- News Release 2009-035 -

Working Group 3
Summary of Report

G-20 Leaders tasked Working Group 3 (WG3) to explore ways to strengthen the International Monetary Fund (IMF). This work focused on ensuring the IMF has sufficient resources and appropriate tools (e.g., lending facilities and policy oversight activities) to provide confidence to members and global markets that it can adequately carry out its mandate of promoting international monetary stability. Additionally, WG3 examined ways to reform the IMF’s operations to ensure they better reflect today’s global economy.

Background

The IMF works like an international credit union, providing emergency loans to member countries facing foreign exchange shortfalls using the resources of other members that are in a position to provide resources. The IMF was set up after World War II when trade flows were limited and financial flows even more so. The growth of financial flows has meant that the IMF no longer lends only to help countries finance short-term, unsustainable trade deficits, but also to provide a bridge in the event of instability in capital flows. A sharp full back in private capital flows can make it very difficult for firms to fund their operations and can place strains on a central bank’s ability to provide the required liquidity, especially for countries that operate using fixed exchange rates. For the IMF, this means its loans must be bigger and finalized more quickly and flexibly.

Equally importantly, the IMF must conduct effective and even-handed oversight of member economies to avoid imbalances and other threats to financial and economic stability, both within individual countries and worldwide. This responsibility is shared by member governments in the policies they follow, which should avoid negative international spillovers and ‘beggar thy neighbour’ elements. However, for IMF surveillance and lending to be effective, there must be buy-in by all members of the institution, which is why it is essential that IMF membership better represent the global economy.

WG3 produced its report based on these considerations, and called on the IMF and its members to make progress in a number of areas:

Resources

To substantially increase IMF resources:

• borrowing from members to temporarily supplement resources,
• expanding the IMF’s standing precautionary loan arrangement with 25 members;
• accelerating efforts to increase member’s quota subscriptions in the Fund – which determine a country’s financial commitments as well as access to resources; and
• increasing members’ foreign reserve positions at the IMF through an allocation of Special Drawing Rights (SDRs), which countries can use to trade for usable currency should they need it during crises.

Lending Instruments

To modernize IMF lending operations:

• a substantial increase in members’ access limits to Fund financing, and further review and streamlining of loan conditionality;
• the urgent establishment of lending facilities that are high access, precautionary in nature and provide for quick disbursements – while balancing the need for appropriate safeguards for Fund resources;
• an expedited review of lending instruments for low-income countries, including possibly increasing access limits and concessional lending resources; and
• cooperation with the World Bank in restoring emerging and developing countries’ access to credit and private capital flows, and supporting the financing necessary to counter responses that only aggravate the damage caused by a crisis.

Surveillance

To increase candidness, even-handedness and effectiveness:

• increased focus on financial sectors and better integration of financial sector surveillance into existing macroeconomic reports;
• collaboration with the Financial Stability Forum to undertake early-warning exercises to identify possible risks; and
• a member commitment to hold candid discussions of threats identified by the IMF, and to participate in transparent IMF/World Bank assessments of their financial sectors.

Quotas and Corporate Governance

To improve Fund governance and provide more effective representation to emerging markets and developing economies:

• urgently ratify a package of membership reforms approved by the Fund in the spring 2008;
• accelerate efforts to realign quota distribution so it adequately reflects each member’s changing economic influence in the world economy;
• expedite a review of the structure of representation within the IMF – which should include greater participation by low-income countries;
• review the role of the Fund in the international economy in light of the crisis;
• expedite a review of the IMF to ensure the institution is operating as efficiently as possible;
• improve the quality of the policy dialogue and political legitimacy of the Fund; and
• support open, merit-based selection processes, regardless of the nationality and origin of the candidates being considered for IMF and World Bank leadership posts.