The IMF brings a global perspective to its work with member countries, while regional financing arrangements offer local knowledge and expertise (photo: IMF)
REGIONAL FINANCING ARRANGEMENTS
By mobilizing resources and pooling risks at the regional level, groups such as the European Stability Mechanism or the Chiang Mai Initiative Multilateralization in Asia increase the firepower available to tackle large-scale crises. Because these regional groups have unique strengths, combining their local-level knowledge and expertise with that of the IMF can boost chances for the success of a lending program, the report finds.
There is more work to be done, however, on the coordination of global and regional financing. In an interview, the IMF’s Strategy, Policy, and Review Department’s Toshiyuki Miyoshi—the report’s lead author—discusses the IMF’s engagement with regional financing arrangements and explains the paper’s findings.
IMF Survey: What are regional financing arrangements and what purpose do they serve?
Miyoshi: A regional financing arrangement (RFA) is a financing mechanism through which a group of countries in a region mutually pledge financial support to countries within the group that are experiencing financial difficulties, drawing on resources pooled at the regional level.
RFAs vary greatly in their objectives, size, and institutional frameworks, but they have been part of the so-called global financial safety net—that is, the range of facilities to support countries in difficulty—since the 1970s. The crises of the 1990s and a move toward greater regional integration more broadly created further incentive for some regions to establish RFAs.
IMF Survey: Why are we hearing about regional financing arrangements now?
Miyoshi: RFAs are increasingly recognized as a key layer of the global financial safety net. Following the global financial crisis of 2008, policymakers realized that domestic policy responses were not sufficient to deal with the rapid propagation of shocks in a highly interconnected global economy. The systemic crisis called for both global and regional efforts to deal with the financial difficulties of individual countries. The IMF responded by quadrupling its lending resources and overhauling its lending toolkit. At the regional level, new RFAs were established and existing ones strengthened, which complement the Fund’s crisis-fighting initiatives.
With this expansion of the RFAs’ influence, there have been increasing calls for enhanced coordination between the IMF and RFAs, since recent experience suggests there is significant potential for such cooperation to enhance global financial stability.
In November 2011, the leaders of the Group of 20 (G20) endorsed six principles for cooperation between the IMF and RFAs. These principles acknowledge complementarities based on comparative advantage, encourage closer collaboration on an ongoing basis (not just in times of crisis), and request that RFAs respect the IMF’s preferred creditor status.
In view of these developments, we prepared a paper that takes stock of the IMF’s engagement with RFAs and explores options for future cooperation, in the hope that it will take the debate forward. Indeed, this paper provided background to a G20-IMF seminar on the role of RFAs and its cooperation with the IMF, which was held at the margins of the 2013 Spring Meetings.
G20 Principles for Cooperation between the IMF and RFAs
In November 2010, G20 leaders asked G20 Finance Ministers and Central Bank Governors to explore “ways to improve collaboration between RFAs and the IMF across all possible areas.” Based on contributions by the EU and by ASEAN + 3 country members of the G20, the following non-binding broad principles for cooperation were agreed. The G20 also noted that collaboration with the IMF should be tailored to each RFA in a flexible manner in order to take account of region-specific circumstances and the characteristics of RFAs.
1) An enhanced cooperation between RFAs and the IMF would be a step forward toward better crisis prevention, more effective crisis resolution, and would reduce moral hazard. Cooperation between RFAs and the IMF should foster rigorous and even-handed surveillance and promote the common goals of regional and global financial and monetary stability.
2) Cooperation should respect the roles, independence and decision-making processes of each institution, taking into account regional specificities in a flexible manner.
3) While cooperation between RFAs and the IMF may be triggered by a crisis, ongoing collaboration should be promoted as a way to build regional capacity for crisis prevention.
4) Cooperation should commence as early as possible and include open sharing of information and joint missions where necessary. It is clear that each institution has comparative advantages and would benefit from the expertise of the other. Specifically, RFAs have better understanding of regional circumstances and the IMF has a greater global surveillance capacity.
5) Consistency of lending conditions should be sought to the extent possible, in order to prevent arbitrage and facility shopping, in particular as concerns policy conditions and facility pricing. However, some flexibility would be needed as regards adjustments to conditionality, if necessary, and on the timing of the reviews. In addition, definitive decisions about financial assistance within a joint program should be taken by the respective institutions participating in the program.
6) RFAs must respect the preferred creditor status of the IMF.
IMF Survey: How does the IMF currently interact with these regional financing arrangements? Are there operational implications for increased engagement with RFAs?
Miyoshi: Since RFAs vary widely in terms of their available resources and their lending framework, our mode of engagement with them varies accordingly. We do not have a one-size-fits-all approach for our collaboration.
In cases of financial support to European Union (EU) member states, the IMF has a very extensive and intensive engagement with EU institutions. Their RFAs now provide large financial support to countries in the context of joint programs. So we discuss the macroeconomic framework for support to the countries, which needs to be consistent.
The paper also points out potential operational implications of coordination with RFAs for the IMF. Currently, the IMF’s processes are geared toward engagement with an individual member country. If we are to add interactions with an RFA into our financing operations, we may need to adapt our internal processes to take into account the fact that some policy decisions impacting program design are made at a regional level.
IMF Survey: What are the potential benefits and challenges of collaboration between the IMF and the RFAs?
Miyoshi: In our view, there are distinct advantages to be tapped from effective cooperation between the IMF and RFAs. Each side has a comparative advantage—RFAs have a deeper understanding of regional issues. The IMF, on the other hand, brings to the table its cross-country experience and global perspectives, which are invaluable in today’s interconnected world. RFAs can enhance the country ownership of the programs we jointly support, while the IMF can strengthen the credibility of programs through our experience in crisis management over the past 60 years. IMF involvement can also contribute to diversification of risks, which is particularly relevant in case of region-wide shocks.
At the same time, we are aware of possible challenges associated with cooperation with RFAs. First, the existence of multiple institutions can result in delays in program design and reviews. More fundamentally, the IMF and RFAs have differing mandates, policies, procedures, and governance. This may have significant implications for coordination of program design and monitoring. For example, the design of IMF-supported programs could be constrained by regional policies or obligations. At the same time, the IMF has established policies to safeguard its resources, including the assessment of debt sustainability and the borrower’s capacity to repay, while RFAs generally do not have this as such.
There is currently no overarching framework for cooperation between the IMF and RFAs. While the absence of such a framework gives us the flexibility to tailor joint work to region-specific circumstances, it might also give rise to the perception of uneven treatment and risks to the credibility of the IMF’s lending framework—discrepancies in policies and procedures could put pressure on the IMF to use greater discretion in applying its lending policies. This is why we are looking into possible modalities to address these challenges and strengthen the effectiveness of cooperation.
IMF Survey: How do you plan to take this forward?
Miyoshi: While stopping short of making concrete recommendations, our paper puts forth two broad options for enhancing IMF-RFA cooperation. One option is to fine-tune the current flexible approach. This approach may involve holding regular dialogue and reaching understandings on how to coordinate with each other, such as establishing procedures for information sharing and jointly conducting crisis scenario exercises.
The other option is a more structured approach involving formal agreement on a set of overarching principles and detailed guidelines on IMF-RFA cooperation. Such agreement could formalize the expectation that co-financing operations would be subject to certain principles and safeguards, similar to those stipulated under the Fund’s lending framework. The detailed guidelines could provide concrete guidance on how these principles could be achieved.
The IMF staff stands ready for further discussion with stakeholders on this important issue. We are also working on fostering open communication with RFAs on a more regular, ongoing basis. We hope that this paper will stimulate discussion on this topic, and we look forward to hearing the views of the IMF’s membership as well as those of individual RFAs.
