Crisis Lessons For The IMF, Speech by John Lipsky, First Deputy Managing Director, International Monetary Fund, At the Council on Foreign Relations, New York
IMF News, December 17, 2008
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- Published: December 17, 2008
Near-Term Outlook
- Additional - and vigorous - policy action will be needed to avoid a serious global downturn.
- Measures needed:
- Stabilize financial systems.
- Monetary and budget measures to support final demand.
- Current financial market conditions:
- Funding and liquidity markets are still severely strained.
- Financial market deleveraging is still underway, underpinning a base case expectation of a substantial and sustained slowdown in credit growth through the coming year.
- Financial stresses have spread to emerging markets, where equity market downturns have equaled or outstripped those in advanced economy markets.
- IMF growth forecast revisions:
- Global economic growth is projected to decelerate to only 2-1/4% in 2009, down from about 5% last year.
- Recovery in 2010 was scaled back; further reduction in the growth forecast is likely in the upcoming January update of the World Economic Outlook.
- Policy emphasis:
- With inflation pressures retreating, more aggressive monetary policy measures are justified in many key economies.
- Fiscal action becomes more important when impaired credit channels make monetary policy less effective and when there is a sharp rise in desired private saving.
- IMF research suggests needed fiscal stimulus should total about 2 percent of global GDP.
- Fiscal measures should be diversified (tax and spending) and sustained; country circumstances (budget balance, debt position, spare capacity) will dictate appropriateness and type.
The Fund's Role in the Current Crisis
- IMF comparative advantage:
- Extensive experience dealing with crises in advanced, emerging and developing economies provides lessons on policies likely to reverse downturns.
- Three elements necessary to reestablish financial sector functionality:
- Liquidity support.
- Recapitalization of institutions.
- Removal of damaged assets from balance sheets.
- Observed shortfalls:
- Policy initiatives to date have tended to be partial rather than comprehensive by the triple-standard above.
- Redoubled efforts are required to contain deleveraging without creating substantial further damage.
- IMF financial assistance and instruments:
- In November alone, the Fund approved loan commitments totaling $40 billion to Hungary, Iceland, Pakistan and Ukraine.
- The Fund augmented pre-existing arrangements in the Poverty Reduction and Growth Facility (PRGF) and modified the Exogenous Shock Facility (ESF) for low-income members.
- Introduced the Short-Term Liquidity Facility (SLF) to provide high-speed access to large amounts of financing for members with strong fundamentals and track records; SLF is short-term and carries no ex-post conditionality.
- Emergency procedures have been invoked to act quickly; conditionality in recent programs is focused narrowly on policies necessary to achieve macroeconomic goals.
The Fund in Tough Times (Multilateral and Resource Issues)
- Pro-cyclicality and multilateral cooperation:
- The crisis revealed powerful elements of pro-cyclicality in the economic and financial system; IMF’s role includes promoting multilateral cooperation and resisting pro-cyclical tendencies.
- Example: Coordinated approach to deposit insurance emerged within days of the mid-October IMF Annual Meetings after global mushrooming of deposit guarantees.
- Policy collaboration (e.g., simultaneous demand-boosting measures among key trading partners) magnifies the impact of fiscal stimulus.
- Fund lending capacity and resource adequacy:
- The IMF's remaining lending capacity cited as some $ 200 billion.
- Fund lending historically has never crossed even half that figure, but adequacy relative to potential stabilization needs is critical.
- Japan's recent offer to lend the IMF $100 billion is noted as a welcome development.
- Other advanced country governments, central banks, and regional pools have capacity to provide additional liquidity and can act in concert with Fund support.
- Underfunded stabilization programs are an invitation to rapid and catastrophic failure; reviewing Fund capacity to mobilize new financial resources in advance of need is common sense.
The Fund in Better Times (Prevention and "Three Gap" Approach)
- Three-gap approach where the Fund acts as "gap filler":
- First gap: lack of information (market transparency).
- Second gap: gaps in regulation, supervision and legal systems.
- Third gap: incomplete markets (missing insurance markets for specific risks).
- Early warning and targeted analysis:
- Emphasize identifying vulnerabilities and risks and proposing specific remedies rather than vague warnings.
- Example: Special Investment Vehicles (SIVs) should have been flagged earlier; remedies could include redefining regulatory perimeters or imposing higher capital charges on off-balance sheet operations.
- IMF analytical and cooperative efforts:
- Stepped up analysis of financial markets, macro-financial linkages, and spillovers; strengthening early warning systems in cooperation with the Financial Stability Forum and other organizations.
- Key regulatory weaknesses identified by IMF staff:
- (1) Poorly drawn boundaries of regulatory oversight (e.g., SIVs).
- (2) Lack of a macro-prudential aspect to financial regulation—need to include economic circumstances in setting prudential standards.
- Role as convener:
- IMF can organize discussions/negotiations among limited groups of members to study and act on topics of special importance (example: 2006-2007 Multilateral Consultation on Global Imbalances; International Working Group of Sovereign Wealth Funds and the Santiago Principles).
Governance of the International Financial System
- IMF institutional strengths:
- Virtually universal membership and a system of constituencies that allow representation at its Executive Board; possesses a decision rule that allows action with legitimacy even without unanimity.
- Governance reform process:
- Following a 2006 decision to reform relative quota weightings, the Fund is adopting voting shares over time to reflect changes in relative weights of countries in the world economy.
- Current structure: non-resident Board of Governors; advisory International Monetary and Financial Committee (IMFC); resident Executive Board chaired by the Managing Director.
- A working group of eminent persons chaired by South African Finance Minister Trevor Manuel is examining proposals including changes to the roles of the IMFC, Executive Board, and Management.
- Proposal under consideration:
- Convert the IMFC from advisory form into an executive body, or Council (Ministerial-level group authorized in the Fund's Articles), increasing the direct connection between Ministerial authority and day-to-day Fund activities; such a Council would represent the entire membership and have voting shares.
- Interaction with G-20:
- G-20 Summit in Washington produced an Action Plan that includes some 50 specific policy deliverables, half of which are to be reported back to the Leaders' meeting planned for next April.
- Noted similarity between membership of the G-20 Finance Ministers and the IMFC; the governance review and the G-20 process should and will converge, shaping post-crisis global economic governance.
Speech by John Lipsky, First Deputy Managing Director, International Monetary Fund, At the Council on Foreign Relations, New York, December 17, 2008.