International financial reform and the G20 group of economies have suffered a serious blow after the US Congress refused to ratify a capital increase for the International Monetary Fund agreed four years ago.
A $1.012 trillion budget package agreed on Monday evening left out funds for the IMF despite intense lobbying by the treasury and the White House because of opposition from conservative Republicans in the House.
With midterm elections in the US this autumn, there is no obvious route to pass the IMF package until 2015, leaving reform frozen.
"The delay has clearly 'broken' the implicit contract underpinning the G20 spirit or contract whereby advanced economies would support a greater voice for emerging economies in global governance arrangements and the latter would take more responsibility as full-fledged stakeholders of the global economy," said Domenico Lombardi at the Center for International Governance Innovation in Ontario, Canada.
Regional alternatives
Mr Lombardi said the failure to reform the IMF would give new momentum to regional alternatives such as the Chiang Mai Initiative, which set up currency swap lines between a group of Asian countries.
The 2010 reform would double the IMF's quota – in effect its equity capital – to $720 billion; shift 6 percentage points of total quota to developing countries; and move two of the 24 IMF directorships from Europe to developing countries.
Existing loans to the IMF would become permanent capital, so the US does not have to commit new money. The refusal of the US to ratify the agreement is ironic, as it drove the deal through in the first place.
There is supposed to be another round of quota reform this year but that is unlikely until the previous changes take effect. In the meantime, Europe will remain heavily over- represented at the IMF, a source of constant tension given the fund’s large loans to troubled euro zone countries.
Disappointment
Christine Lagarde, the managing director of the IMF, expressed disappointment but put a brave face on the failure to pass quota reform.
“The world is evolving, and we are fully committed to helping our membership finalise what it agreed in 2010 . . . to ensure that the fund keeps pace with global change and helps meet emerging challenges,” she said. “We understand the US administration will continue to work on securing the necessary legislative authorisation, and we are hopeful that this will happen.”
The deal fleshes out the budget agreed by Republicans and Democrats last December and will mean the first update to US spending priorities since 2010. For the past few years, the government has run under “continuing resolutions”, which keep funding levels the same as the previous year.– (Copyright The Financial Times Limited 2014)
