IFI governance


Developing countries seek new path for Fund governance reform

8 May 2014

Late in March another attempt by the US administration to convince Congress to ratify reforms to the Fund’s quota and shareholding distribution, agreed upon in 2010, failed (see Bulletin Dec 2013). This has been characterised as crucial for the IMF’s ongoing ability to provide leadership and timely support for crises, such as in Ukraine and more general instability, as occurred throughout the international financial crisis.

Governance impasse

The International Monetary and Financial Committee (IMFC) of ministers, which governs the Fund’s activities, stated in its spring meetings communiqué that “we are deeply disappointed with the continued delay in progressing the IMF quota and governance reforms … we urge the US to ratify these reforms at the earliest opportunity.” In previous statements the IMFC had shied away from naming the United States as the only holdout. Developing countries have signalled that if the US does not ratify the four-year-old agreement, new paths to ensure reform will be explored.  The statement added that if the reforms are not ratified by year-end then “we will call on the IMF to build on its existing work and develop options for next steps”. Since the IMFC meets only twice-yearly the earliest point at which the committee could discuss alternative approaches will be the 2015 spring meetings, pushing the reform process back still further.

Developing countries are expressing considerable anger with continued US failure to ratify the reforms, due to the US Congress’ rejection of an IMF reform amendment. The amendment had been attached to a bill authorising financial support to Ukraine. The reform derives from a 2010 G20 agreement which, when ratified fully, will marginally reduce European and US representation in the Fund to respond to the growing economic weight of emerging countries. Though painted as an effort, amongst other goals, to increase developing country voice, the voting changes overwhelmingly benefit the few larger emerging nations such as China and Brazil at the expense of other developing countries (see Update 85). The changes are also linked to changes to the structure of the IMF executive board. The delay is now also obstructing the negotiation and completion of the next round of IMF reform negotiations which is due to be completed in January 2015 and looks increasingly unlikely to be achieved.

The importance of Fund reform is increasingly a headline issue. The US administration has vowed to keep trying to convince Congress of the need to ratify the IMF reform agreement.  It is the only obstacle left to the reform being enacted by the IMF because the US’ 17 per cent voting stake in the Fund acts as an effective veto to governance changes.

IMF: US foreign policy tool?

The Ukraine crisis, which saw the IMF agree to a $17 billion loan programme on the last day of April, has been used by US pro-reform commentators to highlight the risk of the IMF lacking the credibility to lead in times of crisis. The use of the Ukraine crisis by reform cheerleaders inadvertently demonstrates a key dividing line between the way developing countries view the reform and how it is viewed by European countries and the US. Edwin Truman, former senior US government official and fellow of the US-based think tank the Peterson Institute for International Economics argued in March that IMF reform is “essential to US leadership” and to “repair, in part, the damage that has been done to US reputation for leadership”, ensuring the rest of the world “tolerate [US] power”.  Truman fears that in the absence of reform “the legitimacy of the IMF will suffer and along with it one of the most important tools of US international economic and financial policy.”

The  IMF has once again authorised temporary access to emergency reserves due to “global threats”. An increase to these reserves was a part of the G20 2010 agreement, which also specified the governance reforms, in response to the international financial crisis. Emerging and high growth developing countries provided approximately $100 billion under the New Arrangement to Borrow (NAB; see Update 79). The NAB was expanded from 26 participating countries to include 13 new countries, including large middle-income countries, with a new total commitment of $568 billion (see Update 65). This expansion was considered a stop-gap provision of Funds until the 2010 quota reforms would be enacted, reforming not only members’ vote shares, but also doubling the overall quota of IMF funds. Access to the NAB has now been re-authorised for a seventh consecutive six-month period.

The provision of the $100 billion of emergency funds was a quid pro quo for reform. There is also a widespread suspicion about the extent of European countries’ willingness to reform further a quota system which still leaves them the most over-represented in terms of voting power and seats on the board.

Guido Mantega, finance minister of Brazil, argued in his April IMFC statement that “alternatives to move forward with the reforms must be found”, not only to avoid “excessive reliance on instruments such as the New Arrangements to Borrow”. Mantega suggested “de-linking” quota increases and governance reform “regardless of what happens in the US Congress”. He emphatically added that the agreement on the 2010 reforms occurred “in exchange for the commitment to a comprehensive review of the quota formula and an early completion of the [subsequent] general quota review”. He also pointed to the little-publicised role of European countries in obstructing reform, describing the “overrepresented European countries” as a “major hurdle to making progress”.