Sunday, April 12, 2009

The IMF's New Budget and Its Implications

Sources:, Banking on the Fund; The London Summit, Explanatory Guide to the Communique

On April 2, 2009, the Group of 20 (G-20) leading advanced and emerging economies met in the United Kingdom for the London Summit. The objective of the summit was to bring together world leaders to discuss the global financial crisis and devise ways to get out of it. At the close of the summit, the G-20 issued a communique summarizing the decisions that the leaders had come to and noting the steps that the international community will be taking from this point on.

The most talked-about development arising out of the London Summit was the US$750 billion loan that the G-20 countries will be making to the International Monetary Fund (IMF). Of those US$750 billion, US$250 billion will go directly to the IMF's Special Drawing Rights (SDRs). SDRs are the IMF's version of currency; each country has a quota of SDRs that are available to it. Some critics have pointed out that, though the US$250 billion figure is impressive, it may not make a tremendous difference for those countries (namely emerging economies) that do not have access to a large amount of SDRs.

Some critics have also gone as far as suggesting that the IMF re-structure the way it distributes loans and votes on important issues so that it is better able to make use of the US$750 billion. Some proposed changes: voting procedures (to reduce the influence of "big" players such as the United States), re-structuring short-term loan facilities to look more like insurance plans (with high premiums and close monitoring of pay-outs), and giving more clout to emerging economies. Will the IMF implement these changes? Only time will tell.

Discussion Questions:

1- Do you think that the IMF should be focusing on undergoing a structural face-lift, or should it focus on other issues related to the financial crisis?

2- What do you think the IMF should do with the US$750 billion?

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