THE International Monetary Fund (IMF) announced on Thursday that it is launching a major debate on the future of the international monetary system in an attempt to stave off possible future crises and in an effort to ensure that the system becomes better able to meet the needs of the global economy.
The latest review comes at a time when the international financial system is feeling the strains of huge and volatile capital flows between advanced and emerging economies, caused partly by unconventional monetary policy, and which are creating a need for a more efficient financial "safety net".
"Major structural shifts are posing challenges to the global economy," director of the IMF's Policy, Strategy, and Review Department Siddharth Tiwari said in Washington upon launch of the study.
"The IMF is embarking on a study to understand the challenges facing the international monetary system, identify the system's shortcomings, and lay the basis for reform."
In a frank assessment of the challenges, the senior IMF official noted that "a series of structural shifts is taking place in the global economy, and the confluence of these shifts is raising tensions and risk".
"Three reserve currency areas - the US, the euro area, and Japan - are in the process of transitioning out of unconventional monetary policy, which will create a period of volatility for emerging markets," Mr Tiwari explained.
"This asynchronous monetary policy among the United States, Europe, and Japan signals continued volatility. The global financial safety net will thus need to be strengthened."
As economies become more interconnected, "episodes of capital flow volatility are becoming a permanent part of the landscape".
Meanwhile, "non-bank financial institutions have become significant players".
The "central role of one or two major reserve currencies means that developments in one economy can have significant impact on others (and are) constraining domestic policy choices," the official pointed out.
"A further challenge is China's rebalancing, which needs to happen. Growth will be lower, but likely safer (although this will inevitably have consequences for other economies).
"Then there is the historic commodity price decline that necessitates adjustment for oil-producing countries in the Middle East and other commodity exporters, which need to find a new business model."
The role of the IMF, which has recently had its total financial resources increased to the equivalent to US$1 trillion "will include the provision of an adequate global financial safety net", Mr Tiwari noted.
"Another level of the safety net is regional financing arrangements, such as the Chiang Mai Initiative, and the IMF needs to find a way to work more closely with them."
He added: "The IMF is at the centre of the international monetary system (but) we are part of a larger system with central banks and other standard-setting agencies. Our role is to provide analysis and a shared understanding, but the onus will lie on the membership to take reform forward."
This article was first published on March 18, 2016.
Get The Business Times for more stories.