IMF to Raise $500 Billion

123jump.com Staff
26 Apr, 2009
New York City

IMF, the emergency lender to troubled nations with its reputation in decline backed a plan to raise $500 billion. The fund will issue bonds and raise money from emerging nations after the U.S. and Europe resisted calls from the emerging nations to dilute their voting shares.

12:20AM Washington, D.C., 6:20AM London, 9:50AM Mumbai -[R]IMF, the emergency lender to troubled nations and the institution that has lost its reputation supported today to increase its capital to $500 billion. The fund will issue bonds and raise money from emerging nations after Europeans resist the calls to dilute their voting share in the fund.[/R]

The International Monetary Fund is once again the focus of world’s attention but this time as a borrower and not as a lender.

The IMF, the last lender to nations in emergency, needs its own funding and 20 most industrialized nations have come together to fund the international bank. The IMF is following up with its backing after the recent meeting of G20 nations in London where world leaders pledged to increase IMF lending power.

The IMF committee that sets its strategic policy approved the plan to double its capital base to $500 billion through borrowing. The institution that is more used to dictating governments around the world how to manage their finances and set fiscal criteria is battling for its funds from member nations.

Need to Modernize Voting Structure

The archaic institution voting structure still preserves the world economic order reflecting the World War II era and is in urgent need of modernization. The fast growing China and India and other commodities power houses Brazil, Russia and Saudi Arabia are pushing for more say in the affairs of the bank. But Europeans are resisting and the U.S. is not prepared to dilute its stake in the bank.

So, the world leaders agreed to let IMF use its ability to borrow funds from member nations and emerging nations are hoping that voting structure will be overhauled. It is only a hope and there are no assurances at least so far.

The U.S. controls the largest voting power in the bank with 16.8% and three advanced European countries UK, France and Germany collectively control near equal amounts totaling 15% voting share. Japan has 6%.

But the world has changed in the last sixty years and China and India are knocking on the doors of IMF looking for higher voting share and a greater voice.

The lopsided voting share structure at IMF is starkly evident with four emerging nations together with more than $7 trillion in GDP and 40% of world population have only 9.7% share. China has voting share of 3.7%, India has 1.9%, Russia has 2.7% and Brazil has 1.4%.

IMF to Raise $500 Billion

The IMF noted today in its communiqué released after the meeting in Washington that it has “agreed to increase the resources available to the IMF through immediate financing from members of $250 billion, subsequently incorporated into expanded and more flexible New Arrangements to Borrow (NAB), increased by up to $500 billion, and to consider market borrowing if necessary.”

The U.S., E.U. and Japan will contribute $100 billion each and other European nations will collectively provide $25 billion totaling $325 billion. The fast growing emerging nations China, India, Brazil and Russia have agreed to provide temporary funding to the IMF and also pushed for stronger voice at the fund.

The IMF has remained a tool for the U.S. and Europe to disburse funds to nations that meets political more than economic criteria.

Earlier in April after the G20 meeting U.K. Prime Minister Brown suggested that China may buy $40 billion of bonds and in an interview with the Wall Street Journal Montek Singh Ahluwalia, the deputy chairman of planning commission of India said that the country may buy $10 billion of bonds.

Canada and Switzerland have pledged $10 billion and Norway is prepared to provide $4.5 billion according to the Associated Press. But the goal set in London by world leaders to provide the IMF $1 trillion remains harder to achieve. Wealthy and advanced nations are not able to follow up with their pledges and emerging nations are demanding greater say.

The IMF has resisted for a greater say from emerging nations in the past but this time it has agreed as the lender seeks more capital that wealthier nations are not prepared to provide. European nations are still resisting to the demands from emerging nations to overhaul voting structure but Washington has shown more flexibility in the recent months.

However, any proposed voting share change is going to be incremental that will certainly not satisfy many emerging and poor nations.

Why IMF Needs So Much of Capital and Why Now?

The question remains why IMF needs such a large capital increase now, especially more than $4 trillion of world economic stimulus is announced by wealthy nations in the last six months. And, not a week passes when the governments of the U.S. and E.U. are broadcasting economic rebound in 2010 and mild recession in 2009.

Egyptian Finance Minister Yousef Boutros-Ghali, the chair of the IMF meeting today in Washington said, “Carefully, cautiously we can say there is a break in clouds.”

If there is a break then why the IMF needs $500 billion. Why E.U., U.S. and Japan are prepared to offer $300 billion when only three member nations out of 185 have asked for emergency help so far.

Colombia, Poland and Mexico have requested assistance from the fund and economists in the U.K. have raised a specter of the country seeking IMF assistance if its economy remains weak and government spending spins out of control.

The IMF was quiet today in explaining what it will do with this new capital and how it will be disbursed and under what guidelines?

In the late nineties the fund lost its credibility after it gave advice that most economists consider contributed to a surge in inflation in Indonesia and fall of the Suharto regime and deepened the Asian crisis.