Factsheet
A Changing IMF—Responding to the Crisis
March 16, 2011
As the world economy has become engulfed in the worst crisis in many decades, the IMF has mobilized on many fronts to support its member countries, increasing its lending, using its cross-country experience to advise on policy solutions, and introducing reforms to modernize its operations and become more responsive to member countries’ needs.
Stepping up crisis lending. The IMF has responded quickly to the global economic crisis, with lending commitments reaching a record level of about $250 billion, including a sharp increase in concessional lending to the world’s poorest nations.
Providing analysis and targeted advice. The IMF’s monitoring, forecasts, and policy advice, informed by a global perspective and by experience from previous crises, have been in high demand and have been extensively used by the Group of Twenty (G-20) industrialized and emerging market economies.
Becoming more flexible. The IMF has overhauled its general lending framework to make it better suited to country needs and streamlined conditions attached to loans.
Boosting lending capacity. The IMF has bolstered its lending resources through bilateral loans and note purchase agreements with members totaling over $250 billion. An amended and enlarged New Arrangements to Borrow (the NAB) totaling over $550 billion is expected to become effective soon. Going forward, the IMF’s quotas, its permanent resources, are to be doubled, although there will be a corresponding reduction in the NAB at that time.
Drawing lessons from the crisis. The IMF is contributing to the ongoing effort to draw lessons from the crisis for policy, regulation, and reform of the global financial architecture.
The IMF’s new lending framework
Overhaul of lending framework. As part of moves to support countries during the global economic crisis, the IMF is beefing up its lending capacity and has approved a major overhaul of how it lends money by offering higher amounts and tailoring loan terms to countries’ varying strengths and circumstances. More recently, further reforms have been approved to improve the IMF’s capacity to prevent crises.
Mainly:
_Doubling of member countries’ access to IMF resources
_Streamlined approach aims to reduce stigma of borrowing
_New Flexible Credit Line (FCL) for countries with robust policy frameworks and a strong track record in economic performance
New Precautionary Credit Line (PCL)for countries that have sound economic policies and fundamentals, but are still facing vulnerabilities
Reform does away with “hard” structural conditionality
New focus on objectives rather than specific actions
Increased focus on social spending and more concessional terms for low-income countries
New credit line for well-run economies. The Flexible Credit Line is a crisis prevention tool that offers disbursements that are not phased. There are no conditions to be met once a country has been approved for the facility. The FCL was further enhanced in August 2010 to make it more predictable and flexible. Colombia, Mexico, and Poland have been provided access over $100 billion.
New credit line for sound economies still facing vulnerabilities. The Precautionary Credit Line is also a new crisis-prevention tool that combines an initial disbursement once the country has been approved for the PCL without conditions, with further disbursements subject to focused conditions. In January 2011, Macedonia became the first country to access the PCL.
New rules for terms of IMF lending.Starting May 1, 2009, structural performance criteria have been discontinued for all IMF loans, including for programs with low-income countries. Structural reforms will continue to be part of IMF-supported programs, but have become more focused on areas critical to a country’s recovery. And the monitoring of these policies will be done in a way that reduces stigma, because countries will no longer need formal waivers if they fail to implement an agreed measure by a specific date.
Examples of flexibility in IMF-supported programs
More flexibility and fewer conditions. IMF-supported programs have been tailored to individual country circumstances and focus on the most immediate issues to resolve the crisis. Conditionality is now more tightly focused on core objectives. The number of structural conditions has decreased in many programs, and has been increasingly limited to the most critical measures.
The May 2010 IMF-supported program in Greece is the largest financing package assembled for one country and represents a new level of coordination with international partners (the European Commission), is broad-based (addressing fiscal, financial and structural constraints), and represents a flexible application of IMF lending policies to mitigate systemic risk.
The September 2008 IMF-supported program in Costa Rica used expansionary fiscal policy to mitigate the adverse effects of the drop in private demand during 2009, including increases in the wage bill and infrastructure spending.
The April 2008 IMF-supported program in Guatemala sought a moderate fiscal stimulus to support domestic demand, financed with substantial external resources from multilateral institutions. Social spending was slated to increase by 0.6 percent of GDP, to help offset the effect of the crisis on the poorest people in society.
In Pakistan, the IMF and the authorities have worked to create fiscal space in the program for increased social safety net and security spending. Recently, in response to the devastating floods in July-August 2010, the IMF provided $451 million of Emergency Assistance (ENDA) to help the government provide food, shelter and health services for those affected by the disaster.
This additional funding was disbursed quickly, and was not linked to any program-based conditionality or review. The program's macroeconomic framework will be adjusted to take into account the impact of the floods on growth, the balance of payments, and the budget deficit.
Emphasis on social protection
Emphasis on social protection
The IMF emphasizes protection of social and other priority spending, in line with countries’ priorities as set out in their poverty reduction strategies. In the context of the IMF’s new architecture for LIC lending facilities, increased emphasis is given to strengthening safeguards on social and other priority spending, including through explicit program targets where possible.
Social spending is being preserved or increased wherever possible. For instance, under the IMF-supported program in Tajikistan, the authorities aim to raise social- and poverty-related spending from 7.3 percent of GDP in 2008 to 8.7 percent of GDP in 2009, and further to 10 percent of GDP by 2012. All IMF-supported programs in low-income countries are expected to include floors on social and other priority spending.
In Latvia, the IMF has been working with the authorities, the European Commission, and the World Bank to refine cost-cutting measures so they deliver the necessary adjustment while protecting the most vulnerable groups. These efforts have resulted in a comprehensive strategy to improve the social safety net at a cost expected to reach 0.6 percent of GDP in 2010.
In Jamaica, spending on well-targeted social assistance programs will be increased by at least 25 percent in FY2010–11. This increase will benefit the school feeding program and the Program of Advancement through Health and Education (PATH), which provides conditional cash transfers to the poorest. Structural reforms are designed in a way to protect the most vulnerable. For instance, in El Salvador, the authorities eliminated the non-residential electricity subsidy, thereby creating fiscal space (of up to 0.3 percent of GDP) to increase social spending in 2009.
The IMF is working closely with the World Bank and donors to identify additional external financing for social protection and to help countries promote social safety net reform.
Helping the world’s poorest
Reform of financing instruments. The IMF has overhauled its concessional financing facilities to make them more flexible and address the diverse needs of low-income countries, as many are being hard hit by the global crisis. The reform allows the Fund to provide more effective short-term and emergency financial assistance. The new framework includes increased resources, a doubling of borrowing limits, zero interest rates until the end of 2011, and a new interest rate structure thereafter to ensure increased concessionality.
In response to the global financial crisis, the IMF undertook an unprecedented reform of its policies toward low-income countries. The IMF response was built around a sharp increase in its concessional lending to these countries—to around US $4 billion in 2009, an increase of about four times historical levels. In 2009 and 2010, the IMF committed new concessional lending to sub-Saharan Africa totaling about US $4 billion, compared to US $1.1 billion in 2008 and only about US $0.2 billion in 2007.
Additional resources—including from the sale of IMF gold—are expected to boost the Fund’s concessional lending up to $17 billion through 2014.
As a result of the reforms, IMF programs are now more flexible and tailored to the individual needs of LICs, with streamlined conditionality, higher concessionality and more emphasis on safeguarding social spending.
Stronger pre-crisis macroeconomic positions and a robust countercyclical policy response facilitated a rapid recovery in many low-income countries. This was also made possible by the sharply higher IMF financial support and increased flexibility on fiscal policy in IMF programs.
More flexibility on fiscal policy.Partly because of the crisis, the IMF has generally factored in higher deficits and spending in 2008 and 2009, and has made financial assistance programs more flexible. For example, on average for all sub-Saharan Africa, fiscal deficits widened by about 2 percent of GDP in 2009.
Establishment of Post-Catastrophe Debt Relief (PCDR) Trust.
It allows the IMF to join international debt relief efforts for very poor countries that are hit by the most catastrophic of natural disasters. PCDR-financed debt relief amounted to SDR 178 million ($268 million) in 2010.
Creating a crisis firewall—boosting IMF resources
At the April 2, 2009 Summit in London, leaders of the Group of Twenty (G-20) industrialized and emerging market economies agreed to triple the IMF’s lending capacity to $750 billion and enable it to inject extra liquidity into the world economy via a $250 billion allocation of SDRs—the IMF’s quasi-currency.
The 14th General Review of Quotas, approved on December 15, 2010, will double the IMF’s permanent resources although there would be a corresponding reduction in the NAB when the quota increase is effective, targeted by the Annual Meetings in 2012.
The general allocation of SDRs made in 2009 was equivalent to $250 billion and has resulted in a near ten-fold increase in SDRs. This represents a significant increase in reserves for many countries, including low-income countries.
IMF role in shaping post-crisis financial architecture
The IMF is closely working with governments and other international institutions to try and prevent future crises.
Steps are being taken to improve risk analysis, including by taking a cross-country perspective. Linkages between the real economy, the financial sector, and external stability, in the focus of an early-warning exercise carried out jointly with the Financial Stability Board. Work is also underway looking at financial interconnectedness across borders, and how financial and economic policies in one country can affect others.
More attention to the effectiveness of the IMF’s country surveillance is also key, requiring more even-handedness, clarity, and candor.
The IMF has also provided advice on how to rethink global regulation and supervision of markets.
IMF governance to better reflect the global economy
A top priority for the IMF’s legitimacy and effectiveness has been the completion of governance reform.
On December 15, 2010, the Board of Governors approved far-reaching governance reforms under the 14th General Review of Quotas. The package includes a doubling of
The agreed package builds on
