How IMF support countries to reduce economic crises

IMF new managing director Kristalina Georgieva

The new International Monetary Fund, “IMF” boss Ms Kristalina Georgieva, has said that the immediate priority of the Fund will be to help countries to minimize their risk of crises.

With its near-global membership of 189 countries, the IMF is uniquely placed to help member governments take advantage of the opportunities—and manage the challenges

The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty.

A new IMF study finds that at least $25 billion in urgent concessional financing will be needed this year to help low-income countries affected by the deepening global economic crisis and prevent millions from falling back into poverty.

The majority of low-income countries will find it difficult to preserve priority expenditures that protect the vulnerable groups without increased external assistance,”

Key IMF activities

The IMF supports its membership by providing

1 policy advice to governments and central banks based on analysis of economic trends and cross-country experiences;
2 research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets;
3 loans to help countries overcome economic difficulties;
4 concessional loans to help fight poverty in developing countries; and
5 technical assistance and training to help countries improve the management of their economies.

Georgieva noted that it was a huge responsibility to be at the helm of the IMF at a time when global economic growth continued to disappoint, trade tensions persisted and debt was at historically high levels.

She said, “For our readiness to act, safeguarding the Fund’s financial strength is essential, and so are enhancing its surveillance and capacity development efforts. Working with my team, my goal is to further strengthen the Fund by making it even more forward-looking and attentive to the needs of our members.”

Which IMF instruments can be used to provide support to Low-Income Countries

1 Extended Credit Facility (ECF): Sustained medium- to long-term engagement in case of protracted balance of payments problems

2 Standby Credit Facility (SCF): Financing for LICs with actual or potential short-term balance of payments and adjustment needs caused by domestic or external shocks or policy slippages—can also be used on a precautionary basis during times of increased risk and uncertainty

3 Rapid Credit Facility (RCF): Rapid financial support as a single up-front payout for low-income countries facing urgent balance of payments needs—possible repeated disbursements over a (limited) period in case of recurring or ongoing balance of payments needs.

How is Poverty Reduction Strategies funded?

Funds for PRGT lending are obtained through bilateral loan agreements at market interest rates. Subsidy resources make up the difference between the market rates received by lenders and the concessional rates paid by LIC borrowers. The PRGT is designed to be financially self-sustaining over the long term. It can support annual average lending of about SDR 1¼ billion (about $1.7 billion), which broadly equals the funds committed to LICs in 2009–18 on average.

Aims of IMF

Since then the world has changed dramatically, bringing extensive prosperity and lifting millions out of poverty, especially in Asia. In many ways the IMF’s main purpose—to provide the global public good of financial stability—is the same today as it was when the organization was established. More specifically, the IMF continues to

1. provide a forum for cooperation on international monetary problems
facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction;

2. promote exchange rate stability and an open system of international payments; and

3. lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems.

4 Stepping up crisis lending. The IMF responded quickly to the global economic crisis, with lending commitments reaching a record level of more than US$250 billion in 2010. This figure includes a sharp increase in concessional lending (that’s to say, subsidized lending at rates below those being charged by the market) to the world’s poorest nations.

5 Greater lending flexibility. The IMF has overhauled its lending framework to make it better suited to countries’ individual needs. It is also working with other regional institutions to create a broader financial safety net, which could help prevent new crises.

6 Providing analysis and 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 used by the G-20.

7 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.

Historic reform of governance.

The IMF’s member countries also agreed to a significant increase in the voice of dynamic emerging and developing economies in the decision making of the institution, while preserving the voice of the low-income members.

Source: imf.org

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