Donald Trump’s attacks on the World Trade Organisation have left that other superintendent of the global economy, the International Monetary Fund (IMF), out of the spotlight. This may be about to change. As the Fund’s members assemble for their annual gabfest, this time in Indonesia, financial crises are brewing in Argentina, Turkey and elsewhere.
A savvy management team has done what it can to cultivate the Trump administration and fine-tune operations. After a long period when it focused on budget deficits as the source of financing problems (recall the old saw that IMF stands for “it’s mostly fiscal”), the Fund has intensified its monitoring of financial markets. It has embraced less ideological views of capital controls (not always bad) and austerity (not always good).
But now the IMF is faced with its own financial crisis. Many of its resources come from temporary loans provided by a subset of members through a pair of ad hoc agreements. One is set to expire at the end of next year, the other in 2022.
This crisis could be met by increasing its permanent resources. But these permanent contributions (“quotas” in IMF-speak) also determine voting power in the Fund, where the US has a 17 per cent share, China just 6 per cent. In any discussion of larger quotas China will insist on a greater share, and a bigger vote. But this will diminish American influence—especially because if the US share drops below 15 per cent, it loses its effective veto—and so elicits Washington’s opposition. The Fund could instead seek to extend the system of bilateral and multilateral credits. But as contributions that come in this form don’t ensure additional votes, China would be resistant.
China is already responding to the emerging IMF impasse by providing regional assistance more directly. Its central bank has currency swap arrangements with 32 foreign central banks and in 2016 Beijing enlisted its state banks to provide an emergency loan to Pakistan. It participated in the creation of a regional rescue fund for East Asia. The danger is that the IMF will be sidelined. The Fund could attempt to work together with regional lenders capable of contributing additional resources when it cannot. But what would happen if it disagreed with them on substantive policy? This is what happened with the Greek bailout, when the IMF favoured restructuring the country’s debt but the French and German governments disagreed. Collaboration broke down.
“The old saw was that IMF stood for ‘it’s mostly fiscal’”The fundamental problem is that instead of being a technical function, the job of international lender-of-last-resort is politicised. Countries are reluctant to expand IMF resources and powers out of fear that they will be used to advance Donald Trump’s “America First” policies. Similarly, they worry that European governments, when acting together, can twist IMF policies to their advantage. Politicisation makes it hard for the IMF to commit to desirable ways forward. In 2010 the Fund adopted an “exceptional access policy” prohibiting large loans to countries whose debts were of questionable sustainability. But when the stability of French and German banks hung in the balance, the Fund was pressed by the Europeans to give Greece what was at the time the single largest loan in IMF history.
But the same politicisation can undermine regional and bilateral alternatives to the IMF. If Pakistan is unable to repay the rescue loan received from China, Beijing may demand some strategic asset—witness the 99-year lease on the port of Hambantota it obtained from Sri Lanka in lieu of defaulted debts. There are rising fears that China is pushing loans on poor countries with precisely this strategic endgame in mind.
The solution is the same one used to limit political interference with our domestic lenders-of-last-resort—to delegate decisions to an independent management committee. Member countries would set the broad mandate, and the committee would then be left to take specific decisions without undue interference by creditor countries. Specifying the institution’s mandate could be fraught, and holding the management team accountable for its decisions would be tough. Paul Tucker, a former Bank of England deputy governor, has observed that these same problems bedevil central banks. But independence remains the least-worst option for them. As it would be for the IMF.
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