Factory worker in Lodz: Poland was the second country to make use of the IMF’s Flexible Credit Line (photo: AFP Photo/Dell Handout)
GLOBAL FINANCIAL CRISIS
Speaking at the European Policy Centre December 2, Belka said that following successful stabilization to date, policymakers need to look forward to the steps that will ensure longer-term success.
Steps will differ by country, but he identified three groups that faced different considerations.
• Some, including Latvia and Romania, still have a long period in their initial stabilization programs to go, and successful implementation and avoidance of “reform fatigue” will need to be at the top of their agenda.
• For Hungary and Poland, there is a need to reflect on whether or not they should maintain the support and stability of an IMF-supported program or attempt to “graduate” – with good arguments either way.
• For near crisis countries, the challenges are equally high. They need to decide whether they should get the protection of a program, or attempt to essentially follow the same reform agenda, but without the financial support.
Avoiding future “traps”
With improved global liquidity, there is a danger that the reform agenda might get disrupted, Belka warned. “This outcome would be a disaster, as the costs of the current crisis are very high and avoiding a similar ‘trap’ should be foremost on policymakers’ minds.”
Going forward, old vulnerabilities could not be allowed to reemerge. “Most important will be to put in place a policy framework that fosters the resumption of convergence, yet avoids imbalances and overheating,” Belka stressed.
He said the main elements of such a policy framework are still being designed, but added he saw a key role for the IMF to draw on its broad experience in Europe and elsewhere in proposing the core elements.
Excessive risks
These would include prudential and regulatory rules that allow control of actual risks in a rapidly growing environment. Work was also needed in the areas of taxation to avoid procyclical bias in revenues. In addition, efforts were needed also in western European countries to put in place safeguards to avoid banks and other market participants taking excessive risks in central and east European countries.
Belka recalled that in 2008 and 2009 three EU members—Hungary, Latvia, and Romania—faced balance of payments crisis so severe that they required external financial assistance. In each case assistance was provided under a joint IMF/EU support program. Poland, while less vulnerable, accessed the IMF’s Flexible Credit Line and thereby reassured international capital markets that its liquidity needs were being met.
“While the crisis is by far not over, none of the EU members with a program in place is facing an immediate balance of payments crisis. At the same time, other countries remain vulnerable, and a ‘second wave’ of programs may be yet to come,” Belka said.
With the benefit of hindsight it is clear that the positive outcome was due to the IMF’s ability to act fast, he stated. Leveraging IMF resources with those of the EU and other program partners had helped to ‘tie’ financial support packages that were sizeable enough to be effective, even in an environment characterized by very large capital flows.
Social dimension
Belka underscored that the IMF had also paid close attention to the social dimension of the countries’ programs. The fiscal strategy in Hungary, Latvia, and Romania aims at protecting the poor and low-income earners from the impact of the global crisis through, for example, better targeting of expenditure in the case of Hungary, strengthening the social safety net in Latvia, and higher social spending in Romania.
While implementation of an IMF-supported program was never easy, concentration on critically important reform steps had facilitated acceptance in the countries, and thereby made the process easier for the authorities to initiate and to pursue, Belka said.
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