The IMF 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 the “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 IMF’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 IMF’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.