Mnuchin must not be shortsighted when deciding on IMF funding

Treasury Secretary Mnuchin is testifying Tuesday afternoon on the international financial system. He is expected to present his position on funding for the International Monetary Fund (IMF). 

This likely will include the U.S. using its 16.5-percent vote to veto a capital increase for the IMF — known as IMF quotas — which requires 85 percent of the membership to pass. This is a shortsighted position. 

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Secretary Mnuchin may also reveal what is currently being discussed at the IMF, namely an increase in an IMF backup line of credit, the New Arrangements to Borrow (NAB), with financing commitments from 40 countries. Under current U.S. law, the U.S. is a participant in the NAB but must withdraw by 2022.  

Secretary Mnuchin may indicate that the administration will seek congressional approval to remain in the NAB and to increase the size of the U.S. financial commitment. The United States remaining in the NAB would be positive, but not the step in our country’s best interest. 

Increasing the NAB would compensate for the 2020 expiration of the third line of IMF funding sources — the Bilateral Borrowing Agreements (BBAs) — financing commitments the IMF secured from 40 individual countries but not the United States.    

The Trump administration seems to favor temporary lending to the IMF over permanently expanding its capital base or quotas. Instead, it would be wiser to increase quotas so that larger countries would carry more of the responsibility to backstop the IMF, given their increased share of the global economy. 

Furthermore, relying on quotas for IMF financing helps to preserve transparency of decision-making and avoid possible side bilateral deals by reducing the need for IMF management to turn to borrowing from a subset of individual members.

IMF quotas are capital, the ultimate strength of a financial institution in that they are permanent resources.   Every individual member-country of the IMF is treaty-bound to allow its quota to be drawn upon by the IMF for lending or other operations. 

Quotas are intended to reflect a country’s share of the global economy. Over the years, as countries have grown at different rates, this link has weakened considerably. Given its historical weight, Europe remains very over-represented, while many countries, including China and India, remain under-represented, given their more recent economic growth.

BBAs, the third IMF funding source, have never been utilized. While the NAB has been activated and provided funding for various IMF loans over the last decade, the IMF has not needed to draw on the bilateral borrowing commitments. 

The general interest rate and maturity structure of the BBAs are set by the IMF executive board, which also approves all of the loans. However, these are individual agreements between each country and the IMF. 

In the past, the managing director or senior staff have approached a country’s leadership to request a bilateral loan to the IMF. That is a private exchange — a senior IMF official seeking a funding commitment from a central bank or finance ministry.   

This means that the IMF executive board is not part of that bilateral conversation between IMF and country leadership. Other IMF members do not know what transpires in that conversation.

Is there a side understanding on a related matter important to that country? Perhaps that country seeks an easing of IMF criticism of some aspect of that country’s policy that rankles policymakers or demands the IMF weaken the conditions on a loan to a client state. The IMF executive board has no inkling about any side understandings reached. 

There is no evidence that the current round of BBAs required IMF management to reach side understandings with individual members to secure their loan commitments. But that cannot be verified; no one outside of the two parties can be fully certain that there are no such understandings. 

In a future crisis, with the global economy falling into deep recession and many countries facing balance-of-payments crises, an IMF managing director might be compelled to seek quick bilateral funding commitments, raising the risk for side deals.  

This is because the United States has a veto over both quota and NAB increases and must secure congressional approval prior to increasing either of those funding commitments.  

The United States would be completely ignorant of any side deals. Furthermore, BBAs must be frequently renewed, giving countries repeat opportunities to seek additional concessions from IMF management. 

The United States would be better protected from this risk of side deals by returning the IMF funding structure to being predominately quota or capital based. 

If the Trump administration decides to ask Congress for approval to remain in the NAB and increase the U.S. contribution, that clearly is better than the U.S. withdrawing from the NAB in 2022 and not increasing quotas.  

But the NAB must be renewed by its participants every five years, meaning it is not a permanent source of IMF funding.

The supposed rationale for preferring the NAB to a quota increase is shortsighted. The administration appears concerned about China having a larger quota. Rather, it should worry more about the IMF approaching China privately to secure a larger NAB or bilateral financing. 

The United States should not encourage private negotiations of conditions for country financing commitments to the IMF, even if the overall terms are set by the IMF executive board.

China will be a large IMF creditor, no matter in what form. South Korea, India, Indonesia among others have grown more rapidly than Japan and Europe, for example. IMF management and staff will seek to maintain the confidence of the emerging markets, given their larger role in the global economy. 

Working out decisions in the IMF executive board where all members are represented maintains transparency, preserves inclusiveness and strengthens IMF policy effectiveness.   

Finally, when the BBAs or the NAB are drawn upon to finance IMF lending, they have priority in the repayment stream. Quotas are the ultimate capital protecting IMF borrowing. 

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If large emerging markets had a larger quota reflecting their economic growth, they would share in more of the responsibility to backstop the IMF, instead of their lending to the IMF having priority over repayments of drawings on quota.

The United States must seek congressional approval for either an increase in its IMF quota or NAB contribution.   Increasing quotas would strengthen the IMF capital base and would strengthen the commitment of fast-growing emerging markets to preserving the mutual interdependence of the global financial safety net. 

Increasing quotas would be more transparent than IMF borrowing and would protect the United States from side deals that undercut the U.S. leadership role. It would keep decision-making anchored in the IMF executive board where the U.S. retains its global leadership role. 

The Trump administration should support an IMF quota increase in the best interest of the United States.

Meg Lundsager is a public policy fellow at the Wilson Center (@TheWilsonCenter on Twitter). She is the former U.S. executive director at the IMF.