Last Friday, IMF Managing Director Strauss-Kahn, at an event hosted by Banco de Espana, in Madrid, Spain, gave a speech addressing the future of the Fund. Mr. Strauss-Kahn noted that the Fund’s two main objectives were to “help the world resort stability” and “look ahead and design a financial architecture to make the global economy calmer and less prone to economic and financial instability,” but that this was a critical time to redefine the future of the Fund. Mr. Strauss-Kahn acknowledged that a tangible by-product of the G-20 summit was a comprehensive agenda endorsed by the Finance Ministers to target the crisis, but that actions taken thus far were not enough.
Mr. Strauss-Kahn identified the following three areas that the Fund and its members should focus on in the short term in efforts to “prevent a global depression”:
- Restoring stability to the financial markets;
- Supporting aggregate demand; and
- Providing financial support to crisis-hit countries.
Restoring Stability to the Financial Markets. The Fund has indicated that comprehensive and coordinated government intervention is needed in order to restore confidence and stability in the market place. Specifically, “[g]overnment action needs to have a clear objective so that effective oversight of how public money is used is possible.” Additionally, “[n]ational plans need to also be comprehensive” and “contain guarantees to depositors and assurances to creditors that are sufficient to ensure that markets function.”
Supporting Aggregate Demand. In the near future the Fund will be publishing a paper outlining its proposed fiscal policy strategy to be considered by member states during the present crisis. The Fund believes that, now more than ever, fiscal stimulus is “essential to restor[ing] global growth.” While the Fund recognizes that each member state will need to “consider its own circumstances” before setting forth a policy, it urges countries that have the means to adopt appropriate measures to stimulate the economy to do so. Providing Financial Support to Crisis-hit Countries. The Fund intends to continue providing financial aid to countries most affected by the crisis. Since October, the IMF has provided aid through its various facilities or stand-by arrangements to Ukraine, Hungary, Serbia, Armenia, Iceland, Pakistan, and the Kyrgyz Republic. In October, the Fund also created a Short-Term Facility which is “designed to draw upon existing IMF resources to provide ‘quick-disbursing short term financing’ to countries with relatively strong economic policies, but that have been experiencing liquidity problems as a result of the global economic crisis.”
Mr. Strauss-Kahn cautioned that, if the crisis continues to worsen, the Fund may not have adequate resources to provide aid to countries in need. He encouraged other countries to follow the example of Japan, which is loaning the Fund $100 billion, and urged “the major advanced economies to cofinance Fund loans – either directly or through balance of payments support in conjunction with Fund programs.”
Mr. Strauss-Kahn concluded his statement in part by calling for the enhanced role of the G-20. He stated that such role “needs to be accompanied by greater reliance on multilateral institutions with near universal membership, so that no country that wants to participate in the international system is left out.”