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Global financial safety net adequacy

The global financial safety net (GFSN) has expanded since the global financial crisis, including through a large increase in the IMF’s lending capacity, but Member States in the Addis Agenda recognised the need to further strengthen the system.

The multi-layered GFSN provides resources for addressing economic shocks. The figure shows its constituent components, including IMF resources, those of regional financial arrangements (RFAs), and bilateral financial arrangements. The GFSN, however, needs to be more comprehensive, coherent and coordinated to be effective in serving its purpose. Many countries, including some large emerging markets and those that could act as transmitters of shocks, continue to lack adequate access to predictable and reliable funding. Improvements to the GFSN would be more effective if agreed in advance of crises rather than in the midst of them.

The IMF has taken steps to help reduce remaining gaps in the GFSN, including, in May 2017, strengthening its quick-disbursing instruments the Rapid Credit Facility and Rapid Financing Instrument. In July 2017, it introduced a new Policy Coordination Instrument, which is a non-financing tool designed to signal commitments to reforms and catalyse financing from other sources. In November 2017, IMF staff presented a blueprint for a future liquidity backstop.

The significant growth in the GFSN since the global financial crisis has brought to light coordination challenges between its various layers. Strong IMF and RFA collaboration is one key aspect of the effectiveness of the safety net. Effective coordination can help increase the firepower available to tackle large-scale crises while at the same time combining the deeper regional knowledge and expertise of the RFAs with the broader cross-country experience and global perspectives of the IMF.

In 2017, the IMF proposed a new framework for more structured collaboration with RFAs. However, more can be done to prepare joint strategies and share experiences, especially as most RFAs have yet to be seriously tested with a crisis. Further sharing of lessons among RFAs and wider preparation on how future activity might be coordinated are warranted.

 

It is an open question whether the total value of the GFSN as shown in figure 5 and listed in the inventory is sufficient to respond not only to limited national crises, but also to multi-country, systemic crises. While IMF resources have increased significantly since the 2008 crisis, they are lower today than they were before the mid-1990s, both as a share of world gross product and as a share of gross global capital flows.