Monday, April 6, 2009

The G20 package and the Role of the IMF

Last week, the G20 announced a package to foster economic growth among emerging markets. The question that emerges is whether this package is enough or not. As we learned from the news, the amount of 1 trillion dollars will be made available to countries that run into trouble via the International Monetary Fund (IMF), the World Bank and World Trade Organization. Half the money will come from IMF loans, with $250bn to finance trade deals and a further $250bn from the IMF's currency reserve (SDR).

The ‘package’ is indeed not a package. It intends to announce to emerging countries that they can ask for loans for the IMF without the burden of getting ‘typecast’ of a ‘near defaulted country’. In other words, the IMF will no longer be regarded as a last-resort option for nations in need of resources; instead take preventative action. Many nations have been reluctant to turn to the fund because the stigma of doing so sends bad signals to the financial markets.

Boosting world liquidity: The special drawing rights (SDRs) made available by the IMF – which can be converted by national governments into currency to provide a swift injection of liquidity into their economies – will be increased by a further $250bn. The funds will be used in the short term to support the precarious economies of eastern and central Europe. Romania and Turkey are the latest nations to seek help from the IMF; others in recent months include Ukraine, Pakistan, Iceland and Latvia. The IMF has expressed acute concern that a crisis in these economies could spread via the banks to western European countries.

In other words, the package does not mean that emerging countries will receive more funds due to the severity of the crisis. It does mean, however, an acknowledgement that the funds is there and that the countries in need should not feel embarrassed to ask for help. We should all remember that the IMF was the institution praising the 'laissez fair' ideology and the whole market de-regulation that trigger the whole financial crisis.

1 comment:

  1. Hi Vitoria,

    Actually, I believe that we have two questions. The first one is, will be enough money, and the second will be, what rules will be mandatory, to have the money. As you said, the 'laissez faire' didn't work, in reality, and in many cases worsened the crises (Mexico, Southern Asia, Russia, Brazil).

    Cheers,
    Mario Luis Tavares Ferreira

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