*IMF Launches Debate on the Future of the International Monetary System
The IMF is embarking on a study to understand the challenges facing the international monetary system, identify the system’s shortcomings, and lay the basis for reform.
The international monetary system is the framework that facilitates the exchange of goods, services, and capital among countries and sustains sound economic growth. To be effective, this framework must balance the needs of individual economies and the system as a whole—and do this over time, as economic and financial relationships change.
In an interview, Siddharth Tiwari, Director of the IMF’s Policy, Strategy, and Review Department, discusses the new study, the main challenges facing the international monetary system today, and how he sees the IMF’s role going forward.
IMF Survey: Why has the IMF decided to undertake this work now?
Tiwari: The IMF is at the center of the international monetary system—many people see the Fund as the system’s guardian. The last regular review was done in 2011, and a lot has happened at the IMF—and in the world—in the intervening years. At the Fund, financial sector surveillance has been strengthened, integrated surveillance decision was introduced, spillover analysis was broadened along with other work on interconnectedness, and we’ve overhauled our lending toolkit and sharpened our focus on risks and vulnerabilities.
The IMF’s firepower has also increased, to about $1 trillion. Quotas were increased, the New Arrangements to Borrow were brought on stream, and bilateral borrowings were undertaken. So it is time to review the system again.
IMF Survey: What is your diagnosis of the international monetary system today? Is it working?
Tiwari: A series of structural shifts is taking place in the global economy, and the confluence of these shifts is raising tensions and risk. First, although current account imbalances have shrunk in the post-crisis period, this phenomenon mainly reflects the compression of demand in advanced economies. So the problem of current account imbalances is still with us.
Second, the central role of one or two major reserve currencies means that developments in one economy can have significant impact on others, constraining domestic policy choices.
Third, as economies become more interconnected, episodes of capital flow volatility are becoming a permanent part of the landscape.
Fourth, while a lot of work has been done on the financial sector side—especially on financial institutions and the transmission of risk—nonbank financial institutions have become significant players, and that needs to be taken into account.
And finally, three reserve currency areas—the United States, the euro area, and Japan—will need, over time, to transition out of unconventional monetary policy, which will create a period of volatility for emerging markets. The global financial safety net will thus need to be strengthened.
IMF Survey: What emerging challenges do you see on the horizon for the international monetary system?
Tiwari: A key challenge is that post-crisis growth in advanced economies needs to be raised. When we were at the epicenter of the crisis, emerging markets managed to remain anchored by using their buffers, and it was expected that there would be a “handoff” of sorts from emerging markets to advanced economies in a few years. But that handoff is not happening.
A related issue is to ensure that the dream of globalization—that living standards in emerging markets and developing countries would, over time, converge to those in advanced countries—is not lost.
A further challenge is China’s rebalancing, which needs to happen. Growth will be lower, but likely safer (although this will inevitably have consequences for other economies).
Then there is the historic commodity price decline that necessitates adjustment for oil-producing countries in the Middle East and other commodity exporters, which need to find a new business model.
Finally, there are differences in monetary conditions in the world’s major economies. This asynchronous monetary policy among the United States, Europe, and Japan signals continued volatility. I would see these as the major issues ahead of us.
IMF Survey: What role should the IMF play in the international monetary system going forward?
Tiwari: The Fund remains at the center of the system. As we monitor our member countries’ economies, we must ensure that imbalances do not emerge in different parts of the world—especially the buildup of financial imbalances. We also need to ensure that emerging markets integrate into the international monetary system so that they achieve higher living standards. Financial development and deepening will be important for many member countries, especially in periods of greater market volatility.
Markets can be unforgiving for emerging markets right now. The process of convergence will involve emerging markets running small current account deficits over a period of time and making use of capital inflows to finance those deficits. So inflows need to be more stable for a longer period of time, and we should look at how to make them safer. Part of the solution lies with macroprudential policy; part will lie in the balance between debt and equity.
The IMF’s contribution will also include the provision of an adequate global financial safety net. This safety net, or lending framework, has to respond to three needs for the global economy: encourage better policy making, finance adjustment at a reasonable pace, and provide insurance to “innocent bystanders” who may be affected. Another level of the safety net is regional financing arrangements, such as the Chiang Mai Initiative, and the IMF needs to find a way to work more closely with them.
So while the Fund is at the center of the international monetary system, we are part of a larger system with central banks and other standard-setting agencies. Our role is to provide analysis and a shared understanding, but the onus will lie on the membership to take reform forward.
IMF Survey: What are the next steps for the IMF’s work in this area?
Tiwari: We just had an initial discussion at the IMF Executive Board on the role of the IMF in the international monetary system. Three work areas were identified that were already in the work program: how to make capital flows safer, a strengthened global financial safety net, and the role of the SDR.
The first issue will comprise different phases. The first phase is to take stock of capital flows—their volatility and direction. The second phase, to take place mid-year, will involve taking stock of country experiences in dealing with capital flows in the context of the IMF’s institutional view. And the third phase, to start toward the year’s end, will examine what we’ve learned from country experience and whether the institutional view needs to be revisited.
On the global financial safety net, there will be a stocktaking paper to be discussed in the coming weeks, followed by a paper on the size of the IMF. Both papers will be the backdrop to the subsequent quota discussions. In this stream of work, we will consider whether our safety net is adequate to protect every segment of the membership during periods of crisis.
Lastly, with the addition of the Chinese renminbi to the SDR, our membership is asking us to examine the broader use of the SDR in the international monetary system, and that’s something that we will do in the months ahead.
IMF Survey: What do you expect the most difficult issues to be in terms of political buy-in and support?
Tiwari: Having countries agree on a framework to make capital flows safer will be among the issues that will require a lot of work. But this is essential and goes hand in hand with a stronger global financial safety net.