Worries kept resurfacing during IMF-World Bank Spring Meetings about effect of higher food prices on low-income countries. (photo: Nani Gois/AFP/Getty)
2008 SPRING MEETINGS
They also gave the IMF the green light to wrap up a package of reforms aimed at strengthening the institution's legitimacy and financial soundness, and they called on the Fund to sharpen its oversight of the global economy.
IMF Managing Director Dominique Strauss-Kahn told reporters after a meeting of the International Monetary and Financial Committee (IMFC) on April 12 that "what was obvious was that there is a kind of revival of the multilateral spirit, the idea that we are facing global problems and that to those global problems there must be global answers." IMFC Chairman Tommaso Padoa-Schioppa noted that "the discussion on global economy and financial markets reflects what is the mood at this moment, the sense that the chain of bad news may not have come to an end."
The IMFC—the policymaking committee of the IMF's Board of Governors—said it was "confident that the key reforms recently agreed by the Fund's Executive Board, including the strategic refocusing of the Fund on its core mandate based on its comparative advantage, will strengthen the Fund's role in promoting global financial stability and international monetary cooperation and in serving its universal membership effectively at this critical juncture."
A global slowdown
Since its previous meeting in October 2007, the IMFC said, global financial instability has increased, world economic growth has slowed, and growth prospects for 2008 and 2009 have deteriorated. It agreed that "policymakers should continue to respond to the challenge of dealing with the financial crisis and supporting activity, while making sure that inflation is kept under control. While each country's situation is different, coherent action must be taken, taking due account of cross-border interactions." As for emerging market and developing countries, it noted that so far, they have "continued to grow strongly and show resilience in the face of the ongoing financial crisis, though their growth prospects have moderated and inflation risks have increased."
In this connection, the Group of 24 developing countries called for "decisive" policy actions by rich nations to ensure that the financial turmoil does not spread to them, and it asked the IMF to "urgently" improve its monitoring of advanced economies.
On April 9, the IMF released its latest World Economic Outlook, now predicting global growth of 3.7 percent in 2008, down from 4.9 percent in 2007 and with little pickup in 2009—around 3.8 percent. Moreover, there is a 25 percent chance that the growth will be 3 percent or less in 2008 and 09. The IMF's chief economist, Simon Johnson, told reporters that on balance, the risks are on the downside, with the principal one coming from the possibility that financial strains could deepen. Other risks include continuing inflation worries, especially in the wake of increasing commodity prices, large current account surpluses, and the "uneven pattern of exchange rate movement around the world."
Sharp currency fluctuations
Blaming the twin forces of deteriorating financial market conditions and the continuing correction in the U.S. housing market, the IMF predicts that the United States will slip into a "mild recession" in 2008, from which it will recover only modestly in 2009. The report has marked down sharply its U.S. forecast for 2008 to growth of 0.5 percent—1 percentage point lower than what was forecast in January 2008 and down from 2.2 percent in 2007. The forecast for 2009 is now only 0.6 percent.
On the foreign exchange front, the Group of Seven industrial countries noted that "since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate." Asked by reporters about this statement, Strauss-Kahn said that the IMF shares this concern. He noted that countries are far from fixing global current account imbalances, and he warned that "new imbalances may have appeared" during the recent financial turmoil.
Shaky financial markets
The IMFC welcomed "the actions taken by the central banks of the advanced economies to provide liquidity support to ease strains in interbank markets," and called for "continued vigilance to deal with the financial turmoil." But it also looked to the private sector, saying that "further prompt actions by large financial institutions to disclose losses and repair balance sheets by raising capital when needed and mobilizing medium-term funding will contribute to restoring confidence."
Work is now taking place in several fora aimed at drawing lessons from the financial turmoil to help strengthen the global financial system and reinforce the supervisory and regulatory frameworks. The IMFC welcomed the IMF's work in this area, including the Global Financial Stability Report, which recently warned that widening and deepening fallout from the U.S. subprime mortgage crisis could have profound financial system and macroeconomic implications—with worldwide potential losses of about $945 billion.
The IMFC also urged the IMF to continue to its close collaboration with the Financial Stability Forum (FSF), the Bank for International Settlements, standard-setting bodies, and national authorities. In this context, it called for the "timely implementation" of new FSF recommendations, which center on more vigilant oversight of capital and liquidity at financial institutions. And it emphasized the importance of strengthening the IMF's financial surveillance role, including through the Financial Sector Assessment Program, and its capability to identify risks in the future.
Soaring food prices
Throughout the weekend, worries kept resurfacing about high fuel and food prices—with oil still above $100 a barrel and food prices having jumped 48 percent since 2006. Commodity producers and countries that export commodities have done well, with some enjoying windfall gains. But commodity importers and consumers—especially in the poorest areas—are feeling the pinch of higher commodity prices on their purchasing power, resulting in food protests in countries in Africa, Asia, and Latin America and the Caribbean.
In response, World Bank President Robert Zoellick has been urging governments to act quickly to help hungry people by committing emergency aid to the UN World Food Program, which is seeking $500 million in emergency assistance by May 1. He has also sought backing for a New Deal on Global Food Policy to combat hunger and malnutrition, and at the April 13 meeting of the IMF-World Bank Development Committee, he won that support.
Speaking to reporters after the meeting, he warned that 100 million people could be pushed back deeper into poverty if action was not taken. "We can't afford to wait," he said, adding that "we have to put our money where our mouth is—now—so that we can put food into hungry mouths. It's as stark as that."
Economic disruptions
A similar warning came from Strauss-Kahn the day before, who said that "if food prices go on as they are today, then the consequences on the population in a large set of countries, including Africa, but not only Africa, will be terrible." Moreover, "disruptions may occur in the economic environment, trade balances, and current account, so that at the end of the day most governments, having done well during the last five or ten years, will see what they have done totally destroyed and their legitimacy facing the population destroyed, also." He underscored after the Development Committee meeting that the food price crisis is "a big concern to the Fund and we are going to devote a lot of resources—time, experts, and financial resources—in the coming weeks," noting that this would involve a review of the IMF's financial toolkit for tackling such a crisis.
The latest IMF-World Bank Global Monitoring Report warns that most countries will fall short on the UN Millennium Development Goals. Although much of the world is set to cut extreme poverty in half by 2015, prospects are gravest for the goals of reducing child and maternal mortality, with serious shortfalls also likely in primary school completion, nutrition, and sanitation goals.
Go-ahead on IMF reforms
Another major development over the weekend was solid backing for the IMF's package of reforms from advanced economies, emerging markets, and low-income countries. The IMFC said it welcomed the recent agreement by the Executive Board on quota and voice reforms "as an important contribution to enhance the Fund's credibility and legitimacy." It added that it looked forward to the approval of the quota and voice reforms by the Board of Governors by April 28, 2008, as well as the early acceptance by the members of the proposed amendment of the Fund's Articles of Agreement to make the quota and voice reforms effective.
The IMFC also endorsed the recent agreement by the Executive Board on a new income model and a new medium-term budgetary envelope, "which will contribute to placing the Fund on a sustainable financial footing." It strongly recommended that the Board of Governors give their full support to the new income model by approving the proposed amendment of the Fund's Articles of Agreement by May 5, 2008. And it called on all members to work toward the early completion of the legislative steps required for making the new model effective, including the establishment of an endowment funded by the profits from a strictly limited sale of gold within the agreement of the central banks.
The United States is a key player in the gold sales, and U.S. Treasury Secretary Henry Paulson told the IMFC that "we are committed to seeking Congressional authorization for a limited sale of IMF gold to finance an endowment."
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