IMF considers possible new financing instrument
| Author | Peter Breuer/Alan MacArthur |
| Position | IMF Policy Development and Review Department |
| Pages | 1-9 |
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Discussions are under way on a possible new IMF financing instrument designed to meet the needs of emerging market countries that rely on global financial markets for their investment needs. Taking into account its previous experience with contingent lending and crisis management, the staff is seeking advice from policymakers and academics on the best way to help these countries protect themselves against the potentially devastating effects of sudden stops in access to financial markets. The objective would be to help stabilize confidence in the face of shocks and reduce the risk of crises.
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The IMF is weighing a new financing instrument designed to help prevent confidence crises in emerging market countries by providing a line of contingent financing. The need for a new loan instrument designed specifically with emerging market countries in mind was proposed as part of Managing Director Rodrigo de Rato's medium-term strategy, which seeks to improve the IMF's ability to meet the needs of its member countries in today's globalized world.
The increased mobility of capital has allowed rapidly growing emerging market countries to tap into global savings to satisfy their considerable need for investment capital.
But past experience has demonstrated that such funds may be withdrawn at a moment's notice for reasons that may not be closely related to the country's economic performance. The sudden withdrawal of funds-driven by a loss of confidence and contagion effects-can have devastating effects on countries, but might be avoidable.
It therefore makes sense to consider whether there is a role for the public sector to address what is, in essence, a market failure.
Over the past decade, emerging market countries have improved their policies and increased their reserves. The IMF is supporting this effort on the policy front by improving its surveillance (shorthand for its monitoring of economic developments and policies) and standing ready to make high-access financing available in the event of a crisis. This may reduce the need for emerging market countries to accumulate reserves, which-from a purely economic perspective-may not constitute an efficient use of scarce resources.
A number of emerging market and other countries have suggested that the...
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