The International Monetary Fund (IMF), which came into existence around the end of World War II turned 80. The reason for its formation was primarily to give it an oversight role so that countries could not manipulate domestic currencies, as a number of countries did during the Great Depression of the 1930s, whereby they devalued their currencies to give positive impetus to exports. In addition to the oversight role, the IMF was mandated to provide balance of payments (BoP) support to member countries to correct these fundamental imbalances.
Highlighting the historical aspects of how it came into existence, a recently released report ‘The Bretton Woods institutions at 80: towards a bigger, better and more inclusive global economic governance architecture’ by Boston University’s ‘Global Development Policy Center’ pointed out ‘July 2024 marks the 80th anniversary of the Bretton Woods Agreement that established the post World War II multilateral economic order. The agreement, reached at the Mount Washington Hotel in Bretton Woods, New Hampshire in 1944, led to the establishment of the Bretton Woods institutions, the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), the precursor to the World Bank, both of which in their current forms “remain at the centre of global financial governance today”… While the original agreement also considered trade to be a key pillar, proposing the International Trade Organization (ITO), progress towards a multilateral organization governing global trade took considerably longer. In the meantime, a handful of countries joined the General Agreement on Tariffs and Trade (GATT) in 1947, which would eventually provide the structure and form of the World Trade Organization (WTO), established in 1995.’
In terms of climate change related financial support, there has been a suggestion of an annual climate change related SDR provision by the IMF for highly climate vulnerable countries; which includes Pakistan, as the country is among the top-ten most climate challenged countries. Also, the IMF should do away with its notorious ‘surcharge policy’, which is a ‘junk fee’ taken on account of late repayments by borrowing countries, given the already weak fiscal space situation facing developing countries, in general, in the wake of Covid pandemic, and the fast-unfolding climate change crisis.
Moreover, the IMF provided assistance to needful member countries on the basis of programme conditionalities; where the scope of such assistance increased considerably both after the break-up of the USSR, where a number of countries gained independence, and also given the inherent flaws of the programme itself pushing countries to keep coming back for more programmes. Hence, the ‘Washington Consensus’ basis of IMF programmes, which is highly tilted towards a neoliberal policy thought process, has not allowed sustained macroeconomic stability, and economic growth for recipient countries, mainly because of over-emphasis on aggregate demand squeeze policies, or in other words emphasis on practice of over-board austerity policies, instead of much-needed balanced approach on both aggregate demand-, and aggregate squeeze policies.
The other problem has been the governance of the IMF itself, whereby allocation of resources, and decision-making favours the rich, advanced countries who contribute more resources to the IMF. The same Report pointed out in this regard ‘For the IMF and the World Bank, a significant rebalancing of voting power must be complemented by fundamental governance reforms to ensure more voice and representation for EMDEs [emerging market and developing economies].’ Instead, every member country should be given equal voice in terms of voting. Moreover, instead of making allocation of resources on the basis of ‘quota sharing’ formula, financial allocation should be made on need basis. For instance, enhanced allocation of special drawing rights (SDRs) in the wake of the covid-18 pandemic in August 2021, and on the basis of ‘quota-sharing’ formula, meant that countries, which already have ample fiscal space received most of the allocation of $650 billion, while it should have been the other way round given much higher fiscal, and debt repayment needs of developing countries.
Another issue with the IMF, and which is in line with the overall weak multilateral spirit globally, when the fast-unfolding climate change crisis, and the likelihood of ‘Pandemicene’ phenomenon require much more climate finance provided to the countries, along with putting in place more efficient debt restructuring framework. Noted economist, Barry Eichengreen, pointed out in his recent article ‘Unlocking IMF reform’ in this regard ‘First, the IMF should provide its members with regular annual allocations of its in-house financial instrument, special drawing rights. This would provide an alternative to the US dollar as a source of global liquidity while also addressing the problem of chronic global imbalances. Second, the IMF needs to do better at organizing debt restructurings for low-income countries. Its latest attempt, the rather grandly named Common Framework for Debt Treatments, has fallen short. The Fund needs to push harder for cooperation from China’s government and financial institutions, which are unfamiliar with the responsibilities of a sovereign creditor. It should support reforms to speed up restructurings and endorse initiatives to crack down on holdout creditors.’
In terms of climate change related financial support, there has been a suggestion of an annual climate change related SDR provision by the IMF for highly climate vulnerable countries; which includes Pakistan, as the country is among the top-ten most climate challenged countries. Also, the IMF should do away with its notorious ‘surcharge policy’, which is a ‘junk fee’ taken on account of late repayments by borrowing countries, given the already weak fiscal space situation facing developing countries, in general, in the wake of Covid pandemic, and the fast-unfolding climate change crisis.
