Congress finally gave the administration what it has been asking for on IMF quota reform, and then some. The Obama administration joined other IMF member countries in committing to a package of reforms to IMF quota and governance back in 2010, only to have Congress ignore it for five long years, effectively blocking its implementation and incurring the growing ire of the international community. Changes to quota affect both the resources available to the IMF to address crises and the voting power of the IMF’s member countries. The United States played a leadership role in crafting the 2010 package, only to see that leadership eroded each year Congress failed to act.
The lesson in all of this is that US leadership cannot occur from the sidelines; it must come in the form of strong legislation and strong executive leadership — and hopefully this deal will help reestablish the US standing in the IMF.
Finally a Deal
Overall, the expected passage of the IMF package is very good news, and we can almost hear the sighs of relief coming from the Treasury building, the IMF, and even in finance ministries around the world. The reality is that much of the world very much wants the United States to continue to lead within this important institution, and inaction on quota reform had become a fundamental obstacle to that, something we’ve both written about before.
Going forward, we expect that US standing will in fact recover from the damage caused by five years of delay on the quota deal, particularly as the focus turns back to the IMF’s day-to-day business. And given turmoil, particularly in emerging markets, over the past year, that pivot may be more abrupt than anyone wants.
Warnings for the Future
Congress didn’t just give the administration quota reform and the ability to go forward on governance reform that gives more voting power to rising developing countries. It also included some potentially consequential conditions on its approval. Here we see risks that are manageable but will require some skillful navigation by the next administration.
First, Congress imposed a host of new reporting requirements pertaining to broad IMF policies as well as to specific country programs. All of this new reporting is no doubt irritating to those in the Treasury who will have to write the reports (particularly in the midst of country crises, as some of the language requires). But Treasury and the next administration would do well to heed the larger message here: there has to be more robust interaction between the executive and legislative branches on IMF issues than there has been. A routine process of engagement and consultation should be the norm, particularly in the midst of major negotiations on broader policy issues like quota and governance reform.
Second, Congress has put an expiration date on the remaining US funding in the IMF’s New Arrangements to Borrow (NAB), a contingency facility at the IMF that has historically been used as an emergency liquidity line. It would be problematic for this money to disappear tomorrow since it constitutes a significant portion of overall US funding of the IMF. However, the expiration date is 2022, which gives the next administration considerable time to work to ensure that congressional support for US leadership in the IMF is strengthened.
Third, Congress takes a firm line on the consequential issue of whether the IMF can lend at exceptional levels in situations like Greece’s, where normal IMF rules are waived under a finding of systemic importance. The amount of IMF lending to an individual country is theoretically capped by a number of factors. Until 2010, there were criteria in place for allowing “exceptional access” to larger loans, of which the most important was a calculation of debt sustainability. The IMF changed its policy in 2010 to allow an exemption to these criteria based on systemic risk.
Congress essentially requires the US Treasury to have the so-called “systemic exemption” language dropped from IMF policy. While Treasury is undoubtedly less than pleased with this provision given the importance of preserving flexibility, it was one of the clear substantive differences that the majority in Congress raised, and as Ted Truman notes, it appears to have wide support within the broader IMF membership. More importantly, Congress has rightly provided the administration with negotiating flexibility for replacing this language.
Far more good than harm
All in all, the IMF provisions in the omnibus should rightly be greeted with a collective sigh of relief. The lesson to be learned is clear enough. Congressional indifference to the IMF, reflected in five years of inaction, is far more damaging to US leadership in the Fund (and to the IMF itself) than whatever damaged might be caused by the strings attached to IMF legislation. Congress and the administration can also do a better job of listening to the concerns of the other so that compromise can be reached in a timely manner. It should be a priority of the next administration to heed Congress’s call in this omnibus by increasing its overall engagement with the Hill on IMF issues in the years ahead.