The ANU's Adam Triggs recently argued in the East Asia Forum that the G20 will have to deal with a potentially pernicious issue: what to do about the $379.7 billion of bilateral loans that will begin to expire from late 2016.
Triggs is right to point out that if one third of IMF funding expires, this could introduce unacceptable systemic risk, given the loans are still in place because of continued vulnerabilities in the global economy.
But let’s get a few things straight. There has not yet been need for the IMF to call upon its bilateral loans. Despite the looming deadline, now is not the time to panic on policy alternatives.
The risk from the loans expiring depends on an inability to find a reasonable replacement. Working out the details of the replacement will involve negotiation by the collective memberships of the International Monetary and Financial Committee and G20, and is a good reason to reprise the G20’s International Financial Architecture working group.
The simplest solution would be for the US to pass the IMF reforms (currently stalled by Congress), and for the G20 to extend the bilateral loans on the expectation the next round of quota and governance reform negotiations, the 15th, will put the Fund’s resourcing on a more permanent basis.
We are far from an ideal scenario. As I explained in a recent Lowy Institute paper, US Global Economic Leadership: Responding to a Rising China, the IMF has long been a controversial institution in the US. Congressional challenges to IMF reform are not new. [fold]
An illustrative case was the last time the IMF’s articles of agreement were changed. In 1997, the IMF Board of Governors agreed to a proposed amendment to the articles that would bring all members’ cumulative allocation of special drawing rights (SDRs) up to the percentage of their quotas. The changes would mean that members that had joined after 1981, a full one-fifth of the IMF’s membership, were able to participate in the SDR system on an equitable basis. The US congress took more than a decade — until 2009 — to ratify the changes.
In hindsight, the relative swift passing of a package of IMF quota and governance reforms in 2010 probably stemmed from an exceptional set of circumstance. Strengthening the IMF was a necessary part of the global policy response to the global financial crisis, and it helped that the Democrats controlled the White House as well as both houses of the US Congress. That is no longer the case of course and the Republicans who control Congress are skeptical of the IMF.
So we are faced with the sombre prospect that, even though we are five years into the current ratification process, we may not even be at the midpoint. The chances of IMF reform in the short term — that is, before the bilateral loans are due to expire — are close to zero.
As experienced hands at the IMF know all too well, patience is required. This means ignoring the impulse for radical and impractical alternatives.
Mike Callaghan and I noted back in February the IMF Board has no workable plan B that would give (partial) effect to the reforms in the absence of US ratification. This is no great loss though. The options are, by definition, suboptimal, and generally too modest to be worth all the attention that has been put into discussing them. And the world needs to avoid actions that reduce US involvement in international institutions.
The search for a solution has turned over many stones in the last five years. One of proposals examined has been to include the yuan in the SDR basket. I have always been agnostic about this as a solution. For one thing, the economic consequences of such a move remain far from conclusive. More importantly, though, yuan inclusion should be decided by the technical merits of the case for expanding the basket; not politics. The IMF needs to be, and seen to be, free from overt influence from its largest stakeholders.
Some, including Triggs, have suggested exploring options in the broader financial architecture outside the IMF, and in particular the possibilities of enhancing regional arrangements like the Chiang Mai Initiative Multilateralisation and the BRICS Contingent Reserve Arrangement. However, these regional options are more symbolic than substantive and contribute little to the existing rules-based order. We should not pin our hopes on them.
The simple truth is there is no easy solution and the best path requires patience. China (and the rest of the world) will remain frustrated with the lack of short-term progress in the US domestic scene. G20 communiques, including the result from Antalya at the end of this week, should continue to emphasise such global frustration. But G20 leaders should not be panicking.
Things could be worse. At least the IMF is still performing its cornerstone role in the international financial architecture. But the Fund should be fully focused on monitoring emerging economic vulnerabilities.
In this context, although it may sound counter-intuitive, China should be the champion of the IMF in 2016. By that, I mean China should look to shepherd a process that brokers a reasonable compromise to secure IMF resources in the short term, and seek to avoid both a drawn-out negotiation and bundling other reforms into the mix.
If China were to drive a successful process in the G20 and IMFC, it would demonstrate a strong Chinese commitment to delivering outcomes that are in the global public good.
Photo courtesy of IMF