Strength in Numbers: A Safety Net to Prevent Crises in the Global Economy

IMF Blog, December 19, 2017

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The global financial safety net should help countries in three ways:
- provide insurance to help prevent crises;
- supply financing to countries if crises materialize; and
- provide incentives for countries to adopt the right policies.

Emerging market economies like China, India, and Brazil now account for 60 percent of global GDP.
Since 2000, global reserves have increased from around $2 trillion to $11 trillion.
At the IMF, quota resources have doubled to about $670 billion, and since the crisis member countries have made available substantial additional borrowed funds that the IMF could use if needed.
Bilateral swap networks:
- unlimited permanent swaps among central banks of some major reserve currency–issuing countries; and
- an extensive network of swaps between China and other countries, worth around $500 billion, to support trade and investment.
Regional financing arrangements:
- European Stability Mechanism with a lending capacity of €500 billion.
- The Chiang Mai Initiative multilateralized and funding doubled to $240 billion.
- The BRICs multilateral Contingent Reserve Arrangement worth $100 billion.

Coverage is uneven, with many countries, including key emerging markets, lacking adequate access to funding.
Financing can be uncertain for countries needing to tap newly expanded layers that have yet to be drawn upon.
Most layers lack adequate conditions for borrowing, which can weaken the incentives for countries to adopt strong policies.
Some layers can be financially or politically costly for borrowing countries, or for the global community as a whole, notably in the case of excessive self-insurance through reserves.

The IMF has been improving its lending toolkit, including developing a proposal for a new short-term liquidity swap that could serve as a blueprint for such a facility in the future, if and when there is sufficient support.
The IMF updated the rule book for its Flexible Credit Line, and the Precautionary and Liquidity Line, to make the process for countries to qualify more predictable and transparent.
Rolled out a new Policy Coordination Instrument to help countries unlock financing from different layers of the safety net, particularly regional financial arrangements, and demonstrate their commitment to reform.
- The first Policy Coordination Instrument was approved for Seychelles on December 13.
Published a paper on improving collaboration with regional financial arrangements, setting out principles and a framework for engagement.
Participated in a test-run with the Chiang Mai Initiative Multilateralization, identifying possible refinements to help smooth co-lending.

The global economy’s rapid evolution and financial innovation require staying agile and building a better safety net that keeps its many strands closely connected, coordinated, and focused on countries’ needs.
The IMF continually learns, fine-tunes, and upgrades how it can help countries as part of strengthening global economic stability.

Source: Strength in Numbers: A Safety Net to Prevent Crises in the Global Economy (IMF).

Adequacy of the Global Financial Safety Net
- Adequacy of the Global Financial Safety Net (Markdown version)
- Adequacy of the Global Financial Safety Net (PDF)