The IMF Will Not Run Out of Resources

The International Monetary Fund (IMF) has suddenly reopened a traditional line of business: large-scale lending programs (Iceland, Ukraine, Hungary, Pakistan, and counting). As global recession spreads across the world and increases in virulence, the Fund likely will be lending again for years. Simultaneously, talk has shifted from the world economy not needing the IMF as an international lending institution any more to the IMF not having enough resources to lend and make a difference. The first view was wrong, and the second view is wrong.

Following the Asian financial crises of the late 1990s and a few other crises in the early part of this decade (Argentina, Turkey), many officials and observers argued that the IMF would or should go out of the lending business, as most borrowing countries repaid the Fund with great fanfare. True, many countries built up large reserves, but these reserves may not be enough to stop a run on a country or on its banks. True, many countries’ economic policies are better than they were, but no country’s policies are perfect. True, many countries have been running current account surpluses, but some have not, and the counterpart of net capital outflows can be large gross flows both directions, with the inflows subsequently reversing. True, the private market can extend vast amounts of credit these days, but the market can also withdraw credit.

The international business cycle has not been abolished. The risks that countries will adopt antisocial economic policies in times of crisis or that their crises will adversely affect the global economy are as real today as they were in 1944—perhaps greater today because of a more globalized economy and financial system.

IMF quota contributions are the principal sources of resources for the IMF to borrow from member countries and lend to other member countries. The finance ministers of the industrial countries were wrong to reject proposals to increase overall quotas as part of the 13th general review of quotas concluded in January. I argued in 2005 that IMF quotas should be increased by 50 percent to provide additional resources and to help readjust voting shares in the Fund in the direction of better responsibility sharing.¹ Instead, ad hoc increases totaling only 12 percent have been proposed as part of a minuscule set of governance reforms. Thus, the Fund and its members are stuck with quotas that were agreed in 1998, when the world economy was half the size it is today. As of the end of August, the IMF had only about $200 billion in capacity to commit to lend over the next year.

However, all is not lost.

1. The IMF has $50 billion in credit lines under its General Arrangements to Borrow (GAB) from industrial countries and its New Arrangements to Borrow (NAB) from a larger group of countries.
2. In the past the Fund has borrowed on an ad hoc basis from individual countries, such as Saudi Arabia. Moreover, Saudi Arabia, China, Japan, and other countries with plenty of foreign exchange reserves would prefer to lend through the Fund (under a collective guaranty) with strong economic and financial conditions rather than bilaterally, under lending conditions written in pliant foreign ministries eager to help their neighbors.
3. The IMF can borrow from the market without the need to change its Articles of Agreement, and I recommended that it take the advice of Desmond Lachman and adopt policies that would allow it do so.² This could be done in a matter of weeks if not days.
4. The members of the Fund could also revisit their decision not to increase IMF quotas. A 50 percent increase would yield about $100 billion in additional resources. (IMF quotas are $310 billion. A 50 percent increase would yield $155 billion. The conventional rule of thumb is that two-thirds of quotas are usable.)
5. The IMF could issue Special Drawing Rights (SDR) in any amount that its members decided was appropriate. The SDR would not go principally to countries needing to borrow from the Fund, but doing so might help to restore confidence to the world economy. Moreover, many countries could lend their SDR quickly to the IMF to lend to other countries. (The United States is unable to do so without Congressional approval.)

It is unfortunate that in recent years those people who wanted to starve the IMF of resources and drive it out of the lending business have had their way. However, those forces should be in retreat, and one hopes they recognize the damage they have done. Meanwhile, the IMF will not run out of recourses to lend if, as has happened many times in the past, its members agree that it is appropriate to increase the Fund’s lending capacity.

Notes

1. Truman, Edwin M. 2006. Rearranging IMF Chairs and Shares: The Sine Qua Non of IMF Reform. [pdf] In Reforming the IMF for the 21st Century ed. Edwin M. Truman. Washington: Peterson Institute for International Economics.

2. Lachman, Desmond. 2006. How Should the IMF Resources Be Expanded? [pdf] In Reforming the IMF for the 21st Century ed. Edwin M. Truman. Washington: Peterson Institute for International Economics.