16 April 2020
The debate about how best to increase resources for external financial assistance to countries has been accompanying every global financial crisis. With covid-19, the IMF is again under pressure as its firepower is not deemed sufficient to meaningfully instil confidence that a credible global backstop is available. So far the IMF's measures seem too conventional and timid. Recent suggestions that a considerable allocation of Special Drawing Rights (SDR) would do the trick may overestimate the role of SDRs and underestimate the efforts required for a meaningful allocation. More diversified and flexible mechanisms need to be found. New IMF borrowing ought to be part of the discussion both from central banks and as a novel approach from financial markets.
The IMF has total financial resources of about US$1,000 billion including quota resources and borrowing arrangements. Usable quota resources are US$480 billion. Quotas are the IMF’s own resources representing the financial contributions countries are obliged to make and also determine a country’s voting share in the decisions of the institution. Borrowing arrangements represent additional temporary resources comprising in terms of usable funds the multilateral new borrowing arrangements (NAB) of US$180 billion and bilateral borrowing arrangements of US$340 billion. The IMF has already existing lending commitments of more than US$190 billion leaving a residual lending capacity of about US$800 billion (less than 1 percent of world GDP),
Increasing the IMF’s quota resources is hard. It requires an 85 percent majority of the total voting power of the Board of Governors of the IMF including the U.S. plus the support of the U.S. Congress.
SDRs represent in theory potent instruments. They can be created by the IMF and are issued to IMF member countries. The SDR is an international reserve asset that can be swapped unconditionally for freely usable currencies or foreign exchange and is meant to serve as a liquidity buffer for emerging markets. However, in practice, SDR allocations are difficult to do and the SDR has struggled to play any role in the mobilisation of foreign exchange. There have only been four general allocations since creation of the SDR in 1969. Allocations require the same voting majority as for a quota increase but for allocations up to about US$600 billion not the vote of the U.S. Congress. In August 2009, the IMF made a new allocation of about US$250 billion (SDR183 billion) SDRs. Of the US$250 billion emerging markets excluding China and E.U. countries received SDR84 billion and only US$1.9 billion was used by emerging markets to obtain foreign exchange.
Borrowing still represents the most effective way to boost IMF resources. There is already a plan to augment the NAB by January 2021. But bilateral borrowing arrangements are more flexible and can be set-up ad hoc. China has offered to date relatively few support. Central banks issuing freely usable currencies, currencies that are widely used to make payments for international transactions and traded in the principal exchange markets, could offer theoretically unlimited amounts. Central banks could also lend their securities to the IMF to allow the Fund to borrow in financial markets.
China's total commitment to the IMF is about US$120 billion. It comprises quota resources of US$40 billion and commitments under the borrowing arrangements of US$80 billion. This compares with Germany’s total commitments of US$110 billion, Japan’s US$170 billion and also an underwhelming U.S. with US$150 billion. Given that China’s economy is nearly three times the size of Japan and nearly four times the size of Germany, providing more resources seems to be entirely feasible. The renminbi has been designated a freely usable currency in 2015. The People’s Bank of China could offer lending to the IMF through a new renminbi lending facility.
Other central banks could also step up lending to the IMF on a bilateral basis. The Federal Reserve would probably be constrained but the Eurosystem, Bank of England and Bank of Japan could offer large amounts of freely usable currencies as part of extending their bilateral borrowing arrangements.
The IMF has never borrowed from financial markets. Central banks could extend to the IMF a novel long-term securities lending programme. The Bank of Japan, Eurosystem and Federal Reserve hold combined high quality securities of US$12,700 billion. Most of those securities sit idle. In the case of the Federal Reserve, only about 1 percent are lent to dealers. As the financial structure of the IMF is not naturally equipped to issue bonds and other securities, with the use of collateral, the IMF should find in easy to tap financial markets cheaply.
Boosting external assistance to countries in distress requires a diversified approach. Several borrowing options have not been sufficiently explored. China should be able to offer a significant boost. Other willing central banks can help mobilising new resources including through a securities lending programme that can facilitate IMF financial market access. Political capital for complex coordination is rare nowadays. It is therefore essential to find mechanisms that are flexible and can be implemented promptly.