IMF Head Christine Lagarde Praises Colombia’s Fiscal, Monetary Policy

During an interview earlier this month, International Monetary Fund (IMF) head Christine Lagarde was queried by IMF communications director about how various emerging economies were handling the current slump in commodities prices, especially petroleum. Lagarde singled out Colombia as navigating the turbulence in a way that could set an example for other countries.

Gerry Rice: “Many emerging markets appear to be exposed to both demand softening from China and the broad-based commodity priced route. Do those nations have sufficient buffer, adequate reserve levels and exchange rate flexibility or does the IMF expect stronger demand for its financing services?”

Christine Lagarde: If I look at a country like Colombia , for instance: it has taken the right fiscal approach, the right monetary approach, letting the exchange rate float and using it effectively as a buffer. If you look at other countries they have not yet adjusted to the oil shock and they have seen their revenues really dwindle and be reduced significantly. Third, if countries take the right policy decisions and if they have the right mix of more efficient spending – adjusting the sort of business model to that new reality from a revenue point of view, if they have an exchange rate policy that is sensible and that they can use as a buffer, without pegging unnecessarily and losing a lot of reserve or resorting to some funny, protective rules that are not adequate – they can actually weather the shock and adjust their models, so that, instead of relying heavily on some revenues from export of oil for instance, they can diversify the economy. Now, having said that, some of them are facing a really difficult set of circumstances and my hunch is that there will be more demand addressed to international and multilateral institutions such as the IMF in order to help both in terms of public finances and in terms of overall balance of payment situation, and we are ready to do that without any stigma associated to the relationship that we have with those members.

Now in terms of financial safety net, we at the IMF have taken the view that the financial safety net is part and parcel of a good international monetary system and needs to be strong and needs to be readily available to face any circumstances either at source, when a country is facing a massive shock which is endogenous, but also at what I would call ‘the receiving end.’ When it’s an exogenous shock and the country is,in a way, the collateral victim of what is happening elsewhere, for instance, on the markets. So we will be working on financial instruments whether they are the existing ones like, the Flexible Credit Line or the Precautionary Liquidity Line, or other types of instruments that will really address the situation of those countries with a degree of conditionality that will depend on their respective situation. But where we can be available to actually give a hand during the shock period.

The full Q&A session is here.

Headline photo credit: DAVOS/SWITZERLAND, 25JAN13 – Christine Lagarde, Managing Director, International Monetary Fund (IMF), Washington DC; World Economic Forum Foundation Board Member reflects during the session ‘Women in Economic Decision-making’ at the Annual Meeting 2013 of the World Economic Forum in Davos, Switzerland, January 25, 2013. . . Copyright by World Economic Forum. . swiss-image.ch/Photo Michael Wuertenberg – used under Creative Commons license CC BY-SA 2.0