Wednesday 18 Jul 2018 | 20:48 | SYDNEY
Wednesday 18 Jul 2018 | 20:48 | SYDNEY

G20 and the International Monetary Fund


Stephen Grenville

17 April 2009 09:27

Perhaps the biggest winner from the London G20 leaders’ meeting was the IMF. Business has been slow for the IMF since the Asian crisis: it's been short of both customers and funds. Now, in one hit, its resources have been increased three-fold. This seems sensible, even essential, but other changes are needed.

There are two different classes of potential borrowers both needing help as a result of the Global Financial Crisis. First, the traditional ones: countries that have over-extended themselves and need a bail-out, triggered by the crisis. This includes traditional mendicants like Pakistan, but a new group from Eastern and Central Europe and the Baltic states face very large funding gaps.

Second, there are countries which can no longer borrow in overseas commercial markets because these markets have largely dried up: the limited volume of international funding is being tapped by countries like Australia using its high credit rating. This group of countries does not need the usual intrusive supervision that goes with IMF lending: what they need is a replacement for normal international capital flows.

One suggestion for introducing such differentiation has been made by John Williamson and Morris Goldstein: the revival of the Compensatory Finance Facility.

This distinction could be taken much further. The bail-out of the Eastern Europeans and the Baltic states is largely a bail out-of creditors (Western European banks) who lent foolishly, disregarding obvious risks. If the lenders need help, it should be their own national taxpayers who provide it, not the rest of us Fund members. The Swedish government made a contribution to the Latvian IMF bail-out: this example should become the norm, with the lending country picking up much more of the tab. How else can repeats of this sort of profligate lending be avoided?

The Western Europeans, grossly over-represented at the Fund, will resist taking this extra share of the bail-outs. It highlights a major deficiency coming out of the G20 meeting: the Fund got a huge increase in its funding without any reform of its anachronistic governance.