The International Monetary Fund should prolong an emergency lending pool activated after the global financial crisis because permanent resources alone are insufficient to respond to another bout of instability, according to the fund’s staff.
Expiration of the supplemental financing at the end of the month would leave the fund with lending capacity of about $150 billion compared with $338 billion now, the staff wrote in a report dated March 1 and obtained by Bloomberg News. The note was prepared for the IMF board and for contributors of the so-called New Arrangements to Borrow that are weighing whether to extend the pool for another six months.
“Such a decline in the fund’s lending capacity would not be consistent with ongoing global risks and could further intensify market instability,” according to the staff note. “This implies that maintaining the fund’s lending capacity can in itself be a tool of crisis prevention.”
IMF spokesman Ismaila Dieng declined to comment.
The Group of 20 industrial and developing nations in April 2009 agreed to enhance the IMF’s ability to support the global economy. The U.S. and Japan are the two largest contributors to the NAB facility, with emerging markets such as China and Brazil also pitching in.
While the IMF last year received pledges for an additional temporary $462 billion to help protect the world from the European turmoil, the money is not yet available for use. A 2010 agreement to double the fund’s permanent resources, or quotas, is also not yet in effect pending approval by the U.S. Congress.
The Washington-based IMF in January cut its global growth forecasts and projected a second year of contraction in the euro area as progress in battling Europe’s debt crisis fails to produce an economic recovery. It has since warned that predictions for the U.S. would also be lowered next month to reflect spending cuts that started to take effect in March.
Renewed tensions in the euro region and uncertainties over the U.S. budget outlook are among near-term risks to global growth, the staff said in the note. High debt in some advanced countries and financial imbalances in other regions are also medium-term threats, according to the report.
“Against this background, a new shock could quickly unsettle markets, create adverse spillovers, and undermine or even derail the recovery,” staff wrote.
Under a low-probability scenario that applies shocks to 48 emerging markets and nine advanced economies, the report estimated demand for IMF financing reaching $1.2 trillion. The report cited Egypt, Ukraine, Tunisia, Cyprus, Jamaica and Sri Lanka as countries that may draw on IMF funds in coming months.