Combating the Crisis: How Have IMF Programs Fared?


By Reza Moghadam

We’ve released a new paper earlier this week assessing the effectiveness of IMF-supported loan programs in combating the crisis in emerging markets. Although it is a bit early to be evaluating these programs, “real-time” cross-country reviews are important. In today’s blog, I want to pick up a few takeaways from our latest review.

First, there is the sheer scale of the challenges the program countries, and the IMF, have faced. In Chart 1 below, each bubble is a Fund program—its size being the amount of lending and the vertical distance being the GDP loss associated with the crisis. You can see how, after a few quiet years while emerging markets boomed, the crisis hit hard: multiple simultaneous crises involving severe output crashes, and massive Fund financing. From our perspective at the IMF, it’s been quite a challenge to manage all these new programs, some of which were put in place within weeks of the crisis hitting. (click on each chart for a larger image)

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The World Goes to Istanbul


By Caroline Atkinson

In early October, economic policymakers representing the entire membership of the IMF, 186 countries in total, will gather in Istanbul for the Annual Meetings. More formally, the 2009 Annual Meetings of the Boards of Governors of the World Bank Group and the IMF will be held in Istanbul, Turkey on October 6-7, 2009. Many others—including private sector executives, academics, and civil society representatives—will also come to Istanbul during this period to discuss issues of global concern. 

And where they go, so goes this blog. For the next week or so, the blog will be coming “live” from Istanbul, providing a real time account of the many events and debates.

Istanbul at sunset (photo: Graham Dwyer/IMF)

Istanbul at sunset: economic policymakers representing the entire membership of the IMF, 186 countries in total, will gather in Istanbul for the Annual Meetings (photo: Graham Dwyer/IMF)

There’s a lot going on. We will have the formal meetings of the Boards of Governors of the World Bank Group and the IMF, discussing the next steps in overcoming the global financial crisis and getting growth going again. The IMF will unveil its latest forecasts and present its World Economic Outlook (WEO) and Global Financial Stability Report (GFSR). We will discuss how the IMF has responded to the crisis, looking at how crisis lending reveals more flexible terms, and focuses more on the social impact. 

 

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Reserve Currencies in the Post-Crisis International Monetary System


By Reza Moghadam

The dollar has been the cornerstone of the international monetary system since the Second World War. It is the most important reserve currency, accounting for at least two-thirds of reserve assets, according to the IMF’s Composition of Foreign Exchange Reserves database. Among central banks that do not report this information to the IMF, it is estimated (e.g. by Brad Setser) that 70 percent is held in dollar assets.

The bulk of foreign exchange transactions involve dollars, and significantly more trade gets settled in dollars than involves the United States. Goldberg and Tille examined 23 advanced and emerging economies in Asia and Europe and found that all settled a greater proportion of their trade in dollars than their trade with the United States. The divergence was particularly stark for emerging Asia, where trade with the United States only accounted for about 20 percent of total trade but the bulk of total trade was settled in dollars. ( “Vehicle Currency Use in International Trade,”  Journal of International Economics, Issue 76, Vol. 2, pp. 177-192, December 2008).

The recent crisis has prompted an abundance of commentary on the future of the international monetary system and potential alternative reserve currencies. Those calling for a re-examination of the dollar’s role include Italian economy minister Giulio Tremonti, People’s Bank of China Governor Zhou Xiaochuan, Ousmène Jacques Mandeng of Ashmore Investment Management Limited, and Nobel Laureate Joseph Stiglitz. What does all this mean for the future of the international monetary system and the role of the dollar? 

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High International Reserves: An Embarrassment of Riches?


By Reza Moghadam

Once upon a time, those tracking international reserves focused on simple measures of reserve adequacy—enough to cover, say, 3 months of imports or all of the external debt maturing over the next year. However, the relevance of such yardsticks evaporated as a number of countries accumulated reserves that far surpass such levels, partly in reaction to emerging market financial crises of the 1990s and early part of this decade. Brazil’s reserves now exceed $200 billion, while Russia’s are more than $400 billion—and even these numbers are dwarfed by China’s reserves, which top $2,000 billion

Reserves are rising, driven by emerging markets and, increasingly, low-income countries

SPRblog3chart1

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Freedom of IMFormation


By Reza Moghadam

With the global financial crisis, the world is increasingly looking to the International Monetary Fund—not just for financing but as the global institution charged with overseeing members’ economies and policies (what we call surveillance). It’s easy to forget that only 10 years ago the Fund was a secretive institution. That’s no longer the case. Communicating and engaging with the world at large is now a normal and essential part of the Fund’s business.

The IMF today is a very open institution. The vast majority of our reports are published. The public can search the IMF’s archives. And we are making lots of effort to reach out to external stakeholders.

The benefits of this increased transparency, both for the Fund’s surveillance and lending activities, are indisputable. Transparency allows us to engage with the public and to build a broader understanding and support of what we do. It benefits the quality of our advice by subjecting our analysis to outside scrutiny. And more generally, it makes us more accountable for our advice and financial decisions. In all, it makes us a more effective and legitimate institution.

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IMF: A Big Enough Safety Net?


By Reza Moghadam

As the financial crisis pulled the rug from under the emerging markets, analysts and policymakers alike began to question the adequacy of Fund resources.  This worry was neither new nor surprising. For decades, private international capital flows had grown at a much faster rate than those of the IMF, rendering our institution too small to be able to deal with systemic crises. 

As one country after another approached the Fund for financial assistance, it become clear that the international community needed to act decisively. Thus in April, the leaders of the G-20 industrial and emerging market countries, supported by the entire IMF membership, called for a tripling of the IMF’s lending resources from $250 billion to $750 billion. By early September, individual country pledges, including from many non-G20 countries, had reached the promised $500 billion in contingent resources that could be called by the Fund if needed. 

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IMF Helping Africa Through the Crisis


By Antoinette Sayeh

I believe that Africa’s needs must be fully reflected in any global response to this unprecedented recession. With similar intentions, leading policymakers and stakeholders in Africa gathered in Tanzania last March to discuss how to work with the IMF on this. Under the leadership of President Kikwete and IMF Managing Director Strauss-Kahn, the participants agreed to build a new, stronger partnership.

More than just rhetoric, these common goals included the IMF seeking more resources for Africa and reacting more rapidly, responsively, and flexibly. While much remains to be done, I think it is a fair to say that we have achieved a remarkable amount on both fronts—more in fact than I could have imagined when I started in my job just a little over a year ago.

My colleague, Hugh Bredenkamp has done a fine job detailing the IMF’s response to the needs of low-income countries. In  this post, I would like to talk a little about what it all means for Africa.

Sorting cashew nuts in Tanzania

Sorting cashew nuts in Tanzania

As a reminder, the IMF agreed to mobilize $17 billion through 2014 for lending to low income countries, mostly in Africa—trebling our lending capacity to these countries. This goes far beyond the promise given by our Managing Director in Tanzania to seek a doubling of concessional resources. The financial terms of IMF support have also become more concessional, with zero interest until the end of 2011, and will remain more concessional thereafter.

And the IMF has moved quickly to deploy these resources in Africa. Among international institutions, it has an extraordinary capacity to react early to a country’s needs, as I know from my own experience as a policymaker in my home country of Liberia. Indeed, in the first eight months of 2009, we committed over $3 billion in new resources to countries in sub-Saharan Africa, trebling the total stock of outstanding commitments this year alone.

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Supporting an Upswing in Africa Through Good Economic Policies


By Antoinette Sayeh

Ensuring that sub-Saharan Africa emerges strongly from global recession will require both a sustained recovery in the global economy and sound domestic policies. The good news is that domestic policies are already supporting economic activity.

Many countries entered the crisis in much better shape than in the past. The region’s fiscal position was on average in balance in 2008, compared with big deficits in past cycles. Debt levels were also much lower than in the early 1990s, supported of course by recent debt relief initiatives. Inflation had been brought under control across most of the region. And, reflecting sounder and more open policies, countries had accumulated much larger buffers of foreign reserves—the median ratio of reserves to GDP was 14 percent last year, compared to about 5 percent in the early 1970s.

Nigerian market: many African economies are in better shape than during previous crises (photo: Reuters)

Nigerian market: many African economies are in better shape than during previous crises (photo: Reuters)

This favorable starting point gave many countries in the region a fair amount of breathing space. They were able to respond to the crisis by allowing fiscal deficits to rise and interest rates to fall, reaping the rewards of previous good policies.  Countries with flexible exchange rates also let them adjust to the changing external environment. Such policy responses helped economies absorb some of the impact of the external shocks. Not all countries were able to take this route, however. Faced with large macroeconomic imbalances that pre-dated the global slowdown, a few countries had to tighten their fiscal or monetary policy stance.

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Sharing in the Global Upturn—Better Prospects for Africa


By Antoinette Sayeh

The shape of the global recovery is on everybody’s mind. But how will it affect sub-Saharan Africa? A key lesson from the past is that global cycles matter for Africa.

For sure, there have been definite idiosyncrasies in sub-Saharan African cycles–as will be discussed more fully in the forthcoming October issue of our Regional Economic Outlook—but the global dimension remains paramount.

Previous global cycles—and I’m talking here about the regular fluctuations in global economic growth that bottomed out in 1975, 1982, and 1991—followed some clear patterns. Typically, the end of an unsustainably high period of global growth coincided with the emergence of production bottlenecks and a burst of inflation triggered by accelerating commodity prices (particularly oil), prompting a tightening of monetary policy. The subsequent downturns were relatively short and growth rates typically bounced back fairly
quickly to previous levels.

By and large, Africa followed this pattern too. But the timing and the strength of the recovery were a bit different. Growth rates stayed high during the first year of the global slowdown, and they tended to bottom out later. The rebound was slower, lagging global growth by a year or two. Critically, when growth did recover, it was generally hesitant and low.

chart

What can the past tell us about the present? It is clear that the initial shock to sub-Saharan Africa has been greater than in the past. This reflects both the magnitude of the global crisis and the deeper integration between the region and the world, both in trade and in financial markets.

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Africa and the Global Economic Crisis: Weathering the Storm


By Antoinette Sayeh

Last week, my colleague Hugh Bredenkamp talked about how the IMF is helping the low-income countries overcome the global  economic crisis. This week, I want to follow this theme, but hone in more on sub-Saharan Africa. I know this region reasonably well, both from current and past vantage points. In my present role, I am the director of the IMF’s African department. Previously, I was minister of finance in Liberia and, before that, I spent a significant part of my long World Bank career working on African countries. Grappling with the kinds of economic challenges that affect the lives of millions of Africans is a passion for me.

In this first post, I want to talk about growth prospects for Africa. Let’s take a step backwards. Before the global recession, sub-Saharan Africa was generally booming. Output grew by about 6½ percent a year between 2002 and 2007—the highest rate in more than 30 years. This acceleration was broader than ever before, going beyond the typical short-lived commodity driven booms and touching many more countries. Hopes were high that the region was slowly but surely turning the corner.

Workers making footwear in Nigeria at a factory funded by Hong Kong investment. (photo: Qiu Jun/Xinhua)

Workers making footwear in Nigeria at a factory funded by Hong Kong investment. (photo: Qiu Jun/Xinhua)

Then, in a great reversal of fortune, the global economy went into a tail-spin. Initially, we hoped that the fallout in Africa would be limited. And, indeed, when the global financial tsunami made landfall, it first hit the relatively small number of countries with well-developed financial linkages to international capital markets. South Africa in particular faced difficult challenges as portfolio outflows spiked. Together with Ghana, Uganda and several other frontier markets, its currency plunged, confidence dipped, and foreign direct investment slowed.

But the impact didn’t stop there.  Falling export demand and commodity prices battered economic activity in many more countries, including oil exporters in western and central Africa, causing fiscal and external balances to deteriorate significantly. Remittances from the diaspora shrank and credit dried up. The result, in many countries, was stalled growth.

 

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