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IMF set for huge expansion as world finance ministers meet

With a financial crisis still hammering away at the global economy, the International Monetary Fund is poised for one of its biggest expansions of power since the lender was created after World War II.

business Updated: Apr 23, 2009 10:51 IST

With a financial crisis still hammering away at the global economy, the International Monetary Fund is poised for one of its biggest expansions of power since the lender was created after World War II.

Leaders of the world's 20 largest economies earlier this month offered the IMF a $1 trillion war chest to help countries in trouble and pledged to make it the premier financial watchdog to help avoid the next global downturn.

But while IMF Managing Director Dominique Strauss-Kahn proclaimed "the IMF is back" after the Group of 20 (G20) nations summit in London, not everyone is happy about the organisation's sudden change in fortunes.

The IMF's track record in putting out previous financial fires has long been a topic of intense debate among economists and a source of strained relations between the wealthy and developing world.

This weekend, it will be up to finance ministers to iron out the details and firm up the new commitments, as the 185 members of the IMF and its sister-lender, the World Bank, hold their semi-annual summit in Washington.

The stakes couldn't be much higher: the IMF's own updated forecasts Wednesday predicted a 1.3 percent contraction of the global economy in 2009 - the deepest recession in more than 60 years.

Unemployment rates are rising into double digits in even the richest countries, while global trade is plummeting at the sharpest rate since the Great Depression. Many countries are facing huge budget gaps that could force serious cuts in government and social services.

Filling those budget holes is the main reason the G20 summit agreed to triple the IMF's lending capability to $750 billion. An IMF currency unit known as special drawing rights will also be expanded by $250 billion.

But it is no longer clear that the IMF will get what was promised, as only about half has been firmly pledged by governments.

Arvind Subramanian of the Peterson Institute for International Economics writes that the Washington meeting will be an "unambiguous success" if the IMF can get commitments on the full $500 billion for new loans.

Getting the funds is not the only problem. The IMF's history has left many governments wary of asking for loans even in the middle of a deep recession like the current one.

The IMF has been demonised in developing countries for the tough conditions it attached to past loans. Governments were forced to get their finances in order by making tough budget cuts that reduced social programmes, even while a downturn was still in full swing, according to Mark Weisbrot of the US-based Center for Economic Policy Research.

The organisation's reputation is still badly damaged by a mishandling of the Asian financial crisis of the late 1990s and a Latin American downturn a decade earlier. Brazilian President Luiz Inacio Lula Da Silva, a former labour union leader, joked last week that he used to picket the IMF and is now providing it with fresh funds.

The IMF responded to the criticisms in early April by offering a new "flexible credit line" with fewer conditions. Poland, Mexico and Colombia have already lined up and more countries are expected to follow.

But the new programme is only open to countries with a history of sound fiscal policies. That leaves out many poorer countries that can least afford to weather the global recession on their own, Weisbrot said in a conference call.

Emerging economies are hoping to change the IMF's workings by pushing for a greater voice in an institution that has historically been dominated by the US and Europe. China has made a $40 billion loan to the IMF conditional on the Asian powerhouse getting a larger share of the vote.

Wealthy countries have shown themselves open to the idea, not least by converting the once powerless G20 into the main bloc to help bring the current recession to an end.

"The bottom-line lesson of the last 18 months is that we as nations are in this crisis together," US Treasury Secretary Timothy Geithner said Wednesday.

First Published: Apr 23, 2009 10:50 IST