IMF to issue debts for bail-outs

The International Monetary Fund approved plans on Wednesday to issue its own debt to strengthen its capacity to fund bail-outs.

Meanwhile, the World Bank said it committed a record $59bn in loans and guarantees to developing countries in the year to June 30.

The decision by the IMF board to issue interest-bearing notes, with a maturity of up to five years, opens the way for China, Brazil and Russia to lend the institution large sums of money on an extended temporary basis, thus retaining their leverage in discussions about future governance of the IMF.

China is expected to lend the IMF $50bn by purchasing these notes, while Brazil and Russia are expected to lend $10bn each. Their contributions will help fund future bail-outs, including under the new Flexible Credit Line, which provides pre-approved support for well-run emerging economies. Policymakers hope that by lining up ample IMF funds in advance, they can reassure private markets and reduce the likelihood of crises.

The board agreed to issue interest-bearing notes with a maturity of up to five years denominated in Special Drawing Rights, an artificial currency made up of a basket of dollars, euros, yen and pounds. The notes will be tradeable between governments, but not in private markets – ensuring IMF debt does not compete with that of member states.

The World Bank announcement highlighted its efforts to ramp up support for developing countries hit by the crisis. The main increase was in lending to middle-income countries, with approvals more than doubling from $13.5bn in the previous 12 months to $32.9bn.

Commitments of low cost loans and grants to the poorest countries under its International Development Association scheme rose a more modest 25 per cent to $14bn, although commitments to sub-Saharan Africa were up 36 per cent overall.

“Requests for assistance from the World Bank Group rose sharply this year, and we expect this to continue well into 2010,” said Robert Zoellick, World Bank president.

Critics argue that the pressure to approve projects quickly for counter-cyclical reasons could result in the World Bank financing projects that are either unsound or not subject to proper controls, a charge it rejects.

The World Bank focused in particular on infrastructure projects – $20.7bn overall – which Mr Zoellick says will provide jobs and increase productivity.

The World Bank committed $4.5bn to support social safety nets, while its private sector arm, the International Finance Corporation, launched a $3bn fund to recapitalise banks.

The figures released on Wednesday do not include data on disbursements, which probably increased more slowly than commitments.

Source: FT

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