Why is the IMF at an Impasse, and What Can Be Done about It?
| DOI | http://doi.org/10.1111/1758-5899.12264 |
| Author | Jakob Vestergaard,Robert H. Wade |
| Published date | 01 September 2015 |
| Date | 01 September 2015 |
Why is the IMF at an Impasse, and What
Can Be Done about It?
Robert H. Wade
London School of Economics
Jakob Vestergaard
Danish Institute for International Studies
Abstract
The International Monetary Fund is at an impasse, acutely short of secure lending resources. The main reason is that
the US Congress is blocking ratification of an agreement reached in 2010 by all member states that would almost dou-
ble its permanent loanable funds (its quota). World leaders should be worried that the Fund is currently relying on the
good will of countries to supply it with short-term loans which it can on-lend to countries in crisis. This is not a solid
foundation for the nearest thing the world system has to an international lender-of-last- resort. Since the IMF’s multilat-
eral functions cannot be readily replicated, it is important to find a way out. All solutions lead back to the US veto, the
US being the only state (Treasury or Congress) able to veto supermajority decisions. The prospect of more financial
crises ahead while the Fund is chronically short of secure lending resources should focus all minds on how to end the
US veto. Otherwise the Fund will follow the WTO towards irrelevance, to the benefit of the few countries at the strong
end of bilateral and regional arrangements.
Introduction
The International Monetary Fund is currently at an
impasse, and has been for the past five years. It is
acutely short of secure lending resources –secure in the
sense of not depending on the willingness of countries
that are not in crisis to lend to it on a short-term basis.
The key reason for its vulnerability is that the US Con-
gress is blocking ratification of an agreement reached in
2010 by all member states –including the US executive
branch –that would almost double its permanent (i.e.,
guaranteed) lending resources. World leaders should be
worried that the Fund is currently relying on the good
will of countries to sustain its fire-power in an ad hoc
way. This is not exactly a solid foundation for an institu-
tion that functions as the lender-of-last- resort to econo-
mies in crisis.
The years since 2008 have seen a big increase in the
stock of dollar-denominated debt in emerging markets
and developing countries (EMDCs). Now, as US growth
picks up and the US central bank withdraws its stimulus
and may start to raise interest rates, capital is flowing
back into US financial markets, causing the dollar to soar
in value. The combination of a stronger dollar and higher
interest rates undermines the profitability of investments
that were made on the assumption of a weak dollar and
low interest rates, and causes debt-servicing problems
around the world. Indeed, officials from the Bank for
International Settlements say that many EMDCs are now
as vulnerable as East Asian countries in the mid-1990s.
Meanwhile, the Eurozone crisis is resurfacing, with the
possibility of contagion from Greece to Portugal, Italy,
Ireland and some other countries with high debt burdens
facing rising debt repayments.
Even for today’s crises, let alone the ones to come, the
Fund needs a substantial increase in its permanent
resources, which means a substantial increase in its total
quota. The quota is akin to a credit union deposit, and
the amount of a country’s quota determines its financial
commitments to the Fund, the amount it can borrow,
and its share of votes.
The agreement reached in 2010 comprised both a
near-doubling of the Fund’s total quota and an allocation
of the increase in favor of some developing countries,
giving them a larger share of voting rights. The non-im-
plementation of both components, as of 2015, is the ‘im-
passe at the IMF’of our title.
This essay (based on extensive interviews with Execu-
tive Directors and staff in August 2014 and February
2015) gives the backstory to these developments, or
non-developments. As for how the impasse might be
broken, the essay offers no magic bullet; but it does
©2015 University of Durham and John Wiley & Sons, Ltd. Global Policy (2015) 6:3 doi: 10.1111/1758-5899.12264
Global Policy Volume 6 . Issue 3 . September 2015
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