Sanjaya Panth and Ceyla Pazarbasioglu
The world is changing. From COVID-19 and climate change to digitalization and diverging demographics, the IMF’s member countries are confronting new challenges. The impacts of these challenges are being felt unevenly across countries and will inevitably play out in their balance of payments, potentially undermining global economic stability.
It is therefore important that the Fund also revisit its policy advice, lending activities and capacity building to see whether these should be adapted selectively, and in what ways, to meet the evolving needs of its membership. Ongoing efforts to establish a Resilience and Sustainability Trust are, for instance, intended to build on the historic 2021 SDR allocation of $650 billion and meet the longer-term financing requirements of members in greatest need as they adjust to a rapidly changing world.
Many longer-term challenges faced by low-income countries especially are inextricably linked with questions of development. Yet development finance alone is not sufficient to address the overlapping global public policy goals which require action from all international financial institutions. The Fund is staying well within its mandate by seeking to address these challenges. In fact, directional changes are necessary to ensure that the IMF continues to fulfill its mandate laid out more than 75 years ago in its Articles of Agreement—in particular, of assisting members to overcome balance of payments problems without resorting to measures that threaten national or international prosperity.
When the IMF opened its doors in 1947, financing was understood to be immediate balance of payments lending of very short duration so that the recipient could ride out temporary shocks and maintain exchange rate parity against the US dollar or gold.
The Fund’s financing facilities have, however, had to be modernized over time as the nature of the balance of payments problems of its members evolved. For example, the now-mainstream Stand-by Arrangement (SBA) was considered a radical innovation when it was introduced in 1952 because it provided the member with assurances of a future use of the IMF’s resources, so long as it continued to meet the conditions for each loan tranche, rather than meeting an immediate need.
In the early 1970s, the Fund recognized that the oil price shock would affect its members differently according to their oil import bills—and would therefore give rise to current account movements and protracted balance of payments pressures. The IMF therefore introduced somewhat longer and more concessional financing instruments. With the widespread adoption of flexible exchange rates around the same time, the IMF also overhauled its surveillance activities.
Despite concerns at the time, these innovations did not change the fundamental character of the Fund as a monetary institution concerned with ensuring a viable and sustainable balance of payments as a prerequisite for macroeconomic and financial stability.
Adaptations and innovations continued as new challenges were recognized. The Fund’s fast-disbursing emergency assistance (financing and debt relief) was enhanced, including in the wake of natural disasters such as the Ebola virus in western Africa and the earthquake in Haiti. Thus, when the COVID 19 pandemic struck, the Fund was already uniquely placed to act quickly to provide temporary support to member countries in need, which it is following up with traditional lending programs as the crisis continues.
As the world emerges from the pandemic, traditional short-to-medium-term financing shocks will unfortunately recur. Sharper than expected monetary tightening in the face of inflationary pressures in advanced economies will, for example, have spillover effects on the balance of payments of emerging market countries. Countries with high debt burdens will need to work to avert fiscal and financing crises. And large commodity exporters and importers will need to continue to build resilience to large price swings.
In helping countries address such challenges, the Fund will continue to deploy its traditional toolkit of surveillance, lending and capacity building, though minor modifications may sometimes be necessary.
However, increased surveillance and lending focus on longer-term issues is also critical at the current juncture. Deep-seated structural issues are becoming much more prevalent in today’s world; they should be addressed now to prevent larger and more painful balance of payments problems in the future.
Climate change affects all of humanity but its impact on countries is disparate. Similarly, not all countries will be equally able to seize the opportunities presented by digital change, such as central bank digital currencies. There are quite different demographic pressures in various parts of the world. Income and gender inequalities are widening.
Successfully addressing these challenges requires cooperation between the Fund and other institutions that have expertise in these areas, such as the World Bank. That such trends have disparate ramifications across the membership necessarily implies that they will manifest—to lesser or greater degrees—in the balance of payments of individual countries. Climate change will, for example, lead to higher food imports and outward migration in many affected countries.
Digital change will impact trade in goods and services but also capital flows by accelerating financial innovation. And unless demographic pressures are properly harnessed, countries with young fast-growing populations could face higher unemployment, while shortages of labor, goods and services could become problems for ageing societies.
Thus, the challenges facing IMF member countries are constantly evolving. Yet the need for policy advice—and, at times, financing—from the Fund remains. The IMF therefore continues to add selectively to its toolkits as it has in the past to ready itself to confront these challenges in collaboration with other institutions.
Sanjaya Panth and Ceyla Pazarbasioglu