Unfinished business after the G-20 summit revolves around the IMF, including U.S. funding and China’s membership quota.
Zhang Hong, Fang Huilei and Wen Xiu in Beijing, and Li Xin in London 16 April 2009
The biggest winner at the G-20 summit in London on April 2 was the International Monetary Fund, which received pledges for US$ 1.1 trillion, including US$ 500 billion from member countries and US$ 250 billion through the IMF’s special drawing rights (SDR) currency.
But rounding up the cash and overcoming political obstacles within IMF-member countries will be difficult. Despite the summit’s grand promises, some funding details are fuzzy.
The summit also left unanswered questions about the possibility of issuing bonds to raise money for IMF projects, and the future of quota rights for China.
The SDR pledge was based on a currency set up in 1969 and endowed with many roles – a reserve function and trade settlement. SDR’s value is linked to a basket of currencies that includes the U.S. dollar, euro, yen and pound.
To date, the world’s combined outstanding SDR is a slim 21.4 billion SDR. A 1997 IMF decision to double the amount issued through SDR was never approved by the fund’s largest quota holder, the United States, although the latest boost would greatly increase the fund’s resources.
A former IMF official told Caijing that if countries holding SDR need to “cash” the IMF currency and use the resources for bilateral flows of capital or trade, issuers of the four basket currencies would be obliged to buy SDRs. That’s why many developed countries have been reluctant to expand SDR issuance.
In the wake of the summit and “with the statement made at the G-20,” said the former official, “the Americans can’t oppose the idea (of enlarging SDR) anymore.”
China’s Contribution
The promise of US$500 billion in fresh cash was aimed at beefing up confidence in the world economy and showcasing an international determination to fight the current economic crisis together.
How will the money be raised? Technical details “still need to be worked out in time,” said a source close to the negotiations.
Only a few clues point to how member countries might fulfil the huge promise. Japan signed a bilateral lending agreement with the IMF totalling US$100 billion. The European Union pledged US$100 billion. Canada and Switzerland each promised US$10 billion, and Norway put US$4.5 billion on the table.
The United States was ambiguous about its contribution. Before the summit, U.S. officials expressed a willingness to add US$100 billion to IMF’s resources. But there was no formal statement for such a pledge, which would require approval from Congress.
China’s possible contribution was a matter of curiosity as well.
The host of the summit, British Premier Gordon Brown, tried to convince countries with high foreign reserves such as China and Saudi Arabia to increase lending to the IMF. Although Brown said at the summit press conference that China would contribute US$ 40 billion, that number was confirmed by neither the IMF nor China.
“China’s contribution is out of the consideration for the nation’s own economic strength, not necessarily a match with that of the U.S. or Japan,” a source close to Chinese decision-makers told Caijing.
The source also said the Chinese government wants its contribution to reflect the nation’s strength as well as development stage, taking into consideration the fact that China has been troubled along with the rest of the world by the economic crisis.
The source said China’s pledge was made after considering possible contributions from similar developing countries as well as big foreign reserve holders.
Saudi Arabia, which also sits atop a pile of foreign reserves, may pledge more than US$20 billion, said the source.
Three developing economies -- Russia, Brazil and India -- are like China in that they are at similar levels of development and have parallel interests in international financial organizations such as the IMF. Russia, Brazil and India may loans between US$10 billion and 20 billion, the source said, contributions that would take into account the fact that each country has individual problems. Russia suffers from low commodity prices, Brazil is paying special attention to domestic development, and India’s economy has been hit hard by the crisis.
Bond System?
On several occasions before the summit, Chinese officials made clear that they prefer buying IMF bonds rather than participating in a system called the New Arrangement to Borrow (NAB), whose members are a small group within IMF. China is not an NAB member.
The IMF charter allows bond issues, although that right has never been exercised. Such a move would require a majority vote by IMF’s executive board, said Ge Huayong, China’s representative to the board.
Other international organizations such as the World Bank and Asia Development Bank have a long history of issuing bonds. Bonds are a major fund-raising channel for these banks, allowing them to plan ahead for mid- to long-term loans for projects that focus on poverty alleviation, development and aid.
But as a fire-fighter for international finance, the IMF acts as a lender of last resort for countries swamped by financial crises. It can hardly predict in advance when and how much help countries will need. Issuing long-term bonds for unexpected, short-term needs would create a dilemma for the fund.
A source at China’s central bank told Caijing that the IMF is not urgently hunting for credit. With US$ 250 billion in current resources, and a new credit line from Japan that’s worth US$100 billion, the fund’s motivation for additional financing is less than salient, the source said.
The source also said IMF might consider issuing bonds in the future if several developing countries make a joint request. But the fund may choose to prefer short-term notes.
Quota Reform
Despite the big jump in resources, IMF’s member-quota reallocation and governance reform issues remained unsettled at the summit’s end. Among IMF members, China’s current quota of 3.72 percent ranks sixth, trailing the United States, Japan, Germany, Britain and France.
G-20 participants agreed a quota review should be conducted by the year 2011, and more attention should be given to the voices of developing countries. But will China’s future quota match its economic status? One Chinese finance official expressed reservations.
“Considering China’s contribution to the world economy, its quota shouldn’t be less than that of Britain and France,” the source said.
But the source added that “it’s not very likely that China’s new quota can be around 7 percent,” which is the amount of China’s contribution to the world’s GDP. “But 4 percent is possible.”
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Despite G-20 Promises, IMF Issues Linger
Unfinished business after the G-20 summit revolves around the IMF, including U.S. funding and China’s membership quota.
Zhang Hong, Fang Huilei and Wen Xiu in Beijing, and Li Xin in London
16 April 2009
The biggest winner at the G-20 summit in London on April 2 was the International Monetary Fund, which received pledges for US$ 1.1 trillion, including US$ 500 billion from member countries and US$ 250 billion through the IMF’s special drawing rights (SDR) currency.
But rounding up the cash and overcoming political obstacles within IMF-member countries will be difficult. Despite the summit’s grand promises, some funding details are fuzzy.
The summit also left unanswered questions about the possibility of issuing bonds to raise money for IMF projects, and the future of quota rights for China.
The SDR pledge was based on a currency set up in 1969 and endowed with many roles – a reserve function and trade settlement. SDR’s value is linked to a basket of currencies that includes the U.S. dollar, euro, yen and pound.
To date, the world’s combined outstanding SDR is a slim 21.4 billion SDR. A 1997 IMF decision to double the amount issued through SDR was never approved by the fund’s largest quota holder, the United States, although the latest boost would greatly increase the fund’s resources.
A former IMF official told Caijing that if countries holding SDR need to “cash” the IMF currency and use the resources for bilateral flows of capital or trade, issuers of the four basket currencies would be obliged to buy SDRs. That’s why many developed countries have been reluctant to expand SDR issuance.
In the wake of the summit and “with the statement made at the G-20,” said the former official, “the Americans can’t oppose the idea (of enlarging SDR) anymore.”
China’s Contribution
The promise of US$500 billion in fresh cash was aimed at beefing up confidence in the world economy and showcasing an international determination to fight the current economic crisis together.
How will the money be raised? Technical details “still need to be worked out in time,” said a source close to the negotiations.
Only a few clues point to how member countries might fulfil the huge promise. Japan signed a bilateral lending agreement with the IMF totalling US$100 billion. The European Union pledged US$100 billion. Canada and Switzerland each promised US$10 billion, and Norway put US$4.5 billion on the table.
The United States was ambiguous about its contribution. Before the summit, U.S. officials expressed a willingness to add US$100 billion to IMF’s resources. But there was no formal statement for such a pledge, which would require approval from Congress.
China’s possible contribution was a matter of curiosity as well.
The host of the summit, British Premier Gordon Brown, tried to convince countries with high foreign reserves such as China and Saudi Arabia to increase lending to the IMF. Although Brown said at the summit press conference that China would contribute US$ 40 billion, that number was confirmed by neither the IMF nor China.
“China’s contribution is out of the consideration for the nation’s own economic strength, not necessarily a match with that of the U.S. or Japan,” a source close to Chinese decision-makers told Caijing.
The source also said the Chinese government wants its contribution to reflect the nation’s strength as well as development stage, taking into consideration the fact that China has been troubled along with the rest of the world by the economic crisis.
The source said China’s pledge was made after considering possible contributions from similar developing countries as well as big foreign reserve holders.
Saudi Arabia, which also sits atop a pile of foreign reserves, may pledge more than US$20 billion, said the source.
Three developing economies -- Russia, Brazil and India -- are like China in that they are at similar levels of development and have parallel interests in international financial organizations such as the IMF. Russia, Brazil and India may loans between US$10 billion and 20 billion, the source said, contributions that would take into account the fact that each country has individual problems. Russia suffers from low commodity prices, Brazil is paying special attention to domestic development, and India’s economy has been hit hard by the crisis.
Bond System?
On several occasions before the summit, Chinese officials made clear that they prefer buying IMF bonds rather than participating in a system called the New Arrangement to Borrow (NAB), whose members are a small group within IMF. China is not an NAB member.
The IMF charter allows bond issues, although that right has never been exercised. Such a move would require a majority vote by IMF’s executive board, said Ge Huayong, China’s representative to the board.
Other international organizations such as the World Bank and Asia Development Bank have a long history of issuing bonds. Bonds are a major fund-raising channel for these banks, allowing them to plan ahead for mid- to long-term loans for projects that focus on poverty alleviation, development and aid.
But as a fire-fighter for international finance, the IMF acts as a lender of last resort for countries swamped by financial crises. It can hardly predict in advance when and how much help countries will need. Issuing long-term bonds for unexpected, short-term needs would create a dilemma for the fund.
A source at China’s central bank told Caijing that the IMF is not urgently hunting for credit. With US$ 250 billion in current resources, and a new credit line from Japan that’s worth US$100 billion, the fund’s motivation for additional financing is less than salient, the source said.
The source also said IMF might consider issuing bonds in the future if several developing countries make a joint request. But the fund may choose to prefer short-term notes.
Quota Reform
Despite the big jump in resources, IMF’s member-quota reallocation and governance reform issues remained unsettled at the summit’s end. Among IMF members, China’s current quota of 3.72 percent ranks sixth, trailing the United States, Japan, Germany, Britain and France.
G-20 participants agreed a quota review should be conducted by the year 2011, and more attention should be given to the voices of developing countries. But will China’s future quota match its economic status? One Chinese finance official expressed reservations.
“Considering China’s contribution to the world economy, its quota shouldn’t be less than that of Britain and France,” the source said.
But the source added that “it’s not very likely that China’s new quota can be around 7 percent,” which is the amount of China’s contribution to the world’s GDP. “But 4 percent is possible.”
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