Awash with cash or hard up?

IFIs face increasing demands on their resources

27 November 2008

As economies slump across the world, the World Bank and the IMF are looking to pump out cash, but while the Bank´s resources are expanding, there are questions about whether the IMF has enough cash.

After Iceland approached the IMF for a loan (see related article), officials at the IMF dashed to their calculators to figure out if there was going to be enough money in the coffers to cover an impending rush of clients to borrow from the Fund. The Fund announced that it had $200 billion available for other countries and could quickly get another $50 billion from shareholders if needed.

That figure worried some who noted that if large emerging markets, such as South Korea or Indonesia, who have seen speculation on their currencies, were to approach the IMF, it might quickly run out of money. Even the IMF´s first deputy managing director, John Lipsky, admitted in October that the IMF might have to raise more funds.

the IMF already ruled out Argentina using the facility

UK prime minister Gordon Brown launched a campaign to raise money for the IMF, visiting reserve-rich Middle Eastern countries and calling on China to pitch in. US Treasury officials dismissed this idea, saying the IMF should not seek more money until needed. In the end, Saudi Arabia demurred but Japan agreed to lend the Fund an extra $100 billion.

Ironically, developing countries have been arguing for years that the Fund´s resources have become much too small compared to the size of global trade and investment flows. For example the communiqué of the G24 developing countries in September 2005 noted that for crisis prevention and resolution the IMF’s “resources should be commensurate with members’ potential needs.” IMF resources are linked to voting rights in the institution, so demands had been made to increase the overall size of the IMF’s quota and distribute most of the increase to developing countries.

This had been vigorously opposed by Europeans during IMF governance reform negotiations in 2007 and early 2008. German finance minister Peer Steinbrück presented the European case to the IMF when Germany held the EU presidency in October 2007: “Taking into account the IMF liquidity situation, we consider that a limited increase would be adequate.”

New IMF facility: yet another acronym or real help?

The finance crisis finally prompted the IMF to agree in October to a contingency financing mechanism, the Short-Term Liquidity Facility (STLF), designed to lend high volumes to emerging markets rapidly, with low conditionality. The move followed more than three years of debate over a replacement for the failed Contingent Credit Line facility that was closed having never being used (see Update 54).

IMF member countries had debated the level of conditionality and the eligibility requirements. The key innovation is that the IMF will determine eligibility through confidential discussions with interested countries, rather than publishing a list of eligible countries. This potentially eliminates one goal of such a facility: to convince markets that governments have sufficient resources and thus prevent one-way speculation on currencies.

The STLF will lend up to five times a country’s IMF quota for up to three-month periods. No formal conditionality will be attached and countries are “expected to continue their commitment to maintain a strong macroeconomic policy framework.” For example, Indonesia could access about $15 billion; much smaller than the $40 billion loan it took in 1998 during the Asian financial crisis. The resistance of some rich countries to a contingency financing facility was challenged in October, when business leaders, such as CEO of megabank Citigroup Will Rhodes, and other international figures, such Kemal Dervis, head of the UN Development Programme, came out publicly in favour of a new facility.

Dervis worried about who would have access: “It would be more constructive to expand access to the new IMF lending facility to a greater number of countries [which] could be achieved by an interpretation of the announced eligibility criteria that makes it clear that this facility is not aimed at a select few.” When the facility was announced the IMF already ruled out Argentina using the facility. By mid-November no countries that took out IMF loans (see related article) had used the STLF, presumably because they did not qualify. As the IMF has said that use of the STLF will be made public after the fact, emerging markets may still worry about the stigma attached to using the Fund’s resources.

Bank bonds bonanza

Meanwhile, the World Bank seems to have more money than it knows what to do with. The jitters on international financial markets mean that investors are looking for safe places to put their money. This ´flight to quality´ benefits the Bank with its top notch credit rating and implicit guarantees by the governments of the world.

The Bank was paying its lowest interest rates ever when it raised money through bond issuance in October. The Bank is paying interest of 3.5 per cent on the 5-year US dollar bond . Though this is a bigger spread compared to the US treasury bond rate than the Bank has paid in the past, 78 basis points versus 22 basis points in February 2005. It is also paying 3.5 per cent on a Swedish krona bond issued in November. The World Bank’s private-sector arm, the International Finance Corporation (IFC), also issued its 2008 US dollar bond at a rate of 3.5 per cent in April.

Market conditions have also significantly hurt developing countries´ ability to raise their own finance. Cheap World Bank lending could help fill the gap, but means countries will be subject to Bank conditionality. A similar fate faces the private sector, as emerging market companies lose access to credit, they may be pushed into the arms of the IFC.

In a paper for the G20 summit (see cover article), the World Bank Group committed to drastically increase lending saying it “has the ability to make new commitments of up to $100 billion over the next three years, including a tripling of commitments this year … [the] IFC is launching 4 new facilities for bank recapitalization, infrastructure financing, trade facilitation and refocused advisory services. Combined with monies mobilized from others, these new facilities could provide more than $30 billion over the next three years.”

On top of the previous record IDA replenishment, the Bank now looks bigger and bolder than just a few years ago when it was being written off because developing countries preferred to access capital markets directly. The question remains whether the Bank and Fund will alter their policies and governance so that developing countries can use the resources in ways they see fit, or whether the policy agenda will be driven by the usual controversial economic models.