US proposal may revivify IMF resources

Avoiding quota changes postpones voting-power debate

The spring 2019 meetings of the International Monetary Fund and World Bank meetings are approaching. Behind the scenes, movement may be afoot to increase IMF resources.

The US, surprisingly, is leading the charge, proposing to double the ‘New Arrangements to Borrow’, through which several member countries and institutions can lend additional resources to the Fund. Under the proposal, IMF quotas – and thus country voting power – will remain unchanged. The US would probably also press for IMF policy reforms. Congress must approve the increase in the US NAB line.

Let me put the proposal into context.

G20 and International Monetary and Finance Committee communiqués for years have called for completion of the next quota review by 2019’s spring meetings and no later than this year’s annual meetings in October. But, in late 2018, President Donald Trump’s administration closed the door on any possible 2019 quota increase.

During the 2008 financial crisis, the NAB were increased to more than $550bn from around $50bn. But as part of the 2015 US IMF quota legislation, which doubled overall IMF quotas and the US quota in the IMF, the NAB were halved, and the US NAB line was cut by the amount of the US quota increase. Congress stipulated that the US should withdraw from the NAB by 2022, unless Congress acted otherwise.

The latest US proposal cuts across the interests of relevant parties.

For Christine Lagarde, the Fund’s managing director, the proposal has its benefits. She attaches particular significance to the IMF maintaining its overall loanable resources, which, in essence, come from three pots amounting to around $1.4bn. Quotas contribute $670bn, the NAB another $255bn, and bilateral loans around $440bn. But some resources have already been lent out or committed. Furthermore, the NAB cannot be tapped until quota resources are run down, and bilateral loans likewise cannot be tapped until NAB resources are run down.

If Congress backs the increase, the immediate threat of US withdrawal that looms over the NAB’s future– and the IMF’s resource base – will disappear. An NAB increase should help preserve current IMF resource totals. Several bilateral loan contributors argue their loans are temporary. If some bilateral loans were to roll off, there could be a modest resource reduction. But there are good reasons to believe these would not be sharply cut back, if at all. Despite threats, Japan and many European nations argue bilateral loans should be reflected in propping up their voting power and will want to hold that argument in reserve for a future quota review. Not touching the quotas will also avoid a huge donnybrook in the IMF. But it will frustrate needed changes in voting weights, a fact that will weigh on Lagarde.

China’s voting power in the IMF is around 6.1%, but it accounts for 16% of global GDP. Beijing clearly deserves more voting power, which presumably is precisely what Washington is not proposing, given the current condition of US-China relations. None of this will be lost on China, or other emerging markets. But as unfair as circumstances may be, China may not wish to stir up trouble too much as it seeks a US trade deal.

European and Japanese representatives couldn’t be happier. Behind the scenes, they will break out into dance over keeping their overweight voting power. Japan will remain above China in the Fund’s pecking order. Publicly, though, they will express deep regret at China’s unfair treatment and piously blame the US for frustrating reform.

For the Trump administration, the proposal makes sense. Again, it probably does not mention quotas because the US has no desire to see China’s voting power rise. Indeed, that may be a major selling point to Congress. The increase would preserve the NAB and help Fund management better sustain the IMF’s cache of resource. While, regrettably, the administration could have sought to leverage a small boost in China’s voting power – demanding, for instance, transparency on Belt and Road lending and adherence to sustainable debt guidelines – not changing quotas prevents the rest of the board from trying to manufacture a Chinese boost at Washington’s expense. Plus, the US is putting forth a proposal, rather than just blocking.

On balance, the proposal is a mixed bag. It will help uphold the overall level of Fund resources, though raising the NAB rather than quotas goes against the IMF’s role as a quota-based institution. It will avoid a nasty fight over voting power, but the failure to raise China’s vote share is unfair and may cause Beijing to drift away from multilateral institutions. Nor will the US proposal lessen the push from emerging markets for future shifts in voting powers, though the administration undoubtedly will be pleased to postpone that debate.

The resource debate may be one centrepiece of the upcoming meetings. Stay tuned.

Mark Sobel is US Chairman at OMFIF.

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