Regional Financial Arrangements Research Articles

International regime complexity in sovereign crisis finance: a comparison of regional architectures

The theory of international regime complexity that frames this study specifies expectations for international cooperation stemming from different combinations of hierarchy and differentiation among institutions in regime complexes. This paper compares relationships between regional financial arrangements and the International Monetary Fund in the regional complexes for crisis finance in East Asia, Latin America, and the euro area during 2000-2019 and tests these expectations. Creditor states that sit at the nexus between global and regional institutions are particularly influential in the choice of architecture (the combination of hierarchy and differentiation) for these complexes but are constrained by arrangements inherited from previous decades. Once chosen, the complex’s architecture in turn shapes policy adjustment in borrowing countries and influences whether states pursue regime shifting or competitive regime creation when dissatisfied with institutions. These findings generally coincide with expectations, but exceed the degree of policy adjustment that the core theory expected for the euro area. Interinstitutional collaboration, the dynamics of which are elaborated, fills this explanatory gap. The paper concludes that relations among institutions are essential for understanding the outcomes and evolution of regime complexes and underpin a more complete explanation than provided by singular institutionalism, the power-gap hypothesis and other alternative approaches.

New approaches to international reserves: The lack of credibility in reserve currencies

The ongoing international reserve paradigm based on trust will experience a major transformation despite being convenient, flexible and low-cost. The underlying issue is a loss of trust. Due to the massive financial sanctions imposed on Russia and other states, traditional reserve currencies have lost their footing, compromising confidence in international reserves. Consequently, countries will need a comprehensive revision of their reserve asset management options. This paper overviews these options, which range from trade-offs to non-orthodox solutions. In total, we list twelve options, which can be categorized into three groups according to their novelty and “degree of orthodoxy­.” The first group implies countries can expand the use of available instruments, i.e., investments in gold, renminbi, and currencies of friendly countries, and enlarge the network of swap lines and the toolbox of sovereign wealth funds. In the second group, options call for the introduction of new mechanisms for international reserves functions, such as accumulating physical resources and private cryptocurrencies­, issuing stablecoins by central banks, and building up assets of regional financing arrangements. The third group includes options to shift the energy standard (currency) paradigm and establish a synthetic international currency or form a macroeconomic paradigm with no international reserves. Furthermore, applying our analysis, we move beyond Russia and look at the issue from the perspective of the Shanghai Cooperation Organization members and observers, as it is a leading platform where countries openly discuss this matter.

Climate-Proofing the Global Financial Safety Net

AbstractAlthough climate change poses a serious threat to macrofinancial stability and economic development, the global financial safety has so far failed to sufficiently address this challenge. This article reviews the extent to which the International Monetary Fund (IMF) has started to integrate climate change in its analytical and operational frameworks, showing significant shortcomings in addressing the risks emanating from climate change. Regional financing arrangements (RFAs) have to date not engaged or only very little in addressing climate-related risks. Against this backdrop, this article argues that the IMF and also RFAs need to climate-proof their policies and frameworks and puts forward eight recommendations: (i) mainstream systematic and transparent assessments of climate-related financial risks in all operations; (ii) introduce consistent, systematic, and universal appraisal and treatment of physical and transition risks in surveillance and monitoring for all countries; (iii) ensure that all policy recommendations are aligned with the Paris climate goals; (iv) advance disclosure of climate-related financial risks and promote sustainable finance and investment practices; (v) support member countries in mainstreaming climate risk analysis in public financial management; (vi) support climate-vulnerable countries in dealing with debt sustainability problems; (vii) develop lending instruments for climate emergency financing; and (viii) in the case of the IMF, explore options to use SDRs to support climate-vulnerable countries.

Borrowing Patterns in the Global Financial Safety Net: Does Governance Play a Role?

AbstractThe global financial safety net (GFSN) has become a complex regime. Regional financial arrangements (RFAs) have emerged alongside established IMF structures. How relevant are RFAs and the IMF in moments of financial crisis? And more specifically: Do member countries resort to RFAs as complements or as substitutes to IMF lending? To answer these questions, we developed an original data‐set on the GSFN use by the 61 emerging market and developing economies (EMDEs) that are members of existing RFAs between 1976 and 2018. We find that not only economic criteria such as lending volume, timeliness and conditionality drive patterns of complementarity and substitution in crisis finance, but that RFA governance structure and regional independence matters. The data show that borrower‐dominated RFAs are used much more frequently than creditor‐dominated RFAs. Moreover, RFAs which lack regional policy autonomy but are dependent on the IMF are not called upon – even if they have far superior volumes of potential lending capacity.

The Enlarged Global Financial Safety Net

AbstractThe institutions and instruments of the Global Financial Safety Net (GFSN) represent the part of the global financial architecture that is responsible for providing an anti‐crisis and stabilization support to the countries in need. We argue that the standard understanding of the GFSN as a system consisting of four layers – national reserves, bilateral swaps, regional financing arrangements and the IMF – demands rethinking. We suggest the concept of an enlarged GFSN, namely its expansion by two additional elements – multilateral development banks and bilateral financial support. Both elements of the international financial architecture are partly involved in providing an anti‐crisis and macroeconomic stabilization support at concessional terms. We demonstrate how the enlarged GFSN functions, including at the time of the COVID‐19 crisis.

Penerapan Sistem Informasi Manajemen Daerah Keuangan Dalam Pengelolaan Data Keuangan Pada Organisasi Pemerintah Daerah (Studi Kasus Pada BPBD Kabupaten Magelang)

Technological developments encourage the government to advance computer-based information systems to make it easier for the government to manage finances. A Regional Management System application called SIMDA was developed. SIMDA Finance is a technology that has been used by almost all regional governments in Indonesia when carrying out the related regional financial arrangements themselves. The purpose of this study is to see how the effect of the implementation of SIMDA Finance on the quality of financial reports in BPBD Magelang Regency. This study analyzes the application of SIMDA Finance in one of the SKPDs of Magelang Regency, namely BPBD of Magelang Regency. This research was conducted with a quantitative approach. The data in the current research are primary data types. The data collection system by distributing questionnaires / questionnaires to some employees in BPBD Kab. Magelang which was held in January-February 2020. The results showed that the variable of SIMDA Financial Implementation influenced the Quality of Financial Statements positively and significantly in the Regional Disaster Management Agency SKPD of Magelang Regency in 2020. With a statistical t value of 2.813843> 1.895 (t table ), which means that the SIMDA Financial variable (X) affects the Quality of Financial Statements (Y).

Safety First: Expanding the Global Financial Safety Net in Response to COVID‐19

AbstractWe call for strengthening the Global Financial Safety Net (GFSN) to manage the economic effects of COVID‐19, in particular the massive capital outflows from emerging market and developing economies EMDEs and the global shortage of dollar liquidity. Both the United Nations (UN) and the International Monetary Fund (IMF) estimate that EMDEs need an immediate $2.5 trillion, yet the financing available to them is just $700 to $971 billion. To meet these immediate needs we propose to: (1) broaden the coverage of the Federal Reserve currency swaps; (2) issue at least $500 billion of special drawing rights through the IMF; (3) improve the IMF’s precautionary and emergency facilities; (4) establish a multilateral swap facility at the IMF; (5) increase the resources and geographic coverage of regional financial arrangements; (6) coordinate capital flow management measures; (7) initiate debt restructuring and relief initiatives; and (8) request that credit‐rating agencies stop making downgrades during the emergency. It argues that leaders should swiftly move to address these structural gaps in the GFSN: (1) agree on a quota reform at the IMF; (2) create an appropriate sovereign debt restructuring regime; (3) expand surveillance activity; and (4) adopt IMF governance reform and strengthen its relations with all agents of the GFSN. All of these reforms must be calibrated toward a just transition to a more stable, inclusive, and sustainable global economy.

Whatever it takes? The global financial safety net, Covid-19, and developing countries.

Multilateral financial institutions have pledged to do whatever it takes to enable emerging market and developing countries to fill a $2.5 trillion financing gap to combat Covid-19 and subsequent economic crises. In this article, we present new datasets to track the extent to which multilateral financial institutions are meeting these goals, and conduct a preliminary assessment of progress to date. We find that the International Monetary Fund and the principal regional financial arrangements have made relatively trivial amounts of new financing available and have been slow to disburse the financing at their disposal. As of July 31, 2020, these institutions had committed $89.56 billion in loans and $550 million in currency swaps, totaling $90.11 billion-just 12.6% of their current capacity. The new datasets allow scholars, policymakers, and civil society to continue to track these trends, and eventually examine the impact of such financing on health and development outcomes.

RFAs’ Financial Structures and Lending Capacities: A Statutory, Accounting and Credit Rating Perspective

This paper documents the diverse financial structures – including capital structures and funding strategies – of Regional Financing Arrangements (RFAs) and offers an analysis of RFAs’ lending capacity from a statutory, accounting and credit rating perspective. Using credit rating agencies’ methodologies, the paper presents the dynamic relationship between RFAs’ financial structures, the support from their member states and their resulting creditworthiness. A stylised model is developed to demonstrate how the relative size of an institution’s paid-in and callable capital, together with its member states’ support, could have an impact on the overall credit rating and lending capacity of an RFA. This paper contributes to the growing policy discussions on the heterogeneity of RFAs and their rising importance in the Global Financial Safety Net.

RFAs’ Financial Structures and Lending Capacities: A Statutory, Accounting and Credit Rating Perspective

This paper documents the diverse financial structures – including capital structures and funding strategies – of Regional Financing Arrangements (RFAs) and offers an analysis of RFAs’ lending capacity from a statutory, accounting and credit rating perspective. Using credit rating agencies’ methodologies, the paper presents the dynamic relationship between RFAs’ financial structures, the support from their member states and their resulting creditworthiness. A stylized model is developed to demonstrate how the relative size of an institution’s paid-in compared with its callable capital, together with its member states’ support, could have an impact on the overall credit rating and lending capacity of an RFA. This paper contributes to the growing policy discussions on the heterogeneity of RFAs and their rising importance in the Global Financial Safety Net.

Bypasses to the International Monetary Fund

ABSTRACTCountries hold international financial reserves as a precaution against large and unexpected deteriorations in their balance of payments position. Although the International Monetary Fund was explicitly created to provide liquidity to member countries for just such purposes, other institutional arrangements at the regional and bilateral level have endured or emerged to provide similar services. They fall into three categories—monetary unions; regional financial arrangements; and swap lines between central banks. All three groups of institutions exhibit the key features of international Institutional bypasses. Issues around the twin notions of possible risks and potential benefits to the existing international order, flagged in the framework paper for this symposium, play out fully in the international finance arena, with important implications for the nature and quality of global governance. A formal hierarchy among the IMF and the bypasses, and a seamless global liquidity net have yet to be created.

What do we know about the global financial safety net? A new comprehensive data set

This paper provides a comprehensive database covering four elements of the GFSN (foreign exchange reserves, IMF financing, central bank swap lines and regional financing arrangements) for over 150 countries in the sample period 1960–2014. It also presents some key stylised facts regarding the provision of GFSN financing. Finally, it concludes with some avenues for further research on the possible evolution of the GFSN. An update of the data including years 2015-2018 will also be provided online.

Extending BRICS to BRICS+: the potential for development finance, connectivity and financial stability

ABSTRACTThe heterogeneity of the BRICS impedes rapid progress. One way to overcome this limitation would be to shift the focus from trade liberalization to other types of economic cooperation. This can be complemented by accepting China’s initiative to create a BRICS+ structure, which would augment the cooperation among the core five members by a wider circle generated by each of its members within their respective regional integration arrangements. We conceive of it as a ‘circle-and-spoke’ model. We argue that three areas of cooperation are feasible and promising: development finance, connectivity and financial stability. Institutionally, this means cooperation among regional integration organizations, regional development banks and regional financing arrangements.

Regional Financial Arrangements in the Global Financial Safety Net: The Arab Monetary Fund and the Eurasian Fund for Stabilization and Development

ABSTRACTThe so‐called global financial safety net provides backstop insurance during financial crises. The three elements of the global safety net — the IMF, regional financial arrangements (RFAs) and bilateral swap agreements — underwent substantial changes after the global financial crisis. How have these changes influenced their use? What role do RFAs have in the safety net? This contribution addresses these questions by examining the timeliness, volume and policy conditionality of liquidity provision of each of the three elements, using a data set of 50 RFA member countries from the period 1976–2015. The article presents case studies of the Arab Monetary Fund (AMF) and the Eurasian Fund for Stabilization and Development (EFSD) to create a deeper institutional understanding of the governance mechanisms of regional funds. The authors find that today's global financial safety net produces inequalities in emergency liquidity provision. In terms of volume, RFAs improve the safety net only for small member countries — about one‐third of the countries in the sample can access sufficient liquidity regionally. The experiences of AMF and EFSD demonstrate that intra‐regional asymmetries of RFAs play a contradictory role: while the participation of large economies leverages liquidity provision, it simultaneously creates difficulties for the governance of the regional body.

Leaving the Nest: The Rise of Regional Financial Arrangements and the Future of Global Governance

ABSTRACTThis article examines the impact of regional financial arrangements (RFAs) on the global liquidity regime. It argues that the design of RFAs could potentially alter the global regime, whether by strengthening it and making it more coherent or by decentring the International Monetary Fund (IMF) and destabilizing it. To determine possible outcomes, this analysis deploys a ‘middle‐up’ approach that focuses on the institutional design of these RFAs. It first draws on the rational design of institutions framework to identify the internal characteristics of RFAs that are most relevant to their capabilities and capacities. It then applies these insights to the interactions of RFAs with the IMF, building on Aggarwal's (1998) concept of ‘nested’ versus ‘parallel’ institutions, to create an analytical lens through which to assess the nature and sustainability of nested linkages. Through an analysis of the Chiang Mai Initiative Multilateralization (CMIM) and the Latin American Reserve Fund (FLAR), the article demonstrates the usefulness of this lens. It concludes by considering three circumstances in which fault lines created by these RFAs’ institutional design could be activated, permitting an institution to ‘leave the nest’, including changing intentions of principals, creation of parallel capabilities and facilities, and failure of the global regime to address regional needs in a crisis.

The International Monetary Fund and its Role as a Guarantor of Global Financial Stability

Given the growing real and financial integration of economies worldwide, there is a need for the presence of supranational mechanisms to address crisis situations. The International Monetary Fund (IMF) is the multilateral institution at the core of the global financial safety net (GFSN). The swift development of other elements of this net since the last global financial crisis, such as the regional financing arrangements, has made the system sounder but also poses fresh challenges. The broad membership of the IMF, the volume of its resources and its accumulated global experience in crisis management make the organisation key to shoring up global monetary and financial stability. However, the IMF is subject to recurrent discussions about its governance and lending policies, including the size and composition of its resources, and the distribution of power within the organisation. The IMF is currently immersed in the Fifteenth General Review of Quotas. The backdrop to this negotiation is the risk that, in the absence of a satisfactory agreement on the size and distribution of its resources, the IMF’s financial sufficiency and its degree of representativeness among its members may be diminished in the coming years. This might significantly undermine the stabilising capacity of the GFSN.

Safety for Whom? The Scattered Global Financial Safety Net and the Role of Regional Financial Arrangements

The global financial safety net has undergone fundamental changes since the global financial crisis. The IMF introduced new facilities at the global level, new regional financial arrangements (RFAs) were created, and bilateral swap agreements emerged as a new element. In this paper, we ask how these changes influence the use of RFAs. We create a database with all the cases in which a RFA member drew on one of the elements of the global safety net. This allows us to analyze which other options the country had at hand and how their respective volume, timeliness, and policy conditionality affected their use. We find today’s global financial safety net to be not a global but a geographically and structurally scattered net with unequal access for three different groups of countries. Small countries can draw on their RFA. Only few countries can count on a bilateral swap line. The majority of the countries in our sample do not have several options to choose from. They have the IMF as their only source. We find that volume alone does not explain why countries choose a certain source of emergency liquidity. Even if “the big new” voluminous swap arrangements replaced RFAs in some cases, we find a complex pattern of complementary and substitutive use of the regional and other elements of the global safety net.

Strengthening the Global Financial Safety Net

Since the global financial crisis, the Global Financial Safety Net (GFSN), traditionally consisting mainly of countries’ own foreign exchange reserves with the International Monetary Fund (IMF) acting as a backstop, has expanded significantly with the continued accumulation of reserves, the sharp increase of swap lines between central banks, and the further development and creation of new Regional Financing Arrangements (RFAs). RFAs have expanded, reaching an aggregate size comparable to that of the IMF and becoming an integral layer of the safety net. Enhancing the cooperation between the IMF and RFAs so that they play complementary roles in case of global distress, becomes critical in order to further strengthen the multi-layered GFSN, while paying attention to issues such as moral hazard, stigma or exit strategies in connection with IMF-RFA cooperation. This paper presents recent experience and lessons learned in IMF-RFA cooperation and proposes how to improve their future interaction.

The Exchange of Documents between the Fund and Regional Financing Arrangements

The Exchange of Documents between the Fund and Regional Financing Arrangements

Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform—Revised Proposals

in the Fund’s work stream on the Adequacy of the Global Financial Safety Net (GFSN). The paper follows the Executive Board’s discussion of the Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform on June 30, 2017 (the "June paper"),1 and presents revised reform proposals in light of Directors’ views. In the absence of sufficient Executive Board support for a new liquidity facility, the paper proposes to retain the Precautionary and Liquidity Line (PLL). It also proposes to introduce a Time-Based Commitment Fee (TBCF) in light of many Directors’ support for this feature. 2. This work is part of the Fund’s broader work stream to strengthen the GFSN . As such, it complements the new non-financing Policy Coordination Instrument and operational principles and framework for future Fund engagement with Regional Financing Arrangements.2 3. The paper is organized as follows. Section II lays out the revised set of reform proposals. Section III sets forth issues for discussion, and proposes decisions to (i) complete the review of the Flexible Credit Line (FCL) and the PLL; and (ii) introduce a TBCF. The paper also includes an Annex that describes a planned revision to the presentation of the Fund’s Forward Commitment Capacity (FCC) to provide a breakdown between precautionary and other Fund commitments.