Section 1: Responding to the global economic crisis
The global financial and economic crisis presented extraordinary challenges for the International Financial Institutions (IFIs). The crisis demonstrated the need to reconsider their instruments for making loans and grants, secure additional resources and reform their governance structures to reflect the evolving economic weight of the membership. In these tasks, the G20 played a leading role in providing the political impetus needed for substantial improvements to be made.
The G20 and the IFIs
The G20 led in coordinating the global response to the crisis by its member countries and the IFIs. In addition to Finance Ministers and Central Bank Governors meeting four times during 2008-09, the emergence of G20 Leaders' Summits played an important role -- with the first held on 15 November 2008 in Washington DC and the second on 2 April 2009 in London. The 19 member countries of the G20, which includes Australia, are also among the largest members of the International Monetary Fund (IMF) and World Bank.
In their Washington DC Summit declaration, G20 Leaders agreed that they would take all necessary action to restore jobs and economic growth. They agreed on a 47 point Action Plan which included reinforcing international cooperation, reforming the IFIs and ensuring that the IMF, World Bank and other multilateral development banks have sufficient resources to continue playing their role in overcoming the crisis. To take forward the agreed Action Plan, G20 Working Groups were established on IMF Reform, and on the World Bank and other multilateral development banks (MDBs).
At the London Summit, G20 Leaders agreed on a comprehensive action plan for recovery and reform. In relation to the IFIs, and drawing on the reports of the relevant working groups, this included:
- US$1.1 trillion program to restore credit, growth and jobs in the world economy, including support for US$500 billion in additional resources for the IMF and at least US$100 billion additional lending by multilateral development banks;
- call for a US$250 billion general allocation of Special Drawing Rights (SDRs) to inject liquidity into the world economy;
- on the need to accelerate IMF quota reform and ensure all IFIs have the facilities they need to address the crisis and meet the needs of developing countries;
- call for the IMF to assess regularly the actions taken and the global actions required to accelerate the return of the global economy to trend growth;
- call for the IMF and Financial Stability Board to monitor progress in implementing the Leaders' agreed actions to build a stronger, more globally consistent supervisory and regulatory framework for the financial sector;
- to implement the first phase of World Bank reforms agreed in October 2008;
- call for World Bank voice and representation reforms to progress on an accelerated timescale, to be agreed by the 2010 Spring Meetings;
- to review the flexibility of the joint IMF and World Bank Debt Sustainability Framework; and
- that the heads and senior leadership of the international financial institutions should be appointed through an open, transparent, and merit-based selection process.
Response by the IMF
During 2008-09, the IMF's activities and roles expanded to historic levels in response to the global financial crisis and recession. Its assistance to help member countries address balance of payments needs expanded, with new lending commitments for the year exceeding US$158 billion, compared with US$1.5 billion in 2007-08, and including substantial assistance to low-income countries.
The IMF also overhauled its lending and conditionality framework, including the establishment of a new Flexible Credit Line, available on a precautionary basis, to meet the increased demand for crisis-prevention and crisis-mitigation lending from countries with robust policy frameworks and strong track records in economic performance. Three countries -- Mexico, Poland and Colombia -- entered into arrangements under the FCL for a total of US$78 billion. The IMF also commenced efforts to strengthen the effectiveness of its surveillance, including by enhancing its focus on macro-financial vulnerabilities and cross-border spill-overs.
The IMF's resource base was expanded following the G20 Summit in London, initially through immediate financing of US$250 billion to be subsequently incorporated into an expanded and more flexible New Arrangements to Borrow (NAB), increased by up to US$500 billion. On 12 May 2009, the Treasurer announced that as part of this international response, the line of credit that Australia has made available under the NAB since 1998 would increase to US$7 billion.
The crisis accentuated the need for a more representative and legitimate IMF. Australia took a leading role in facilitating discussion of reforms to the distribution of quota and the Fund's governance structures. In the lead up to the G20 Leaders' Summit in London on 2 April 2009, Mr Michael Callaghan, Executive Director (International) of Treasury's Macroeconomic Group, co-chaired (with South Africa) the Working Group on reform of the IMF.
Response by the World Bank
The World Bank took a leading role amongst the MDBs in responding to the crisis. The World Bank significantly increased its lending and also created innovative measures and programs to help developing countries to stabilise their economies, boost social safety nets and stimulate their economies.
The International Bank for Reconstruction and Development (IBRD) is the main arm of the World Bank Group (WBG) and lends to middle-income countries and creditworthy low-income countries. In 2008-09, the IBRD committed US$32.9 billion. This was a 144 per cent increase from 2007-08 lending of US$13.5 billion. The IBRD expects that it will triple its lending from pre-crisis levels to a total of US$100 billion over the three financial years 2009 to 2011.
The International Development Association (IDA), which assists low-income countries with poor creditworthiness, had less flexibility to respond with increased lending due to its funding and allocation structures. Despite these constraints, by front-loading and fast-tracking commitments, IDA funding reached US$14 billion across 63 countries, a 25 per cent increase from 2007-08 lending of US$11.2 billion.
The WBG focused these increased resources into programs and sectors that mitigate the impact of the crisis and facilitate recovery. Support was tripled for social safety net programs such as school feeding, nutrition, conditional cash transfer projects and cash for work. The new special purpose Vulnerability Financing Facility (VFF) streamlined crisis support to the poor and vulnerable through social interventions under the Rapid Social Response Program.
The IFC committed US$10.5 million and mobilised a further US$4 million from other sources in financial year 2009. This was a slight drop from financial year 2008 commitments of US$11.3 billion. The more difficult environment which resulted in net losses in 2008-09, limited the capacity of the International Finance Corporation (IFC) to respond further.
IFC initiatives were important in addressing both the immediate and longer-term needs of the private sector by helping to strengthen banks in developing countries, supporting small and medium size enterprises, bolstering trade and supporting critical infrastructure projects.
As with the IMF, Australia has supported voice reforms to enhance the legitimacy and effectiveness of the World Bank. The Development Committee agreed to a package for the first phase of reforms to enhance the voice and participation of developing countries in the WBG at the October 2008 Annual Meeting. The DC also agreed to accelerate the second phase of voice and participation reforms, including realigning shareholding to further increase the voice of developing countries, with agreement to be reached by April 2010.
Section 2: Australia's interactions with the International Monetary Fund
Australia and the International Financial Institutions