New lending facility for good performers

The new facility marks a shift in IMF lending practices. Previously, the Fund extracted rigorous conditions from borrowing countries. Negotiations therefore often required significant lead times.

The innovative “few-strings-attached” facility, however, is designed to enable countries suffering short-term liquidity problems to obtain the money they need to bridge problems that do not stem from their own imprudent economic policies.
Only a few countries were expected to be eligible for the IMF’s new emergency loan programme, among them Brazil, which has done much in recent years to build confidence in its economic stability. Countries have been reluctant to borrow from the Fund’s traditional “stand-by” facility in the past, because it was thought to reflect poorly on their economic health.

That is expected to be different now, as only countries with a sound macroeconomic track record are eligible for support from the new facility. The IMF said it hoped that rich countries with large foreign reserves would be encouraged to lend to stable emerging markets countries as well. Japan in November said it would contribute $ 100 billion in temporary funds from its vast foreign-exchange reserves to the IMF to help emerging economies deal with recent troubles.
While the IMF has said it has plenty of capital – around $250 billion – available for lending, there is some concern that with mounting numbers of countries requiring assistance, that capital could quickly dwindle. Some economists have warned that a single country requiring a bailout could eat up as much as a third of the total.

G 20 leaders met in Washington in mid-November to discuss the economic crisis. They pledged to examine the IMF’s and other institutions’ access to funds in order to make financing available to countries that need it.

The IMF is still using the stand-by fund, however, loans from which are tied to strict conditions. Observers note that even loans from the stand-by facility have been disbursed more quickly and with fewer conditions than in the past.
In the first week of November, the IMF lent Ukraine $ 16.4 billion over two years. In addition the IMF gave Hungary a $15.7 billion loan over 17 months. In response, Hungary raised its interest rate to 11.5 % to stem the precipitous drop in its currency.

The country is expected to improve banking supervision, cut its external debt and reduce public sector spending. On top of the IMF money, Hungary also got $ 8.1 billion from the EU and $ 1.3 billion from the World Bank.

The IMF also agreed to a $ 7.6 billion bailout for Pakistan, after that country raised its key interest rate to 15 % to help stem inflation, which is running close to 25 % at the moment. Brazil, along with Mexico, South Korea and Singapore, also received $ 30 billion credit swap lines as part of the IMF’s rescue effort.

In many ways, the recent financial crisis has put the IMF back in center stage. It is not only expected to be one of the main financing sources for crisis-afflicted countries, the G20 also wants the IMF to play a greater role in surveillance of countries’ financial stability in the future. The G20 also said it hoped to increase the influence of emerging markets countries like China and India in the IMF, which has 185 members.

China itself announced a huge fiscal programme in November, including a $ 586 billion stimulus package targeted mainly at the housing and infrastructure sectors. Observers welcomed the plan, but some said that China needs to stimulate domestic consumption in order to balance out the economy’s dependence on exports. Rather than making tax cuts, some suggested increasing public spending on healthcare and education, which are two of the main reasons Chinese households have such high levels of savings.

Dominque Strauss-Kahn, the managing director of the IMF, praised China’s efforts at the G20 meeting and said it would take a large global stimulus package, amounting to around two percent of global GDP to boost growth, which is expected to be about 2.2% in 2009, down from 3.7% in 2008.