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Business News/ Opinion / Views/  Act with urgency to reform the international monetary system

Act with urgency to reform the international monetary system

An IMF restructured to function more equitably would reinforce its role in global monetary and financial governance

Reviews of IMF quotas should ensure a much more effective representation of each member country, corresponding closely with its actual economic importance today. (REUTERS)Premium
Reviews of IMF quotas should ensure a much more effective representation of each member country, corresponding closely with its actual economic importance today. (REUTERS)

The global economy is at an impasse. The needs resulting from climate change, attacks on the environment, pandemics, the debt burden of many countries, demographic evolutions, and the ravages of conflicts in Ukraine, Africa and now the Middle East are upsetting the balance of the international financial system and deepening its fragmentation.

The resources necessary to meet these needs are scarcely available, even if we count on the full implementation of the decisions taken at the recent International Monetary Fund (IMF) and World Bank annual meetings in Marrakech. This points to unacceptable risks on the horizon and feeds the concern of a world threatened with inequalities and dramatic shortages. The world community must take a major initiative without delay, while working to restore multilateral cooperation.

A central element of this initiative should be reform of the international monetary system. There is no paucity of work that has been done in this direction since the Global Financial Crisis (GFS), such as the Palais Royal Initiative, but just a few steps have been adopted. Even if the present political climate does not allow for immediate change, we need to prepare for much needed reforms by identifying the basic pillars of a renovated central institution of the system, the IMF. These pillars would be greater fairness in the IMF’s functioning, an adjustment of its mandate for the 21st century and a reinforcement of its role in global monetary and financial governance.

Fairness: Making the system equitable should be the first pillar of any real reform. Thus, reviews of IMF quotas should ensure a much more effective representation of each member country, corresponding closely with its actual economic importance today. In particular, the quotas of China and other emerging countries largely remain too small in comparison with those of the US and other industrialized countries.

The same fairness principle should apply to the composition of the IMF’s Board of Directors. The required majority of 85% for important decisions, which gives de facto veto power to the US, needs to be reduced, as was proposed unanimously by the Palais Royal Initiative (including Paul Volcker, former US Federal Reserve chairman).

Fairness should also apply to the distribution of Special Drawing Rights (SDR), this embryo of a global currency that the IMF may issue under certain conditions. The last SDR allocation of an equivalent of $650 billion was decided in 2021 after the covid crisis, and, like the preceding ones, it was done in proportion to the quotas, which meant disproportionate shares for countries that need them the least. As a positive measure, the IMF recently invited rich countries to give a fraction of their SDRs to the poorest ones through IMF Trust Funds. We would suggest a change in the system, earmarking around 20% of future allocations for the poorest countries.

More fairness is also called for in IMF surveillance of its members, which currently exerts itself mostly on countries that need its financing, while others in a situation of external payments surplus, or whose global influence is systemic, often ignore its recommendations. This monitoring should focus particularly on countries’ external reserves, which, in some cases, greatly exceed reasonable levels, thereby sterilizing a significant fraction of global savings invested in short-term instruments and reducing our collective ability to finance indispensable long-term investments, such as for the ecological transition.

Mandate: The IMF’s mandate should explicitly include effective surveillance of capital flows, which, in a highly financialized world, has much greater influence on exchange rates and countries’ macroeconomic situations than fluctuations in current account balances. Towards this, the IMF, together with the Bank for International Settlements (BIS) and leading central banks, should establish a framework for the management of global liquidity, with the objective of preventing financial crises and fragmentation of the global financial system. SDRs could become an essential tool in this context. By issuing SDRs in the event of a shortage of liquidity or withdrawing them from circulation in the event of an over-abundance, the IMF could better play the role of a global central bank. To allow SDRs to fully play an effective role in the management of global liquidity, steps to broaden the SDR market and develop its role as a global currency need to be taken.

The IMF role of lender-of-last-resort should also be more explicitly recognized in its Articles of Agreement and its resources should be increased significantly. This recognition would assure countries exposed to aberrant capital-flow fluctuations of protection without their having to accumulate excessive and poorly productive reserves.

Governance: To endow the IMF with greater democratic accountability and legitimacy, the decision-making role of the International Monetary and Financial Committee (IMFC)—composed of the finance ministers and central bank governors of the 24 countries with seats at its Executive Board—should be enhanced, while its executive directors, who have a more administrative profile, should prepare the agenda.

Given that re-orienting global financial institutions is now effectively viewed as a G20 mandate, it’s desirable to review the G20’s composition for truly universal and equitable representation of all countries in the design and implementation of global strategies. This can be done via a system of regional constituencies that has served the Bretton Woods institutions well, and steps were taken in this direction under India’s G20 presidency.

With the reforms outlined above, the IMF would become more truly democratic and universal, and would have at its disposal the instruments needed to exercise its responsibilities. Given the IMF’s role and importance, it would amount to reforming the international financial system.

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Published: 31 Oct 2023, 06:52 PM IST
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