The debate over congressional passage of IMF reform has reached a critical juncture. The Senate Foreign Relations Committee today approved legislation providing loan guarantees for Ukraine and supporting sanctions, and the bill includes language implementing the long-delayed IMF reform. Assuming passage by the full Senate, the debate next moves to conference, where both sides will need to step up and negotiate in good faith. In her companion piece on this blog, Heidi Crebo-Rediker makes a compelling argument that there are significant geo-strategic benefits from this legislation. There are meaningful economic benefits as well that make it important to reach a deal.
The economic case for IMF reform
There is sometimes the mistaken view that the bill is only about expanding the lending of the IMF. It is not. The package would double IMF quotas, replacing temporary commitments made during the financial crisis (New Arrangements to Borrow, or NAB). But the overall level of Fund’s usable resources would increase only a very small amount, on the order of $15 billion (current unused lending capacity is around $400 billion), with increased resources coming primarily from the large emerging markets. Quotas will be larger, and arguably the Fund’s resources will be more permanent; lending programs might rise over time as a result. Ted Truman today has an excellent summary of the legislation and the Fund’s reform package.
Does the Fund even need this level of resources? Desmond Lachman, for example, has three reasons why the Fund does not need the money:
-Europe now has crisis mechanisms in place and so the Fund will not need to lend in such large amounts to periphery countries in the future;
-there has been a backlash against the IMF in Europe, further reducing demand; and
-large lending programs create moral hazard–countries don’t implement needed reforms–and debt overhangs.
These are serious concerns but on balance I am not convinced. His first point relies on the establishment of the European Stability Mechanism (ESM) and the ECB’s ability to buy bonds (OMT). But the ESM is limited in size, with a very limited ability to directly recapitalize banks without burdening national balance sheets. I further doubt that the OMT will ever become operational. One can take the view that Europe would do the right thing in crisis and change their rules, but I see a European economic union that is far from complete and vulnerable to renewed crisis. I am more comfortable with the Fund involved and providing a backstop. I do agree there has been a backlash to recent Fund programs in Europe, and moral hazard (by both creditor and debtor) will always exist, but there will still be cases of national and systemic shocks where we will nonetheless find it necessary to provide extraordinary support and smooth the needed adjustment.
The broader issue is that the reform package does much more that. The reform includes significant governance changes–representation and organizational–that addresses the concerns of rising economic powers who feel the IMF does not adequately reflect their voice and their contribution to the institution. This agreement provides them a greater voice at the Executive Board (primarily at the expense of the major European countries). By doing so, it ensures stronger support over the longer term for the Fund. While we can find much to criticize in past Fund programs, it remains the principal institution for international economic cooperation, and leverages U.S. economic and security interests.
Why now—does Ukraine make the case?
The current situation in Ukraine underscores the argument that a strong IMF advances U.S. interests. With the crisis deepening, the international community will look to the Fund for leadership, reform, and a lot of money. The IMF has the resources to lend to Ukraine, a point emphasized by my colleagues Dinah Walker and Benn Steil. Still, there are practical ways in which legislation would provide important support to Ukraine. This is the core of the argument made by the U.S. Treasury and other proponents of the legislation, and boils down to three points:
- Passage of the IMF quota reform will increase Ukraine’s access to emergency funding. I have argued in the past that the IMF should adopt as two-stage approach, rather than rushing to an ambitious IMF program that could destabilize Ukraine further. The first stage in this case is emergency, low- or non-conditional financing through the Fund’s Rapid Financing Instrument (RFI). With Ukraine’s current quota, that would be limited to around $1 billion. Under the new quota, it would rise to $1.6 billion. Is that material on its own? No. Is it potentially catalytic for a package of rapid-disbursing official aid that could total $5 to 6 billion? I believe so.
- The expansion of the quota would increase the amount of financing Ukraine could get under the Fund’s normal lending rules. With its new quota, Ukraine could borrow $18 billion over three years under normal limits. I suspect that, in the end, the amounts needed will be larger than this and thus the Fund’s exceptional access and systemic exemption clauses will need to be invoked to allow a large financing package to proceed. But there would certainly be a challenge to such an approach, particularly by emerging markets that believe that a double standard exists in lending to Europe.
- Rising economic powers feel that the IMF does not adequately reflect their voice and their contribution to the institution. Passing the reform now would strengthen support for an ambitious Fund role, which has benefits for Ukraine as well as for future crisis cases.
Together, I see this as compelling evidence that approval of the IMF package would, in the words of Secretary Lew, “support the IMF’s capacity to lend additional resources to Ukraine, while also helping to preserve continued U.S. leadership within this important institution.”
In the end, Congress will have to decide quickly, as we cannot allow this debate to derail the broader effort to support Ukraine at this time. But given the considerations above, this is well worth the effort.
This piece is cross-posted from Macro and Markets with permission.