The International Monetary Fund (IMF) today published the paper “The Adequacy of the Global Financial Safety Net,” which the IMF’s Executive Board discussed during an informal session as part of the Fund’s ongoing review of the international monetary system. The paper assesses the strengths, weaknesses and challenges of the Global Financial Safety Net (GFSN) –comprised of international reserves, central bank swap arrangements, regional financing arrangements, Fund resources (complemented by other multilateral and bilateral development partners), and market-based instruments.
The paper establishes that the GFSN today is much larger and more multi-layered than before, reflecting the accumulation of reserves, the expansion of bilateral and multilateral arrangements, and greater access to Fund resources. Several features of the GFSN have also been enhanced over time. Notably, the refinements to the IMF’s surveillance and lending frameworks have filled important gaps in the system. However, the study also recognizes that there is scope for improving the current configuration of the safety net, to enhance the predictability, reliability and speed of insurance and financing mechanisms against shocks, and provide the right incentives for countries to implement sound macroeconomic policies.
Indeed, the multi-layered system, though diversified and flexible, has also led to uneven coverage across countries and uneven policy implementation. Additionally, many of the elements of protection are costly for borrowers – either from a financial perspective (i.e., reserves, commodity hedging) or from a political perspective (i.e., issues of stigma related to access to Fund arrangements). Moreover, most country groupings remain underserved by the system, lacking access to predictable and reliable funding.
The Board’s informal meeting helped inform a discussion of the diagnosis. As a next step, Fund staff will continue technical work on possible avenues for reforms going forward. The GFSN is also a priority of the Group of 20 and will be discussed by ministers of finance and central bank governors in the upcoming High-Level Seminar on International Financial Architecture on March 31 in Paris.