Towards a More Robust and Equitable Global Financial Safety Net

The global financial system has been facing a series of challenges, including high levels of indebtedness, climate shocks, inflation and higher-for-longer interest rates. Many in response have called for the international financial architecture to ensure a more equitable and resilient Global Financial Safety Net (GFSN), or the set of institutions tasked with providing emergency liquidity assistance to countries in need. 

Given the International Monetary Fund’s (IMF) vital role within the international financial architecture as the lender of last resort, a strong and effective GFSN with a quota-based IMF needs to be at the center of Group of 20 (G20) initiatives. While the IMF’s 16th General Review of Quotas resulted in an increase of IMF quota resources, the additional resources will replace borrowed resources, meaning the IMF’s lending capacity will remain the same. Furthermore, the additional quotas are to be allocated equi-proportionally, rather than rebalancing quota shares to reflect the increased importance of emerging market and developing economies (EMDEs) in the global economy. 

In a new Think20 (T20) policy brief, William Kring, Marilou Uy, Rakesh Mohan and Laurissa Mühlich navigate these fundamental shifts in the global economy, arguing for an adjustment of the Fund’s quota formula to ensure better access to resources and more equitable governance. They present three key policy recommendations to ensure that the GFSN is sufficiently resourced, quota-based and equitably distributed as well as providing voice and representation to all countries. 

Policy Recommendations:

• A stepwise increase in the IMF’s resources dedicated primarily to providing financing in times of crises to developing economies and responding to systemic global financial crises.
• Realignment of IMF quota shares to improve voice and representation, adjusting voting power and influence on Fund decision-making to reflect today’s economic realities. 
• Fostering a multilateral approach to the GFSN such that countries could potentially bridge funding using multiple sources of financing from the GFSN.

The authors argue that the G20 must also issue a set of guiding principles for the IMF’s 17th General Review of Quotas. As the IMF considers changes to the quota formula, the G20 has a key opportunity to ensure a continuation of IMF governance reform to increase the voice and representation of EMDEs and safeguard the most vulnerable IMF members.