How to fix the International Monetary Fund

Today the fund’s role as a crisis lender is both shrunken and less successful (Photo: Bloomberg)
Today the fund’s role as a crisis lender is both shrunken and less successful (Photo: Bloomberg)

Summary

  • The fund must get tough on obstructive creditors, but save them a seat at the table

Ever since it was founded in 1944, the IMF has had to get used to reinventing itself. Today, however, it faces an identity crisis like none before. The fund, whose annual spring jamboree kicks off on April 10th, is supposed to provide a financial safety-net for countries in distress. Yet, although the poor world is in the throes of the worst debt crisis in decades, the fund seems all but unable to lend. The fund has hundreds of billions of dollars of spare firepower and has sought more from its members. However, since the pandemic began its loan book has grown by a paltry $51bn.

The fund is paralysed because it is a multilateral institution that aspires to represent the whole world, at the same time as being a club which is controlled by America and its Western allies. That worked when America was the world’s dominant power and was intent on pursuing liberal internationalism. Now China is trying to build an alternative order and America is turning inward. Unless the fund acts soon, its ability to do its job as a crisis lender will be in question.

In its infancy the IMF’s main role was to promote balanced trade and manage the Bretton Woods system of fixed exchange rates. It was only when those arrangements collapsed that it shifted its focus to another of its missions: providing emergency cash, with strings attached, to countries in crisis. From the 1980s, and especially during the Asian financial crisis in 1997, the fund became known for its unyielding application of economic orthodoxy. In the 2010s it revised some of its views on austerity and capital controls, and tried to promote its softer side.

Today the fund’s role as a crisis lender is both shrunken and less successful. Many big emerging markets have amassed vast quantities of foreign-exchange reserves to guard against currency crises. Some 30% of the fund’s outstanding lending has gone to just one borrower, Argentina. The IMF lends to countries like Egypt and Pakistan, which are strategically important to America. But these have gained licence to put off reform indefinitely; the fund has been urging Pakistan to mend its sales tax since at least 1997. And the IMF is no longer the only crisis lender in town. Gulf countries including Saudi Arabia now offer emergency cash, often using obscure methods, say by depositing money at the borrower’s central bank.

The main problem is that China has become a big creditor to the poorest countries, whose needs are small but urgent. Rising interest rates and the pandemic have left at least 21 in default or seeking debt restructuring, and many more look fragile. Yet China is reluctant to participate in debt write-downs, in part because it objects to the IMF not bearing its share of losses—a vital safeguard for a lender of last resort. The fund has not overseen a single write-down involving China since the crisis started.

Without them, countries’ finances may not be sustainable even as creditors are bailed out. America worries about IMF funds flowing into China’s pockets. Although many loans have been approved, most are supposed to be conditional on restructuring that has not been agreed on—much of the cash intended for Suriname, for example, has been in limbo for more than a year. As the fund has floundered, China has boosted its own emergency lending.

Together these trends risk making the IMF irrelevant—just like another global institution, the World Trade Organisation, which has also been sabotaged, this time by America. With debt talks frozen, the fund is conjuring up new goals, such as lending to help with climate change. That has caused a turf war with the World Bank, which is better suited to project finance.

The fund does not need a new mission. It needs the ability to get tough on rogue creditors. For some the solution is for it to align itself explicitly with the West, perhaps by implementing restructurings that ban countries from ever again borrowing from unco-operative official creditors. But even if such a policy were credible, it would be a mistake to freeze out China entirely. Not only would it be against the spirit of the fund’s mission, but if countries are forced to make a once-and-for-all choice between financial spheres, some may well choose China’s.

Instead the IMF should make borrowers suspend payments on their debts to obstructive official creditors for as long as a fund programme is active. That would circumvent and punish lenders that block restructuring, while leaving open a path to their participation should they decide to behave constructively. The IMF would remain open and global. It would not push China away, but save a seat at the table should it choose to take one. Such a strategy would echo the fund’s inclusive approach to several communist states in the cold war.

Though the IMF should not close itself off, the sooner it can bypass today’s blockages, the better. Helping countries in crisis is much harder and less glamorous than it used to be. But it is still essential.

Correction (April 6th 2023): An earlier version of this article said an extra $1trn had been committed to the IMF since the pandemic began. This misrepresented the status of some of the money. Sorry.

© 2023, The Economist Newspaper Limited. All rights reserved. From The Economist, published under licence. The original content can be found on www.economist.com

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