Expert Speak Raisina Debates
Published on Sep 09, 2016
The G20, though formed in 1999, was chosen as a forum to discuss financial reforms after the Global Financial Crisis of 2008.
G20's contribution to global financial reforms

The recently concluded G20 summit at Hangzhou, China, has struck a dark note in its communique on the state of global recovery. They pointed out that growth is still weaker than desirable. On the economic side, the warning about the general economic conditions of the world economy and commodity prices, fluctuations in trade and investment, slow productivity and growth has come close behind the International Monetary Fund’s (IMF) recent warning. However, what the G20 meeting has managed to achieve is something laudable — forcing the IMF to undertake Quota reforms and including Chinese Yuan (RNB) in the Special Drawing Rights (SDR) basket. SDRs are an international reserve asset created by the IMF in 1969 to supplement its member countries' official reserves. SDRs can be exchanged for freely usable currencies.

The G20, though formed in 1999 after the Asian Financial Crisis, was chosen as a forum to discuss reforms in the international financial architecture after the Global Financial Crisis of 2008.  It has been described as "an informal forum that promotes open and constructive discussion between industrial and emerging market countries on key issues related to global economic stability." Though the G20 remained dormant after its inception in 1999, it became very important as the main forum for spearheading reforms in the international financial architecture.

The G20, though formed in 1999 after the Asian Financial Crisis, was chosen as a forum to discuss reforms in the international financial architecture after the Global Financial Crisis of 2008.

In G20’s various annual meetings in Washington DC, Pittsburgh, Toronto, Seoul, Cannes, Los Cabos, St. Petersburg, Brisbane and Antalya, decisions for taking steps to help initiate reforms in the IMF were taken. They also decided to expand the Basel based organisation — Financial Stability Facility (FSF) for banks' surveillance. Earlier the FSF had a membership of developed countries only and was formed after the Asian Financial Crisis to bring together key national and international regulators to eliminate the regulatory gaps which enabled financial contagion to spread. The G20 renamed FSF as Financial Stability Board (FSB) and all G20 members were included as members, which means that for the first time, Emerging Market Economies (EMEs) became members of an important international financial regulatory body.

After the G20 summit in Washington in 2008, which took place soon after the Global Financial Crisis, the IMF came out stronger than before in the new financial architecture and the G20 basically replaced G8 in taking important decisions on international level financial sector reforms. The G20 meeting in London in 2009 pledged to provide more resources to the IMF and other multilateral institutions by $1.1 trillion. It also committed $500 billion to a renewed and expanded New Arrangement to Borrow facility of the IMF.

In Pittsburgh, the World Bank was given the task to advise the progress in promoting development and poverty reduction. At the Seoul summit in November 2010, the members proposed strengthening the international regulatory system and agreed that it would have to be tightened. It was the G20 members who agreed to improve the quantity and quality of bank capital as per the Basel III norms. The Basel III framework sets out higher and better quality of bank capital, better risk coverage, introduces leverage ratio as a backdrop to risk based requirement measures to promote the build-up of capital that can be drawn during periods of stress and introduces two global liquidity standards.

The IMF was elevated to the position of an innovative crisis handler provided it introduced governance and Quota reforms to take into account the growing importance of BRICS and other EMEs. IMF Quotas are denominated in IMF’s special unit of account the SDR and are calculated through a complex formula regarding each member country’s macroeconomic indicators like size of the GDP. It allows the members to borrow from the IMF according to their Quotas. The US and EU have disproportionately high Quotas.

In Cannes, the G20 urged the IMF to increase the Quotas for the EMEs and strengthen its surveillance. At Los Cabos G20 summit in 2012, it was decided that IMF Quota reform should be speeded up from 2013. But nothing was done because US the biggest Quota holder vetoed the reform. The G20 also wanted to increase the allocation of SDRs in 2009 to 5 percent of IMF’s total non-gold reserves. In Antalya also the G20 complained about the tardiness of IMF reforms. Surprisingly, US relented and the Quota reforms (under IMF’s 14th Review of Quotas)  took place in January 2016.

In Cannes, the G20 agreed that the SDR basket composition should continue to reflect the role of currencies in the global trading and financial system. It should be adjusted over time to reflect key currencies’ changing role and characteristics. It said that a broader SDR basket composition should be important determinant for its attractiveness and in turn influence its role in a global reserve asset. In Antalya, the G20 again reaffirmed that the SDR basket composition should continue to reflect the role of currencies in the global trading and financial system and hoped that the completion of the review of the method of valuation of the SDR.

This has also been done and surprisingly the Chinese Yuan will be included in the SDR basket from October 2016.

The G20 in Hangzhou has observed with some satisfaction, "We welcome the entry into effect the 15th General Review of Quotas, including a new Quota formula, by the 2017 Annual Meetings (of IMF-World Bank). We reaffirm that any realignment under the 15th review in Quota shares is expected to result in increased shares for dynamic economies in line with their relative positions in the world economy and hence likely in the share of emerging market and developing countries as a whole."

They also added "Following the IMF’s decision, we welcome the inclusion of the RMB into the Special Drawing Right currency basket on October 1. We support the ongoing examination of the broader use of the SDR, such as broader reporting in SDR and the issuance of SDR–denominated bonds, as a way to enhance resilience."

The G20 has also welcomed the second annual report of the Financial Stability Board on implementation and effects of reforms and will continue to enhance the monitoring of implementations and effects of reforms to ensure their consistency without overall objectives, including by addressing any material unintended consequences.”

G20’s role has indeed been significant in reforming the international financial architecture though it has not addressed adequately the serial financing needs of developing countries which can only be fulfilled by more regional banks and not by the World Bank-IMF sisters.

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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