Doubling up

The IMF is sharply increasing its lending capacity. It expects that more countries may need its help



THE International Monetary Fund usually draws attention when it doles out cash. As notable, however, was the news last week of a deal with the Japanese government, allowing the fund to add an extra $100 billion to its kitty. The loan will augment the fund’s existing lending capacity by about half, but it is not stopping there: it plans to raise still more money (perhaps another $200 billion) from other governments. If it succeeds, it would have roughly doubled its lending capacity compared with the start of September 2008, when the global financial crisis broke in earnest.
It is not immediately obvious why the IMF, already flush with cash, needs to raise so much more money now. In September last year it had roughly $250 billion available for loans in uncommitted funds. Since then it has committed roughly $48 billion to a variety of battered emerging economies, including Belarus, Latvia, Pakistan, Iceland, Ukraine, Hungary and Serbia. A burst of activity at the end of last year has, however, been followed by a period of calm. No more loans have been agreed upon this year, except a precautionary arrangement with El Salvador, under which the country is entitled to draw $800m in case of balance-of-payments difficulties. That should leave the fund with some $200 billion lying about, even before the injection of Japanese funds.


Evidently the fund is worried that emerging economies face a large shortfall in external financing, and in turn is concerned that it might suddenly lack the means to plug the gap, if asked. Such concerns are not misplaced. Private capital, which flooded into emerging countries in the boom years, is now rushing out just as fast. According to the Institute for International Finance (IIF), net inflows of such capital to these economies peaked at nearly $929 billion in 2007, but then almost halved to $466 billion last year. Worse is to come. The IIF expects that flows will dwindle to a paltry $165 billion this year. Bank lending to emerging economies, in particular, has dried up. Western banks have hunkered down in their home markets; the IIF predicts a net outflow of $61 billion this year, a dramatic reversal of the net inflow of $410 billion in 2007. As private capital dries up, therefore, emerging markets may have to turn elsewhere: the fund is an obvious, if usually unpalatable, choice.


The worry is that if several large emerging economies needed to turn to the IMF at once, the latter’s resources could prove inadequate. Also, the fund has been adding facilities to its arsenal. In October it launched a new short-term liquidity facility to help countries with otherwise sound macroeconomic policies facing sudden capital flight. Although no loans have been made under this facility so far, these would only be credible if they were backed up by enough resources.
Signs suggest that more countries may soon have to turn to the IMF for money, over and above loans that have already been approved. Pakistan’s government is considering a request for a $4.5 billion loan to top up the $7.6 billion the IMF agreed to lend in November. Romania’s prime minister says that his government will decide in the next two weeks whether it will seek money from the IMF. More generally eastern Europe has been hit hard by the reversal of private capital flows. Turkey is negotiating the terms of a possible loan with the fund.


Some economists, including former IMF economist Arvind Subramanian, even estimate that $500 billion may not be enough to allay worries about the fund’s capacity to commit, credibly, to rescuing countries in trouble. Mr Subramanian reckons the fund may need to have as much as $1 trillion on hand. But where such additional funds would come from is far from clear. The fund is not yet considering turning to private markets. Tapping additional resources from reserve-rich emerging countries such as China is a possibility. But this may require the fund to reform its governance structure radically to give these countries significantly more voice in its running than they have at present. In a hopeful sign, reforming the IMF figures prominently on the agenda of the meeting of G20 leaders in April. Movement on this vexed issue would hugely help the effectiveness of the IMF.