US takes heat for blocking IMF reforms

2014-04-20 15:00

The International Monetary Fund (IMF) has to push on with reforms despite its major veto-holding shareholder, the US, constantly blocking changes that almost the entire world has agreed to.

This was the rallying call at the IMF’s annual spring meetings in Washington this weekend, where finance ministers from across the world lamented the apparent deadlock.

Almost every delegation at the meeting, including the Americans, expressed “regret” about the US not getting the reforms approved in its Congress.

Far-reaching reforms were agreed to in 2010 after the effect of the global economic crisis on European countries returned the IMF to its former glory as the world’s lender of last resort.

Brazil led the charge, with its finance minister Guido Mantega saying other IMF members should find alternatives and move on without the Americans.

The reforms will increase the total permanent resources of the IMF, but that comes out of the New Arrangements to Borrow (NAB).

The NAB is a set of credit lines from a minority of large IMF members operating outside the quota system. It was enlarged to deal with the 2009 global financial crisis.

The idea is to now shift these resources into the IMF’s quota system and reshuffle the allocation of voting shares.

The quotas measure every economy’s importance in the global economy and determine the resources it provides to the IMF and the votes it gets.

Despite it being called “historic”, the reforms do not really transform the IMF beyond recognition.

The US will keep its veto with 16.5% of the votes while Africa will lose more ground under the 2010 proposal with its votes falling from 6.5% to 5.6%.

But China does rise to become the third-largest voter after the US and Japan.

Changes to the composition of the IMF’s board are also pending?–?this will remove the automatic inclusion of a French and German member.

A few of the major ideological differences between IMF members were also on display in the official statements at last weekend’s meeting.

A sore point is that the IMF seems far more able to respond quickly and thoroughly to crises when European countries, or countries with strong economic ties to Europe, are in trouble.

There are also differences about the general thrust of the IMF’s policy advice to governments. A move towards including inequality as an IMF policy concern is supported by just a few members.

Brazil was again the most outspoken on this front, saying the IMF needs to come up with “relevant policy advice” on inequality in countries.

It also put forward economic redistribution as a possible way for advanced economies to wean themselves off “unconventional monetary policy”, meaning the US’s quantitative easing.

The imminent end of this massive programme, which involves the US Federal Reserve’s large-scale buying of US bonds to keep interest rates near zero, will be a major shock to the global financial system.

Mantega said: “If individuals with a higher marginal propensity to consume could get a bigger share of national income, it would be easier to rebalance global demand.”

Quantitative easing achieves the opposite, he implied.

Brics bank

The agreements creating miniature versions of the IMF and the World Bank planned by the Brics (Brazil, Russia, India, China and South Africa) group of countries will be ready by July.

This was according to Brazil’s finance minister, Guido Mantega, who spoke at the IMF’s annual spring meetings last weekend.

The $100?billion (R1?trillion) contingent reserve arrangement (CRA), which will serve an IMF-like function to smooth over “short-term liquidity pressures”, as well as the still unnamed new development bank, are “cornerstones in the cooperation among the Brics”, said Mantega.

The Brics countries will hold their next summit in Brazil in July. The plan is to sign the agreements there.

This tight deadline will not summon the two new institutions into existence, but is likely to flesh out the details.

One of the outstanding issues that will hopefully be clarified in July is how much each of the five Brics countries will commit to the bank.

Another issue is where the bank will be based and how broad its mandate will be.

Donald Kaberuka, the president of the African Development Bank, recently welcomed the planned bank.

But he criticised the relatively modest capital that the Brics countries intend to put into it.

The initial capitalisation is reportedly going to be $50?billion, which will increase over time.

South Africa’s contribution to the CRA will be relatively minor – a reported total of $5?billion.

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