G-20 Reaffirms IMF's Central Role in Combating Crisis

We talked about the role of the IMF in class last week and the question came up about how the IMF actually fosters stability among the world's financial systems. Here's a piece of the press release coming out of the recent G-20 from the IMF's website:

• Strauss-Kahn says IMF reinforced as central institution of financial system
• G-20 decides to triple Fund's lending capacity to $750 billion
• Leaders target concessional lending to low-income countries to more than double

The Group of Twenty (G-20) industrialized and emerging market economies has reaffirmed the IMF’s central role in the international financial system, agreeing to triple the Fund’s lending capacity to $750 billion and enabling it to inject extra liquidity into the world economy, according to Managing Director Dominique Strauss-Kahn.

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."