Strengthening the International Monetary System
IMF News, March 8, 2017
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- Published: March 8, 2017
Overview and purpose
- Remarks by IMF Deputy Managing Director Mitsuhiro Furusawa to a Conference on the Future of International Monetary System for Asia, organized by Hitotsubashi University and the IMF Regional Office for Asia and the Pacific, Tokyo, March 7, 2017.
- Objective: provide an overview of key issues related to the International Monetary System (IMS) with focus on three central priorities for Asian policymakers:
- the reduction of global imbalances;
- the strengthening of the global financial safety net; and
- the internationalization of currencies.
Key structural shifts affecting the IMS
- Findings:
- "The center of global economic 'gravity' continues to shift" reflecting the role of emerging markets and integration of developing economies.
- "The rapid rise of financial interconnectedness" as countries open capital accounts and financial markets deepen.
- Key statistics preserved from the speech:
- "since 2000, the share of emerging and developing economies in global GDP has increased more than two thirds."
- "It reached almost 40 percent in 2015."
- "gross external liabilities stood above 160 percent of world GDP in 2015; up from 30 percent of world GDP in 1980."
Global imbalances
- Findings:
- Global imbalances have narrowed since the crisis but "remain above desirable levels."
- Adjustment in the absence of formal mechanisms has "largely achieved through demand compression in deficit countries."
- "The concentration of imbalances among a few large countries presents a risk to the global economy."
- IMF responses and tools:
- Overhauled surveillance process and strengthened analytical tools.
- Introduction of the External Sector Report to assess large economies' external positions and analyze potential spillovers in a multilateral context.
- These analyses are integrated into bilateral surveillance discussions with authorities.
Strengthening the global financial safety net
- Findings:
- International efforts were critical during the global financial crisis but "shortcomings remain."
- Reserve accumulation is a central element of the safety net, particularly important since the Asian Crisis, but it is costly and can lead to inefficient resource allocation, hinder external adjustment, and "contribute to looser policies on the part of reserve issuers."
- IMF reforms and initiatives:
- "Our lending capacity was boosted to $1 trillion."
- Overhauled lending framework to offer more insurance and financing instruments.
- Exploring a "new short-term liquidity facility and a non-financial policy instrument" that would provide monitoring and signaling of member countries' policies.
- Working to remove the perception that Fund programs carry a stigma; encouraging earlier approaches to the Fund (e.g., Flexible Credit Line seen as a sign of strength).
- Exploring broader roles for the SDR: "official SDR, SDR-denominated assets, or the SDR as a unit of account."
- Milestone: "the renminbi was included in the SDR basket."
- Example of SDR use: "in the last year large SDR-denominated bonds were successfully placed in China."
- Regional Financing Arrangements (RFAs) complement IMF resources; example: "doubling of resources under the Chiang Mai Initiative Multilateralization to $240 billion from 2014."
- Policy recommendations and discussion topics:
- Upgrade the safety net with attention to "size, predictability, and timelines of liquidity support."
- Strengthen cooperation through structured dialogue between IMF and RFAs.
- Encourage timely, sufficient liquidity support to reduce incentives for costly reserve accumulation.
Internationalization of currencies
- Findings:
- Greater use of multiple currencies can "diversify risks, enable gradual global adjustments, and provide incentives for sustainable policies."
- Benefits at the country level may include "lower transaction costs and reduced exchange rate risk, and the ability to issue foreign debt on more competitive terms."
- International experience shows prerequisites for currency internationalization: safeguard macroeconomic stability, increase flexibility of monetary frameworks, and deepen financial markets.
- Caution: a multi-currency system "alone will not solve the shortcomings of the IMS" and "potentially could increase systemic risks" via "switching effects" that increase financial volatility and external imbalances.
- Policy guidance:
- Emphasize the primacy of strong domestic policies to manage risks associated with internationalization.
- View internationalization as potentially a by-product of sound macroeconomic and financial policy reforms.
Conclusion and IMF role
- Bottom line: remain vigilant against IMS challenges; "The IMF is prepared to assist its membership in this effort."
- Next steps and engagement:
- Listen to member insights to inform and enrich ongoing IMF work on IMS issues.
- Continue dialogue on safety net design, surveillance, and supportive measures for currency internationalization.
Source: Remarks by IMF Deputy Managing Director Mitsuhiro Furusawa, Tokyo, March 7, 2017.