Istanbul: The head of the International Monetary Fund (IMF) on Friday called for a further increase in its resources so the institution can become a “credible” global lender of last resort.
IMF managing director Dominique Strauss-Kahn noted that a $500 billion (Rs24 trillion) increase in IMF funding agreed in April would require fresh approval every five years by contributing countries and could be activated only in times of crisis.
He said that could create “uncertainty” in markets about whether countries could count on IMF in times of need.
“This uncertainty means that the IMF cannot yet serve as a credible global lender of last resort,” Strauss-Kahn said in a speech ahead of weekend meetings of IMF and the World Bank. “And because providing global financial insurance is so critical for crisis resolution and crisis prevention, the resource base of the IMF should be increased further.”
Strauss-Kahn argued that bolstering IMF’s lender of last role would discourage nations from relying on export-led growth in order to build up large currency reserves, helping pave the way for a more balanced global economy.
“The absence of adequate insurance to guard against sudden stops in private capital flows has played a major role” in the growth of reserves, he said.
Asian countries, wary of IMF’s handling of the region’s financial crisis in the 1990s, have amassed trillions of dollars in savings to avoid having to return to IMF for help again.
Strauss-Kahn said the build-up in reserves had come at the expense of investments that would have had a higher social return, such as education or infrastructure.
He also said the “self insurance” of large reserves could complicate monetary and exchange rate policy by fostering a potentially inflationary level of liquidity.
Strauss-Kahn said increasing the subscriptions, or quotas, of member countries, which would require them to pony up resources in exchange for greater voting power, would be one way to boost funding for the global lender.
The issue of increased quotas, which determine voting power in IMF, is set to loom large for emerging economies when global financial officials meet in Istanbul this weekend for the semi-annual IMF and World Bank meetings.
Strauss-Kahn said it was difficult to know exactly how much in new resources the fund would need, but noted that some experts have called for $1 trillion in added funding.
For the first time ever, emerging market countries, such as China, Russia, India and Brazil, contributed resources this year towards an IMF crisis fund.