The IMF’s global comeback

The IMF can save countries from collapse — but only if donors step up with the cash.

By Caroline Atkinson

European Union leaders meeting in Brussels on March 20 announced that they will call for a doubling of the International Monetary Fund’s loanable resources when the G-20 meets in April. In addition to mounting trouble at home, EU countries are keen to stem the alarming fallout from the financial crisis; Latvia, Hungary, Belarus, and Ukraine have all taken IMF emergency loans. China, Brazil, Japan, and Russia have similar worries about contagion from the crisis in their regions. Yet though many have thrown their political weight behind the fund, the IMF still needs more resources to do the job for which it was intended.

Today’s global economic crisis has proven that the world needs the IMF more than ever. In recent months, the fund has expedited loans worth more than $50 billion to emerging markets hit by the crisis. And more countries are likely to need help.

The IMF’s return to center stage seemed unlikely as recently as last year, when many wrote the fund off as a marginal player. Demand for loans was falling, and bilateral grants and aid were filling the gap. Because the financial crisis rippled outward from the United States, affecting other advanced economies first, some initially argued that emerging market and developing countries — the IMF’s traditional borrowers — would remain unscathed.

That argument swiftly proved unfounded. A second wave of the crisis hit emerging markets last fall, first in Central and Eastern Europe. The dramatic halt to growth in the United States and other large economies has slowed trade and growth across the globe, to say nothing of credit flows. Most analysts expect a further repatriation of capital by distressed funds, making it more difficult for emerging-market countries to roll over loans and finance their budgets. Today, the IMF is also worried about a third wave of financial crisis casualties beginning to hit the poorest. In Africa, for example, exports and access to credit are plummeting.

The easy money has dried up, and the IMF is the best, and often the only, answer for capital-starved countries. Adapting to the fast-changing conditions, the fund has streamlined loan conditions, and special concern is being paid to the social impact of the crisis.

What’s needed now is for countries in a position to do so to step up. The fund’s managing director, Dominique Strauss-Kahn, has called for at least a doubling of loanable resources. The United States, the IMF’s most influential member country, thinks the fund’s lending capacity should be tripled to $750 billion. Individual loans by IMF member countries are the fastest way to up the fund’s base, as a recent $100 billion commitment from Japan and €75 billion from the European Union demonstrate.

Other countries should follow suit. In addition to the EU and U.S. endorsements, the four largest emerging-market economies seem to agree that more money for the IMF would be a good thing. In a March 14 communiqué, Brazil, Russia India, and China noted that “the crisis has led to a massive withdrawal of private capital in 2009 and this is likely to continue in 2010. It is imperative that multilateral financial institutions should expand their lending to offset the massive decline.”

The benefits will go far beyond saving individual failing countries. IMF loans can help rebuild confidence in global financial markets. One investment fund dubbed the enhancement of the IMF’s lending capacity called for by the G-20 “a potential game-changer.”

More money might also help speed reforms, where much work is already underway. The G-20 wants the fund to be a place that countries come to for money and advice before their economies collapse, rather than after. It wants the IMF to do a better job of anticipating and warning of economic troubles ahead. And, importantly, it wants to give emerging and low-income countries a larger voice in the fund’s management.

The IMF is back in the lending business. Even its fiercest critics can agree on that. The challenge for the world is to keep it primed with the cash it needs to do the job well.

Caroline Atkinson is director of external relations for the International Monetary Fund.

TIM SLOAN/AFP/Getty Images