Monday, June 11, 2018

What BRICs Want from IMF in Exchange for $750B

This is to update you on the results of the IMF convocations discussing ways to raise up to $750B from member countries. There is nothing quite surprising if you've read the previous post. In a concession to something desired by would-be major LDC funders, the IMF has agreed to issue bonds whose yields are not markedly lower than those on offer from major reserve asset issuers (read: America).

Something which may raise an eyebrow though is the BRICs' stated intentions of developing a secondary market for SDR-denominated debentures. Indeed, this may be a play towards the development of an alternative (perhaps SDR-denominated) reserve currency discussed earlier with the important feature of serving as a medium of exchange in open markets as opposed to being a mere unit of account in intra-IMF transactions. (Recall the functions of money.) From the Wall Street Journal:

A push by Brazil, Russia, India and China to have the International Monetary Fund issue its first bonds has become part of a strategy by developing nations to gain a bigger say at the IMF. At the fund's annual meeting for the northern spring, the four countries said they were willing to contribute to a previously announced quadrupling of IMF resources to $US1 trillion ($1.38 trillion), mostly by purchasing bonds.

The bonds would be denominated in the IMF's quasi currency, called special drawing rights, have a maturity of about one year, and be sold only to central banks. If the so called nations of BRIC have their way, the bonds could also be sold on secondary markets to make the instruments more liquid.

The proposed purchase is meant to send a double-message, said Eswar Prasad, a former IMF official who remains close with the Chinese and Indian officials. The countries of BRIC are willing to contribute to the IMF, but they won't contribute heavily to longer-term fund resources until the world body increases their voting shares substantially. "They don't want to get locked into providing more money until they get their (shares) increased," Mr Prasad said.

The issue of voting rights and IMF bonds were at the forefront of the group’s meetings, where discussions also explored the state of the global economy and providing support for low-income countries.

In a statement on Saturday to the IMF's main advisory committee, Brazilian Finance Minister Guido Mantega said the world body "still has to address its original sin: its democratic deficit". Egyptian Finance Minister Youssef Boutros-Ghali, the chairman of the advisory group, said in an interview that he wanted to get national leaders involved in remaking the IMF voting system.

IMF voting shares are supposed to generally reflect global economic power, but now give far greater weight to countries that were powerful after World War II, especially smaller European ones.
The thing is, the BRICs' revised number of voting shares can still be said to reflect a Western dominance despite a changing world economy. What is becoming apparent is the perceived value of having a say in the IMF as LDCs are keen on participating provided more voice in its affairs, while European members threatened with share dilution now say they are willing to pony up more to justify their shares:
In March 2008, after lengthy negotiations, the IMF announced that developing nations' voting shares would increase by 5.4 percentage points and the body said it revisit the issue in 2013. For Brazil, that meant its voting share increased by 0.3 points to 1.7 per cent. China's voting share was boosted 0.9 percentage points to 3.8 per cent. Even those increases were not yet in effect. (The voting rights for Belgium and the Netherlands equal China's, even though China is a much larger economy.) The IMF now is committed to looking into the issue next year. But the BRIC countries believe the IMF's need for funds gives them additional leverage.

At the summit of leaders of the Group of 20 industrialised and developing nations early this month, British Prime Minister Gordon Brown said China was ready to lend the IMF $US40 billion. But China never committed to that amount and is now balking, said IMF and other finance officials. Instead, the Chinese are looking at contributing perhaps half that much, which would be in line with its voting share, and providing additional money through bond purchases, which are seen as less significant by the IMF because they are for a limited time; Brazil, India and Russia were also pushing bond purchases.

Indeed, Western European countries, which have pledged $US100 billion to the IMF, were now considering boosting that amount to $US160 billion, one official said, in part to help justify Europe's bigger stake in the IMF.
I am usually blindsided by invocations of social justice at the multilateral level, such as with China saying it has more of a right to pollute given that Western nations are more historically responsible for emissions that have led to global warming. In an interesting juxtaposition, European countries are now saying that they still deserve outsized shares in the IMF because of their historical contributions. What goes around comes around:
Nearly every IMF plan to revamp the voting structure foresees a smaller role for European counties, especially smaller ones like Belgium and the Netherlands. In an interview with Reuters, Belgian Finance Minister Didier Reynders said that the country should keep its seat on the IMF's 24-member governing board because European countries contributed heavily to the IMF.

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