Safety net is no remedy for a fit fiscal policy, says India

IMF conclave: Identify triggers of systemic crises

The global financial safety net needs to “truly global” and consist of multiple layers to be effective, Finance Minister Pranab Mukherjee, on Saturday, said even as he warned that it is no substitute for “macro-economic adjustment or sound regulation and supervision.”

“The post-crisis global financial safety net needs to be truly “global” and include multiple layers consisting of individual countries, central banks, regional arrangements, and international financial institutions,” Mukherjee said in his intervention at the Plenary Session on the Managing Director’s Action Plan to the International Monetary &Financial Committee.

“The IMF needs to catalyse such a global arrangement, while clearly communicating the criteria for both the inclusion as well as exclusion of specific countries,” he said.

Observing that the IMF has overhauled its lending toolkit and boosted its resources with a view to strengthen its ability to mitigate the adverse consequences of future shocks, the Finance Minister said its effectiveness in this context will draw on the ability to identify triggers of systemic crises well before their onset, especially those originating in large or more integrated economies with high potential of contagion.

“It is also important to ensure that support is specific to genuine bystanders with strong fundamentals and prudent macroeconomic policies. The financial safety net should not be used as a substitute for macroeconomic adjustment or sound regulation and supervision,” he said.

Early detection

The minister said for the early detection and prevention of crises, it is important to focus on risk assessment and ensure stronger traction with policymakers.

In order to mitigate the systemic effects of crises, especially on emerging economies and low income countries, the lending toolkit should be an integral part of the global financial safety net, he said.

Mukherjee said while near-term liquidity issues require the use of appropriate fiscal policy, recent experience shows that sustainability of public debt is equally important to ensure solvency. “Debt sustainability exercises should be reviewed separately for advanced economies, emerging market economies (EMEs) and low income countries (LICs) in order to account for the unique and distinct challenges facing each set of countries,” the finance minister said.

“In order to overcome large infrastructure gaps and attract public investment in infrastructure, any debt sustainability analysis should make allowances for such infrastructure investment without compromising the viability of public finances,” the finance minister said.

There has been a spillover of significant sovereign risks to the banking sector, transmitted by extensive cross-border holdings of sovereign debt, he observed. “While there is a pressing need to address the fiscal challenges facing governments, it is also critical for banks to raise private capital to restore confidence and also for adequate public backstops for their recapitalisation when needed,” finance minister Mukherjee said.