In her thought-provoking article in the first issue of Global Policy, Ngaire Woods argues that, as the world emerges from the current crisis, multilateral institutions such as the International Monetary Fund (IMF) will have only a limited role to play because no fundamental change to global economic governance has taken place. While we agree that maintaining the momentum of multilateral cooperation in a post-crisis era will not be easy, the reforms under way give greater hope for continued multilateralism than Woods’ analysis may suggest. In what follows, we would like to offer our own perspective on the future of multilateralism, drawing on the IMF’s recent experience and its current work agenda.
1. The IMF’s response to the global crisis
As Woods points out, the IMF has been at the heart of the global response to the financial crisis. This says as much about the greater need for global cooperation in a time of crisis as it does about an IMF that has been intent on pushing ahead with reforms to make itself more relevant for its membership. Thus, as the global financial crisis engulfed the world, posing unprecedented challenges, the IMF acted with alacrity. The G20 in turn endorsed the Fund’s role in crisis management and in building a more robust global architecture.2 Indeed, the G20’s support for a tripling of Fund resources and a new Special Drawing Rights (SDR) allocation, subsequently endorsed by the International Monetary and Financial Committee (IMFC), contributed to a strong global response to the crisis and heralded a new phase of multilateralism.
The IMF’s managing director, Dominique Strauss-Kahn, was among the first (as early as January 2008) to advocate a global fiscal stimulus as recession loomed, giving impetus to what became a globally coordinated fiscal, monetary and financial sector response to the crisis.3 At the country level, the Fund customized its crisis response to its members’ diverse needs, demonstrating its flexibility. For some of its emerging market members, the speed of response was critical, and a number of IMF-supported programs were put in place within weeks of the crisis hitting these economies (for example, in Hungary, Latvia and Ukraine).4
To increase the flexibility of Fund support and enhance members’ ownership of reforms, lending facilities were overhauled. New instruments were created, based on a recognition that many emerging market and developing countries had entered the crisis on a strong footing and needed help to counter a massive external shock rather than a deterioration in their economic fundamentals. To meet the needs of the strongest countries, the Flexible Credit Line, with no ex post conditionality, was introduced to signal the strength of policies and country fundamentals and to attenuate perceptions of stigma attached to Fund support. High Access Precautionary Arrangements were established to provide needed backstop support for a broader set of countries. At the same time, a new conditionality framework was introduced, abolishing the use of binding structural conditions in favor of monitoring based on periodic programs reviews – thereby providing greater room for maneuver to countries in implementing their programs. These reforms facilitated a substantial increase in the take-up of Fund assistance, with 25 new arrangements in emerging markets since the outbreak of the crisis in the fall of 2008, amounting to total lending commitments of more than US$170 billion.
2. Dealing with the ‘development emergency’
While the Fund’s swift and forceful response to the crisis in emerging market economies has been highly visible, its response to the ‘development emergency’ in low-income countries (LICs) has been appreciated more by the countries that have benefited than by commentators in the developed world. Woods’ conclusion that many of the IMF’s new resources have been devoted to emerging market economies does not do justice to the Fund’s crisis response in LICs.
The Fund began to act earlier in LICs, as they were hit by twin crises – the soaring world food and fuel prices during 2007−08 and then the global financial crisis. The first step was to modify what was at the time the IMF’s main vehicle for helping countries hit by forces outside their control – the Exogenous Shocks Facility.5 Changes in September 2008 made this facility more flexible and easier to use. Fifteen countries have since made use of it.
As the impact of the global crisis intensified in early 2009, the IMF doubled the access limits for its loans (the amount each country can borrow in relation to its IMF quota) and quickly ramped up the overall scale of its support for LICs. New concessional (that is, highly subsidized) lending commitments in 2009 amounted to about US$3.8 billion, compared to the historical average of about US$1 billion. The number of LICs with IMF-supported programs almost doubled during the twin crises. In addition, under the US$250 billion general allocation of SDR in August−September 2009, LICs received more than US$18 billion to bolster their foreign exchange reserves. The IMF’s shareholders also agreed to a package of measures that will sharply increase the resources available to low-income countries, boosting the IMF’s concessional lending to up to $17 billion through 2014 and more than doubling its medium-term concessional lending capacity, based in part on resources derived from the planned sales of IMF gold.
These increased resources are now being channeled through a new set of lending facilities for LICs. The new facilities provide more flexible financing options that are better tailored to the different needs of an increasingly diverse group of LICs.6 They will also be cheaper. To help countries maintain debt sustainability in the face of increased borrowing needs, the IMF is waiving all interest payments on new and outstanding concessional loans through the end of 2011, and the concessionality of these loans will be permanently higher after 2011. The new facilities will continue to place a strong emphasis on poverty alleviation and growth objectives – including, wherever appropriate, specific targets to safeguard social and other priority spending.
Of course, in dollar terms, emerging market countries have accounted for the lion’s share of Fund financing, as Woods points out. But this largely reflects the fact that these economies are much bigger than those of the LICs (so their IMF quotas are much larger, too). Moreover, emerging market countries faced a particular type of shock – a ‘sudden stop’ or reversal of capital flows – which could be addressed only by large amounts of short-term financing. In contrast, LICs’ additional financing needs, which reflected mostly a deterioration in their current account positions, tended to be on a smaller scale (even relative to the size of their economies), and more protracted. Financing for LICs also has to be mostly concessional, since these countries often need more time to adjust to shocks and have a weaker capacity to carry additional debt.7 Thus, IMF assistance has always been intended to meet only a part of LICs’ financing needs, while helping to catalyze additional grants and highly subsidized long-term loans from development agencies and donors. Accordingly, throughout the twin crises, the Fund has called upon the international community to scale up financial support on highly concessional terms to meet the increased needs of LICs.8
By boosting its financial assistance and adapting program design, the Fund has helped LICs to undertake countercyclical policies to mitigate the impact of the twin crises – emulating the responses the IMF has advocated in emerging market and advanced economies. Fortunately, in the years leading up to the crises, many countries had strengthened their economic fundamentals through improved economic management, supported by large-scale debt relief. This gave them more room for maneuver to respond to the shocks that followed. A recent IMF study showed that most LIC programs have allowed for a significant easing of fiscal and monetary policies in the face of the food and fuel price shocks and the global financial crisis, allowing government spending to rise in many cases, despite the slump in fiscal revenues. Both emerging market and LIC crisis programs have also placed considerable emphasis on targeting support to protect the most vulnerable.9
3. Strengthening governance
While dealing with the global crisis, the Fund has continued to focus on strengthening its governance. Woods rightly highlights the importance of engaging emerging market economies in accomplishing the tasks that the international community has assigned to the Fund, including addressing global imbalances.
As Woods acknowledges, progress has already been made in governance reform at the Fund, with the reform package agreed in April 2008 kicking off a significant shift in voting power in favor of emerging market and developing countries. But all agree that this is not enough, and a tremendous effort is therefore under way to better align quotas with countries’ weight in the global economy. The crucial step was the commitment last fall by the G20 leaders and the IMFC to accomplish a shift in quota share to dynamic emerging market and developing countries of at least 5 per cent from overrepresented countries to underrepresented countries using the current quota formula as the basis to work from, while protecting the voting share of the poorest members. The schedule for completing the next quota reform has been brought forward from 2013 to January 2011. In addition, progress is under way on broader governance reforms, such as putting in place an open, merit-based and transparent process for the selection of IMF management – which the IMFC intends to adopt at its 2010 Spring Meeting.
4. Sustaining multilateralism
With a global economic recovery in sight, the Fund’s efforts to sustain multilateralism remain strong. High on the Fund’s work agenda is addressing the challenges faced by its membership in a post-crisis world. At the request of the IMFC, the Fund is reviewing its mandate in the light of the crisis – encompassing its role in surveillance, lending and in the global reserves system – to assess how to better serve as a guardian of global stability. The general thrust of these efforts is to bring more of a systemic perspective, with emphasis on financial stability, in all of the Fund’s work, and to build on the innovations successfully deployed in the midst of the crisis. Meanwhile, the G20’s request for the Fund to take a central advisory role in their mutual assessment process shows both their commitment to working together and their trust in the Fund to support these efforts.
Work is also under way in the context of the 14th review of quotas to bolster the Fund’s resource base for the long term. This review will consider what the overall size of the Fund needs to be for it to be able to fulfill its mandate and, within this, what proportion should come respectively from enlarged quotas and from borrowing arrangements, such as the New Arrangements to Borrow. (The IMFC has emphasized repeatedly that the IMF is, and should remain, a quota-based institution.) Meanwhile, a new income model has been approved, and will enter into force when the requisite number of members have ratified the required change in the Fund’s Articles of Agreement. Once it is in place, the Fund will no longer rely primarily on interest paid by countries that borrow from the Fund for financing its operational expenses.
The international community’s response to the crisis was successful because it was based to a large extent on global collaboration – not just among the countries at the heart of the crisis, but also with all others affected by it, from the most advanced to the poorest. The IMF was instrumental in this success and is determined to build on these achievements. No doubt, there are hints that the general spirit of collaboration may be fraying, and it is certainly too early to declare multilateralism victorious. Indeed, it probably always will be. That said, there are solid grounds to hope that, with continued efforts to reform global governance, multilateralism may indeed endure. For the IMF, this is more than a central objective – it is our raison d’être.
See IMF press release at http://www.imf.org/external/np/sec/pr/2008/pr08286.htm.
See Strauss-Kahn’s commentary in the Financial Times, 30 January 2008, available from: http://www.imf.org/external/np/vc/2008/013008.htm.
For details about how the IMF has responded to the crisis at the country level, see ‘Review of Recent Crisis Programs’, available from: http://www.imf.org/external/pp/longres.aspx?id=4366, and ‘Creating Policy Space – Responsive Design and Streamlined Conditionality in Recent Low-Income Country Programs’, available from: http://www.imf.org/external/pp/longres.aspx?id=4372.
See the IMF Factsheet on this facility at http://www.imf.org/external/np/exr/facts/esf.htm.
See IMF Factsheet on new LIC facilities at http://www.imf.org/external/np/exr/facts/poor.htm, http://www.imf.org/external/np/exr/facts/concesslending.htm.
Nevertheless, some LICs (e.g. Angola, Armenia, Georgia, Pakistan and Sri Lanka) have been able to use substantial amounts of the Fund’s nonconcessional resources. Combined with concessional resources, total IMF loan disbursements to LICs during 2008–09 represented about 23 per cent of the IMF’s disbursements to its entire membership.
See ‘The Implications of the Global Financial Crisis for Low-Income Countries – An Update’, September 2009. Available from: http://www.imf.org/external/pp/longres.aspx?id=4371.
See references cited in Note 4.