US resists efforts to boost IMF’s permanent reserves

Move deals a blow to Christine Lagarde’s efforts to shore up fund’s financial footing

James Politi and Sam Fleming in Washington

© Reuters

The US has come out against an increase to the International Monetary Fund’s permanent reserves, dealing a blow to efforts by Christine Lagarde, its managing director, to put the institution on a more stable financial footing.

David Malpass, the US Treasury’s undersecretary for international affairs, told a congressional committee on Wednesday that the US is “opposed to changes in quotas”. He argued that the IMF has ample firepower and countries have developed alternative resources to draw on in a crisis.

Ms Lagarde had embarked on a drive to persuade the IMF’s largest shareholders to back an increase in the organisation’s permanent firepower around the time of its annual meetings in Bali, Indonesia, in October. Had the US supported the idea of an increase in IMF quotas, it would have probably triggered a positive response from other leading countries as well.

While the US appears to have shut the door on an increase in the IMF’s permanent reserves, it appears to have left it open when it comes to US backing for alternative funding mechanisms, for example a renewal of the NAB — the borrowing facility that pools temporary contributions to the IMF from its members.

While the IMF has plenty of available cash, the expiration of borrowing arrangements in the coming years is expected to sharply shrink its resources, potentially constraining its capacity to rescue financially troubled economies.

The Trump administration’s decision to shy away from a permanent boost to IMF resources reflects its aversion to multilateral institutions. While an increase for the IMF would have strengthened an institution that has for decades been synonymous with the US-led international economic order, it would have inevitably allowed emerging markets, including China, to wield greater influence within the organisation, at a time of high tension between Washington and Beijing.

The US enthusiastically backed this year’s IMF bailout of Argentina, the largest in its history, but has been more sceptical of IMF interventions in countries that are big recipients of Chinese investment, such as Pakistan.

Speaking to the House Financial Services Committee, Mr Malpass said: “We will be seeking a constructive size for IMF resources that contributes fully to the stability of the international financial system, but recognises that the IMF is just one part of the global financial system and its various support mechanisms.

“We are opposed to changes in quotas given that the IMF has ample resources to achieve its mission, countries have considerable alternative resources to draw upon in the event of a crisis, and the post-crisis financial reforms have helped strengthen the overall resiliency of the international monetary system.”

Mr Malpass said in his testimony that he met Ms Lagarde last week to discuss funding needs, and that the administration would notify Congress within a few weeks of the formal start of negotiations with the IMF. Gerry Rice, the IMF’s chief spokesperson, said it had taken note of Mr Malpass’s comments.

“The fund currently has the financial means to fulfil its role in the global financial system, and we will continue to provide advice and program support to our membership in line with our policies,” said Mr Rice.

“We are actively engaged in discussions with our membership to complete the 15th review of quotas by the time of the annual meetings [in] 2019 at the latest. These discussions will continue, guided by our members’ common interest in ensuring that the IMF remains strong and well-resourced into the future.”

Mark Sobel, US chairman of think-tank Omfif, who represented the US on the IMF's board until April, said: “Even if fund resources are ample at this moment, that is no guarantee of the future. Turning our backs on a fund quota increase will be seen across the globe as another US snub of multilateralism, global institutions, and a rules-based order.”

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