TWN Info Service on Finance and Development
G24 developing countries call for international monetary system reforms, a greater role for SDRs in capital controls
The G24 statement, that came at the end of the
Group's 85th ministerial meeting in
G24 Ministers stated their disagreement with the
IMF’s proposed framework for capital controls, which would be used as
staff advice to member countries on managing capital flows and get included
in IMF surveillance reports. Instead, the G24 stressed that the IMF
must adopt an “open-minded and even-handed approach to the management
of capital flows and take into account policies in capital-originating
countries,” in particular the systemic financial centers in the
In the recently released IMF paper on a capital controls framework, the Fund tries to formulate the “global rules of the game” on “macroprudential policies, capital account liberalization, and reserve adequacy.” The paper stipulates that because capital controls can potentially be used to avoid the necessary macroeconomic policy adjustments, they warrant greater scrutiny and should be used only when appropriate macroeconomic conditions are already in place as a “first line of defense.”
The three central macroeconomic conditions are an exchange rate that is not undervalued (“allowing the currency to strengthen”); reserves that are more than adequate (“accumulating reserves”); and, resistance to lowering interest rates any further when the economy is overheating (“rebalancing the monetary and fiscal policy mix”). These macroeconomic pre-conditions are some of the contentious areas to which G24 Ministers referred when stating that policymakers of capital recipient countries “must have the flexibility and discretion to adopt policies that they consider appropriate and effective…”
The IMF paper also states that “the onus of policy adjustment from inflow surges rests solely on the recipient countries.” The G24 again parted ways with the IMF, stating that the IMF must “take into account policies in capital-originating countries, especially systemically important financial centers, as well as specific circumstances of capital-receiving countries.” Academics such as Kevin Gallagher and Stephanie Griffith-Jones have also argued that capital controls could be “coordinated on a global level – indeed, as a part of the global process to re-regulate finance.” They remind the international community that “in the meetings that led up to the establishment of the IMF, both Harry Dexter White and John Maynard Keynes agreed that capital controls be targeted at ‘both ends’ of a capital flow.”
Reserve adequacy, international monetary system, and SDRs
The G24 Ministers did not support the adoption
of the IMF’s recent policy proposal on “reserve adequacy metrics,” nor
the inclusion of such a framework that defines reserve adequacy in IMF
surveillance. Instead, the Ministers emphasized the important role that
reserves have played in cushioning the impact of the financial crisis
on developing countries. Since the Asian financial crisis of 1997-98,
many developing countries, particularly in Asia and
G24 Ministers asked the IMF to continue exploring options to improve the international monetary system, including through a “greater role for SDRs and expansion of the SDR basket to include emerging markets currencies.” This statement echoes recent calls by China, and other countries such as France, for the inclusion of the yuan and other emerging market currencies in the SDR currency basket, so that the international currency better reflects current changes in the world economic geography. (The SDR is currently comprised of the US dollar, the euro, the yen and the sterling pound).
Emerging economies are increasingly trying to diversify their reserve assets from the traditional reserve composition that has been dominated by the US dollar Treasury bills. Diversification of the composition of assets in country reserves would on the one hand decrease the privilege of the US dollar as the sole global reserve currency, and on the other hand lower the foreign exchange risk associated with the low-value US dollar for countries.
Ministers also called for regular allocations of SDRs to complement the reserves of member countries. So far, there has been only one SDR allocation of $283 billion, which occurred in August 2009, in direct response to the urgent liquidity needs of member countries in response to the many adverse impacts of the financial and economic crisis. However, the SDR allocations were made according to the IMF’s skewed quota-based voting power system. Consequently, the vast majority of the SDR allocation was received by developed countries, which, ironically, needed them the least.
Commodity price spikes
The G24 Ministers call for “urgent and concerted actions to deal with the immediate consequences of food and energy price increases and to address the long-standing impediments to food and energy security.” Their communiqué highlighted the surge in commodity prices relative to their previous peak in mid-2008 and agreed that “structural, cyclical and financial factors, as well as supply disruptions, all appear to play a role in explaining recent trends and increased volatility.”
While commodity price increases have been a positive development for developing countries that are commodity exporters, the sharp price spikes of fuel and food are a serious concern for many developing countries. A key cause of concern is the high share of consumption that food and fuel account for in the household budgets of the most vulnerable sections of society in developing countries. Other concerns are inflation pressures, the exacerbation of social tension, and fiscal and import cost burdens that endanger growth prospects, especially of low-income countries.
The G24 called on the IMF to adapt its lending tool kit, particularly with respect to conditionality and interest rates, to better help countries cope with the adverse effects of the food and energy crisis. Concern was expressed about the adequacy of resources available for food and energy from the World Bank’s Global Food Crisis Response Program as well as other international financial institutions. However, the G24 Ministers agreed with the World Bank’s Agriculture Action Plan which scales up agriculture, improves resilience to climate change and addresses binding land and water constraints toward the goal of decreasing the supply shocks associated with commodity price volatility.
Surveillance and global imbalances
The G24 Ministers highlighted the lessons from
the recent report by the Independent Evaluation Office (IEO) on IMF
performance in the run-up to the 2008 crisis, calling for “even-handed
surveillance” and more effective traction in systemically important
advanced economies. One of the key conclusions of the IEO report was
the lack of impartiality and objectivity in IMF surveillance, as advanced
economies, particularly the
On the hotly debated issue of global imbalances,
the G24 acknowledged the role of developing countries in supporting
global demand. While this reflects the persistent argument from the
G24 Ministers noted that while fiscal consolidation
in many advanced economies is imperative, the “pace and synchronization
of fiscal adjustment” must be supportive to maintaining private demand
as well as to “strong structural reforms.” Upon the advent of interest
rate increases (monetary tightening) in the
Downside risks were identified by the G24 to range from the still weak financial systems in advanced economies, debt sustainability problems in the Eurozone area, recent commodity price spikes, “disruptions to growth stemming from the disruptions in oil supply”, and threats to food security from “aggravated demand-supply imbalances.”
The communiqué made note of the recent events
The G24 communiqué highlighted the shift towards “multi-polar sources of growth” through the contrast between advanced economies, where risks of a “double-dip” recession continue and where high unemployment and sluggish growth persist, and developing regions, which continue to maintain “strong growth momentum reflecting robust macroeconomic frameworks.”
World Bank lending and boosting multilateral development finance
The G24 ministers welcomed ongoing reforms that streamline World Bank lending through “due flexibility in the policies and instruments of the Bank, including its financial policies, and cautioned against increases in the costs associated with its lending.” Ministers also welcomed the proposed introduction of a new instrument for “results-based lending,” the program for results (P4R), that focuses on scaling up successful country programs, while stressing that “the efficacy of this instrument should not be undermined by conditions and restrictions.”
In a major break with the past, governments using the P4R instrument will not be required to comply with the World Bank’s environmental and social safeguards even for operations classified as Category B, or in other words, programs with “substantial risk.” Category A operations, such as large infrastructure projects, would be subject to a revised set of safeguards.
Ministers agreed that a “priority area for collective action is the reinvigoration of multilateral development finance.” To achieve this they committed to work together on financing proposals, “including through enhanced South-South cooperation.” They also underscored the critical importance of upgrading infrastructure and raising investment in developing countries, as well as financing to meet the Millennium Development Goals (MDGs), agricultural revitalization, and climate change adaptation and mitigation.
On climate finance, the G24 Ministers took note
of the agreement reached at
Ministers asked the G24 to assist member countries in drafting proposals that can serve as an input to the deliberations in the Transitional Committee and related discussions in the G20 to ensure that low-carbon growth is pro-poor, to provide input on the design of the Green Fund, and to advise economies on adaptation and its development linkages.
Governance tenets for the Green Fund were discussed by the Ministers, which range from provision of public funds based on the principles of common but differentiated responsibility in compliance with financing obligations, leveraging public resources, private flows and MDG finance to ensure scaled up, adequate and predictable financing, and having the flexibility to address REDD+ adaptation, mitigation, technology development and transfer and capacity building. The Ministers underscored that the governance arrangements for the Green Fund should operate under the guidance and accountability of the Conference of Parties, and that the Green Fund be anchored in country-focused and country-owned programs.
(REDD refers to Reduction of Emissions from Deforestation and Forest Degradation.)
Governance reform in the Bretton Woods Institutions
Governance reforms in both the World Bank and IMF were taken note of and Ministers repeated their call for an “open, transparent, merit-based process,” without regard to nationality, for the selection of both Bank and Fund chiefs. There are prevailing sentiments that the next chief of the IMF should be selected from a BRICS country (Brazil, Russia, India, China, South Africa), while civil society groups have also put forward a joint advocacy report calling for the fair, open and meritocratic selection of the next IMF Managing Director.
The G24 group is composed of African, Asian and
Latin American country clusters. There are 9 African countries (
For the full communiqué please see: http://www.imf.org/external/np/cm/2011/041411.htm