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News : International Last Updated: Sep 29, 2009 - 7:42:07 AM


IMF supported programs help countries weather the worst of the global crisis says internal review
By Finfacts Team
Sep 28, 2009 - 5:31:37 AM

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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 economic and financial effects of past crises -- including currency overshooting, 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 sector conditions 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 provision and deposit insurance—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 G-20 with 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 executives are linked to sustainable performance. 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 Committee and Development Committee 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.

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