IMF financial facilities: signalling versus insurance

Since 2005 the IMF has been reviewing its medium-term strategy, largely in response to the debate on its role in the financial crises of the late 1990s and early 2000s. Globalisation has unquestionably significantly changed the role of the IMF and revealed certain deficiencies in its functions and in the instruments used to carry them out. This debate has prompted reflection on its role in an international economy in which a formal framework of co-operation barely exists between the national authorities and in which the growing financial integration has enabled many emerging economies to benefit from unprecedented access to the financial markets, but which is highly vulnerable to sudden reversals of capital flows. Some of the matters addressed in recent months as part of this strategic review are: the role of official financing in crisis prevention and resolution; how the IMF should respond in a situation such as the present one, characterised by growing global imbalances; and the build-up of reserves in a good number of emerging economies, which, on the one hand, denotes a desire for self-insurance so as not to depend on the IMF and, on the other, tends to aggravate these global imbalances. The early repayment by Brazil and Argentina of their outstanding debt to the IMF in late 2005 and early 2006, respectively, added fuel to the debate on its role in the financing of countries in crisis. In general, the IMF’s crisis management has drawn criticism from both borrowers and lenders. For creditor countries, the large rescue packages have contributed primarily to distorting incentives, both those of investors (for proper risk assessment) and those of the country authorities (for adopting appropriate economic policies). In the opinion of the borrower countries, however, the IMF’s financial programmes have tended to impose excessively stringent domestic adjustment, and the volume of assistance has not been sufficiently predictable nor have the terms been adapted to the circumstances of each crisis. One of the most interesting discussions regarding the role of official financing in emerging economies is to what extent there is a gap between the surveillance and financing functions of the IMF that could make it advisable either to strengthen its signalling role, i.e. its ability to provide signals about its members’ economic policies that affect the decisions of international investors, or to broaden its range of financing facilities by adding an insurance-related instrument so that, in the event of adverse exogenous shocks, IMF members have assured access (under certain conditions) to its funds that is predictable in regard to volume and maturity. This article briefly describes the context and terms of this debate, because of its topicality and significance within the discussions on international financial architecture.