IMF Response to the Financial and Economic Crisis

International Monetary Fund. Independent Evaluation Office

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 2015
• eBook ISBN: 9781498305174

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Chapter 1. Introduction

This evaluation assesses the IMF’s response to the global financial and economic crisis, focusing on the period September 2008 through 2013.¹ It is a natural follow-up to the 2011 IEO report on IMF Performance in the Run-Up to the Financial and Economic Crisis. It assesses the IMF’s actions to help contain the crisis and navigate a global recovery, assist individual economies to cope with the impact of the crisis, and identify and warn about future risks. The evaluation recognizes that there is still an ongoing debate, which is likely to continue for some time, on the appropriate policy response to a financial and economic crisis of this magnitude.

In the aftermath of the Lehman collapse the world entered the most serious financial and economic crisis since the Great Depression. An incipient financial panic led to a sharp global downturn in 2009, giving rise to fears of a protracted recession as in the 1930s. The financial panic was contained as central banks injected massive liquidity into financial markets worldwide and key systemic institutions were rescued. Automatic stabilizers and the adoption of fiscal stimulus also limited the initial loss of output. A global depression was avoided, thanks in part to the concerted response of the international community. But the economic rebound seen in 2010 was followed by slower global growth, and performance since then has been uneven across countries. In many regions and especially in Europe, the economic downturn and loss of employment has been the largest since the 1930s.

The IMF played an important role in the concerted response, even though it was in a relatively weak position when the crisis erupted. IMF resources were at a historic low relative to financial flows and the size of the global economy. The organization was in the midst of a major downsizing and restructuring (see Annex 2), motivated by low demand for its lending and the widespread belief that the global economy had entered a period of “Great Moderation.” The downsizing resulted in the loss of many seasoned staff, distracted others, and complicated the staffing of program and surveillance missions. There were concerns about the IMF’s ability to respond effectively to the crisis because it had not warned about the vulnerabilities that had brought it about. Segments of the membership were concerned with the IMF’s performance during the crises of the previous decade. Finally, some large emerging market economies (EMEs) questioned the IMF’s legitimacy to play a major role because they felt that they did not have enough say in its governance (see IMF, 2009b).

The evaluation is organized around three broad areas of IMF activity: coordination with multilateral entities, surveillance, and financial support to member countries.

Coordination and collaboration with multilateral entities

• The IMF participated in and helped to coordinate global and regional initiatives. For example, it provided analytical support and policy advice that facilitated the efforts led by the Group of Twenty (G20), and it cooperated with the Financial Stability Board (FSB).

Multilateral and bilateral surveillance

• The IMF agreed on a new surveillance framework that aims to better integrate bilateral with multilateral surveillance, and economic with financial surveillance, and it advised member countries on responses to the crisis.
• It analyzed shortcomings in financial sector policy and regulatory frameworks, and proposed corrective actions. It also made the Financial System Stability Assessment (FSSA) component of the Financial Sector Assessment Program (FSAP) a mandatory part of its bilateral surveillance for the world’s top systemic financial centers, to take place at a minimum of every five years.
• It revamped its mechanisms to detect vulnerabilities and risks. In partnership with the FSB, it launched a semiannual Early Warning Exercise (EWE) to explore tail risks to the global economy.

Contributions to strengthening the global financial safety net

• The IMF quadrupled its credit capacity and made a general allocation of SDRs equivalent to $250 billion—increasing total SDR holdings tenfold.
• It revamped its lending toolkit, introducing more flexibility in its lending instruments, increased the amounts that members can borrow (i.e., access limits), and streamlined conditionality. It also launched several new instruments, among them the Flexible Credit Line (FCL) to facilitate access to precautionary resources for members with strong fundamentals, policy frameworks, and implementation records.
• It increased nonconcessional lending from almost nil before the crisis to about $400 billion in 2008–13 and contributed to a coordinated effort to limit the withdrawal of private financing in Central and Eastern Europe.

This evaluation assesses these activities and explores institutional issues that influenced their effectiveness. It asks what went well, whether lessons from previous crises were applied, and what issues need to be addressed going forward. In addition to asking about past performance, the evaluation asks how well the IMF is prepared for the future: whether it is better equipped to warn of systemic risks, and whether it is better positioned to respond to the next crisis.

The evaluation team gathered information through a variety of methods, including reviewing IMF and other documents and undertaking semi-structured interviews with authorities from more than 30 countries, Board members, and current and former Management and staff. The evaluation team participated in workshops and seminars to elicit the views of counterparts from other international institutions and private sector and civil society organizations. Background information and analysis can be found in background papers (see the IEO website, www.ieo-imf.org).

The remainder of this report is organized as follows. Chapter 2 considers IMF coordination roles in the response to the crisis. Chapter 3 assesses IMF surveillance following the crisis, focusing on the IMF’s macroeconomic and financial sector advice and on its work to strengthen its framework to detect risks and vulnerabilities. Chapter 4 examines the IMF’s contributions to strengthening the global financial safety net, including its efforts to bolster the resources available to member countries, as well as its lending to countries most affected by the crisis. Chapter 5 provides conclusions and key recommendations. Annex 1 presents an IMF-centric timeline of developments during the evaluation period, Annex 2 provides the background to and a description of the IMF downsizing exercise of 2008–09, Annex 3 presents the abstracts of the background papers prepared for the evaluation, and Annex 4 summarizes conclusions and recommendations from previous relevant IEO evaluations.

Chapter 2. Coordination and Collaboration with Multilateral Entities

This chapter examines the partnerships and institutional arrangements through which the IMF assisted in coordinating the response to the crisis, as well as its cooperation with national authorities, country groupings, and other international agencies.² Specifically, it describes the IMF’s relationship with and role within four key operational partnerships: the G20, the FSB, the Vienna Initiative, and the Troika arrangement with the European Commission and the European Central Bank.³

The response to the crisis represents a successful example of international cooperation. The IMF played an important role within this response. It supported the G20 process including by providing analytical inputs to the Mutual Assessment Process (MAP). It took the lead in providing financial support for programs in affected emerging markets, particularly in Central and Eastern Europe. It cooperated well with partners and played important roles within the FSB, the Vienna Initiative, and the Troika, but its effectiveness and legitimacy in coordinating with these entities could have been enhanced by greater clarity on responsibilities and accountabilities.

A. Supporting the G20 Process

The G20 assumed leadership in directing responses to the crisis as the forum was elevated to the Heads of State (“Leaders”) level in November 2008.⁴ This was in keeping with past experience, when the leadership for crisis response passed to political bodies (previously the G7), particularly regarding coordination among large advanced economies.⁵ The IMF Managing Director and the Chair of the IMFC participated in G20 Finance Ministers’ meetings to facilitate transparency and coordination between the work and political support of the G20 and the universal membership of the IMF.

The IMF played a dual role in influencing the G20 and in supporting its work, especially in the early years of the crisis. It played an influential role at the November 2008 G20 Leaders’ Summit in calling for a coordinated global fiscal stimulus. Also, the G20 (which has no dedicated secretariat) looked to the IMF to provide analytical support, most prominently for the MAP. The G20 called on the IMF to collaborate with the FSB to promote financial stability and participate in the G20 Data Gaps Initiative. The IMF followed through on G20 initiatives, for instance as the G20-brokered resource mobilization strategy was adopted by the IMFC and implemented by Management and staff working with members.

The relationship with the G20 in the context of the crisis raised concerns within parts of the IMF’s membership. At successive Board meetings, assurances were sought that decisions regarding the IMF’s engagement in the G20 would first be considered by Executive Directors. Some Directors, particularly from those countries not represented in the G20, expressed misgivings about the IMF being so closely involved in the MAP and other G20 activities, given the G20’s restricted membership and the heavy demands on IMF staff at a time of constrained resources. They argued that the IMFC was better placed than the G20 to set the course for the IMF in responding to the crisis, given its arrangements for weighted universal representation in decisions.⁶ Other Directors, however, thought that involvement with the G20 would be helpful for the IMF to build political support, and thus gain greater traction for its policy advice.

The involvement with the G20 gave the IMF the opportunity to have its analysis reach the heads of state of the largest economies, and to gain traction for its recommendations. On the other hand, the involvement raised questions about whether all members have a voice in decision making, and about to whom the IMF and its management are accountable.

B. Working Within and With the FSB

In November 2008, G20 leaders called for the establishment of the FSB as a strengthened successor to the Financial Stability Forum (FSF). The goal was to promote financial stability by coordinating and strengthening regulation and supervision and by exploring sources of financial risks, among other activities. The FSB charter provided for membership comprised of central banks, finance ministries, and other regulators from G20 countries and a few other advanced economies. The IMF and a few other international organizations were also asked to join.

In considering whether the IMF should become a member of the FSB, a number of IMF Executive Directors were concerned that FSB membership would affect the IMF’s ability to conduct its surveillance mandate and might compromise its independence and its accountability to its membership.⁷ A number of Executive Directors representing EMEs expressed reservations and suggested that perhaps the IMF’s role in the FSB should be limited to that of observer.

The Board ultimately approved IMF membership in the FSB conditional on clarifying that this would have no legal and policy implications for the IMF’s rights and obligations and by providing “opt-out” clauses from decisions that may not be consistent with the IMF’s legal or policy framework. Directors stressed that the IMF would continue to take the lead in surveillance of the international monetary system and analysis of macro-financial stability issues in its member countries, but that it would collaborate with the FSB to address financial sector vulnerabilities and to develop and implement regulatory, supervisory, and other policies in the interest of financial stability.

The G20 called upon the IMF and the FSB to collaborate in identifying macroeconomic and financial risks and the actions needed to address them, and to reshape regulatory systems so that authorities would be able to identify and take account of risks emanating from the financial sector. The G20 asked them to conduct the Early Warning Exercise (EWE) and to present the results to the IMFC, in addition to the G20 Finance Ministers and Central Bank Governors. Authorities who had attended the EWE presentations expressed satisfaction with the initiative, although some commented that the outputs appeared more like “two reports stapled together than a single document.” Some authorities believed that this lack of integration carried the potential for missing important risks. The EWE is discussed further in Chapter 3.

These challenges in the EWE process illustrate the difficulties in fostering collaboration between a treaty-based organization with universal membership and a large professional staff, such as the IMF, and a comparatively small organization with limited membership, such as the FSB. Staff in both organizations were satisfied with their working relationship, but they worked more in parallel than jointly, as evidenced by the EWE. Joint work is particularly difficult when the parties’ mandates, size, structure, and culture are very different. To this end, IMF Management may need to focus on incentives and accountabilities for joint work, which are difficult to establish across institutional boundaries.

Authorities from both advanced economies and EMEs wondered whether certain issues—such as the implications of changing regulatory frameworks for capital flows and investment, or the incentives and behaviors of regulatory and supervisory agencies—were not examined sufficiently because of a lack of clarity in the IMF and FSB on their respective mandates. Other interviewees suggested that IMF staff may have yielded to the FSB on such issues out of deference to its expertise and mandate.

Overall, IMF collaboration with the FSB, both as a member and as a partner, has served the whole IMF membership well. At the same time, authorities and analysts have raised questions about the impact that this partnership has had on the IM...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Foreword
• Abbreviations
• Executive Summary
• 1 Introduction
• 2 Coordination and Collaboration with Multilateral Entities
• 3 IMF Surveillance Following the Crisis
• 4 Strengthening the Global Financial Safety Net
• 5 Conclusions and Recommendations
• Boxes
• References
• STATEMENT BY THE MANAGING DIRECTOR, IEO RESPONSE, AND THE CHAIRMAN’S SUMMING UP
• Footnotes