF “does not aspire to be a global regulator,” he said that the Fund does need to get a better handle on the complicated nexus of exposures, cross-exposures, and the shifting pattern of asset and liability concentration across regions and institutions. To do this, the IMF needs to improve access to necessary data, working with national supervisors and the Financial Stability Board.
• Enhancing multilateral surveillance. To get a better handle on the linkages that underlie the global financial system, the IMF plans to introduce new “spillover reports” starting with five systemic economies—China, the Euro Area, Japan, the United Kingdom, and the United States—over the next eighteen months, to assess how policies in these economies might affect global and regional stability.
• More relevant bilateral surveillance. Individual country assessments remain one of the main tasks of the Fund. To improve its effectiveness in this area, the IMF is looking at producing more “ thematic multi-country” reports, to better leverage its cross-country experience for the benefit of all its members.
Strengthening IMF governance
Strauss-Kahn said that building on its 2008 reforms, the IMF will move ahead with a further, targeted quota shift of at least 5 percent, to give a greater voice to dynamic emerging markets and developing countries. “We are committed to seeing this through ahead of the January 2011 deadline. It is ambitious, but doable.”
He added that this quota reform—allied with other changes such as greater ministerial engagement in Fund activities, a more transparent management selection process, and a more diverse staff—would help enhance the IMF’s legitimacy and effectiveness.