G-20 leaders decided to dramatically beef up IMF’s lending capacity to support its ability to combat financial contagion (photo: Kyodo News)
GLOBAL ECONOMIC CRISIS
At their summit in London on April 2, the G-20 leaders decided to dramatically beef up the IMF’s lending capacity to support its ability to combat financial contagion, providing significant new financing and a broad mandate for action.
Strauss-Kahn told reporters that the huge increase in IMF resources would bolster the IMF’s firepower to help economies around the world respond to the crisis, which has plunged economies into recession and sent world trade plummeting. Low-income countries would also get help, with leaders proposing more than a doubling of concessional lending resources.
The G-20 leaders agreed to triple the IMF's war chest to $750 billion. And they will back the IMF in effectively creating an additional $250 billion by issuing "special drawing rights," or SDRs, the institution’s own reserve asset or quasi-currency that borrowing nations can draw upon if needed.
IMF’s multiple roles
Strauss-Kahn told a press conference after the G-20 summit that the IMF’s role in helping to combat the global economic crisis and reinforce the financial system had been reaffirmed in a variety of ways.
• Economic forecaster. IMF economic forecasts were now the central reference point for countries planning how to respond to the crisis. The IMF is forecasting that the global economy will recover in 2010, but only if the right policy actions, including a coordinated fiscal stimulus, are taken.
• Policy advisor. The IMF has been outspoken during the crisis in pressing for a coordinated response to the crisis through cuts in interest rates, big increases in government spending, cleaning up the financial sector, and bolstering regulation. The IMF had become a partner for governments to discuss policies and help them analyze what policy responses to the crisis would work.
• Economic surveillance. The IMF will monitor policy implementation by governments around the world and has been asked to beef up early warning systems, along with the Financial Stability Forum. “We call on the IMF to assess regularly the actions taken and the global actions required,” the G-20 communiqué said. Strauss-Kahn said the IMF has a unique capacity to analyze the relationships between financial markets and the real economy, with a global perspective given its membership. “Our global and country monitoring procedures are being sharpened, including with a new mechanism for early warnings,” he stated.
• Global lender. The resources the IMF has to support its members will be tripled to $750 billion, including $100 billion each from Japan and the European Union. The IMF will use the money to buttress countries affected by the global downturn. Strauss-Kahn pointed to Mexico, which is seeking $47 billion in a precautionary credit line from the IMF. He pointed to new changes in IMF lending policy to make it more flexible.
• Provider of help to low-income countries. Strauss-Kahn said he had committed at a conference in Tanzania last month to being the voice for low-income countries at the G-20 summit. The summit set a target to more than double concessional lending to the world’s poorest countries. “So the commitment made by the IMF in Dar es Salam has been fulfilled, and the low-income countries are not forgotten at the G-20.”
• Boosting world liquidity. The G-20 mandated the IMF to make a new general allocation of SDRs which will inject $250 billion into the world economy and increase global liquidity. Strauss-Kahn said that although $250 billion did not seem that much in a global context, “you will see that it’s the beginning of increasing the role of the IMF, not only as a lender of last resort, not only as a forecaster, not only as an advisor in economic policy and its old traditional role, but also in providing liquidity to the world, which is the role finally and in the end, of a financial institution like ours."
Making IMF representation fairer
Reflecting the growing clout of emerging markets, the G-20 leaders committed to implementing the package of IMF quota and voice reforms agreed in April 2008 and agreed to bring forward a further review of quotas by January 2011. Quotas determine country representation at the 185 member institution.
The G-20 also agreed to consider greater involvement of the Fund’s Governors in providing strategic direction to the IMF and increasing its accountability. They agreed that the heads and senior leadership of the international financial institutions should be appointed through an open, transparent, and merit-based selection process.
Gold sales
The G-20 communiqué said that IMF would use part of the proceeds of a previously proposed sale of gold to provide concessional financing for low-income countries.
A move to sell gold must be supported by 85 percent of the Fund’s executive board, and will require legislative action by several member countries, including the United States.
The proposal to sell 403.3 metric tonnes of IMF gold had been agreed last year as part of a plan to bolster the Fund’s income. The communiqué suggested that part of the proceeds could now be used to provide concessional financing. “We have committed, consistent with the new income model, that additional resources from agreed sales of IMF gold will be used, together with surplus income, to provide $6 billion additional concessional and flexible finance for the poorest countries over the next 2 to 3 years. We call on the IMF to come forward with concrete proposals at the Spring Meetings,” the G-20 leaders said.
The IMF and the World Bank will hold their Spring Meetings in Washington on April 25-26.
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