Editor’s note: The following article appears in a June 2, 2015 briefing from the Official Monetary and Financial Institutions Forum.
Over the past five years, the US Congress has been repeatedly browbeaten by the Obama administration as well as by a chorus of international leaders for its opposition to IMF reform proposals agreed by the G20 nations in 2010. However, over the same period, there have been a number of major developments that must raise serious questions as to the appropriateness of the IMF reform package on the table. This could offer the opportunity for crafting a new IMF reform proposal that would be both more palatable to the US Congress and more suited for the effective operation of the IMF.
Two principal factors motivated the G20 in agreeing to a basic overhaul of the IMF. The first was the recognition of the increased relative importance of major emerging market economies like Brazil, China and India. After more than a decade of very rapid economic growth, those countries had become grossly under-represented in the IMF’s governance structure. The second was the belief that, in the aftermath of the Lehman crisis, the IMF needed additional permanent lending resources to fulfil its mandate of promoting external financial stability.
The essence of the 2010 IMF reform proposals was to increase the relative representation of the emerging market economies. This was to be achieved by trebling the overall lending capacity of the IMF – from $250bn to $750bn – and by having the emerging market economies make a disproportionately large share of the country quota contributions to achieve that result.
The increase in the emerging market countries’ relative representation in the IMF’s governance was to be achieved at the expense of the European countries, which were generally considered to be grossly over-represented. By contrast, the US relative IMF voting position was to be little changed, which would allow Washington to maintain its effective veto power on key IMF decisions.
Since 2010, the case for increasing the voice of the emerging market economies at the IMF to reflect their greater relative clout in the global economy has increased. In the aftermath of the 2009 recession, there was a pronounced slowing in industrial countries’ growth, yet emerging market economies retained their vigour.
Over the past five years, the case for greater emerging market representation has become stronger, not least to arrest the trend towards the formation of regional financial institutions. Yet the case for a bigger IMF has become considerably weaker. In 2010, at the start of the European sovereign debt crisis, it could be argued that a very much larger IMF was needed to support Europe’s beleaguered economic periphery, since Europe did not have the financial instruments in place to provide that support.
However, much has changed since then. In June 2012, Europe established a €500bn European Stability Mechanism to support euro area member countries. Still more important, in September 2012, the European Central Bank introduced its so-called outright monetary transaction mechanism to enable the ECB to do ‘whatever it takes’ to save the euro.
Europe is now in a better position to take care of its own problems. Asian and Latin American countries are still highly reluctant to submit themselves to IMF loan conditionality after their respective crises in the late 1990s. So it is extremely debatable whether the IMF really does need an extra $500bn in lending capacity.
Further substantially weakening the case for a larger IMF has been the way in which the IMF has abused its ‘exceptional access’ lending policy over the past five years. This policy, which effectively removes any reasonable limit on the amount that the IMF can lend to an individual country, has allowed the IMF to lend very large amounts without precedent to countries with dubious economic fundamentals. As a result of such exceptional lending, three countries with a questionable ability to repay (Greece, Portugal and Ukraine) account for two-thirds of the IMF’s loan portfolio.
As the chaotic discussions with Greece underline, the IMF will have to fight to get its money back on time from Athens. No one knows how a worsening of the Greek imbroglio would impact the safety of IMF loans to other problem countries in Europe. Not only does such lending expose the IMF to large loan losses, which could put US taxpayers’ money at risk. It has also unduly delayed debt restructuring that might have given IMF programmes in those countries a better chance of success.
Recognition of post-2010 developments would suggest that the IMF should go back to the drawing board on its proposed reforms. A new IMF reform package might still seek to increase the relative voice of the key emerging market economies in the IMF’s governance structure. However, this should not be achieved through an increase in the IMF’s lending capacity. Indeed, there is the strongest of cases for the IMF’s ‘exceptional access’ lending policy to be terminated and the IMF to return to its original role of a catalytic lender. Such a reform package would offer the IMF a much better chance of getting the US Congress on board than the package now on the table.
Realistically, there is little prospect that IMF reform will be approved by the current Congress. Rather, it would seem that US approval will need to await the November 2016 US presidential and congressional elections. By that time, the IMF might have in place a new managing director, who might be chosen from outside Europe and who might have the mandate to make a fresh attempt at far-reaching IMF reform.
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