Tackling Current Challenges
The global economic crisis created the worst recession since the Great Depression of the 1930s. The crisis began in the mortgage markets in the United States in 2007 and swiftly escalated into a crisis that affected activity and institutions worldwide. The IMF mobilized on many fronts to support its member countries, increasing its lending, using its cross-country experience to advise on policy solutions, and introducing reforms to modernize its operations and become more responsive to member countries’ needs. As the apex of the crisis shifted to Europe, the Fund has become actively engaged in the region and is also working with the G-20 to support a multilateral approach.
Here’s some of the issues that top the agenda:
As part of its efforts to support countries during the global economic crisis, the IMF has beefed up its lending capacity. It has approved a major overhaul of how it lends money by offering higher amounts and tailoring loan terms to countries’ varying strengths and circumstances. More recently, further reforms strengthen the IMF’s capacity to respond to and prevent crises. In particular:
- Doubling of lending access limits for low-income member countries and streamlining procedures to reduce perceived stigma attached to borrowing from the Fund
- Introducing and refining a Flexible Credit Line (FCL) for countries with robust policy frameworks and a strong track record in economic performance; a Precautionary and Liquidity Line (PLL) for countries that have sound economic policies and fundamentals, but are still facing vulnerabilities; and a Rapid Financing Instrument (RFI) for countries facing an urgent financing need but that do not need a full-fledged economic program
- Modernizing conditionality to ensure that conditions linked to IMF loan disbursements are focused and adequately tailored to the varying strengths of members’ policies
- Focusing more on social spending and more concessional terms for low-income countries
The IMF has committed more than $300 billion to crisis-hit countries—including Greece, Ireland, Portugal, Romania, and Ukraine—and has extended credit to Mexico, Poland, and Colombia under a new flexible credit line. The IMF is also stepping up its lending to low-income countries to help prevent the crisis undermining recent economic gains and keep poverty reduction efforts on track.
The IMF is actively engaged in Europe as a provider of policy advice, financing, and technical assistance. We work both independently and, in European Union countries, in cooperation with European institutions, such as the European Commission and the European Central Bank as part of the so-called troika. The IMF's work in Europe has intensified since the start of the global financial crisis in 2008, and has been further stepped up since mid-2010 as a result of the sovereign debt crisis in the euro area. The IMF has recommended that Europe focus on structural reforms to boost economic growth, such as product and services market reforms, as well as labor market and pension changes. The IMF has also urged eurozone members to make a more determined, collective response to the crisis by taking concrete steps toward a complete monetary union, including a unified banking system and more fiscal integration. Read our Factsheet on Europe and visit our webpage that pulls together IMF information about Europe. See also article on fixing the flaws in EMU.
The IMF has upgraded its support for low-income countries, reflecting the changing nature of economic conditions in these countries and their increased vulnerabilities due to the effects of the global economic crisis. It has overhauled its lending instruments, especially to address more directly countries' needs for short-term and emergency support. The IMF support package includes:
- Mobilizing additional resources, including from sales of an agreed amount of IMF gold, to boost the IMF’s concessional lending capacity to up to $17 billion through 2014, including up to $8 billion in the first two years. This exceeds the call by the Group of Twenty for $6 billion in new lending over two to three years.
- Providing interest relief, with zero payments on outstanding IMF concessional loans through end-2012 to help low-income countries cope with the crisis.
- Commiting resources to secure the long-term sustainability of IMF lending to low-income countries beyond 2014.
The 2008 global financial crisis highlighted the tremendous benefits from international cooperation. Without the cooperation spearheaded by the Group of Twenty industrialized and emerging market economies (G-20) the crisis could have been much worse. At their 2009 Pittsburgh Summit G-20 countries pledged to adopt policies that would ensure a lasting recovery and a brighter economic future, launching the "Framework for Strong, Sustainable, and Balanced Growth."
The backbone of this framework is a multilateral process, where G-20 countries together set out objectives and the policies needed to get there. And, most importantly, they undertake to check on their progress toward meeting those shared objectives—done through the G-20 Mutual Assessment Process or MAP. At the request of the G-20, the IMF provides the technical analysis needed to evaluate how members’ policies fit together—and whether, collectively, they can achieve the G-20’s goals.
The IMF’s Executive Board has also been considering a range of options to enhance multilateral, bilateral, and financial surveillance, and to better integrate the three. It has launched “spillover reports” for the five most systemic economies—China, the euro area, Japan, United Kingdom, and the United States—to assess the impact of policies by one country or area on the rest of the world. The IMF recently strengthened the ways in which it keeps an eye on country economies with its global analysis, and as Managing Director Christine Lagarde has stressed, the IMF must continue to pay more attention to understanding interconnectedness and incorporating this understanding into risk and policy analysis.
The current International Monetary System—the set of internationally agreed rules, conventions, and supporting institutions that facilitate international trade and cross-border investment, and the flow of capital among countries—has certainly delivered a lot. But it has a number of well-known weaknesses, including the lack of an automatic and orderly mechanism for resolving the buildup of real and financial imbalances; volatile capital flows and exchange rates that can have deleterious economic effects; and related to the above, the rapid, unabated accumulation of international reserves, concentrated on a narrow supply.
Addressing these problems is crucial to achieving the global public good of economic and financial stability, by ensuring an orderly rebalancing of demand growth, which is essential for a sustained and strong global recovery, and reducing systemic risk. The IMF’s recent review of its mandate and resultant reforms—to surveillance and its lending toolkit—go some way towards addressing these concerns but further reforms are being pursued.
The IMF must represent the interests of all of its 188 member countries, from its smallest shareholder Tuvalu, to its largest, the United States. Unlike the General Assembly of the United Nations or the World Trade Organization, where each country has one vote, decision making at the IMF was designed to reflect the position of each member country in the global economy. Each IMF member country is assigned a quota that determines its financial commitment to the IMF, as well as its voting power.
In recent years, emerging market countries such as China, India, Brazil, and Russia have experienced strong growth and now play a larger role in the world economy. In December 2010, the IMF agreed on reform of its framework for making decisions to reflect the increasing importance of emerging market and developing economies.
When fully implemented, the reforms will produce a shift of more than 6 percent of quota shares to dynamic emerging market and developing countries. The reform contains measures to protect the voice of the poorest countries in the IMF. Without these measures, this group of countries would have seen its voting shares decline.
The reform will enter into force once three fifths of the IMF’s membership―which currently amounts to 113 countries― representing 85 percent of total voting power have accepted the proposed amendment. Watch a video on the latest efforts on reforming IMF governance.