IMF SUPPORTED PROGRAMS HELP COUNTRIES WEATHER THE WORST OF THE GLOBAL CRISIS SAYS INTERNAL REVIEW
FinFacts Ireland
Sep 28, 2009 – 5:31:37 AM
Section of the G-20 family gathering in Pittsburgh on Friday, Sept 25,
2009 – – British Prime Minister Gordon Brown making what he seems to
believe is a serious point to a non-plussed Chancellor Angela Merkel
as Sweden’s PM Fredrik Reinfeldt, current president of the European
Council, on Merkel’s right, looks puzzled. Behind Reinfeldt, is IMF
Managing Director Dominique Strauss-Kahn earwigging; on his left
is the Director-General of the International Labour Organisation
(ILO) Juan Somavia, looking bored; on his left, is United Nations
Secretary-General Ban Ki-moon, looking into the distance and possibly
wondering if the leaders of the big countries present, will give him
the nod for a second term, after an unremarkable first one.
The IMF said on Monday that a mix of increased resources, policy
flexibility, and more focused conditionality has resulted in better
support for emerging market countries hit by the recent global
financial crisis. In an analysis of 15 countries1, Review of Recent
Crisis Programs, the IMF said that the Fund-supported programs are
delivering the kind of policy response and financing needed to help
cushion the blow from the worst crisis since the 1930s.
"What this study tells us is that, with IMF support, many of the
severe disruptions characteristic of past crises have so far been
either avoided or sharply reduced,"IMF Managing Director Dominique
Strauss-Kahn said. "Serious challenges remain, especially restoring
sustained growth in output and employment, but there are encouraging
signs of stabilization. The governments and peoples of the countries
concerned deserve the credit for these efforts."
In the past, the IMF earned a bad name in the developing world for
its harsh reform programs that were often perceived as inflicting
too much pain on the poor, in particular.
Today’s published study describes the typical econo ng, sharp current
account contractions, and systemic banking crises — and examines why
these outcomes have so far been avoided in most cases. Key factors
this time include rapid provision, large-scale, and front-loaded
IMF financing channeled to sectors facing the tightest financing
constraints; accommodative macroeconomic policies; emphasis on
protecting the financial sector from liquidity squeezes; more focused
conditionality; and stronger country ownership. The study notes that
outcomes and policies in program countries are broadly similar to
those of non-program emerging market countries, once controlling for
pre-existing vulnerabilities, such as current account deficits and
credit booms.
"It is clear that this new generation of programs incorporate the
lessons of the past," IMF Director of Strategy, Policy, and Review
Reza Moghadam said, "While it is certainly too early to draw firm
conclusions, this assessment is useful in providing real-time
feedback to country authorities, IMF staff, partner institutions
and policymakers elsewhere, so that we can continue to learn and
improve further."
Among the factors that have helped avoid past problems are:
Large and timely financing: The Fund was able to quickly mobilise large
financing packages for countries hit by the financial turbulence of
late 2008. Almost all have entailed exceptional access — beyond
the normal limits — to Fund resources, with more front-loaded
disbursements. Financing packages have included support from other
official creditors, enabling risk sharing. Private sector involvement
has also been sought in a number of European programs. Importantly,
official financing has been used more to meet actual funding
constraints of the private and public sectors, less to replenish
central banks reserves.
More focused conditionality: recent programs carry fewer structural
conditions than previous arrangements. The study found a sharp fall
in measures outside the key areas of Fund competency and a marked
increase in the share of financial sect s at the root of the current
crisis. However, structural conditions typically rise over time as
crises deepen and vulnerabilities shift–so this aspect will require
continued close monitoring.
Stronger Country Ownership: the programs show differences in
design across countries (with respect, for example, to the choice
of currency regimes), reflecting the need to tailor support to each
country’s particular reform agenda–the failure to do this has been
a criticism of past IMF support. Compliance has been better and
completion of program reviews timely, suggesting strong country
ownership of programs supported by the Fund.
Policy responses tailored to country circumstances, including:
* Accommodative fiscal policy: fiscal policy in most cases has been
accommodative and adjusted to evolving conditions. Deficits were
allowed to rise in response to falling revenues and, in cases where
domestic and external financing was lacking, this was facilitated
by channeling Fund resources directly to the budget. Going forward,
countries with heavier debt burdens will need to redouble fiscal
efforts to secure sustainability.
* Avoidance of abrupt monetary policy tightening: sharp spikes
in interest and exchange rates have been avoided, minimising the
negative dynamics from balance sheet effects, particularly in countries
where a high share of borrowing is in foreign currency. As a result,
the real exchange rate adjustment needed to support lower current
account deficits can hopefully be achieved in a more gradual and less
stressed environment.
* Pre-emptive steps to address banking problems: the general avoidance
of banking crises in program countries thus far is remarkable,
given that in many cases, especially in Central and Eastern Europe,
banking systems entered the crisis after an externally-financed credit
boom. The study argues that various factors–strengthened financial
sector regulation in advance, avoidance of currency and interest rate
overshooting, and emergency program measures including liquidity p
urance–have contributed to this result.
* Commitments to sustain or expand social safety nets: these have
been undertaken by authorities in all program countries, with some
shifting from higher spending to better targeting over time. Given
the importance of protecting the most vulnerable groups, this is
another aspect requiring continued close monitoring.
While concluding that the worst outcomes have so far been avoided
in most cases and that early stabilization has been achieved, the
study cautions that major challenges remain, including the timely
unwinding of fiscal and monetary stimulus, adjustment to external
competitiveness factors, and fixing bank balance sheets.
1Armenia, Belarus, Bosnia & Herzegovina, Costa Rica, El Salvador,
Georgia, Guatemala, Hungary, Iceland, Latvia, Mongolia, Pakistan,
Romania, Serbia, and Ukraine.
On Friday, leaders of the Group of Twenty (G-20) industrialised
and emerging market economies at their summit in Pittsburgh
pledged to sustain the strong policy response to counter the global
economic crisis and provided political support for a shift in country
representation at the IMF of at least 5 percent toward dynamic emerging
market and developing countries.
In a communiqué, the leaders said the forceful policy response
to the crisis had helped stop a dangerous, sharp decline in global
activity and stabilise financial markets. Industrial output is now
rising in nearly all economies and international trade is starting to
recover. The leaders quoted IMF analysis showing the global economy
expected to grow at nearly 3 percent by the end of next year.
The leaders, meeting on September 25, said they decided to designate
the G-20 as the "premier forum for our international economic
cooperation." The G-20 leaders also agreed to continue strengthening
regulation of the international financial system; protect consumers,
depositors, and investors from abusive market practices; and encourage
the resumption of lending to households and businesses. They asked
the IMF to help the th its analysis of how national or regional policy
frameworks fit together.
At the same time, they stressed their commitment to the world’s
poorest countries, saying "steps to reduce the development gap can
be a potent driver of global growth."
IMF Managing Director Dominique Strauss-Kahn welcomed the G-20’s
continuing support of the IMF and noted the leaders’ reaffirmation
of their London Summit initiative to reach agreement on IMF quotas by
January 2011. "The April 2008 quota and voice reforms were a first step
to enhance the voice and representation of the world’s emerging and
developing countries. Today’s G-20’s commitment to a shift in quota
share to dynamic emerging market and developing countries of at least
five percent from over-represented to under-represented countries, and
to protect the voting share of the poorest in the IMF, is a decisive
move. This historic decision, and the emergence of the G-20 as a key
forum for international economic cooperation, will lay the foundation
for a deeper partnership in global economic policy between emerging and
developing countries and the advanced economies," Strauss-Kahn said.
While the G-20 will have responsibility for global economic
coordination, it will only have a role of influencing members as it
will have no power of sanction.
The G-20 agreed in Pittsburgh that bonus payments for financial
managers will in future be linked to long-term financial performance,
worldwide. Banks will be required to increase their capital reserves
to cover high-risk ventures so that the current financial crisis is
not repeated. At the same time the major industrialised countries
and emerging economies (G-20) have resolved to put in place a common
global framework for the world economy, which is in future to be
managed sustainably.
In response to European, and particularly Franco-German pressure,
major progress was made in Pittsburgh on drawing up a new financial
market constitution.
In future all states will ensure that bonus payments for bank
execut e. If their company does badly they may even see their pay
cut. Performance-linked pay is more often to take the form of shares
rather than cash payments, which should be a further incentive for
the recipient to ensure that the company does well.
By 2011 banks will be required to build significantly higher capital
reserves to cover high-risk products. The stricter regulations already
in place in Europe will then also apply to US banks. Accounting
regulations will be harmonised at international level.
A system will be put in place to ensure that banks can never again
blackmail states and government. The Financial Stability Forum is to
draw up proposals to this end, also by 2011. The plan is to create
a legal framework to regulate the rehabilitation or winding up of
ailing banks.
The G-20 nations will consider a financial transaction or speculation
tax, as proposed by Germany and France but the issue is at an early
stage of discussion.
In addition to regulating financial markets the G-20 in future aims to
deal with other urgent economic issues that require an international
response. In Pittsburgh they already looked at ways of eliminating
imbalances in global trade, in particular making good the deficits
suffered by poorer countries as compared to the industrialised nations.
To revive the world economy, the G-20 states said they intend to
work to further liberalise world trade. The Doha Round of trade
talks of the World Trade Organization (WTO) is to be brought to a
successful conclusion at the start of next year, after eight years
of negotiations.
The G-20 comprises Argentina, Australia, Brazil, Canada, China, France,
Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia,
South Africa, South Korea, Turkey, the United Kingdom, and the United
States, plus the European Union. To ensure global economic fora and
institutions work together, the Managing Director of the International
Monetary Fund and the President of the World Bank, plus the chairs
of the International Monetary and Financial Comm of the IMF and World
Bank, also participate in G-20 meetings on an ex-officio basis.
Together, member countries represent around 90 percent of global
gross national product as well as two-thirds of the world’s population.