The IMF’s Lending Overhaul

The International Monetary Fund should be an essential port of call for emerging-market and developing countries facing financing needs. With its ability to mobilize large financial resources and buttress policy credibility, the IMF can help mitigate the large economic and social costs often associated with crises. Against this background, the world has come together in the midst of the crisis to radically overhaul the framework for IMF lending. Now and in the future, the world needs the IMF to respond flexibly and effectively to its members’ needs. First and foremost, our financing packages should be large enough relative to the size of the problem to make a difference. In addition, the absence of an IMF insurance facility with acceptable terms has been a major gap in the global financial architecture, especially for the more dynamic emerging-market economies. This is despite all the evidence of the value of early access to IMF financing, before a tough situation deteriorates into a crisis. Moreover, while it remains essential to attach policy conditions to IMF-supported programs, they should be focused squarely on solving a country’s critical problems, so that the conditions will be relevant rather than intrusive. With our members’ support, we are implementing important reforms to our lending policies that will encourage countries to approach the IMF early on, before crises become severe and almost intractable. The reform comprises three core elements: First, policy conditions associated with future IMF lending will be better tailored to country circumstances. A new Flexible Credit Line makes high-volume financing available – even before a crisis has struck – without any ex post policy conditionality to qualifying countries with strong economic fundamentals and policy frameworks. Some observers have dubbed the new facility “EZ loan,” though few countries meeting the qualifying criteria would consider their policy achievements – and their commitment to maintaining that record – anything but “easy.” For others, conditionality will be more tightly focused on core areas, and “structural” conditions that require hard-to-time legislative measures will be judged in a less formalistic manner. Second, for those not qualifying for the new instrument, the Fund’s workhorse lending facility, the Stand-By Arrangement, will be made more flexible along several dimensions. These include permitting high financial access even before a crisis materializes, and allowing disbursements to be more front-loaded. Third, the amount of lending available from the IMF is being raised substantially. Normal limits on access to IMF resources are being doubled – a development consistent with the growing consensus that the Fund’s lending capacity needs to be at least doubled given the severity of this crisis. This is extremely important, since few things are as fatal to the credibility of a policy package as insufficient financing. Taken together, these steps address the core problems – the stigma associated in the past with IMF conditionality, the availability of early pre-crisis financing, and the overall size of rescue packages – that have sometimes diminished the effectiveness of the Fund’s role as a crisis lender. Emerging markets that approach the IMF early on for pre-crisis financing will find shelter from the winds of global deleveraging, which in turn will help contain the spread of the crisis. The IMF has already moved quickly to help many of our member countries in this time of crisis, including by protecting social spending in order to cushion the impact of the crisis on the most vulnerable. The lending reforms adopted this week will enable us to be even more flexible and responsive in assisting even more countries. At the same time, these reforms are only a part of a much larger plan for IMF renewal. Still in the pipeline are initiatives to increase concessional lending to low-income countries hit by the crisis, to strengthen the Fund’s surveillance and early warning capacity, and to improve its governance structure in ways that recognize the larger role of emerging-market countries in the world economy. It is my hope that further action in all these areas will be taken in the coming months. Together, they constitute a turning point in the way the IMF works, and will allow it to serve its global membership even better. Dominique Strauss-Kahn is Managing Director of the International Monetary Fund. Copyright: Project Syndicate, 2009.www.project-syndicate.org

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The IMF’s Lending Overhaul