Treasury Notes

 Myth vs. Fact: Why IMF Quota and Governance Reforms are Urgently Needed

By: Natalie Wyeth Earnest

This week, in a bipartisan vote, the Senate Foreign Relations Committee came together and took action to support Ukraine during this fragile period with a legislative package that includes $1 billion in loan guarantees to supplement a larger multilateral assistance package led by the International Monetary Fund (IMF), the world’s first responder for countries in economic trouble. The Senate proposal also includes critical IMF quota and governance reform legislation that will immediately strengthen the ability of the U.S. to support Ukraine through the IMF, maintain our country’s position of leadership at the institution, and advance our strategic interests around the world.

After World War II, the U.S. led the creation of the IMF in order to establish an institution capable of addressing financial crises. The U.S. led the international effort in 2010 to reform and strengthen the IMF after the global financial crisis. The reforms in the Senate proposal preserve the U.S. leadership and veto position in the IMF, without increasing our financial commitment to the IMF. The 2010 reforms also modernize the IMF to reflect the growth of the global economy and better anchor the fast-growing emerging economies in the multilateral system from which the United States has benefitted tremendously.  Today, the U.S. is the only country holding back implementation of the reforms.

Here are the facts on why IMF reform needs to happen as soon as possible:  ​

Myth:  The 2010 IMF quota reforms don’t help Ukraine.

Fact:   Ukraine’s leaders have made clear that an IMF assistance package is central to their economic future.  Immediate passage of IMF quota reform legislation will underscore the solidarity of international support for Ukraine and support the IMF’s capacity to lend additional resources to Ukraine, while preserving continued U.S. leadership within this important institution.  The IMF reforms will increase Ukraine’s IMF quota, and increase the resources the IMF has available to lend Ukraine.  Ratification of the IMF reforms will put the Fund’s finances on a more stable long term footing and provide the IMF with more financial flexibility in lending additional resources to Ukraine.  New Ukrainian Prime Minister Yatsenyuk personally asked the President to complete the IMF reforms during his trip to Washington because he understands that it means more support for Ukraine.

Myth:  The IMF is not important for American families, businesses, and workers.    

Fact:  American leadership in the IMF protects and supports the U.S. economy. When foreign economies are in crisis, they import less from U.S. businesses, they invest less in the United States, and they damage our financial markets, hurting the value of Americans’ 401Ks and household savings.  By helping shelter the U.S. economy from financial turbulence abroad, the IMF helps us protect American jobs. 

For example, the IMF was the first responder to the Asian financial crisis in the late 1990s, helping to restore growth and promote U.S. exports, particularly in the agriculture and aerospace sectors. Today, American export industries continue to be a major driver of U.S. economic growth, accounting for roughly 14 percent of U.S. GDP and supporting nearly 9.8 million jobs in 2012.

Myth:  Approving the IMF reforms will cost taxpayers billions of dollars. 

Fact:  The United States is not committing one new dollar to the IMF. The reforms move money from one U.S. account at the IMF to another account, but do not change our overall financial commitment and exposure to the IMF.  The U.S. quota increase will be matched by an equal and permanent reduction in U.S. financial participation in the IMF’s emergency account which was expanded during the global financial crisis, for no net change.  

Myth:  The IMF reforms put taxpayer money at risk.  

Fact:  The United States has never lost a dollar of our contribution to the IMF.  The IMF has strong safeguards for its resources and its sound lending policies and preferred creditor status assure repayment.  Our claims on the IMF are liquid and interest-bearing; these claims are further protected by the IMF’s rock-solid balance sheet, with substantial reserves and unrealized gold profits that exceed total IMF credit outstanding.  

Myth: The IMF reforms will reduce the United States’ influence in the IMF.

Fact: After the IMF reforms are implemented, the U.S. will remain the IMF’s largest shareholder and the only country in the world with veto authority over major decisions at the IMF. The reforms strengthen the IMF’s quota-based financial and governance structures in which the United States exercises its leadership position.  The longer Congress delays passing IMF legislation, the more U.S. leadership of the IMF is compromised, as we are the only G-20 country that has failed to ratify this agreement.

Myth: The IMF reforms will benefit Russia in the IMF.

Fact:  Under the quota reforms, Russia’s voting power in the IMF changes from 2.4 percent to 2.6 percent of the Fund’s total voting power. This is an immaterial change.  In contrast, the United States’ voting power will be 16.5 percent, giving us veto power over key IMF decisions.  Further, the G-7 quota shares will remain well over 40 percent. It is preposterous to think that the United States government would act to strengthen Russia’s influence, when Russian behavior is violating international laws and norms. Russia currently has an outsized role at the IMF because of its bilateral agreement to lend the IMF $10 billion and is exploring if the IMF can move forward without the United States.  That is unacceptable. Approval of the IMF reforms will make the IMF less dependent on bilateral loan arrangements from countries like Russia and more dependent on the resources provided by the United States and our allies.  

Myth:  The IMF reforms will result in less U.S. control over IMF funds  

Fact:  A change in quotas requires 85 percent support of the IMF’s Board of Governors.  Similarly, the New Arrangements to Borrow (NAB) activation requires an 85 percent majority vote of the IMF’s Governors.  IMF quota resources and NAB resources are both disbursed to countries with a simple majority vote of the IMF Executive Board.  For these reasons, a transfer of resources does not diminish in any way the amount of U.S. influence at the IMF.  

Myth: The U.S. will lose its representation on the IMF Board.

Fact: If the reforms are approved, the United States will retain far more voting power than is needed to be assured of keeping our Board seat at the IMF.   

Myth:  Support for the IMF is a partisan issue.

Fact: Support for the IMF has never been a partisan issue. On March 12, 2014, 32 former cabinet members, politicians and senior military leaders sent a letter to the Senate and House leadership, calling on Congress to pass the IMF quota reforms because it advances U.S. national security and economic interests.  That letter was signed by James Baker, Nicholas Brady, Paul O’Neill, John Snow and Henry Paulson, all former Republican Secretaries of the Treasury.  It was also signed by Henry Kissinger, Robert McFarlane, Condoleezza  Rice, Frank Carlucci and Stephen Hadley, all leading Republican national security establishment figures.  Many others signed the letter as well.

Further, since the United States led the charge to create the IMF 70 years ago, there have been eight quota increases for the IMF.  Five of these increases were approved under Republican Administrations.  The IMF has always received bipartisan support in the United States.

Myth:  The IMF is not important for U.S. national security.

Fact:  The IMF is a vital tool in our national security toolkit.  After the fall of the Soviet Union, the IMF provided critical assistance to Poland, the Czech Republic and the Baltics, allowing successful market economies to flourish.  More recently, the IMF helped prevent a break-up of the Euro Area and mitigate the spillover effects of the European crisis on our shores. In the Middle East and North Africa, new IMF programs in Jordan, Tunisia, and Morocco in the last two years have helped prevent economic crises from further deteriorating the political environment to the detriment of U.S. interests. Countries distracted and destabilized by financial crises are less reliable partners.  This is especially true in unstable regions where economic dissatisfaction can lead quickly to political instability.  By providing financial support and hands-on policy advice, the IMF keeps our allies and partners strong.

Myth:  The IMF only provides help to wealthy European countries.      

Fact:  The IMF’s central role in helping Ukraine belies this argument. And the IMF has played a critical role in helping countries in the Middle East, and throughout Asia.  The IMF exists for all of its members in times of crisis, by devising programs of corrective policies and providing financing as they return their economies to sustainability. 

Myth: The IMF encourages fiscal recklessness through its assistance.

Fact: IMF financing is only provided in the context of strict terms and conditions.  A key feature of IMF programs is that the borrower agrees to reforms that will stabilize its finances and put it on a path to a sustainable economic framework. 

Natalie Wyeth Earnest is the Assistant Secretary for Public Affairs at the United States Department of the Treasury.​

Posted in:  International Monetary Fund
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