The G-20 Response To The Global Economic Crisis-Part IV

This is the fourth in a series of articles on the deliberations and decisions of the G-20 Heads of State Summit Meeting at London, on the 2nd of April this year.

In this article, we examine the third step of the plan of action initiated by the G-20 to contain the current economic crisis.

Strengthening International Financial Institutions:

The thrust of the action plan of the G-20 is to fortify the international financial institutions, especially the International Monetary Fund, to enable them to play a positive role in supporting emerging economies to keep up with their growth rates, and not be weighed down by the burden of the current economic crisis.

The most important aspect of supporting the emerging economies, is to keep the flow of foreign capital flowing into them.   This would help them in the process of capital infusion in their banking sector.   It would also  help them invest more funds in infrastructure that would, in turn, contribute to capacity building.   It would  provide funds for trade finance that would boost cross-border trade.   Also to provide balance of payment support, so that a skewed BOP position does not disturb the fiscal and economic balance of the country.   Further to provide relief in the form of “debt rollover” and to help counter cyclical spending.   Last, but not the least, to contribute to social support.

In order to achieve the above goals, the G-20 has decided to fund the IMF in the order of USD 250.00 billion.   In future, this funding would be dovetailed into a “new arrangement to borrow”, with additional funding upto USD 500.00 billion.   If necessary, market borrowing would also be resorted to.

Apart from the IMF, Multilateral Development Banks (MBDs) wold also be used as a vehicle to channel financial support to needy countries, especially the poor ones, to the tune of at least USD 100.00 billion.

The G-20 places much store in the ability of the IMF to address the problems faced by countries in regard to their balance of payment financing needs.   In this connection, the new Flexible Credit Line (FCL) of the IMF is considered the right medium of financial assistance to countries with BOP problems.   Of particular concern is the withdrawal of external capital flows to the Banking and corporate sectors.

The G-20 agreed to infuse USD 250.00 billion into the world economy through the mechanism of the Special Drawing Rights (SDRs), with a view to increase global liquidity.   Further, ratification of the Fourth Amendment relating to the special one time allocation of SDRs would be expedited.

The G-20 committed itself to the overhauling and streamlining of the international financial institutions to enable them to operate in sync with the current global realities, and to respond to emerging challenges with necessary competence.   Increasing the credibility of these institutions, and giving more scope for the aspirations of the poorest countries are among the priorities of the G-20.

The above goals are sought to be achieved by the G-20 through the following measures.

1. To implement the package of IMF quota and voice reforms.
2. The IMF Governors to be given more powers  to provide strategic direction to the Fund, and increasing its accountability.
3. To put in place, a merit based selection process for senior level positions in International Financial Institutions.
4. To seek proposals from the IMF and the World Bank for various reforms to be undertaken to improve the functioning of the International Financial Institutions.

Apart from the above measures, the G-20 proposed to promote an inclusive system of development that worked on the principle of consensus on major issues relating to economic development.

The idea behind this is to ensure sustainable economic activity that encompasses the entire global community, in a federal sort of arrangement, that is fair and equitable to all.

                                                                                               To be concluded