In our study, we analyze how fiscal frameworks for resource-rich countries be made more flexible in practice from a practitioner’s perspective, proposing specific options to effectively anchor fiscal policy while allowing for a sustainable scaling up of spending in the context of increased resource revenue.
As the global economics crisis abates, there is an emerging consensus that a better global financial safety net is needed to enable countries with good policies to insure against bad outcomes, especially when they are innocent by-standers caught in a financial turmoil. Last week the IMF took another step toward meeting this need by further enhancing its country insurance facilities. Reza Moghadam, head of the IMF’s Strategy, Policy, and Review Department, has authored this blog to coincide with a series of speeches about the reforms, including a scheduled speech at the Peterson Institute for International Economics next Monday. The blog outlines the two major changes: enhancements to our flagship insurance option—the Flexible Credit Line (FCL)—for countries with very strong policies and economic fundamentals; and the establishment of a new Precautionary Credit Line (PCL), which offers a new form of contingent protection for countries with some moderate vulnerabilities.
The IMF resource base needs to be adequate to deal with most shocks. Some observers, however, worry that a large IMF with beefed-up financing instruments would add to moral hazard, encouraging reckless lending or unsafe policies. This is less of an issue when IMF lending is targeted to deal with “exogenous” shocks, i.e., shocks that cannot be influenced by the behavior of the individual country or its creditors.
In our highly globalized economy, large and rapid flows of money across borders are here to stay. The challenge for emerging economies is to find ways to manage these flows so that they don’t exacerbate boom-bust cycles, while still leaving the door open to productive (and hopefully stable) investment. This means using all available tools, particularly greater use of prudential regulations, and keeping an open mind when it comes to capital controls.