Can the IMF adapt to a world transformed by debt and AI?

AS FINANCE ministers and central bank governors gather in Bangkok, Thailand, for the International Monetary Fund (IMF) and World Bank annual meetings starting Monday (Oct 12), they will confront a global economy increasingly different from the one for which today’s international financial architecture was designed.

The backdrop is sobering. The recent G20 finance ministers’ meeting struggled to reach consensus, including over global imbalances and sovereign debt – precisely the issues requiring greater international cooperation.

The challenge for Bangkok is not to recreate the old multilateral order, but to make cooperation work in a more fragmented world.

For much of the period following the 2007-2008 global financial crisis, advanced economies enjoyed low inflation, exceptionally low interest rates and cheap government financing. Globalisation and expanding trade supported growth.

That era is ending.

The first challenge is the interaction between historically high public debt and a transformed financial system.

Worldwide aggregate public debt is approaching 100 per cent of global gross domestic product, while ageing populations constrain potential growth even as governments face rising demands from pensions, healthcare, defence, infrastructure and energy security.

Moreover, higher inflation and interest rates have transformed the arithmetic of debt.

But the risk is no longer simply fiscal. Post-2008 reforms strengthened the banking system, but the structure of global finance has changed substantially.

Markets and non-bank financial institutions (NBFIs), such as hedge funds and insurance firms, now play a much larger role in intermediating savings and credit, while remaining closely connected to banks through credit lines, repo, derivatives and liquidity provision.

Financial stability therefore increasingly depends not just on banks, but also on how stress travels across institutions and markets.

Leveraged NBFIs have become important participants in sovereign-bond markets. Rising yields can simultaneously increase government debt-service costs and trigger margin calls, causing liquidity strains in financial intermediaries as they are forced to deleverage.

Fiscal, monetary and financial-stability risks increasingly interact.

This creates a new challenge for international surveillance. IMF needs to assess more systematically how sovereign debt vulnerabilities, market leverage and cross-border capital flows interact, and how financial disturbances in major economies could transmit to emerging markets.

Such analysis should become a more integral part of IMF’s already existing bilateral and multilateral surveillance of monetary and fiscal policies.

A second challenge comes from technological transformation.

As finance becomes increasingly dependent on digital infrastructure, artificial intelligence can amplify risks in the system.

The technology could increase the sophistication of cyberattacks, amplify market movements through automated trading and create correlated behaviour where institutions rely on similar models or technology providers, potentially increasing volatility and weakening market price discovery.

Looking further ahead, quantum computing could threaten the cryptography underpinning financial transactions, payments and communications.

Financial surveillance by multilateral bodies such as IMF must increasingly encompass the resilience of the infrastructure connecting institutions and markets.

Yet AI also offers an important potential counterweight. Extraordinary investment in AI and advanced technology could raise productivity and potential growth.

The eventual dividend remains uncertain, however, and could widen inequality within and between countries, as IMF managing director Kristalina Georgieva pointed out in her Oct 7 speech ahead of the meetings.

Asian economies possessing the infrastructure, skills, capital and technological capacity to exploit AI could pull further ahead.

This matters as the trade-led development model from which Asia benefited enormously comes under pressure. Economies across Asia, particularly those seeking to advance to higher income levels, need new sources of productivity and domestic growth.

Meanwhile, higher advanced-economy yields raise the global price of capital. Emerging markets must compete with heavily indebted advanced governments – and companies financing AI – for global savings.

NBFIs intermediate much of these cross-border portfolio flows, increasing emerging markets’ sensitivity to changes in global risk appetite.

The third challenge is whether the international financial architecture has kept pace with these changes. Sovereign debt crises remain difficult to resolve across an increasingly fragmented creditor landscape.

Institutional reforms needed

There has been progress on prevention. IMF and World Bank have approved the first major revision since 2017 of their joint Debt Sustainability Framework for low-income countries.

It will give greater weight to domestic debt, refine assessments of debt-carrying capacity, strengthen stress tests and encourage greater debt-data transparency.

These changes should improve the diagnosis of debt vulnerabilities and help guide more country-specific policy recommendations.

But better diagnosis is not the same as better debt resolution. The G20 Common Framework and The Global Sovereign Debt Roundtable have brought progress, yet restructuring remains difficult.

Bangkok should build on the IMF-World Bank reform by linking earlier identification of debt stress to a more coherent and predictable restructuring process when fiscal sustainability has already been lost.

The events held in Bangkok should also be an opportunity to strengthen regional initiatives. The US$240 billion Chiang Mai Initiative Multilateralisation (CMIM), a currency swap arrangement launched by Asean+3, should become a genuinely usable regional safety net.

In its current form, it remains essentially a pledge-based swap arrangement rather than a fund with paid-in resources. Asean+3 is examining a transition towards a paid-in-capital structure while developing a Rapid Financing Facility that would assist countries with urgent financing needs.

This transition should be accelerated. A CMIM with paid-in capital would provide greater certainty that financing is available when several countries face stress simultaneously.

Combined with stronger surveillance by the Asean+3 Macroeconomic Research Office and close links with IMF, it could become a credible layer of the global financial safety net.

The objective is not to substitute regional arrangements for IMF, but to make them complementary. In a fractured world, regionalism and multilateralism need not be competitors.

IMF itself must also be strengthened. It is being asked to monitor global spillovers, finance countries in crisis, help coordinate debt restructuring and anchor an increasingly fragmented global financial safety net.

Yet the institution’s own internal reforms are progressing slowly. IMF’s 16th General Review of Quotas held in 2023 has still not become effective, while the deeper issue of realigning quota shares remains unresolved.

The Bangkok meetings therefore confront three interconnected challenges:

• a more difficult sovereign debt and financial market environment;
• technological change bringing both new vulnerabilities and opportunities for growth; and
• an international financial architecture struggling to keep pace with both.

Even if G20 consensus is increasingly difficult, the answer cannot be less international cooperation.

Bangkok’s task is to adapt multilateralism to a more fragmented financial system: strengthen IMF as the global anchor, make regional arrangements such as CMIM effective complements to it, and improve the capacity to identify fiscal, financial and technological risks before they become systemic.

The writer is a distinguished fellow at the Centre for Social and Economic Progress and former Asia-Pacific director at the International Monetary Fund