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The IMF faces arguably the greatest test of its legitimacy since it was forged almost 80 years ago. It has weathered multiple crises, from cold war politics to currency crashes. But today it needs to confront a confluence of challenges: global co-operation is fragmenting just as the strains of indebtedness and climate change on the international economy grow larger.
The annual meetings of the IMF and World Bank, which started on Monday in Marrakech, are an opportunity to catalyse reform of the flagging global economic guardian. Without concerted effort among its members for change, the IMF could see its influence as the world’s emergency lender wane. That would be detrimental to an interconnected global economic system that needs an overarching arbiter to guarantee its stability.
Challenges to the IMF’s legitimacy come partly from recent failings. First, despite its $1tn lending capacity, it has recently struggled to deploy its financial resources effectively at scale, according to the ODI, a think-tank. Second, while the fund estimates about 60 per cent of low-income countries are at high risk of, or in, debt distress, the process of debt restructuring — which it plays a critical role in — has been painstakingly slow. Though the IMF has been impeded by intransigent creditors, its own procedures have been criticised for lacking speed and transparency.
A broader threat to its relevance comes from shifts in the global economy. The economic rise of China and India has not been accompanied by a commensurate increase to their share of IMF quotas, which determine contributions and voting rights. The institution over-represents the voice of Europe in particular. The fund is now competing against crisis lending from Beijing and Gulf countries, which often provide finance to developing countries on opaque terms. China has blocked numerous IMF attempts to restructure sovereign debt.
Charting a path forward requires buy-in from its members — which will be difficult amid rising economic nationalism. The US is leading a push for an equi-proportional increase in the IMF’s quota resources, which will raise contributions from its 190 member countries while maintaining current voting power allocations. That would be a welcome start towards raising its lending capacity. To leverage more funds from rising powers it would need to raise their quotas and voting shares — and dilute that of other members. Any efforts to raise the influence of Beijing, in particular, at the IMF should be linked to support for debt restructuring. China cannot expect a greater say without adhering to IMF principles.
There are other levers the fund could pull. First it needs to be tougher on creditors unwilling to be involved in a restructuring. This could mean using an existing backstop that ensures borrowers suspend debt repayments to difficult creditors. It also needs to be more transparent with it own debt sustainability analysis to speed up the restructuring process.
While the IMF needs to bolster its core function as an emergency lender, it has a broader role too. Since climate change and terms of trade shocks hit poorer nations’ fiscal stability, its preventive resilience financing support remains important. Indeed, channelling resources such as its special drawing rights — the IMF’s own international reserve assets — to more nimble multilateral development banks makes sense.
Acting as the world’s lender of last resort and leading the restructuring of sovereign debt is a messy but essential job. Critics often focus on the IMF’s errors, while its successes — including suspending debt servicing payments for poor nations and raising $650bn in SDRs during the Covid pandemic — are forgotten. Nonetheless, it needs to be reformed to stay relevant for the sake of the global economy. For that, the IMF ultimately remains dependent on the good sense and willingness of its members to co-operate.
Source: Economy - ft.com
