In connection with the Annual Meetings of the IMF and the World Bank in Washington, D.C. this weekend, the IMF Board of Governors’ International Monetary and Finance Committee (IMFC), chaired by Dr. Youssef Boutros-Ghali, Minister of Finance of Egypt, issued a communiqué summarizing the IMF’s Annual Meeting. The communiqué, representing the consensus of all 187 IMF member states, addressed the following topics:
Global Economy. The IMFC noted that economy recovery is proceeding but remains fragile and uneven across the membership. The IMFC reaffirmed its “strong commitment to continue working collaboratively to secure strong, sustainable, and balanced growth and to refrain from policy actions that would detract from this shared goal.” The IMFC remarked that its top priorities “are to address remaining financial sector fragilities; ensure strong growth in private sector demand and job creation; secure sound public finances and debt sustainability; work toward a more balanced pattern of global growth, recognizing the responsibilities of surplus and deficit countries; and address the challenges of large and volatile capital movements, which can be disruptive.” The IMFC also called upon global leaders to reject protectionism. In his remarks on Friday, U.S. Treasury Secretary Timothy Geithner stated that the IMF and World Bank “effectively kept trade protectionism at bay” and that as the global economy has “started to recover, trade has rebounded, presenting us with a renewed opportunity to advance the multilateral trade agenda.” He reiterated the United States’ commitment to the multilateral rules-based trading system.
Remarking on what IMFC Chairman Boutros-Ghali called currency “frictions,” Secretary Geithner stated that “the IMF has an important role to play to help ensure that progress toward rebalancing strengthens and that the international adjustment process is permitted to work. … It is ultimately the responsibility of countries to act, but the IMF must speak out effectively about challenges and marshal support for action.”
In a press briefing in connection with the communiqué’s release, Chairman Boutros-Ghali stated that “the global recovery is happening, but it is fragile. It is uneven around the world. It is still threatened by a number of elements that could push on the downside. Some elements related to sovereign risk, others related to financial sector which is still recovering, which is not fully recovered.”
Financial Sector Reform. The IMFC noted its approval of the recent Basel III agreement on a substantial improvement in the quality and quantity of bank capital, together with the introduction of a global liquidity standard and a leverage ratio. It called for further action to enhance regulation, supervision, cross-border resolution, and macro-prudential surveillance. It supported measures to strengthen balance sheets and market infrastructure, and to reduce risks from systemically important financial institutions and moral hazard, while ensuring a level playing field.
Low-Income Countries (LICs). The IMFC applauded the resilience and rapid recovery of many LICs, and voiced support for the significant reforms undertaken by these countries to cushion their economies during the crisis. It solicited members’ contributions for concessional lending and call for further such support, including from new contributors. In his remarks, Secretary Geithner stated that “the World Bank's mission to end poverty remains vital, and the United States recognizes the value of the Bank's efforts to strengthen broad-based economic growth, including strengthening the private sector and infrastructure, investing in innovation, and building sustainable systems for meeting basic human needs.” He applauded the World Bank and the IMF actions to cushion the LICs from the worst impacts of the crisis and to help restore liquidity for world trade flows. He cited these actions as critical to global stabilization efforts and called them a fundamental part of the reason for current growth.
IMF Reform. Noting “the extensive and ongoing work by the Fund on the review of its governance and mandate,” the IMFC said that “further action is urgently needed to reinforce the institution’s role and effectiveness as a global body for macro-financial surveillance and policy collaboration.” Specifically, the IMFC noted the following:
- Quota and governance reforms. The IMFC reemphasized that “quota and governance reforms are critical to institutional legitimacy and effectiveness.” It noted the progress made on finding “common ground on core reform areas,” including the size of the quota increase and the quota shift, “enhanced voice and representation of emerging markets and developing countries at the IMF’s Executive Board,” “modalities for protecting the voting share of the poorest members,” enhanced “ministerial engagement and strategic oversight,” and an “open, transparent, and merit-based process” for selecting the heads of the IMF and the other international financial institutions. During the press briefing, IMF Managing Director Dominique Strauss-Kahn made the point that “when countries want to have bigger quota, have more say, more voice, more influence in the IMF, then they must also share the problem of the whole. You cannot be in the center and be a free rider.”
- Surveillance mandate. The IMFC called for “stronger and evenhanded surveillance to uncover vulnerabilities in large advanced economies,” emphasizing that surveillance should also be “better focused on financial stability issues and their macroeconomic linkages, and more attentive to cross-border spillovers.” It called for the 2011 triennial review to consider the effectiveness of the IMF’s framework for surveillance, including its “rigor, candor, evenhandedness, focus on systemic issues, and ways to improve its traction.” Secretary Geithner supported strengthening the IMF’s surveillance role to avoid future crises, calling surveillance “one of the Fund's core functions,” He also remarked that the IMF must strengthen its surveillance of exchange-rate policies and reserve accumulation practices. Excess reserve accumulation on a global scale, to Secretary Geithner, is leading to serious distortions in the international monetary and financial system, and is inhibiting the international adjustment process. During the press briefing, Managing Director Strauss-Kahn stated that “usually the surveillance process goes once through bilateral surveillance, but with very little attention or no attention at all paid to the consequences of economic policy implemented in one country, on other countries.” As an example, he noted that “in systemic countries like the U.S., like the euro zone, like Japan, like China, what they do for their own countries have consequence on the rest of the world.” Consideration of this “spillover effect” would be part of the Article IV Consultation Report, an annual report compiled that assesses each member government’s economic health, assured Managing Director Strauss-Kahn.
- Financing mandate. The IMFC supported recent decisions by the IMF’s Executive Board to further strengthen IMF’s crisis prevention role by refining the Flexible Credit Line and establishing the Precautionary Credit. It supported efforts to continue its work on ways to improve the IMF’s capacity to help members cope with systemic shocks, and to cooperate with other relevant bodies, in particular regional financial arrangements. Secretary Geithner supported the reforms to the Flexible Credit Line and the creation of the Precautionary Credit Line, stating they will give the IMF the necessary tools to respond more quickly and forcefully to future crises.
- Mandate for international monetary stability. The IMFC noted the continuing tensions and vulnerabilities as a result of widening global imbalances, continued volatile capital flows, exchange rate movements, and issues related to the supply and accumulation of official reserves. It called on the IMF to deepen its work in these areas, including in-depth studies to help increase the effectiveness of policies to manage capital flows. Notably, the IMFC did not adopt any stronger statements about countries’ efforts to actively manage currency exchange rates. While China’s currency policies were highlighted during the annual meeting, no formal action was taken with respect to currency movements. The U.S., European nations, and even some emerging markets claim that China is deliberating undervaluing its yuan to aid its exports. Surrounding countries, such as Japan and South Korea, have taken measures to reduce the value of their currencies as well, raising concerns of a possible trade war. At a meeting of the G-20 in Toronto in June, China had agreed to show “flexibility” in its exchange rate policy, ending a period of linking the yuan to the U.S. dollar. Since then, the Chinese yuan’s value has not risen appreciably, leading White House economic adviser Larry Summers to met with Chinese officials in Beijing in September. The U.S. is expected to raise the issue of China’s exchange rate policies at a summit of the leaders of the G-20 in Seoul in November.