IMF managing director Dominique Strauss-Kahn yesterday called for a huge increase in the Fund’s permanent funding base so that it can act as a “global lender of last resort” and alleviate the need for countries to hold large foreign exchange reserves. The recent major boost in the IMF’s resources is only “temporary”, he noted.
The resource base needs boosting so that the IMF can provide “financial insurance” to emerging economies in times of crisis and for warding off crises, he said. “How much is needed is a difficult question,” said Strauss-Kahn. “Some have said $1 trillion, while others think the resource base should be far larger than that.”
In a wide ranging policy speech in Istanbul ahead of the IMF annual meeting, Strauss-Kahn appeared to be laying the groundwork for a further major increase in IMF resources at a time when some governments have still to meet existing loan commitments.
He argued that a radical recapitalization of the Fund would free emerging markets from the need to accumulate huge foreign exchange reserves – a move that has contributed to global imbalances. “Self insurance - as opposed to collective financial insurance - is costly. At the country level, investing in foreign reserves is inefficient because of foregone alternative investments, such as infrastructure or education, which could have a much higher social return.”
His comments were echoed yesterday by Jose Vinlas, director of the IMF’s monetary and capital markets department who told Emerging Markets: “It is inefficient to have self-insurance on the part of each country. It is efficient to have a cooperative mechanism at the global level and the IMF is the institution that can do that best.”
Strauss-Kahn underlined the danger of emerging markets facing a fresh funding crunch once monetary authorities in advanced economies start tightening again, and warned that the.the global financial and economic crisis is by no means over.
The managing director told a seminar hosted by the Central Bank of Turkey and the Reinventing Bretton Woods Committee that a “strengthened international monetary system with a global lender of last resort” is needed to deal with such threats. “Recent experience has “shown that fast-paced and hard-hitting financial crises can lead to an extraordinarily large demand for official resources,” he said.
Since the current global crisis erupted, the IMF has “already committed more than twice the amount that we lent during the Asian crisis,” Strauss-Kahn said. It has been able to do this because of the G20 decision in April to triple the IMF’s lending resources to $750 billion, he noted.
“The resources made available and pledged to the IMF were extremely helpful in stabilising markets at the peak of the crisis. But they are temporary or contingent,” he pointed out.
The $500 billion in new lending resources the IMF has received through a system of credit arrangements with certain member countries, known as the New Arrangements to Borrow, require approval every five years, Strauss-Kahn pointed out. They can be activated only when a crisis is looming or underway.
“These conditions could add an element of uncertainty to the availability of IMF crisis financing. And, while our new lending resources have proved sufficient so far, they may not be enough to reassure our members and financial markets that they would be sufficient to meet future crises.”
This means that “the IMF cannot yet serve as a credible global lender of last resort,” he added. Strauss-Kahn noted that foreign exchange reserve holdings in emerging and advanced economies have quadrupled from $2 trillion in the late 1990s to more than $8 trillion today.