Crisis Lending and the IMF
As the financial crisis in advanced economies spread to emerging markets, a number of vulnerable countries began to experience difficulties in their economies and financial systems, and support for some of these countries has been arranged. The IMF has about US$200 billion available for immediate lending and can draw on an additional $50 billion in additional resources if needed. It can process requests for assistance under fast-track emergency financing procedures. Loans have conditions attached, but those conditions are focused on resolving core problems only. |
What is a crisis?
Crises take different forms. They can be characterized by a large decline in consumer demand and investment by firms, higher unemployment, and a lower standard of living. They are often accompanied by heightened uncertainty in financial markets and declines in the prices of stocks, bonds and, quite frequently, the value of the domestic currency. Crises can originate in or affect the financial sector, and can lead to difficulties in banks and the payments system, causing damage to economic activity as well. A very severe crisis (economic and/or financial) could lead to recession, debt defaults, and what is known as a sudden stop: a deep recession and a reversal in the flow of international capital.
Crises in emerging markets can be caused by external or domestic factors. External causes comprise a collapse of export prices, a drastic increase in import prices, a shift in investor perceptions about risk that cause capital outflows, a large depreciation or devaluation of the currency of a close trading partner, a retrenchment of local activities of international banks, or a sharp curtailment of credit or increase in interest rates in world markets.
Domestic causes include excessive monetary creation, unsustainable fiscal deficits, an overvalued domestic currency, political instability, and natural disasters. External shocks can have a multiplying effect on vulnerable countries, which tend to have relatively high levels of private or public debt, weak financial systems, and a history of instability and inappropriate policies.
These factors often coincide, magnifying the depth and breath of a crisis. Different sectors in the economy tend to fare differently depending on the sources of the crisis and underlying vulnerabilities. All crises are therefore marked by a sudden worsening of perceptions about a country's prospects, often including the ability of the government, banks, or corporations to honor their obligations. The ensuing loss of confidence precipitates deleveraging of financial contracts, a collapse of domestic asset prices, and downward pressure on the value of the domestic currency.
Role of the IMF
Arresting economic and financial crises normally requires a timely package of decisive measures adapted to the country's circumstances. The implementation of this package is aimed at restoring confidence by improving expectations about the country's prospects. It also requires isolating the most significant problems and dealing with them without crowding the program with non-essential measures. In a crisis case, it is critical to focus only on those measures that are essential to restore stability—the conditions for recovery should be circumscribed to the source of the problem but powerful enough to ensure a country's return to economic and financial stability.
The IMF provides policy advice and financial support upon request by its members. An IMF staff team travels to the country to assess the sectors affected (for instance, government finances, financial institutions, the corporate sector) and discuss with the country authorities the policy response. The discussions include estimating the size of the country's financing needs (that cannot be met by the private sector). Once understandings has been reached on policies and a financing package, a recommendation is made to the IMF's Executive Board to endorse the program and disburse the loan. This process can be expedited under the IMF's "emergency financing procedures".
| The IMF's Emergency Financing Procedures |
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| The Fund has emergency procedures to help provide financing at short notice. The Emergency Financing Mechanism has been used in 1997 during the Asian crisis for the Philippines, Thailand, Indonesia, and Korea; in 2001 for Turkey; and in 2008 for Georgia. When can it be used? When a member country faces an exceptional situation that threatens its financial stability and a rapid response is needed to contain the damage to the country or the international monetary system. How does it work? (i) The Executive Board is informed about the intention to activate the procedures; (ii) a short report is quickly circulated; (iii) as soon as understandings are reached with the government, the Board considers the request to support a program within 48-72 hours. How long can the whole process take? Under the emergency procedures, the period between the beginning of discussions on the program and the approval of the program by the Board could be very short. |
Program design
A program's policy measures are based on a diagnosis of the situation and discussions with the government. Financial assistance is based on the estimated financing needs for the period of the program. Typically this will take the form of a new IMF loan but it can also be an augmentation of resources under an existing IMF arrangement. The policy program will normally have quantitative targets and a calendar of measures to ensure future disbursements.
Under the IMF's policy of normal access, countries can request financing up to 100 percent of their IMF quota on an annual basis and 300 percent of their quota cumulatively. In exceptional circumstances, additional resources are requested as "exceptional access". There is no pre-specified maximum on such access, although the IMF will assess factors such as the size of balance of payment pressures, the country's debt sustainability and its ability to regain access to financing from other sources, and the strength of policies to be adopted. When there is a crisis, disbursements tend to be front-loaded with smaller subsequent tranches.
At present, the IMF's capacity to lend is about US$250 billion, an amount which includes special arrangements with selected countries to borrow additional resources. In addition, some countries may be in a position to provide additional resources, if there was a need to do so.