In 1930, almost a century ago, and well before the Bretton Woods institutions were established, Keynes wrote, “The ideal arrangement would surely be to set up a supranational bank to which the central banks of the world would stand in much the same relation as their own member banks stand to them.”
This arrangement could have made global liquidity a public good. Recent events re-confirm we are certainly not there yet. It helps, however, that G20 countries have taken up this issue during India’s Presidency of the group. The challenge is to develop a carefully sequenced agenda for the next few years until political conditions allow a broader reform of the international monetary system. After the 2008 Global Financial Crisis, the G20 was designated as the forum to modernize the international financial architecture. In 2023, India needs to push the G20 towards this goal.
A global financial safety net: The reality is that while the International Monetary Fund (IMF) in principle provides nearly universal access to external financing, it is actions by the US Federal Reserve and other major advanced-economy central banks that have important implications for global financial markets. As we saw, the US Fed and five other leading central banks recently took new measures to improve global access to dollar liquidity as financial markets reacted to turmoil in the banking sector. These bilateral swap lines among advanced countries helped address US dollar liquidity shortages and stabilize global financial markets, but are clearly insufficient to deal with crises in other countries.
As for regional arrangements, theEuropean Stability Mechanism (ESM) was used to prevent contagion effects during the European debt crisis, and is generally now a well-regarded regional financing arrangement. But beyond Europe, there is an absence of credible regional financing arrangements. For example, in East Asia, the Chiang Mai Initiative (CMIM) has not been tested, which has raised a number of concerns about its functionality. Hence, the unevenness of the global financial safety net and need for a global lender of last resort (LOLR), as Keynes had in mind.
Where is the IMF in this?: A global LOLR needs to ensure financially constrained economies have unimpeded access to international liquidity. For these countries, the reality is that China now, for many cases, has an effective veto power that stops or delays the Fund from lending (in a growing number of countries such as the recent case of Sri Lanka). How can it be that a LOLR with standing facilities is unable to lend because we lack a “credible and specific financing assurance” from one shareholder—whose lending goes via institutions that are official creditors but typically act like private creditors in debt negotiations?
This is symptomatic of a global tension, where the rules developed by the world’s advanced countries (the Paris Club or G7) are not fully accepted by other key players—which in turn is symbolic of the reality that country representation at the IMF (and other international financial institutions ) is out of line with any objective metric. What this means is that reforms of IMF governance have moved very slowly so far, intertwined with delays in enhancing the Fund’s capital though a quota review (now scheduled for December 2023). These reforms need to be carried forward—as was emphasized after the global financial crisis—to allow the IMF to adapt its rules, re-establish its LOLR function, and build a global financial safety net.
It is politically unlikely that these reforms will get done by December 2023. As such, the G20 should build a sequenced reform agenda that could be taken politically forward over the next few years. Among the steps to be considered as part of a sequenced agenda are these:
One, the IMF needs to redesign its precautionary instruments—like flexible credit lines—to make them more usable, with lower costs, and ease of extension.
Two, the IMF should be assigned responsibility for monitoring movements in the capital account balances of countries, like it watches current account balances.
Three, the IMF must enhance the role of Special Drawing Rights (SDR), a facility which remains underused, upgrading it over time for it to serve as a multilateral currency. In this context, the $650 billion General Allocation of SDRs in August 2021—replicating on a larger scale what was done after the global financial crisis—was an important step forward to boost the reserve assets of all economies and help ease liquidity constraints. However, decisions now need to be taken to allow member countries that have strong external positions to channel their SDRs to liquidity constrained and low-income countries.
Looking ahead, in developing a sequenced agenda for IMF reforms, the institution should be charged—in cooperation with national banks and other international institutions—with the task of continuously monitoring global flows of liquidity and preparing the ground for regulatory decisions that would need to be taken to manage these. Empowered by this mission and also a better-fledged monetary asset, the Fund’s governing body could then decide, if and when necessary, to add or withdraw liquidity, depending on the state of markets and economic conditions. This, then, would not be far removed from the mechanism outlined by Keynes in the early 1930s.
Anoop Singh is a distinguished fellow at the Centre for Social and Economic Progress, and a former member of the 15th Finance Commission
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