## _031016

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### EXECUTIVE SUMMARY
- GFSN components: international reserves, central bank bilateral swap arrangements (BSAs), regional financing arrangements (RFAs), Fund resources, and market-based instruments. Objectives: (i) provide insurance against a crisis; (ii) supply financing when crises hit; (iii) incentivize sound macroeconomic policies.
- Recent IMF reforms: overhaul of surveillance and lending frameworks post-crisis; introduction of the Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL); 2010 Quota and Governance reforms. FCL and PLL “filled important gaps” but usage limited.
- Consensus challenge: little international agreement on adequacy, strengths, and weaknesses of current GFSN. Paper aims to build consensus on diagnosis to identify where reform is needed.

### DIAGNOSIS: ARCHITECTURE, SIZE, FRAGMENTATION, COVERAGE
- Expansion and fragmentation
  - Growth driven by reserves accumulation and expansion of BSAs and RFAs.
  - Rising role of BSAs and RFAs—some untested—has decentralised the safety net and increased uncertainty.
  - Lack of coordination produced fragmentation.
- Coverage and financing gaps
  - Sizeable financing gaps in many economies, especially systemic and gatekeeper EMs, even under full access assumptions.
- Cost, reliability, and moral hazard
  - Most elements are costly: financially (reserves, market instruments) or politically (stigma associated with the Fund and some RFAs).
  - Predictability and reliability are inadequate for many resources (notably BSAs and RFAs); most elements provide time-bound support.
  - Fragmentation and weak policy content reduce incentives for sound policies, raise crisis risk, and encourage facility shopping.
- Heterogeneity of shortcomings
  - Reserve currency-issuing AEs best served; non-systemic non-gatekeeper EMs least served.
  - Systemic and gatekeeper EMs face inadequate predictability/reliability from BSAs/RFAs and high costs from reserve accumulation or Fund stigma.
  - Most countries would need multiple GFSN elements to cover needs, raising coordination issues.

### CONTEXTUAL DRIVERS INCREASING DEMAND FOR A STRONGER GFSN
- Structural/cyclical shifts raising demand:
  - EMDCs: 85 percent of world’s population; produce 40 percent of global GDP (at market prices).
  - China: 10 percent of global trade; EMDCs: 38 percent of global trade (up by 16 percentage points since 2000).
  - Increased trade and financial integration; larger banking links.
  - Ongoing transitions and risks: China’s transition, unprecedented decline in commodity prices, diverging monetary policies in main reserve currency countries, higher public debt, policy rates near the lower bound, and waning political support for difficult structural reforms.
- Implication: reduced policy space and increased value of a strong GFSN.

### MOVING FORWARD: PRIORITIES FOR REBUILDING MULTILATERAL CONSENSUS AND REFORMS
- Timing/rationale: With more than five years since earlier reforms and implementation of 2010 Quota and Governance reforms, reassessment of GFSN and consensus-building on priorities is timely.
- Initial direction: strengthen the Fund and its cooperation with other GFSN elements; more cooperative system could be more effective but requires significant Fund reform.
- Next steps: a follow-up IMF staff paper could set out more specific reform proposals.

*Prepared by a staff team from the Strategy, Policy and Review Department; approved by Siddharth Tiwari.*

### BOX 1 — SYSTEMIC AND GATEKEEPER ECONOMIES (DEFINITIONS & METHODOLOGY)
- Systemic countries
  - Index combines: (i) size of country contributions to global markets (trade or financial—bank credit and portfolio investment) and (ii) centrality measured by eigenvector centrality.
  - Criterion: top 25 countries each year during 2011–14 for trade, and either each year during 2011–13 for bank credit or each year during 2011–14 for portfolio investment.
- Gatekeeper countries
  - Identified via aggregate network consolidating five networks (global trade and financial data). Insignificant links dropped using annual pruning threshold broadly stable at 12.3 (out of 0-100).
  - Aggregate link: geometric average of link weights above threshold, unless difference between smallest and largest link weight > 50 then largest weight used.
  - Clique Percolation Method used; countries in multiple clusters classified as gatekeepers.
- Systemic AEs listed: Australia, Belgium, Canada, France, Germany, Italy, Japan, Korea, Netherlands, Singapore, Spain, Switzerland, the UK, the US.
- Systemic EMs listed: Brazil, China, India, Mexico, Russia.
- Gatekeeper AEs listed: Austria, Germany, Greece, Italy, Japan, Singapore, Spain, Sweden, Switzerland, the UK, the US.
- Gatekeeper EMs listed: Brazil, China, Panama, South Africa, Turkey.
- Key thresholds and rules (exact):
  - Systemic trade ranking requirement: top 25 countries each year during 2011–14.
  - Systemic bank credit ranking requirement: top 25 each year during 2011–13.
  - Systemic portfolio investment ranking requirement: top 25 each year during 2011–14.
  - Pruning threshold for aggregate network: broadly stable at 12.3 (out of a range of 0-100).
  - Aggregate link construction rule: geometric average of link weights above threshold, unless difference between smallest and largest link weight > 50, then use the largest weight.
  - Cluster detection: Clique Percolation Method.

### ENHANCEMENTS TO FUND RESOURCES SINCE THE CRISIS
- General and special SDR allocation: more than US$280 billion in 2009; EMDCs received over US$100 billion; DCs received around US$20 billion (on average a 20 percent increase in their own reserves).
- Borrowing and contingent resources:
  - US$500 billion expansion of the New Arrangements to Borrow (NAB).
  - Bilateral borrowing agreements of about US$400 billion.
  - Ratification of the 14th General Review of Quotas doubled the Fund’s permanent resources to US$660 billion; corresponding rollback in the NAB.
- Lending framework overhaul:
  - Doubling of access limits; streamlining of conditionality.
  - Introduction of the FCL and PLL as precautionary instruments.
  - Introduction of Rapid Financing Instrument (RFI) and Rapid Credit Facility (RCF).
  - Revamp of lending architecture for DCs in 2010 with new facilities and doubling of access limits; access limits raised again in 2015.

### HEDGING INSTRUMENTS
- Sovereign commodity hedging use has grown since mid-2000 due to increased commodity price volatility.
- Examples:
  - Importers: Morocco and Panama for oil.
  - Exporters: Mexico for oil, Ghana for cocoa, South Africa for gold, Zambia for copper.
- Trading venues: Chicago, London, New York; Asia and Latin America exchanges since the 1990s; more limited trading in Africa (Kenya, Mauritius, South Africa).

### A MORE FRAGMENTED GFSN
- Reserves still dominate but their share in total safety net resources has fallen since 2007.
- IMF’s share increased only marginally and has fallen behind RFAs and BSAs.
- RFAs and BSAs expanded the most; decentralization and lack of coordination increased fragmentation and uncertainty.
- Country-level implications:
  - Uneven coverage: some countries have access to unlimited resources (reserve currency AEs), others rely mainly on limited reserves and the Fund (most DCs).
  - Some smaller systemic and gatekeeper AEs have a substantial portion of resources classified as “uncertain.”

### DIAGNOSTIC APPROACH & CRITERIA
- Three-part assessment:
  1. Size and coverage: sufficiency of GFSN size; adequacy for systemic economies and gatekeepers.
  2. Individual elements assessed against five criteria: Predictability, Speed, Reliability, Costs, Policies.
  3. System diagnosis from borrower and global perspectives: same criteria plus whether GFSN insures risks, limits contagion, provides crisis financing, and ensures sound policies.

### SIZE AND COVERAGE FINDINGS (SCENARIO ANALYSIS)
- Methodology overview:
  - Country-level potential financing gaps = financing needs − total available financing sources (Annex III).
  - Four scenarios vary by prevalence and severity of shocks.
  - Prevalence: very pervasive (3 percent crisis-probability threshold) to pervasive (5 percent).
  - Severity: 75th to 85th percentile of historical systemic crises distribution.
  - Widespread shock defined as crisis probability 3 percent and severity at the 85th percentile.
- Aggregate adequacy
  - Under a widespread shock and current access levels, financing gaps arise.
  - GFSN resources would be just sufficient to cover aggregate financing gap only under very strong assumptions of full access to all GFSN elements, including:
    - (i) resources unlimited under the ESM, and used up to maximum access limits for other RFAs;
    - (ii) all active swap lines can be tapped, and historical lines can be renewed with same amounts;
    - (iii) entire lending capacity of the Fund deployed (current forward commitment capacity and bilateral loans).
- Distributional/coverage findings
  - Full access scenario (including unlimited ESM): almost all AEs in sample fully covered or have more than adequate financing.
  - In contrast, all EMs but one have financing gaps (before potential Fund engagement), particularly large for systemic and gatekeeper EMs.
  - If no swap lines and limited RFA financing assumed, financing gaps would emerge in some AEs, mainly in the euro area.
- Reference statistic:
  - Blue dotted line in accompanying figure indicates the new cumulative normal access limit of 435 percent of quota.

### ELEMENTS EVALUATION: PREDICTABILITY, SPEED, RELIABILITY, COST, POLICIES
- High-level conclusion: Most GFSN elements score well on speed and predictability, less so on reliability, and poorly on cost and policies.
- Example strengths/weaknesses:
  - Reserves: predictable but costly.
  - BSAs: less predictable but less costly.
  - RFAs: generally neither predictable nor reliable; can be slow to deploy.
  - Market-based hedging: quick and predictable; cannot enforce policy commitment.
  - Fund: strong on policies; shortcomings on speed and reliability.
- Summary table scores (legend: Red (0)=Limited/insufficient, Yellow (1)=Some, Green (2)=Extensive/adequate)
  - Characteristics / Reserves / Swaps / IMF / RFAs / Hedging
    - Predictability: 2 1 2 1 2
    - Speed: 2 2 1 0 2
    - Reliability: 1 1 1 1 1
    - Cost: 0 2 0 1 0
    - Policies: 0 1 2 1 0
- Predictability details
  - Reserves: most predictable; central banks access with certainty and flexibility.
  - BSAs: between reserve-currency AEs predictable; other BSAs have formal expirations and limited access—future access uncertain.
  - Fund: accessible to near-universal membership; availability of precautionary arrangements (FCL/PLL) depends on criteria; cumulative access limit example: 435 percent of quota.
  - RFAs: heterogeneous; concentrated in Europe and Asia; many EMs not covered; assistance forms vary; access sometimes depends on parallel Fund program.
  - Hedging instruments: generally available in private markets; currently used by a few sovereigns.
- Speed details
  - Reserves: most rapid; deployable almost immediately.
  - BSAs: once established, relatively fast, especially reserve-currency swaps; activation speed varies.
  - Fund precautionary instruments (FCL/PLL): relatively quick if qualification met; crisis-resolution disbursements often delayed by negotiations on terms/conditionality.
  - RFAs: generally slow to unlock; delays from political/negotiation processes; resources contingent on Fund arrangements can face stigma-related delays.
  - Hedging: immediate relief conditional on contract design.
  - Note: COFER Q3 2015—about 60 percent of recorded reserves denominated in US dollars.
- Reliability details
  - Reserves: generally reliable but countries reluctant to use more than about 25 percent of their reserves in crises.
  - BSAs: short duration and renewable; renewal during crisis non-trivial.
  - Fund: more reliable than other elements but limited coverage for prolonged shocks; precautionary arrangements typically 6 months to 3 years; crisis-resolution arrangements typically 3 to 4 years; Fund has used successor SBAs and EFFs for longer financing.
  - RFAs: largely untested except ESM (maturities up to 20 and 30 years); reliability for long crises untested.
  - Hedging: typically 1–2 year contracts; less liquid and costlier for longer maturities.
- Cost details (exact figures preserved)
  - Reserves: Fund analysis suggests median cost for EMs averaged around 200 bps during 2001–09 (net financial cost proxy). Average maturity of GRA credit outstanding increased from 4 years (since 2000) to 6.5 years.
  - BSAs: reserve-currency swap borrowing costs average 20–50 bps over a reference interest rate.
  - Fund: commitment fees for precautionary arrangements on sliding scale up to 60 bps. Lending rates include basic rate of charge (SDR interest rate plus margin currently set at 100 bps). Surcharge: 200 bps on credit outstanding above 187.5 percent of quota; surcharge rises to 300 bps if credit remains above this level after three years for SBAs or 51 months for EFFs.
  - RFAs: example ESM charged around 100 bps.
  - Hedging: costs vary; established commodity exchanges can make hedges less prohibitively expensive than other market instruments.
- Policies (conditionality, surveillance, moral hazard mitigation)
  - Only the Fund has an established conditionality framework, regularly and transparently reviewed/updated.
  - Reserves, market-based instruments, many BSAs and RFAs: no explicit requirements or limited ex-ante screening; some RFAs rely on Fund conditionality above certain thresholds.
  - Moral hazard concerns:
    - Borrowers: may accumulate excessive imbalances and avoid adjustment.
    - Creditors: may underprice risk expecting bail-outs.
    - Reserve currency issuers: may run looser policies when demand for safe assets is high.
  - Policy recommendations to mitigate moral hazard:
    - Strong ex-ante incentives for macro stability and ex-post correction of imbalances.
    - Surveillance as primary tool to encourage policies.
    - Ex-ante screening/conditionality to provide incentives to maintain strong policies.
    - Ex-post financing combined with policy incentives to ensure adjustment.

### SHIFT FROM EX-POST TO EX-ANTE POLICY REQUIREMENTS
- Post-crisis shift motivated by interconnectedness, changing nature of shocks, and lessons requiring insurance to limit contagion.
- Experience of FCL users does not support concern that ex-ante conditionality increases moral hazard.
- Comparative policy frameworks:
  - Reserves: no direct policy requirements; weaker policies increase accumulation costs.
  - BSAs: rely on ex-ante screening; limited monitoring and leverage; qualification/review processes not transparent.
  - IMF: comprehensive surveillance and conditionality; FCL/PLL have ex-ante conditionality; most arrangements subject to ex-post review.
  - RFAs: range from comprehensive EU framework to reliance on the Fund (CMIM, BRICs CRA) to none (FLAR). CMIM and BRICs CRA apply IMF policy requirements for access above 30 percent; both untested so far.
  - Hedging instruments: no explicit policy requirements.
- Policy content scores (0 = Limited, 1 = Some, 2 = Extensive)
  - Reserves: Overall Score = 0
  - BSAs: Overall Score = 1
  - IMF: Overall Score = 2
  - RFAs: EU = 2; CMIM = 1; BRICs CRA = 1
  - Hedging instruments: Overall Score = 0

### SYSTEM DIAGNOSIS BY COUNTRY GROUP (AVAILABILITY & EFFECTIVENESS)
- Country groups: reserve currency-issuing AEs; other AEs; systemic and gatekeeper EMs; other EMs; DCs.
- Key group-specific findings (preserve exact characterisations and examples)
  - Reserve currency-issuing AEs
    - Best served. Reserves and BSAs sufficient; euro area is special case.
  - Other AEs
    - Cannot issue reserve currencies; may secure BSAs but less predictable; Fund financing within normal access limits predictable; RFAs less predictable but lower political costs.
  - Systemic and gatekeeper EMs
    - BSAs from major central banks not predictable/reliable; stigma deters Fund use; RFAs unlikely to assist net creditors; hedging relevant for commodity exporters but costly.
  - Other EMs
    - Near-zero probability of obtaining reserve-currency swap lines; BSAs from major trading partners may be trade-restrictive; many belong to RFAs that are poorly tested.
  - DCs
    - Options limited to reserves, the Fund, and development banks; self-insurance costly; Fund most predictable/reliable/affordable and carries limited stigma for DCs; Fund lacks FCL/PLL-type instrument specifically for DCs.
- Tabled characteristic scores by country group (selected exact scores preserved)
  - Euro Area countries characteristics excerpt:
    - Predictability: Reserve currency AEs = 2, Other AEs = 1, Systemic and gatekeeper EMs = 1, Other EMs = 1, DCs = 2
    - Speed: Reserve currency AEs = 2, Other AEs = 2, Systemic and gatekeeper EMs = 2, Other EMs = 1, DCs = 1
    - Reliability: Reserve currency AEs = 2, Other AEs = 1, Systemic and gatekeeper EMs = 1, Other EMs = 0, DCs = 1
    - Cost: Reserve currency AEs = 2, Other AEs = 1, Systemic and gatekeeper EMs = 0, Other EMs = 0, DCs = 0
    - Policies: Reserve currency AEs = 0, Other AEs = 1, Systemic and gatekeeper EMs = 1, Other EMs = 1, DCs = 1
  - Availability/effectiveness matrix (selected exact entries)
    - Reserve currency AEs (Reserves, Swaps, IMF, RFAs, Hedging)
      - Predictability: Reserves = 2, Swaps = 2, IMF = N/A, RFAs = N/A, Hedging = 2
      - Speed: Reserves = 2, Swaps = 2, IMF = N/A, RFAs = N/A, Hedging = 2
      - Reliability: Reserves = 2, Swaps = 2, IMF = N/A, RFAs = N/A, Hedging = 1
      - Cost: Reserves = 2, Swaps = 2, IMF = N/A, RFAs = N/A, Hedging = 0
    - Systemic and gatekeeper EMs (Reserves, Swaps, IMF, RFAs, Hedging)
      - Predictability: 2 1 2 1 2
      - Speed: 2 2 1 0 2
      - Reliability: 1 1 1 1 1
      - Cost: 0 2 0 1 0
    - Other AEs (Reserves, Swaps, IMF, RFAs, Hedging)
      - Predictability: 2 1 2 1 2
      - Speed: 2 2 1 0 2
      - Reliability: 1 1 1 1 1
      - Cost: 1 2 0 1 0
    - Other EMs (Reserves, Swaps, IMF, RFAs, Hedging)
      - Predictability: 2 0 2 1 2
      - Speed: 2 2 1 0 2
      - Reliability: 1 0 1 1 1
      - Cost: 0 2 0 1 0
    - DCs (Reserves, Swaps, IMF, RFAs, Hedging)
      - Predictability: 2 N/A 2 N/A 2
      - Speed: 2 N/A 1 N/A 2
      - Reliability: 1 N/A 1 N/A 1
      - Cost: 0 N/A 1 N/A 0
- Best-available combinations and financing implications
  - Reserve currency-issuing AEs: rely on reserves and swap lines.
  - Other AEs: rely on swap lines and reserves; may need Fund or RFA financing.
  - Systemic and gatekeeper EMs: need swap lines (if available), run down reserves, obtain Fund arrangement; some may require exceptional access.
  - Other EMs: run down reserves, tap swap lines if available, obtain Fund arrangement (often exceptional access) or co-finance with RFA.
  - DCs: rely on Fund and own reserves; potential support from unpredictable bilateral/multilateral creditors.
- Coordination challenges
  - Multiple elements required increases coordination complexity; overlapping conditionality between IMF and RFAs can delay programs and financing.

### SYSTEM-WIDE CONCLUSIONS & POTENTIAL FUND REFORM ROLE
- Primary weaknesses
  - GFSN fails to deliver adequate policy incentives across groups, encouraging global spillovers.
  - Over reliance on reserve accumulation creates negative externalities and inefficient resource use.
  - Fragmentation fosters facility shopping and delays appropriate policy-conditioned support.
- Cost, predictability, reliability, speed
  - Best available combinations tend to involve costly reserve accumulation.
  - Predictability and reliability gaps lead to rapid reserve accumulation and global imbalances.
  - Speed generally adequate due to reserves and swap expansion, but many EMs and DCs excluded from effective swap networks.
- Potential objectives for Fund reform
  - Provide predictable and reliable financial support for prevention and resolution.
  - Reduce moral hazard by incentivizing sound policies.
  - Reduce over accumulation of reserves via improved pooling and cost efficiency.
  - Limit coordination problems among GFSN layers and provide more even coverage.
  - Reframe Fund programs from stigma to signal of strength.
- Possible toolkit/instrument changes discussed
  - Immediate liquidity support and reliable cover for full duration of shocks to many countries.
  - Prequalification to enhance speed/predictability and reduce stigma.
  - State-dependency to ensure coverage throughout turmoil.
  - Strengthen cooperation among GFSN layers; Fund monitoring or policy signaling to facilitate cooperation.
  - Tailored support for country-specific shocks (e.g., commodity price declines).
- Past reform proposals summarized (high-level)
  - Sharpen surveillance, promote crisis prevention, consider shorter-term liquidity lines (GSM), refinements to precautionary instruments, enhance cooperation with RFAs and reserve pool arrangements.
  - More innovative proposals (limited appetite): lending against collateral; market-support instruments guaranteeing new issuance or automatic secondary market purchases; catalyzing markets for country insurance instruments (commodity hedging, state-contingent bonds).

### ISSUES FOR DISCUSSION (AS FRAMED IN SOURCE)
- Do Directors agree that:
  - The GFSN does not adequately cover all members?
  - The GFSN fails to deliver on cost and policies?
  - Many groups remain underserved and predictability/reliability need improvement?
  - Better coordination among various elements is required?
  - There is a need for reforms to strengthen the Fund?

### ANNEX III — FINANCING GAP ESTIMATES (METHODOLOGY & ASSUMPTIONS)
- Two-step estimation:
  1. Calculate country demand for financing under plausible shock assumptions based on historical crisis experiences.
  2. Account for supply of financing from all sources other than the Fund under the current GFSN. Financing gap arises when demand > supply.
- Prevalence captured by crisis-probability threshold from the Fund’s Vulnerability Exercise.
- Shocks applied to 2016–17 period; demand equals financing needs arising from shocks.
- Core scenario assumptions (exact):
  - Crisis-probability threshold: 3 percent (highly pervasive systemic crisis scenario).
  - Severity: 85th percentile of kernel distribution for EMDCs; less severe for AEs.
  - FDI inflows: decline by 25 percent from baseline projections in both 2016 and 2017 for both EMDCs and AEs.
  - Short-term debt rollover rates:
    - EMDCs: 70 and 88 percent for 2016 and 2017, respectively.
    - AEs: 85 and 95 percent for 2016 and 2017, respectively.
  - Medium- and long-term debt rollover rates:
    - EMDCs: 50 and 65 percent in 2016 and 2017, respectively.
    - AEs: 70 and 90 percent in 2016 and 2017, respectively.
  - Reserve adequacy lower bound: 100 percent of the ARA metric or 100 percent of short-term debt (where ARA unavailable).
- Supply scenarios (before potential Fund engagement)
  - Full access scenario (assumptions exact):
    - Countries with adequate reserves (above 100 percent ARA or 100 percent short-term debt) run down reserves by a maximum of 25 percent, but not below reserve adequacy lower bound.
    - Countries with a current or historical swap line can immediately deploy (or renew the historical one and deploy) it.
    - RFA members can access resources up to maximum access limit (often requiring Fund engagement).
    - ESM assumed unlimited—euro area policymakers flexibly increase size under euro re-denomination risk.
    - This is an admittedly extreme assumption.
  - Limited access scenario (differences from full access exact):
    - All swap lines except standing ones between the six reserve-currency issuing central banks are inaccessible (excluded swap lines mainly Chinese, untested, trade-limited, activation slow, high conversion costs).
    - ESM assumed to have current, not unlimited, size.
    - Under this scenario, Fund resources are presented as residual financing gap.
- Key operational thresholds and parameters (preserved exactly):
  - Crisis-probability threshold used in core analysis: 3 percent.
  - Shock percentiles: 85th percentile for EMDCs (with less severe shocks for AEs).
  - Shock application period: 2016–17.
  - Reserve adequacy lower bound: 100 percent of the ARA metric or 100 percent of short-term debt (where ARA unavailable).
  - Maximum reserves drawdown in full access scenario: 25 percent (but not below reserve adequacy lower bound).
  - Short-term debt rollover rates assumed:
    - EMDCs: 70 percent (2016), 88 percent (2017).
    - AEs: 85 percent (2016), 95 percent (2017).
  - Medium- and long-term debt rollover rates assumed:
    - EMDCs: 50 percent (2016), 65 percent (2017).
    - AEs: 70 percent (2016), 90 percent (2017).
  - FDI inflows assumed decline: 25 percent in both 2016 and 2017 (EMDCs and AEs).

*Source: Excerpt from IMF staff analysis in the provided PDF content.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context: recent reforms and the role of the GFSN
- The Global Financial Safety Net (GFSN) comprises international reserves, central bank bilateral swap arrangements (BSAs), regional financing arrangements (RFAs), Fund resources, and market-based instruments. Its three main objectives are: (i) provide insurance for countries against a crisis; (ii) supply financing when crises hit; and (iii) incentivize sound macroeconomic policies.  
- The Fund overhauled surveillance and lending frameworks after the global financial crisis, introduced the Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL), and implemented the 2010 Quota and Governance reforms. The introduction of the FCL and PLL "filled important gaps", but the use of these new instruments has been limited.  
- Past and proposed further Fund reforms stalled because of the difficulty in building consensus for a broad and complex set of issues. There is little agreement internationally on the adequacy, strengths, and weaknesses of the current GFSN. The paper aims to build consensus around a common diagnosis to help identify whether and where further reform is needed.

### Diagnosis: architecture, size, fragmentation, and coverage
- The GFSN has expanded significantly since the global financial crisis:
  - Growth mainly reflects continued accumulation of reserves and expansion of official bilateral and multilateral arrangements, including BSAs and RFAs.  
  - The growing relative importance of BSAs and RFAs—some of which are untested—has led to a more decentralized and uncertain safety net.  
  - Lack of coordination across elements has resulted in fragmentation.
- Coverage is uneven and financing gaps remain:
  - There are sizeable financing gaps in many economies, especially systemic and gatekeeper emerging markets (EMs), even when assuming full access to all GFSN elements, undermining effectiveness in preventing contagion.
- The expanded but fragmented GFSN is costly, unreliable, and conducive to moral hazard:
  - Most GFSN elements are very costly—either financially (reserves and market-based instruments) or politically (due to stigma—the Fund and, to some extent, RFAs). Some elements also entail global costs (reserves).  
  - Inadequate predictability of many resources (in particular BSAs and RFAs) and lack of reliable cover for the full duration of shocks (most elements provide time-bound support) incentivize an over accumulation of reserves.  
  - Fragmentation and lack of adequate policy content in most elements reduce appropriate incentives for sound policies, raise risk of crises, and encourage facility shopping.
- Shortcomings differ across country groups and coordination remains challenging:
  - Reserve currency-issuing advanced economies (AEs) are best served by the current GFSN; non-systemic non-gatekeeper EMs are the least adequately served.  
  - Systemic and gatekeeper EMs face inadequate predictability and reliability from BSAs and RFAs, and high financial costs from reserve accumulation or political costs from stigma associated with Fund financing.  
  - Most countries would need to use several elements of the safety net to fully cover financing needs, which could raise coordination issues, particularly for vulnerable EMs and AEs.

### Contextual drivers increasing demand for a stronger GFSN
- Structural and cyclical global developments are likely to raise demand for stronger safety nets:
  - EMDCs are now home to 85 percent of the world’s population and produce 40 percent of global GDP (at market prices).  
  - China now accounts for 10 percent of global trade; EMDCs represent 38 percent of global trade (up by 16 percentage points since 2000).  
  - Global trade and financial integration have increased (trade networks more interconnected; banking links have grown dramatically in size), raising the risk of systemic liquidity crises and contagion.  
  - Ongoing transitions and risks include: China’s transition, an unprecedented decline in commodity prices, diverging monetary policies in main reserve currency countries, higher public debt, policy rates near the lower bound, and waning political support for difficult structural reforms. These factors reduce policy space and increase the value of a strong GFSN.

### Moving forward: priorities for rebuilding multilateral consensus and reforms
- Timing and rationale:
  - With more than five years of experience since earlier reforms and the recent implementation of the 2010 Quota and Governance reforms, now is viewed as an appropriate time to reassess the GFSN and build consensus on reform priorities.  
- Initial reform direction:
  - Early reforms could aim to strengthen the Fund and its cooperation with other GFSN elements. A more cooperative system could be more effective globally but would require significant reforms to the Fund.  
- Next steps:
  - There is increasing attention to systemic GFSN issues from the international community. A follow-up IMF staff paper could lay out more specific proposals to identify possible avenues for reform.

*Prepared by a staff team from the Strategy, Policy and Review Department; approved by Siddharth Tiwari.*

### Box 1. Systemic and Gatekeeper Economies

### Box 1. Systemic and Gatekeeper Economies

### Definitions and Identification Methodology
- Systemic countries:
  - Ranked by an index that, at equal weights, combines: (i) size of country contributions to global markets (trade or financial—bank credit and portfolio investment) and (ii) centrality measured by eigenvector centrality.
  - Criterion: country is in the top 25 countries for each year during 2011–14 for trade, and either each year during 2011–13 for bank credit or each year during 2011–14 for portfolio investment.
- Gatekeeper countries:
  - Identified using methodology in IMF (2012a-b) on an aggregate network consolidating five networks: global trade and financial data (BIS locational and consolidated bank credit, FDI, and portfolio data).
  - Insignificant links are dropped using a pruning threshold determined each year to maximize the number of non-overlapping clusters; threshold is broadly stable at 12.3 (out of a range of 0-100).
  - Aggregate link between country pairs: geometric average of link weights that are above the threshold, unless the difference between the smallest and largest link weight is greater than 50, in which case the largest weight is used.
  - Clique Percolation Method identifies potentially overlapping clusters; countries belonging to multiple clusters are classified as gatekeepers (act as links transmitting trade or financial conditions between clusters).

### Systemic Countries (by group)
- Systemic AEs:
  - Australia, Belgium, Canada, France, Germany, Italy, Japan, Korea, Netherlands, Singapore, Spain, Switzerland, the UK, the US.
- Systemic EMs:
  - Brazil, China, India, Mexico, Russia.

### Gatekeeper Countries (by group) and overlap
- Gatekeeper AEs:
  - Austria, Germany, Greece, Italy, Japan, Singapore, Spain, Sweden, Switzerland, the UK, the US.
  - Note: most of these countries are also systemic.
- Gatekeeper EMs:
  - Brazil, China, Panama, South Africa, Turkey.

### Key methodological thresholds and rules (exact)
- Systemic trade ranking requirement: top 25 countries each year during 2011–14.
- Systemic bank credit ranking requirement: top 25 each year during 2011–13.
- Systemic portfolio investment ranking requirement: top 25 each year during 2011–14.
- Pruning threshold for aggregate network: broadly stable at 12.3 (out of a range of 0-100).
- Aggregate link construction rule: geometric average of link weights above threshold, unless difference between smallest and largest link weight > 50, then use the largest weight.
- Cluster detection: Clique Percolation Method.

*Source: IMF staff estimates.*

### 23.      Since the crisis, the availability of and access to Fund resources has also been

### _031016 - 23.      Since the crisis, the availability of and access to Fund resources has also been

### Enhancements to Fund resources since the crisis
- General and special SDR allocation totaling more than US$280 billion in 2009—a near tenfold increase in SDRs.
  - EMDCs received over US$100 billion.
  - DCs received around US$20 billion, representing, on average, a 20 percent increase in their own reserves.
- Increased borrowing and contingent resources:
  - US$500 billion expansion of the New Arrangements to Borrow (NAB).
  - Bilateral borrowing agreements of about US$400 billion.
  - Ratification of the 14th General Review of Quotas doubled the Fund’s permanent resources to US$660 billion, resulting in a corresponding rollback in the NAB.
- Overhaul of the lending framework:
  - Doubling of access limits.
  - Streamlining of conditionality.
  - Introduction of new financing instruments that can be treated as precautionary: the FCL and PLL.
  - Introduction of instruments for rapid financial assistance: the Rapid Financing Instrument (RFI) and Rapid Credit Facility (RCF).
  - Revamp of the lending architecture for DCs in 2010 with new facilities tailored to their needs and a doubling of access limits; access limits were raised again in 2015 (IMF, 2015).

### Hedging instruments
- Use of commodity hedging by sovereigns has grown since mid-2000 in response to increased volatility in commodity prices.
- Examples of sovereign hedging:
  - Commodity importers: Morocco and Panama for oil.
  - Commodity exporters: Mexico for oil, Ghana for cocoa, South Africa for gold, Zambia for copper.
- Trading venues:
  - Conventional exchanges in Chicago, London, and New York.
  - Exchanges established in Asia and Latin America (1990s).
  - More limited trading in Africa (Kenya, Mauritius, and South Africa).

### A more fragmented Global Financial Safety Net (GFSN)
- While reserves still dominate the safety net, public elements—particularly RFAs and BSAs—have increased their contributions.
- Share of international reserves in total safety net resources has fallen since 2007, but reserves remain the largest component.
- The IMF, the second largest component pre-crisis, has increased its share only marginally and has fallen behind RFAs and BSAs.
- RFAs and BSAs have expanded the most.
- Decentralization and lack of coordination among safety net elements have led to an increasingly fragmented safety net.
- Proliferation of RFAs and BSAs—mostly untested and less predictable—has likely increased uncertainty in the system as a whole, raising concerns about adequacy and certainty of coverage.
- Country-level implications:
  - Fragmentation produces highly uneven coverage: some countries have access to unlimited resources (e.g., reserve currency-issuing AEs), while others can rely only on limited reserves and the Fund (e.g., most DCs).
  - Some countries (smaller systemic and gatekeeper AEs) have a substantial portion of their overall resources classified as “uncertain” resources.

### Diagnosis of the safety net — approach and criteria
- The diagnosis assesses the GFSN’s size and coverage, individual elements, and the overall system from borrower and global perspectives.
- Three-part structure:
  1. Assess size and coverage: Is current GFSN size sufficient? Is coverage adequate across systemic economies and gatekeepers?
  2. Assess each element against five criteria aligned with GFSN objectives:
     - Predictability: Will resources be available and accessible, and can terms be anticipated?
     - Speed: How quickly can resources be activated and disbursed?
     - Reliability: Do resources provide coverage for the entire duration of the shock (state-contingent) or are they easy to renew/extend?
     - Costs: Financial and political costs (including stigma).
     - Policies: Do associated policies provide the right ex-ante and ex-post incentives regarding external imbalances?
  3. Diagnose the system as a whole:
     - Borrower’s perspective: predictability, speed, reliability, cost, and combination of GFSN elements.
     - Global perspective: same criteria plus policy incentives—does the GFSN insure against risks, limit contagion, provide crisis financing, and ensure sound policies?

### Size and coverage findings (scenario analysis)
- Methodology:
  - Scenario analyses compute country-level potential financing gaps = financing needs − total available financing sources (see Annex III in source).
  - Four scenarios differ by prevalence of shocks and severity of shocks.
  - Prevalence ranges from very pervasive (crisis probability threshold of 3 percent) to pervasive (crisis probability threshold of 5 percent).
  - Severity ranges from the 75th to 85th percentile of the distribution of shocks based on historical systemic crises.
  - The widespread shock is defined as the shock with a crisis probability of 3 percent and severity at the 85th percentile.
- Aggregate adequacy:
  - Under a widespread shock and current access levels, financing gaps would arise.
  - GFSN resources would be just sufficient to cover the aggregate financing gap only under very strong assumptions of full access to all GFSN elements, including:
    - (i) resources are unlimited under the ESM, and used up to maximum access limits for other RFAs;
    - (ii) all active swap lines can be tapped, and all historical lines (especially those extended during the global financial crisis but discontinued after) can be renewed with the same amounts;
    - (iii) the entire lending capacity of the Fund is deployed (including both the current forward commitment capacity and bilateral loans).
- Distributional/coverage findings:
  - Under the full access scenario (including unlimited access to the ESM), almost all AEs in the country sample are fully covered or have more than adequate financing resources.
  - In contrast, all EMs but one have financing gaps (before potential Fund engagement), particularly large for systemic and gatekeeper EMs.
  - If no swap lines and limited RFA financing are assumed, financing gaps would also emerge in some AEs, mainly in the euro area.
- Reference statistic shown in accompanying figure:
  - The blue dotted line in the figure indicates the new cumulative normal access limit of 435 percent of quota.

*Source: Excerpt from IMF staff analysis in the provided PDF content.*

### 30.      Most elements of the safety net do relatively well in terms of speed and

### 30.      Most elements of the safety net do relatively well in terms of speed and predictability, but less so on reliability, and poorly on cost and policies.

### Overview
- Most elements of the GFSN score well on speed and predictability, less so on reliability, and poorly on cost and policies.
- Individually, each layer has strengths and weaknesses; none score well against all criteria.
- Examples cited:
  - Reserves: predictable but costly.
  - BSAs: less predictable but less costly.
  - RFAs: generally neither predictable nor reliable, and can take a long time to deploy.
  - Market-based hedging: quick and predictable but cannot directly enforce policy commitment.
  - The Fund: scores highly on policies but has shortcomings on speed and reliability.
- Nearly all GFSN elements score poorly against the cost and policies criteria.

### Summary table scores (as presented)
- Characteristics / Reserves / Swaps / IMF / RFAs / Hedging
  - Predictability: 2 1 2 1 2
  - Speed: 2 2 1 0 2
  - Reliability: 1 1 1 1 1
  - Cost: 0 2 0 1 0
  - Policies: 0 1 2 1 0
- Legend: Red (0) = Limited/insufficient, Yellow (1) = Some, Green (2) = Extensive/adequate

### Predictability
- General statement: Predictability ranges from almost certain (reserves, Fund, and market-based insurance) to somewhat certain (BSAs and RFAs).
- Key bullets:
  - Reserves: most predictable; central banks can access with certainty and flexibility; deployable for multiple objectives.
  - BSAs between reserve currency AEs: predictable access and terms (central banks can create their own currency reserves on demand). Other BSAs: formal expiration dates (usually no longer than a few years) and limited access, making future access uncertain and dependent on domestic policy considerations and non-transparent ex-ante screening by liquidity-providing central banks.
  - Fund financing (crisis prevention and resolution): accessible to near-universal membership with varying access limits and requirements. Availability of precautionary arrangements (FCL/PLL, SBAs) depends on fulfillment of specific criteria. Access normally varies from 435 percent of quota, net of scheduled repurchases (cumulative access limit for the life of an SBA treated as precautionary) to no cap in access limit (FCL). Size of Fund arrangements relative to individual country GDP has grown much larger since the crisis, reflecting FCL and PLL and increases in SBAs.
  - RFAs: very heterogeneous; large variation in resource availability and less predictable access. Most RFA resources concentrated in Europe and Asia; many EMs not covered. Assistance forms vary and many instruments untested. Access sometimes depends on existence of a parallel Fund-supported program (BRICs CRA, CMIM, and to some extent ESM).
  - Hedging instruments for commodity prices: generally available, supported by established private sector markets; currently used by a few sovereigns.

### Speed
- General statement: Reserves, swaps, and market-based insurance generally deliver rapid deployment; RFAs tend to be slow. Fund disbursements often delayed due to agreement on terms.
- Key bullets:
  - Reserves: most rapid; highly liquid securities accessible and deployable almost immediately by central banks.
  - BSAs: once established, can provide relatively fast access, especially for reserve currencies; activation speed varies with approval procedures of liquidity-providing central bank; non-reserve currency swaps may require conversion with further delays.
  - Fund precautionary instruments (FCL and PLL): can be made available relatively quickly if qualification criteria met and commitment fees paid. In crisis resolution, significant lags often occur while terms and conditionality are agreed.
  - RFAs: generally more difficult to unlock; delays from complex negotiations balancing borrower conditionality and member states’ responsibilities (e.g., ESM). RFA resources contingent on a Fund arrangement can face stigma-related delays (e.g., BRICs CRA and CMIM).
  - Hedging instruments: can provide immediate relief conditional on contract design, smoothing export income and reducing need to use public safety net.
- Note: According to latest COFER survey data from Q3 2015, about 60 percent of recorded reserves are denominated in US dollars.
- Note: Countries with existing precautionary arrangements can immediately access resources.

### Reliability
- General statement: All elements provide only limited coverage for prolonged crises; most instruments are time-bound rather than state-dependent.
- Key bullets:
  - Reserves: generally reliable but with diminishing benefits beyond certain levels; less reliable for longer shocks as countries reluctant to use more than about 25 percent of their reserves.
  - BSAs: typically short duration and renewable; renewal during a crisis can be non-trivial, especially for non-reserve currency swaps where liquidity-providing central banks have veto powers.
  - Fund resources: more reliable than other elements but provide limited coverage for prolonged shocks. Precautionary arrangements typically 6 months to 3 years unless successor arrangement approved; subject to periodic reviews (quarterly or semi-annually for SBAs treated as precautionary, semi-annually for PLLs, annually for two-year FCLs). Crisis-resolution arrangements typically 3 to 4 years with phased financing tied to conditionality and reviews. The Fund has financed member needs for longer periods since the global crisis via successor SBAs and EFFs rather than increasing maximum permitted length for arrangements.
  - RFAs: reliability varies across arrangements and instruments; largely untested except for ESM which has provided financing with long maturities (up to 20 and 30 years). RFA reliability for continued support through longer crises remains untested; less dependable for region- or system-wide shocks.
  - Hedging instruments: typically short-term contracts (between 1 and 2 years); less liquid and more costly for longer maturities depending on commodity shock.

### Cost
- General statement: Most elements have significant financial costs (reserves and market-based insurance) or political costs (IMF, market-based insurance, and some RFAs).
- Key bullets:
  - Reserves: most financially costly for non-reserve currency issuers. Net financial cost proxy (spread between interest on sterilization instruments and interest received on reserve assets) — Fund analysis suggests median cost for EMs averaged around 200 bps during 2001–09. Sterilization costs increase with higher reserve levels. Costs compounded by exchange rate appreciation via falling value of interest payments received and capital losses on reserve stock.
  - BSAs: typically cheapest FX liquidity insurance; reserve-currency swap arrangements carry no commitment costs, borrowing costs average 20–50 bps over a reference interest rate. Other currency swap lines typically more expensive.
  - Fund resources: relatively low financial cost. Commitment fees for arrangements treated as precautionary on a sliding scale up to 60 bps. Lending rates include basic rate of charge (SDR interest rate plus margin currently set at 100 bps) and surcharges depending on level and duration of credit outstanding. Surcharge of 200 bps paid on credit outstanding above 187.5 percent of quota; surcharge rises to 300 bps if credit remains above this level after three years for SBAs or 51 months for EFFs. Significant associated political cost ("stigma") can delay or prevent requesting Fund support.
  - RFAs: typically more cost effective than individual reserve accumulation due to reserve pooling and avoidance of fiscal sterilization costs. Lending rates often unspecified but tend to be low; example: ESM charged around 100 bps. RFA support can be subject to political stigma-related costs, particularly when tied to Fund financing.
  - Hedging instruments: established commodity market exchanges may make hedges less prohibitively expensive than other market-based instruments, which can carry excessively high risk premia. Political economy considerations may add costs; if shocks do not materialize, hedging costs may be more visible than other insurance forms.
- Note: The average maturity of GRA credit outstanding has increased from 4 years (since 2000) to 6.5 years.

### Policies (conditionality, surveillance, and moral hazard mitigation)
- General statement: Strong policy incentives help mitigate moral hazard, prevent crises, and encourage faster adjustment. Only the Fund has an established conditionality framework that is regularly and transparently reviewed and updated. Most other elements have limited requirements, ranging from ex-ante screening to reliance on Fund conditionality to no explicit requirements.
- Key bullets:
  - Reserves, market-based instruments, and many BSAs and RFAs: no explicit requirements.
  - Some BSAs: ex-ante screening.
  - Some RFAs: rely on Fund conditionality.
  - Fund: established conditionality framework; financing provided “temporarily” and under “safeguards” with conditioning on policy implementation and safeguards to preserve revolving nature of resources and members’ capacity to repay the Fund.
- Moral hazard concerns (paragraph 31):
  - Availability of global safety net could provide negative incentives to borrowers, creditors, and reserve currency issuers:
    - Borrowers: may accumulate excessive imbalances during capital inflows and avoid needed adjustment after a crisis.
    - Creditors: may be more willing to lend under expectations of bail-outs, leading to underpricing of risk.
    - Reserve currency issuers: may run looser policies when facing high demand for their assets, producing negative global spillovers.
- Policy recommendations for mitigating moral hazard (paragraph 32):
  - Strong policy incentives for macroeconomic stability ex-ante and appropriate correction of imbalances ex-post.
  - Surveillance is the primary tool through which GFSN elements can encourage adoption of policies to ensure stability and minimize crisis risks.
  - Ex-ante screening or conditionality could provide additional incentives to maintain very strong policies to meet qualification criteria and access safety-net elements.
  - Ex-post financing combined with policy incentives would help ensure proper adjustment.

*Source: IMF staff estimates and analysis.*

### 33.      Policy requirements have been shifting from ex-post to ex-ante since the global

### _031016 - 33.      Policy requirements have been shifting from ex-post to ex-ante since the global

### Shift from ex-post to ex-ante policy requirements
- Policy requirements have been shifting from ex-post to ex-ante since the global financial crisis.
- Motivations for the shift: increased interconnectedness; changing nature of global shocks from the current to capital account; lessons from past crises creating the need for insurance to limit contagion.
- The concern that recent changes in conditionality increase moral hazard is not supported by the experience of the FCL users.

### Comparative policy frameworks across GFSN elements
- Only the Fund has an established macroeconomic policy framework that is regularly and transparently reviewed and updated.
- Reserves
  - Can be accumulated and used without any explicit policy requirements or conditionality.
  - Indirect policy considerations affect accumulation and use in the event of a shock: "Countries with weaker policies would face higher costs associated with accumulating reserves, and so the quality of policies is factored into the cost of accumulation, analogous to the pricing of market-based insurance."
  - In countries with misaligned exchange rates or underlying macroeconomic fundamentals that need adjustment, reserves are not effective in alleviating volatility (IMF, 2011a and IMF, 2014a).
- BSAs (Bilateral Swap Arrangements)
  - Rely mostly on ex-ante screening of borrowers and have limited ex-ante or ex-post policy conditionality.
  - Setup and maintenance depend on provider domestic policy priorities.
  - Example: Fed swap lines during the global financial crisis reflected US domestic concerns and borrowers’ macroeconomic fundamentals; China’s objectives include bilateral trade promotion and renminbi internationalization, with borrowers’ macro fundamentals not seeming to play a significant role.
  - Degree of policy monitoring by swap providers appears limited; policy leverage is largely binary (renewal/withdrawal) though size could be adjusted for credit risk.
  - No transparent/public information regarding qualification or review process for countries receiving swap lines.
- IMF
  - Comprehensive tools and policies: surveillance and conditionality for use of resources, regularly reviewed internally and subject to external review.
  - Instruments such as the FCL and PLL have ex-ante conditionality; most Fund arrangements are subject to ex-post review on a regular basis.
  - Leverage is strong in financing arrangements with inadequate policies through delaying reviews or cancelling arrangements, but limited in bilateral and multilateral surveillance.
- RFAs (Regional Financing Arrangements)
  - Range from comprehensive own sets (EU facilities) to reliance on the Fund (CMIM and BRICs CRA above certain access thresholds) to none (FLAR).
  - EU: broad policy requirements; treaty-enforced surveillance for fiscal policy; enforcement implementation has been mixed; ex-post conditionality similar to Fund but subject to greater political influence (approval by parliaments).
  - CMIM: developing surveillance; IMF policy requirements for access above 30 percent; limited policy advice; financing above 30 percent subject to Fund-supported program and Fund conditionality.
  - BRICs CRA: IMF policy requirements for access above 30 percent; self-reporting; IMF review of arrangements; financing above 30 percent subject to a Fund-supported program.
  - So far there has been no drawing of either the CMIM or the CRA; leverage cannot be assessed.
  - Other RFAs vary; FLAR has none.
- Hedging instruments
  - No explicit policy requirements.
  - Similar to reserves: countries with weaker policies face higher costs, but no direct ex-ante or ex-post policy requirements and enforcement.

### Tabled policy scores (level of ex-ante and ex-post policies and leverage)
- Scoring legend: 0 = Limited policies, 1 = Some policies, 2 = Extensive policies.
- Table 2 (Policy Content of the Elements) — Overall scores listed in source:
  - Reserves: Ex-ante Policy = No direct requirements; Ex-post Policy = No direct requirements; Leverage = None; Overall Score = 0
  - BSAs: Ex-ante Policy = Varies by issuer. Ex-ante screening; Ex-post Policy = Limited; Leverage = None/withdrawal; Overall Score = 1
  - IMF: Ex-ante Policy = Ex-ante conditionality for the FCL/PLL; surveillance; Ex-post Policy = Ex-post conditionality (except for the FCL)/review of arrangements; Leverage = Conditionality for financing only; surveillance; Overall Score = 2
  - RFAs:
    - i. EU: Ex-ante Policy = Surveillance/comprehensive policy requirements at EU level; Ex-post Policy = Ex-post conditionality/review of arrangements; Leverage = Strong enforcement rules for surveillance; Overall Score = 2
    - ii. CMIM: Ex-ante Policy = Surveillance; IMF policy requirements for access above 30 percent; Ex-post Policy = Surveillance; IMF review of arrangements; Leverage = Untested; Overall Score = 1
    - iii. BRICs CRA: Ex-ante Policy = IMF policy requirements for access above 30 percent; Ex-post Policy = Self-reporting; IMF review of arrangements; Leverage = Untested; Overall Score = 1
  - Hedging instruments: Ex-ante Policy = No direct requirements; Ex-post Policy = None; Leverage = None; Overall Score = 0

### Diagnosis of the system from borrower and global perspectives
- Overall assessment: Current GFSN serves reserve currency-issuing AEs well; serious shortcomings for all other borrower groups; may not be effective in preventing global spillovers and contagion.
- Key shortcomings:
  - Inadequate predictability and reliability (from BSAs) and high financial costs (from reserve accumulation) or political costs (from Fund stigma) for systemic and gatekeeper EMs.
  - Most countries would need to use several GFSN elements to fully cover financing needs, raising coordination issues.
  - From a global perspective, GFSN fails to provide appropriate policy incentives and cost efficiency; insufficient predictability and reliability lead to over accumulation of reserves.

### Availability and effectiveness of GFSN elements by country group
- Country groups used: reserve currency-issuing AEs; other AEs; systemic and gatekeeper EMs; other EMs; DCs.
- Summary of group-specific findings:
  - Reserve currency-issuing AEs
    - Best served by current GFSN.
    - Reserves (can be printed on demand) and BSAs (unlimited in size and time) sufficient to cover needs.
    - Euro area countries are a special case: printing reserves only reliable for union-wide shocks; idiosyncratic shocks require other means (same options as "Other AEs").
  - Other AEs
    - Cannot issue reserve currencies or have unlimited swap lines.
    - Good probability of securing a BSA from a reserve currency central bank in case of a global shock, but less predictable/reliable than reserve currency AEs.
    - Fund financing can be anticipated within normal access limits; FCL/PLL qualifications and exceptional access arrangements are uncertain.
    - RFAs less predictable but lower political costs.
    - Commodity price hedging meaningful for a subset.
  - Systemic and gatekeeper EMs
    - BSAs from major central banks neither predictable nor reliable; may be extended during global shocks but discontinued after crisis peak.
    - Heterogeneity: larger economies more likely to access reserve currency BSAs (Fed swap line evidence).
    - BSAs among systemic/gatekeeper EMs (often involving China) may take longer to activate.
    - RFAs unlikely to assist net creditors within arrangements.
    - Stigma associated with the Fund deters use of Fund instruments including FCL/PLL.
    - Commodity price hedging relevant for commodity exporters but costly.
  - Other EMs
    - Near-zero probability of obtaining reserve currency swap lines.
    - BSAs from major trading partners may restrict financing to trade.
    - Many part of RFAs but these are often poorly tested, reducing reliability and speed.
    - The Fund offers good predictability within normal access limits and a known timeline; stigma can vary by region.
  - DCs (Developing Countries)
    - Most limited set of options: reserves, the Fund, and development banks are generally the sole options.
    - Self-insurance (reserves) is particularly expensive given high opportunity cost.
    - The Fund is the most predictable, reliable and affordable option; generally carries limited stigma for DCs.
    - The Fund does not currently have an FCL or PLL-type instrument specifically for DCs.
    - Commodity exporters and frontier markets: commodity price hedging attractive but with hefty financial cost.

### Tabled characteristic scores by country group (preserve exact scores)
- Table excerpts with scores as provided:
  - Euro Area countries characteristics table (fragment):
    - Predictability: Reserve currency AEs = 2, Other AEs = 1, Systemic and gatekeeper EMs = 1, Other EMs = 1, DCs = 2
    - Speed: Reserve currency AEs = 2, Other AEs = 2, Systemic and gatekeeper EMs = 2, Other EMs = 1, DCs = 1
    - Reliability: Reserve currency AEs = 2, Other AEs = 1, Systemic and gatekeeper EMs = 1, Other EMs = 0, DCs = 1
    - Cost: Reserve currency AEs = 2, Other AEs = 1, Systemic and gatekeeper EMs = 0, Other EMs = 0, DCs = 0
    - Policies: Reserve currency AEs = 0, Other AEs = 1, Systemic and gatekeeper EMs = 1, Other EMs = 1, DCs = 1
  - Availability/effectiveness matrix (selected entries preserved)
    - Reserve currency AEs (Reserves, Swaps, IMF, RFAs, Hedging)
      - Predictability: Reserves = 2, Swaps = 2, IMF = N/A, RFAs = N/A, Hedging = 2
      - Speed: Reserves = 2, Swaps = 2, IMF = N/A, RFAs = N/A, Hedging = 2
      - Reliability: Reserves = 2, Swaps = 2, IMF = N/A, RFAs = N/A, Hedging = 1
      - Cost: Reserves = 2, Swaps = 2, IMF = N/A, RFAs = N/A, Hedging = 0
    - Systemic and gatekeeper EMs (Reserves, Swaps, IMF, RFAs, Hedging)
      - Predictability: 2 1 2 1 2
      - Speed: 2 2 1 0 2
      - Reliability: 1 1 1 1 1
      - Cost: 0 2 0 1 0
    - Other AEs (Reserves, Swaps, IMF, RFAs, Hedging)
      - Predictability: 2 1 2 1 2
      - Speed: 2 2 1 0 2
      - Reliability: 1 1 1 1 1
      - Cost: 1 2 0 1 0
    - Other EMs (Reserves, Swaps, IMF, RFAs, Hedging)
      - Predictability: 2 0 2 1 2
      - Speed: 2 2 1 0 2
      - Reliability: 1 0 1 1 1
      - Cost: 0 2 0 1 0
    - DCs (Reserves, Swaps, IMF, RFAs, Hedging)
      - Predictability: 2 N/A 2 N/A 2
      - Speed: 2 N/A 1 N/A 2
      - Reliability: 1 N/A 1 N/A 1
      - Cost: 0 N/A 1 N/A 0

### Best available combinations and financing implications
- Method: Rank GFSN instruments by characteristics (predictability, speed, reliability, cost) and determine how far down list a country group needs to go to fully cover financing needs for the median financing gap (zero in full access scenario).
- Summarized "best available" outcomes:
  - Reserve currency-issuing AEs: can fully rely on reserves and swap lines in systemic crises.
  - Other AEs: mostly rely on swap lines and own reserves; vulnerable ones may need Fund or RFA financing (or co-financing).
  - Systemic and gatekeeper EMs: need swap lines (if available), run down reserves, and obtain a Fund arrangement; more vulnerable may require Fund arrangements entailing exceptional access.
  - Other EMs: run down reserves, tap swap lines where available, and obtain a Fund arrangement, often entailing exceptional access (or co-financing with an RFA).
  - DCs: rely on the Fund and own reserves, with potential support from unpredictable bilateral or multilateral creditors.
- Coordination challenges
  - Most countries need multiple GFSN elements to fully cover needs, increasing coordination complexity.
  - High coordination challenges for vulnerable EMs and AEs who may rely on IMF/RFA co-financing with overlapping conditionality on macro-critical issues but different rules and objectives.

### Constraints based on domestic policies and shock nature
- Borrowers with policy adjustment needs are less likely to obtain BSAs or FCL/PLL arrangements.
- Self-insurance via reserves or precautionary SBA from the Fund are available but more costly financially and politically than for "innocent bystanders."
- Nature of shocks matters:
  - Swap lines not useful for protracted shocks or sovereign crises.
  - Commodity price hedging insures only terms-of-trade shocks.
- Country grouping maps to main shocks:
  - Reserve currency AEs: banking sector liquidity crises.
  - Other AEs: banking liquidity shocks and sovereign debt crises.
  - EMs: capital flow shocks.
  - DCs: trade shocks.

### System-wide conclusion
- The current GFSN fails to deliver in key dimensions for all country groups except reserve currency-issuing AEs.
- Other AEs: some access to most elements, but adequacy is limited except for speed of deploying financing via swap lines.
- Systemic and gatekeeper EMs: inadequate predictability, reliability, and face high costs (financial and political).
- Other EMs: worst-off group—insufficient reliable sources to last through prolonged shocks and very high costs.
- DCs: somewhat better off than other EMs due to Fund access at lower political cost, but reserve accumulation is especially costly; lack of FCL/PLL-type instruments for DCs is a gap.
- Overall: insufficient predictability and reliability of resources contributes to over accumulation of reserves and a GFSN that does not adequately limit contagion, allocate resources efficiently, or ensure multilaterally consistent policies.

*Source: IMF staff estimates.*

### 41.      From a global perspective, ensuring sound policies is a key objective of the GFSN,

### _031016 - 41.      From a global perspective, ensuring sound policies is a key objective of the GFSN,

### Diagnosis: primary weaknesses of the current GFSN
- Fails to deliver adequate policy incentives in all country groups, especially in reserve currency-issuing AEs, which could generate global spillovers.
- Countries that can “print their way out of a crisis” and the demand for safe haven assets by non-reserve currency issuers reduce the impetus to improve policies.
- Other central banks may extend and maintain swap lines out of self-preservation even if counterparty policies are weak.
- Limited policy incentives across groups increase the frequency and severity of idiosyncratic and systemic crises.
- Lack of adequate ex-ante policy incentives implies a need for a larger GFSN to meet crisis financing needs — an inefficient use of resources.

### Fragmentation and its effects on incentives and behavior
- Multiple institutions and instruments with varying policy requirements create risks of arbitrage and facility shopping.
- Countries prefer GFSN elements with inadequate or no policy content, delaying engagement with institutions that condition support on policy adjustment.
- Delays in accessing appropriately conditioned support can worsen shocks domestically and exacerbate contagion.
- Need to access multiple GFSN elements creates coordination challenges:
  - In programs co-financed by the Fund and an RFA (e.g., vulnerable other AE or EM), differences in objectives, rules, and policy frameworks (e.g., debt sustainability assessments and need for debt restructuring) can result in protracted program discussions and delayed financing.
  - Political-level settlement of differences can prolong and complicate programs.
  - Differences in pricing of instruments can cause cross-subsidization and shifts in risk burden across institutions, reducing incentives to provide financing.

### Cost, predictability, reliability, and speed
- Cost:
  - Best available combination for each country group involves reserve accumulation — a financially costly form of self-insurance with negative externalities.
  - Market distortions and technical constraints raise the cost of risk transfer, impeding reserve pooling and risk sharing.
  - Institutions offering low financial costs often carry high political costs, delaying crisis prevention or resolution.
  - Reducing political costs is as important as, if not more than, reducing financial costs.
- Predictability and reliability:
  - Limited predictability of resource availability in a crisis leads to rapid reserve accumulation, especially in some systemic and gatekeeper EMs with high political cost of accessing Fund resources.
  - Markets often evaluate reserve adequacy against peer country reserves rather than economic fundamentals, prompting competitive reserve accumulation among EMs.
  - Over accumulation leads to global imbalances and diverts resources from productive investments.
  - Reliability is a universal problem for all countries except reserve currency-issuing AEs, particularly during prolonged shock periods.
  - Limited predictability (ex-ante prevention) and limited reliability (ex-post resolution) make the current GFSN ineffective in limiting contagion and ring-fencing innocent bystanders.
- Speed:
  - The current GFSN delivers relatively well on speed for most country groups thanks to reserve accumulation and expanded swap lines.
  - Other EMs and DCs are exceptions — they have been excluded from swap networks or have access only to untested swap lines.
  - Expansion of swap lines and BSAs to serve these excluded groups seems unlikely given domestic/regional mandates.

### Conclusions on adequacy and systemic implications
- The current configuration is too costly and creates conditions for moral hazard.
- Coverage is uneven and worsens when uncertain elements of the safety net are unavailable.
- Many protection elements are costly for borrowers:
  - Financially costly: reserves, commodity hedging.
  - Politically costly: the Fund.
- Most country groupings remain underserved, notably systemic and gatekeeper EMs lacking adequate access to reliable and predictable funding.
- Coordination between different elements remains a recurring problem.
- Fragmentation leads to:
  - (i) uneven coverage and sizeable financing gaps in key systemic and gatekeeper countries, worsening contagion-limiting effectiveness;
  - (ii) coordination challenges from needing multiple GFSN elements to cover financing needs;
  - (iii) facility shopping, producing inadequate policy incentives and increasing crisis frequency/severity.

### Potential role for reforming the Fund (objectives)
- The Fund could be improved to:
  - provide predictable and reliable financial support for crisis prevention and resolution;
  - reduce moral hazard by incentivizing sound policies at country and global levels;
  - reduce incentives for over accumulation of reserves and improve cost efficiency via global reserve pooling;
  - limit coordination problems among layers of the GFSN;
  - provide more even coverage across membership.
- Reforming the Fund could help change perception of Fund programs from stigma to a signal of strength.

### Possible toolkit and instrument changes discussed
- Options to revisit the Fund’s toolkit:
  - Provide immediate liquidity support and reliable cover for full duration of shocks to a wide range of countries to limit contagion.
  - Prequalification to ensure funds are readily available (enhancing speed and predictability) and reduce stigma (reducing costs).
  - State-dependency to ensure borrowers can rely on instruments throughout turmoil periods (strengthening reliability).
  - Strengthen cooperation among different GFSN layers; Fund monitoring or policy signaling could facilitate cooperation and reduce moral hazard.
  - Consider better-tailored support for country-specific shocks (e.g., commodity price declines).
- A follow-up IMF staff paper could lay out more specific reform proposals.

### Summary of past reform proposals (high-level)
- Reforms implemented after the global financial crisis included new financing instruments, higher access, and streamlining of conditionality, plus introduction of precautionary instruments.
- IMFC-called proposals sought to:
  - Sharpen surveillance of risks, spillovers, financial systems and external positions.
  - Promote crisis prevention and address systemic events through shorter-term liquidity lines, both bilateral and multilateral (the Global Stabilization Mechanism, GSM), and refinements to precautionary instruments.
  - Enhance global and regional cooperation with RFAs and reserve pool arrangements.
- More innovative earlier proposals (limited appetite) included:
  - Lending against collateral on a short-term basis as a substitute for policy conditionality where no policy adjustment is needed.
  - Instruments for market support during heightened market stress by guaranteeing new sovereign debt issuance and/or automatic purchase of secondary market bonds of pre-qualified countries.
  - Catalyzing the market for country insurance instruments such as commodity price hedging, natural disaster insurance, state-contingent bonds, or sovereign asset and liability management.

### Issues for discussion (as framed in the source)
- Do Directors agree with conclusions that:
  - The GFSN does not adequately cover all members?
  - The GFSN fails to deliver on cost and policies?
  - Many groups remain underserved and there is a need to improve predictability and reliability?
  - Better coordination is needed between various elements?
- Do Directors agree with the need for reforms to strengthen the Fund?

*ADEQUACY OF THE GFSN, INTERNATIONAL MONETARY FUND*

### Annex III. Financing Gap Estimates

### Annex III. Financing Gap Estimates

### Methodology overview
- Estimation uses scenario analysis with two steps:
  - (i) Calculate the demand for financing of each country under a set of plausible shock assumptions, based on historical crisis experiences.
  - (ii) Take into account the supply of financing from all sources—other than the Fund—under the current GFSN. If demand > supply, a financing gap arises, indicating the need for Fund financial engagement.
- The prevalence of a systemic crisis is captured by a threshold of crisis probability; countries with crisis probability above the threshold are assumed to face funding shocks.
- Probabilities of crises are obtained from the underlying estimates of the Fund’s Vulnerability Exercise.
- Shocks are applied to a two year period (2016–17). Country-level demand for financing is estimated as the financing needs arising from the shocks.

### Assumptions on prevalence and severity of shocks
- Crisis probability threshold used in the core scenario:
  - 3 percent crisis probability, which represents a highly pervasive systemic crisis scenario.
- Severity of shocks:
  - Shock size aligned with the 85th percentile of the kernel distribution for EMDCs; a somewhat less severe shock for AEs.
  - Specific shock parameter assumptions (as used in the shock scenario):
    - FDI inflows: decline by 25 percent from the baseline projections in both 2016 and 2017 for both EMDCs and AEs.
    - Short-term debt rollover rate:
      - EMDCs: 70 and 88 percent for 2016 and 2017, respectively.
      - AEs: 85 and 95 percent for 2016 and 2017, respectively.
    - Medium- and long-term debt rollover rate:
      - EMDCs: 50 and 65 percent in 2016 and 2017, respectively.
      - AEs: 70 and 90 percent in 2016 and 2017, respectively.
- The lower the crisis-probability threshold, the higher the number of countries facing shocks.

### Supply of financing under current GFSN — scenarios
Two scenarios are considered for supply (before potential Fund engagement):

- Full access scenario
  - Countries with adequate reserves (above 100 percent of the ARA metric, or 100 percent of short-term debt where ARA metric is unavailable) run down reserves by a maximum of 25 percent, but not below the reserve adequacy lower bound (100 percent of the ARA metric or short-term debt).
  - Countries with a current or historical swap line can immediately deploy (or renew the historical one and deploy) it to meet financing needs.
  - RFA members can access resources up to the maximum access limit (which often requires Fund engagement).
  - The ESM is assumed to be unlimited—euro area policymakers would flexibly increase the size of euro area firewalls under a euro re-denomination risk scenario (e.g., enhanced burden sharing, OMT activation).
  - This is noted as an admittedly extreme assumption.

- Limited access scenario
  - Two assumptions differ from the full access scenario:
    - All swap lines (current and historical) except the standing ones between the six reserve currency issuing central banks are inaccessible. These excluded swap lines are mainly Chinese swap lines, characterized as largely untested operationally, often limited to facilitating trade, could take very long to activate and have high conversion costs, and therefore may not be useful in a sudden stop scenario. Renewing historical swap lines is even more uncertain.
    - The ESM is assumed to have its current, rather than unlimited, size—enhanced burden-sharing may not be totally unrealistic under a tail risk scenario, but would most likely require time.
  - Under this scenario, the need for Fund resources is presented as a residual financing gap.

### Key operational thresholds and parameters preserved from the analysis
- Crisis-probability threshold used in core analysis: 3 percent.
- Shock percentiles: 85th percentile for EMDCs (with less severe shocks for AEs).
- Shock application period: 2016–17.
- Reserve adequacy lower bound: 100 percent of the ARA metric or 100 percent of short-term debt (where ARA unavailable).
- Maximum reserves drawdown in full access scenario: 25 percent (but not below the reserve adequacy lower bound).
- Short-term debt rollover rates assumed:
  - EMDCs: 70 percent (2016), 88 percent (2017).
  - AEs: 85 percent (2016), 95 percent (2017).
- Medium- and long-term debt rollover rates assumed:
  - EMDCs: 50 percent (2016), 65 percent (2017).
  - AEs: 70 percent (2016), 90 percent (2017).
- FDI inflows assumed decline: 25 percent in both 2016 and 2017 (EMDCs and AEs).

*Source: Annex III. Financing Gap Estimates*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2016/_031016.pdf_