Staying Ahead of the Next Crisis: Improving Collaboration with Regional Financing Arrangements

IMF Blog, December 21, 2017

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Canonical URL: Staying Ahead of the Next Crisis: Improving Collaboration with Regional Financing Arrangements

Authors: Petya Koeva Brooks, Pragyan Deb, Nathan Porter
Publication date: December 21, 2017
Main point: Effective and efficient collaboration between the IMF and regional financing arrangements is critical to preventing and mitigating crises as the global financial safety net has evolved and expanded.

A decade ago, regional financing arrangements played a limited role in the global financial safety net; the global financial crisis has drastically changed the landscape.
Resources in the global financial safety net "tripled between 2007 and 2016."
New arrangements created include the European Stability Mechanism and the Chiang Mai Initiative Multilateralization.
Given the IMF’s universal membership and role at the center of the global financial safety net, the IMF has proposed a framework to facilitate systematic collaboration with regional financial arrangements across various regions.
Without strong collaboration, countries will be hampered in their efforts to mitigate and prevent crises.

Speed and adequate financing are critical to any country’s response to a crisis; a "too little, too late" response enlarges financial needs and raises the prospect that the crisis and its impact can spread.
The IMF’s experience in helping countries in crisis and its universal risk pooling—combined with the greater regional knowledge and country ownership brought by the regional arrangements—can substantially strengthen the safety net.
Collaboration "dividend": when countries seek combined assistance from the IMF and regional arrangements early, it reduces the risk of contagion and contains crises.

Recent initiatives have moved the IMF and regional financing arrangements closer together.
The IMF was invited to participate in the "2016 'test-run' of the Chiang Mai Initiative Multilateralization." The simulation modeled a member country experiencing a shock large enough to require financing from both the IMF and the Chiang Mai Initiative Multilateralization, to gauge effectiveness and operational readiness for a joint financing operation.
To date, most collaboration has been ad hoc, particularly in crisis lending situations.
Calls for moving beyond a "case-by-case" approach by developing operational guidance have come from: the IMF’s Executive Board, the Group of Twenty advanced and emerging economies, and the IMF’s Independent Evaluation Office.

The IMF’s new framework considers how collaboration can strengthen crisis prevention (helping countries develop capacity to formulate better policy and identify vulnerabilities early) but its focus is on co-financing in crisis situations.
The framework builds on lessons from extensive joint lending in Europe, including:
- fostering complementarity,
- coherent program design,
- recognition of differences across lending partners,
- importance of early and ongoing cooperation.
Several principles and operational guidelines were derived from these lessons; application depends on context and characteristics and capacities of each participating regional arrangement and respective synergies and complementarities with the IMF.
Models of collaboration described:
- Co-lending: nature of collaboration and operational guidelines depend on the ability of the regional arrangement to design or monitor a program; where such expertise exists, guidelines should allow for flexible collaboration.
- Lead agency model: where clear delineation of responsibility is possible, a lead agency model may be most appropriate—for example, the IMF leads on the macroeconomic framework and policies, while the regional arrangement focuses on areas within its comparative advantage.
- Routine day-to-day operations: country surveillance and capacity development can be streamlined through formal agreements.

Maintain an open dialogue with regional arrangements, both collectively and individually, to identify and resolve obstacles to collaboration, especially in emergency situations, before the next crisis.
Key task: test in a practical, operational sense how to work together in a more structured manner, including through greater transparency and timely information sharing.
The IMF’s participation in the 2016 test-run with the Chiang Mai Initiative Multilateralization identified challenges to smooth co-lending that need to be addressed.
Similar exercises in other regions could be helpful.

Source: IMF blog post "Staying Ahead of the Next Crisis: Improving Collaboration with Regional Financing Arrangements", December 21, 2017