World financial leaders at IMF-World Bank Annual Meetings are expected to consider reforming underlying rules of global finance (photo: Arne Dedert/DPA)
IMF-WORLD BANK ANNUAL MEETINGS
Sandbagged by three successive shocks—high commodity prices, the housing slump in the United States and a number of other advanced economies, and the growing financial crisis—the global economy is forecast to slow dramatically.
In addition to assessing the health of the international economy, world financial leaders are expected to consider ideas for reforming the underlying rules and regulations of global finance.
"There is a deeper structural issue to be resolved. This crisis is the result of regulatory failure to guard against excessive risk-taking in the financial system, especially in the U.S. We must ensure it does not happen again," says IMF Managing Director Dominique Strauss-Kahn.
Tectonic shift
With the demise of some of the most famous names on Wall Street, the credit crisis has marked a tectonic shift in the U.S. financial system, which demands a comprehensive, internationally coordinated response. "The reality of financial globalization means that policy interventions—including the longer-term issues of regulatory and supervisory reforms—need to be globally coherent and consistent in order to be effective," says IMF First Deputy Managing Director John Lipsky.
Apart from the one-day plenary session of the 185 members of the IMF and the World Bank on October 13, there will be several sessions at which discussions will focus on a broader resolution of the crisis and longer-term reform of the financial system. They include a seminar of the Financial Stability Forum on October 9 and a meeting of the International Monetary and Financial Committee (IMFC)—the 24-member ministerial policy guidance body of the IMF.
Also, alongside the meetings of finance ministers of several country groupings—the G7 (advanced economies), the G20 (advanced and developing), and the G24 (developing economies), a series of high-profile seminars will take place focusing on topics ranging from the current market turbulence to climate change, and the impact of high oil and commodity prices. Speakers include global financier and philanthropist George Soros; Trevor Manuel, the Finance Minister of South Africa; Mahmoud Mohieldin, the Investment Minister of Egypt; Nobel Prize-winning economist Michael Spence; and John Lipsky.
Overshadowing the conversation will be IMF assessments of the capital markets, published in the Global Financial Stability Report (GFSR) on October 7, and the global economy, published in the World Economic Outlook (WEO) the next day, when new IMF Chief Economist Olivier Blanchard will give his first assessment of the credit meltdown.
State of world economy
Because of the crisis, IMF analysts have marked down sharply earlier projections for world growth. "It is now all too clear that we are seeing the most dangerous shock to mature financial markets since the 1930s, posing a major threat to global growth," said Charles Collyns, Deputy Director of the IMF's Research Department.
"Even though past periods of financial stress have not necessarily been followed by recessions, we find that when the banking system suffers major damage, as in the current episode, the likelihood of a severe and protracted downturn in activity increases."
"To limit the fallout on the real economy, it is therefore of paramount importance that the damage to the banking systems in the United States and Europe be swiftly contained by far-reaching and comprehensive measures. This lesson is clearly brought out by the experience of many economies that have struggled with virulent financial crises over the past decades, for example, in Nordic countries or Japan in the 1990s," he added.
IMF Historian James Boughton says that since the 1930s the world has been through a number of crises, including the collapse of the fixed exchange rate system in 1973. "What makes this crisis different from some of the earlier ones is that the interlinkages among financial institutions are much greater now than they used to be."
The "other crisis"
In addition to addressing systemic cracks in the global financial system, ministers will also look at the impact of recent shocks on low-income countries. Strauss-Kahn has emphasized that, at a time of deep global concern about the crisis in U.S. financial markets, it is essential that governments do not lose sight of the "other crisis" that is having a direct impact on the world's poor—surging food and fuel prices.
IMF analysis shows that the impact from the price increases remains severe: some 50 low- and middle-income countries remain vulnerable to deteriorating balance of payments and overall inflation. The new study, which updates a July IMF analysis of the macroeconomic impact of food and fuel costs, shows that prices remain well above their levels at the onset of the recent price surges.
Strauss-Kahn called for "bolder action" from the international community in terms of additional aid and action to help vulnerable countries.
The IMF has recently concluded a series of discussions in its Executive Board on the Fund's role in low-income countries and Strauss-Kahn is expected to brief the IMFC on the approach to be followed.
SWFs outcome
An additional focus of the meetings will be on the successful outcome of a series of discussions by sovereign wealth funds (SWFs) about how they will operate.
The members of the International Working Group of Sovereign Wealth Funds (IWG), which met on September 1-2, 2008 in Santiago, Chile, reached a preliminary agreement on a draft set of principles and practices for recommendation to their respective governments.
The Generally Accepted Principles and Practices for Sovereign Wealth Funds (GAPP) is a voluntary framework that would guide the appropriate governance and accountability arrangements, as well as the conduct of appropriate investment practices by SWFs. The GAPP will be presented to the IMFC at its October 11 meeting.
The IWG members also decided to explore the establishment of a standing group of sovereign wealth funds. This is in recognition of the need to carry forward the work relating to the GAPP, as necessary, and to facilitate dialogue with official institutions and recipient countries on developments that impact SWF operations.
The Working Group was co-chaired by Jaime Caruana, the Director of the IMF's Monetary and Capital Markets Department, and Hamad al Suwaidi, Under Secretary of Finance of Abu Dhabi and a Director of the Abu Dhabi Investment Authority. The IMF acted as the group's secretariat.
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