IMF work program reflects continuing concerns about financial market volatility, weaker growth prospects, fiscal and financial vulnerabilities (photo: Newscom)
IMF WORK PROGRAM
Among the top priorities will be providing insightful analysis and policy advice to address vulnerabilities and rekindle growth and job creation. The IMF will seek to strengthen the institution’s lending instruments to help reduce these vulnerabilities, and prevent and resolve crises. Work will also focus more attention on the interconnections in the global economy, particularly via the financial sector.
Other priority initiatives include advancing capital flows work and enhancing support for low-income countries. Many of these issues will be high on the agenda for leaders of the Group of Twenty (G-20) leading advanced and emerging market economies as they meet in Cannes later this week.
In an interview with IMF Survey online, Reza Moghadam, head of the IMF's Strategy, Policy, and Review Department, discusses the key areas of work for the next six months.
IMF Survey online: IMF Managing Director Christine Lagarde has said that the global economy has entered a dangerous new phase. How will this influence the IMF’s work?
Moghadam: The global economy is going through a very difficult period, and that is certainly reflected in our work program. There are continuing concerns about financial market volatility, weaker growth prospects, and fiscal and financial vulnerabilities. At the 2011 Annual Meetings, the International Monetary and Financial Committee (IMFC), the IMF’s policy-setting body, asked us to work on resolving these tensions, focusing on advice and policy initiatives to address both immediate threats and longer-term concerns. Euro zone leaders have since taken important steps in the right direction at their recent summit. However, the challenges facing the euro area, and the global economy more generally, require continued efforts.
Addressing vulnerabilities and rekindling growth and job creation are our top priorities. In that context, we will look closely at the nexus between fiscal policy and employment growth, lessons from the initial crisis response, as well as booms and busts and their links with credit cycles.
Our financial support to member countries is another critical way we help reduce vulnerabilities. We currently have Fund arrangements with more than 50 countries, with total commitments of roughly $270 billion. Looking ahead, it will also be critical for us to make sure that we have the right lending instruments, and that they are adequately resourced. We will be working on these issues in the weeks and months ahead.
IMF Survey online: Given the particularly difficult task that policymakers face, how is the IMF refocusing its policy advice to best support member countries?
Moghadam: The IMF’s policy analysis and advice to individual countries—what we call bilateral surveillance—remains as important as ever. Indeed, this dialogue with member countries is a key strength of the Fund, and discussions will focus closely on the vulnerabilities that I mentioned earlier.
That said, the global crisis has also made it very clear that economies are closely interlinked: problems in one part of the globe can spread rapidly to others. We are trying to incorporate this reality in our analysis, for instance, with spillover reports for the five systemically important economies and work on interconnectedness to help shape our policy advice. The ultimate aim is for our bilateral and multilateral surveillance to complement and reinforce one another, especially when countries face common challenges.
IMF Survey online: Recent developments have put the spotlight on the IMF’s role in the global financial safety net. Should we expect further reforms to the IMF’s lending toolkit?
Moghadam: Both the IMFC and the G-20 have stressed the importance of an effective global safety net, particularly given the heightened risks in today’s global economy. To this end, the work program emphasizes two ongoing endeavors: (i) further reforming the IMF’s lending toolkit to make it more flexible and broaden its reach to better deal with rapidly evolving crises, and (ii) broadening the scope for using the IMF’s nonconcessional emergency assistance.
As a first step, the IMF’s Executive Board will soon review the experience with the Flexible Credit Line and the Precautionary Credit Line. This review will inform discussion of proposals to strengthen the IMF’s existing toolkit, focusing on enhancing our existing nonconcessional lending instruments. Early next year, the Board will also conduct a major review of program conditionality to evaluate its design and implementation, along with program outcomes, for IMF-supported programs approved since 2002.
The IMF needs to have adequate resources to give confidence and this is something both our membership and G-20 finance ministers, at their meeting in Paris in October, have emphasized. Indeed this issue will also be discussed by G-20 Leaders at their meeting in Cannes later this week. The IMF’s Board will soon review the adequacy of Fund resources. It is also essential that the IMF’s member countries complete, as soon as possible, the steps needed to implement the quota increase agreed in 2010.
IMF Survey online: Low-income countries are also more exposed to risks from global economic problems. What action is the IMF taking to help them confront these challenges?
Moghadam: Low-income countries have fared better in the last crisis than in previous ones. Thanks to improved domestic policies, they built up buffers (such as higher reserves and lower debt) that provided policy space during the crisis. However, those buffers have not been fully rebuilt since the crisis, and in light of uncertain prospects for donor assistance, low-income countries remain more exposed to global shocks.
For this reason, the IMF is focusing more closely on the vulnerabilities low-income countries face, and what policies are needed to address them. The first of these detailed “vulnerability exercises”, focuses on assessing the impact of global growth and commodity price shocks. Together with the World Bank, we will also review the framework we use for assessing debt sustainability in low-income countries. This will be followed in early 2012 by a thorough review of the policy on debt limits introduced in December 2009.
In keeping with the added attention to effective financial sector surveillance for all members, we will undertake work analyzing the impediments to, and potential benefits and risks from, financial sector deepening in low-income countries.
The Executive Board will also discuss a range of papers on the IMF’s financial support to low-income countries, including on the Heavily Indebted Poor Countries and Multilateral Debt Relief Initiatives, and reviews of country eligibility and interest rates under the Poverty Reduction and Growth Trust.
IMF Survey online: The IMF has just completed the Triennial Surveillance Review. What changes in the focus of the IMF’s work should we expect?
Moghadam: The crisis was an important catalyst in improving IMF surveillance. Initiatives like the early warning exercise or mandatory financial sector assessments for systemic economies reflect the lessons we drew from the crisis. But there are areas that need further improvement. The review called for more attention in five areas: interconnectedness, risk assessments, financial stability, external stability, and impact or traction of IMF surveillance. The legal framework for surveillance was also found to be falling short of supporting stronger and more integrated surveillance.
The Managing Director’s “Action Plan” includes concrete measures to make IMF surveillance more effective, candid and evenhanded. Let me highlight just a few of the major elements: as I mentioned earlier, there will be additional coverage of spillovers and cross-country experiences, and more explicit discussion of risks in discussions with member countries. We also plan to develop a strategic plan for the IMF’s financial sector surveillance and propose to assign a financial expert to each Article IV team covering a systemically important financial sector.
IMF Survey online: Looking beyond the immediate threats to the global economy, a major goal of the IMF has been to make the international monetary system less prone to crisis. What will be the priorities for moving this line of work forward?
Moghadam: Reforming the international monetary system is a daunting task. It requires both near-term actions as well as longer-term structural changes. In the coming months, the steps we’re taking to strengthen surveillance and the global safety net are important elements of a near-term response.
The current work program also calls for additional work on understanding capital flows, with a view to developing a comprehensive framework for thinking about capital flows to best promote growth and stability. Discussions are planned in two areas: the multilateral aspects of policies affecting capital flows, and capital account liberalization and management of capital outflows. These two papers are intended to complement our earlier work to examine the IMF’s role regarding cross-border capital flows and on managing capital inflows. Together, these outputs—and the discussion they will engender—should provide further support for developing a comprehensive framework for thinking about capital flows to best promote growth and stability.
The Spring 2012 Global Financial Stability Report will include a chapter on the implications of fewer “risk-free assets” for global financial stability, which is particularly relevant to the functioning of the system. Of course, reforming the international monetary system has engaged generations of economists. Not only are these reforms a long-term endeavor, but the constant evolution of the global system means that we should never assume that our work is done. Surely, as the global economy climbs out of its current perilous state, there will be more questions to answer.
