Two questions key to increase in IMF funds
Mar 25 2009 by Anna Blackaby, Birmingham Post
A global economic recession and spreading financial crisis have raised concerns about whether the International Monetary Fund will have sufficient resources to help emerging market and developing economies cope with the crisis.
In response, the political chiefs of the G20 leading developed and developing powers are expected to agree on additional capital for the IMF at a summit in London on April 2. They are expected to say yes to a significant increase in the IMF’s arsenal but the question of which countries will pay and how much is still being negotiated.
The United States, which has indicated it is willing to give up to £68.5 billion to the IMF, has said there should be £342 billion in new funds on top of £171 billion the IMF already has. However, European officials have said they support at least a doubling of IMF resources and, when questioned, said that would require additional contributions of about £102 billion. Together with £68.5 billion pledged by Japan earlier this year, that would make a total of £342 billion.
Last week, the European Union pledged more than £68.5 billion in new loans for the IMF ahead of the summit.
Questions remain over whether emerging market powers will contribute, with China saying it will not give additional funding to the IMF until its voting power within the institution is increased.
Europe and the United States could foot the bill without China but they are not keen to do this because they want everybody to chip in. In addition, the governor of China’s People’s Bank of China, Zhou Xiaochuan, has suggested the IMF’s Special Drawing Rights could become a super-sovereign reserve currency. The SDR is an international reserve asset created by the IMF in 1969.
Russia has also said it has broad support among fellow emerging market economies, including Brazil, China, South Africa and South Korea, for the creation of a new reserve currency - possibly using SDRs. A UN panel of experts has been looking at a similar idea.
The IMF’s capital is increased through members’ quotas, or subscriptions, which are usually determined by the size of a country’s economy, trade and reserves, among other factors. But IMF officials said it would take too long to agree on quota increases, which then require legislature approval in some countries.
An IMF paper recently proposed that new resources could be raised by issuing IMF bonds to member countries’ central banks, a proposal that is not popular with some European countries. However, some countries favour this option and the Fund believes it should be left to member states to decide.
The easiest and most direct way to raise IMF resources is for member countries to lend the IMF the money through straightforward loan transactions.
With advanced economies and the IMF’s largest shareholders, the United States and European nations, in recession, the hope is that countries with trade surpluses like China and Saudi Arabia will commit money for the IMF.
G20 officials say they have not had immediate success in trying to convince China to agree but have not ruled out the possibility.
By lending the IMF money, China would eventually increase its voting power in the IMF, leading to a bigger say in IMF decisions. However, the agreement on voting rights took two and a half years to conclude and the developed countries, all in the G20 too, are not keen to be sidetracked on to this.
Saudi Arabia has been more generous to the IMF than China. The country is not keen to reopen the voting debate because it risks losing out, one G20 official said on condition of anonymity.
While the IMF has said it is not about to run out of money, the potential additional demand is difficult to predict, subject to rapid change, and could be “significant” in many cases.
The concern is that, should a large emerging market country falter and affect other countries, the cost of rescue packages could quickly soar. The IMF has loaned £34 billion to countries including Iceland, Hungary, Ukraine, Latvia, Belarus, Serbia and Pakistan.
