Motorcycle assembly line in Toluca, Mexico, where proposed IMF credit line will help country face fallout from the global economic crisis (photo: Newscom)
FLEXIBLE CREDIT LINE
Mexico announced it was seeking $47 billion under the IMF’s new Flexible Credit Line (FCL) launched by the IMF last month to buttress strong economies against fallout from the global crisis.
“Last week, the Executive Board approved an historic reform of the IMF’s lending instruments, including the creation of the Flexible Credit Line. Following that meeting I invited strong performing countries that may be affected by the global crisis to use the new FCL as a tool to underscore international confidence,” Strauss-Kahn said in a press statement in reaction to the announcement by the Mexican authorities.
“Today, I am very pleased to report that, as stated yesterday by President Calderon, Mexico has responded to my invitation and has indicated its interest in an arrangement under the FCL.”
Mexican Finance Minister Agustin Carstens told a press briefing in London attended by IMF First Deputy Managing Director John Lipsky that the country is not planning to use the credit line, saying it was intended as “a precautionary line." But the facility would effectively "bullet-proof [Mexico] from any future uncertainty or events that might tighten market liquidity" and help the economy recover from the global crisis impact.
Meeting of G-20 leaders
The announcement was made ahead of the Group of Twenty (G-20) London summit of leading industrial and emerging market economies to tackle the global economic crisis.
The IMF had announced the creation of the FCL—a type of insurance policy for strong performers—as part of a package of reforms of IMF lending. The revamp of IMF lending will enable it to help countries more nimbly as the impact of the crisis grows. One objective of the lending overhaul is to encourage countries to come to the IMF as early as possible, rather than when their problems have become intractable.
“Mexico has had a strong macroeconomic performance for over a decade, marked—among other things—by solid growth and low inflation; a steady strengthening of public and private sector balance sheets; and a strong and well capitalized banking system. This has been underpinned by very strong economic fundamentals and policy frameworks, as well as a sustained track record of implementing strong policies,” Strauss-Kahn said.
An FCL could play an important role in supporting Mexico’s economic policies and in bolstering confidence in this very difficult global environment. “Overall, I believe that Mexico is an excellent candidate to pioneer this new facility, and I therefore intend to move ahead rapidly in seeking Board approval,” Strauss-Kahn added.
Crisis crossroads
The Managing Director has said the G-20 leaders face a crossroads in the global economic crisis, with the opportunity to spur a recovery next year if they take the right action.
As part of moves to support countries during the global economic crisis, the IMF is beefing up its lending capacity and approved a major overhaul of how it lends money by offering higher amounts and tailoring loan terms to countries’ varying strengths and circumstances.
The 185-member institution has also said it will double nonconcessional loan access limits, enhance its traditional Stand-By facility, and simplify lending terms. Complementary reforms of concessional lending instruments for low-income members are also in train.
Emerging market and developing countries are facing increasing difficulties around the world because of the spreading global economic crisis, with external financing drying up, exports dropping sharply, and commodity prices falling. As the crisis becomes more prolonged, a growing number of countries will find room for policy maneuver increasingly limited. Large-scale financing from the IMF can cushion the economic and social costs of these global shocks and even help avert full-blown crises if assistance is requested early on.
Global activity is now projected to contract by ½ to 1 percent in 2009 on an annual average basis—the first such fall in 60 years, the IMF has said. Global growth is still forecast to stage a modest recovery next year, conditional on comprehensive policy steps to stabilize financial conditions, sizeable fiscal support, a gradual improvement in credit conditions, a bottoming of the U.S. housing market, and the cushioning effect from sharply lower oil and other major commodity prices.
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