IMF Increases Emerging Market Power, Doubles Capital Base
Watching the dealings of the International Monetary Fund can be rather dull. On Jan. 22 for example, it issued a press release called “IMF Statement on Suriname.” Not terribly interesting unless you either work for the IMF or live in Suriname.
However, the IMF is an important international institution, and every once in a while it slips in a highlight that the general public then doesn’t notice, like on Jan. 27.
The press release with the poetic title “Historic Quota and Governance Reforms Become Effective,” for example, is one that’s worth some attention.
“The reforms represent a major step toward better reflecting in the institution’s governance structure, the increasing role of dynamic emerging market and developing countries,” it says in the statement.
This means primarily more voting rights for the BRIC countries: China (6.07 percent), Russia (2.6 percent), Brazil (2.2 percent), and India (2.6 percent) are now top 10 members of the fund.
Their combined share is less than the U.S. share of 17.085 percent (giving it veto power); however, another interesting change makes BRIC’s increased voting rights very useful.
“For the first time, the IMF’s Board will consist entirely of elected Executive Directors, ending the category of appointed Executive Directors,” of the top five members consisting of the United States, Japan, Germany, France, and the United Kingdom.
Given this change in the power structure (in theory the fund could be run by all Chinese, although the U.S. veto makes this unlikely), it is not surprising that it took the fund 5 years to make these changes effective.
The IMF needed the approval of at least 85 percent of the capital base (not possible without U.S. consent) and could only move forward after the U.S. Congress finally agreed to the terms in December of last year.
Together with the inclusion of the Chinese yuan in the IMF’s SDR reserve currency, it is indeed a historic shift toward emerging markets.
Talking about the SDR (Special Drawing Rights), the IMF decided to “increase [its] finance strength” by doubling the amount of SDR in circulation to $659 billion.
The IMF uses the SDR as a unit of account in dealing with its own members, so it can also serve as members’ equity capital.
Unlike a normal company, the IMF doesn’t have to go to the market (its members) to raise the money; it can just print it up like a central bank.
The last time this happened was in 2009 when the world was in disarray and China was calling for the SDR to replace the U.S. dollar as the world’s reserve currency. With the world on the edge of a recession and China on the verge of a full-blown financial crisis, does the IMF know something we don’t? Or is it just taking another step to make China’s 2009 wish come true?