IMF Reforms

Last week, the finance chiefs of the member nations of the IMF met in Washington and ended their meeting with a call for the US to approve a reform package passed by  the IMF Board of Governors in 2010. US approval will require an act of Congress, which so far the White House and Congressional leadership have been unable to pass. The G20 nations have set a deadline of the end of the year for the US to approve the reforms before they begin looking at other option (though what those options might be is unclear given the US' veto power in the IMF).

A March 2014 CRS report, "IMF Reforms: Issues for Congress" summarizes the package of reforms as follows:

• Doubling IMF quota and rollback of the NAB[New Arrangements to Borrow, temporary measures taken to increase IMF funding]: The reform package calls for a doubling of IMF quota, and a corresponding rollback of the NAB. Although IMF quota has been periodically increased before, if adopted, this would be the largest proportional quota increase in the history of the IMF.

• Shifting IMF quota to emerging economies: The reform package also calls for a 6% shift in quota share to emerging markets, which would increase their voting power at the IMF, as well as their relative financial commitments to the institution. If implemented, the negotiated changes in quota shares would result in China becoming the third-largest shareholder at the IMF, and India and Brazil would also join China and Russia among the 10 largest shareholders.  The United States quota share would fall slightly, but the U.S. quota would still be sufficient to ensure it had more than the 15% of the total voting power needed to veto major IMF policy decisions. See Table A-1 for more details about how IMF quota shares would change for major economies. [US quota would go from 17.69% to 17.40%]

• Creating an all-elected IMF Executive Board: Rather than continuing the practice of having the five largest shareholders at the IMF appoint Executive Directors to the Board, the proposed reform would make all Executive Directors on the Executive Board elected. This reform could pave the way for future consolidation of European representation on the Executive Board.

•  Reducing representation of advanced European economies on the Executive Board: Ten seats on the Executive Board represent advanced European economies. The reform proposal reflects a commitment by the membership to reduce the number of Executive Directors representing advanced European economies by two, so emerging and developing countries have more representation on the Board. 

In the IMF's own summary of the reform package highlights the following key facts:

• All BRIC countries will be top 10 IMF shareholders
• More than 6 percent shift in quota share to dynamic emerging market and developing countries
• Voice of poorest countries maintained by preserving their voting shares.

So who pays for the shift?
• The bulk of the shift—about 80 per cent—comes from a reduction in the shares of advanced economies and some oil producers
• 110 countries will gain or maintain quota share, of which 102 are emerging market and developing countries.

Once reforms in place, rebalancing to be mirrored in IMF’s Executive Board
• Advanced European economies will hold two fewer seats
• All Executive Directors will be elected.

With regard to the IMF's funding quota (or core funding), the summary notes:

Member countries’ quotas, the IMF’s principal source of financial resources, will double under the 14th General Review of Quotas to SDR 476.8 billion (about $755.7 billion at current exchange rates) from SDR 238.4 billion agreed under the 2008 quota and voice reform.

As part of the agreement, the New Arrangements to Borrow (NAB), a backstop arrangement between the IMF and a group of IMF members to provide additional lending resources to the Fund, will be rolled back.

Since major policy decisions at the IMF require an 85% vote, the US voting share of 17.69% means that the US must approve these changes for them to go into effect.

While the CRS notes that these reforms will have minimal effects on the US, it does note that there is opposition to the reforms. Without naming names, the report notes that some raise technical objections that the IMF has sufficient funds to do it job and that the New Arrangements to Borrow have better safeguards on the use of the funds in them than is the case for the IMF's core funds. Others are reluctant to increase representation of emerging markets due to concerns about the commitment of these nations to the existing norms and standards of international financial institutions.

In general, this is a fairly modest set of reforms that is going to increase quota funding by giving emerging markets a bigger role in the organization (and thus a bigger quota). The US has long had a voting share that is below its quota share (about 21.6% in 2011) and so the quota can be redistributed without the US losing voting share or its veto. Given that the US will retain its veto, it is hard to give much credence to concerns about emerging market nations subverting the norms of the organization. Within this veto constraint, the reforms do make the organization more inclusive, which will enhance its credibility.

However, most of this is irrelevant to members of Congress who (even if they personally get it) must play out any vote on the package in the arena of election year politics. The hope, of course, is that the lame duck Congress will pass a bill approving the reforms after the elections in November (which will be ahead of the G20 deadline).

The Renminbi and the Role of the Dollar: Greenback vs Redback

The last post talked about currency manipulation and the renminbi, but what about the idea of the renminbi as a challenger to the dollar's role as global reserves currency. In other words, is the redback (as the renminbi is sometimes called) a threat to the greenback's global dominance.

The Economist gave the standard arguments (albeit in the kind of depth somewhat unique to the Economist) one normally hears back in 2011. Specifically, that being the issuer of the world's reserve currency was a boon to the US (often called the exorbitant privilege) and that China was fed up with relying on the dollar. However, it also discussed the traditional counter-argument that being the issuer of the reserve currency is a curse because it puts a nation in the Triffen dilemma. That is, it encourages the issuer to put more money in circulation, which in turn undermines confidence in its currency. (Of course, the Triffen dilemma applied to the Bretton Woods System in which the US had to maintain a fixed exchange rate with gold while everyone else was able to adjust the value of their currency to the dollar, but I'll let that slide.)

Barry Eichenberger laid out the in-depth argument for the demise of the dollar as the reserve currency in "Why the Dollar's Reign Is Near an End" He argues that the US dollar's role as reserve currency is founded on 3 pillars: the depth of US dollar securities in the market, the fact the dollar is the world's safe haven, and the lack of viable alternatives. However, the rise of the Euro and the Yuan will provide rivals for the dollar while economic crises and rising debt in the US will undermine the perception of dollar as a safe haven. This will lead to multiple reserve currencies being adopted instead of reliance upon the dollar alone.

Michael Pettis disagreed with the view that the RMB could play the role of reserve currency. His original blog post was lost when it was hacked by Business Insider summarized his argument. First, unless China starts running a current account deficit, there will be no way for the world to acquire renminbi. Second, people are suspicious of China's financial system which is in need of significant liberalization and reform. Third, major countries such as Russia, India, South Korea, and Vietnam are also suspicious of China for political and security reasons. Finally, Pettis argues that the international trade in RMB is overstated as most of the trade is in the form of swaps between the People's Bank of China (PBoC) and other central banks as opposed to private financial transactions.

Pettis also argued that having the dollar as reserve currency represents an Exorbitant Burden in a Foreign Policy article. He argues that having the dollar as reserve currency contributes to the US current account deficit and that the US would be better off if another reserve currency was in place. Pettis argues that developing the IMF;s Special Drawing Rights (SDRs) into a truly international currency would be the best alternative.