Whither IMF?

The ongoing global financial crisis is putting new pressure on the International Monetary Fund, according to the Financial Times. Iceland and Ukraine, strapped by liquidity crises and plunging currencies, are turning to the IMF for their own bailouts, $2 billion for Iceland and $16.5 billion for Ukraine (pending the resolution of yet another political crisis). Currently, the IMF is able to meet these requests, but some analysts question the ability of the Fund to provide assistance in the future if the global financial crisis continues. Before the crisis of this year, emerging markets had been relatively peaceful and the IMF was able to stockpile many of the quotas provided by member countries. (For an explanation of the quota system, click here and a breakdown of quotas by country, click here. However, instability in the financial markets is now hitting emerging markets especially hard and countries like Belarus, Hungary, and Pakistan are knocking at the IMF’s door for help. Pakistan is probably in the most dire of straights and Germany’s foreign minister warned that “the world [has] less than a week to prevent a full-blown financial crisis” there. The country requires $4-5 billion through June of next year to meet payment requirements and many worry that mounting debt could threaten security in this especially volatile part of the world.

Negotiations for stabilizing these markets are ongoing, but the current situation also raises questions about the long-term viability of the IMF and economic integration in developing markets. The IMF has access to around $200 billion, but as former IMF chief Simson Johnson states, “$200 billion can go very quickly.” The $700 billion Emergency Economic Stabilization Act (lovingly referred to as “the bailout”) dwarfs this number, as do sovereign wealth funds of many individual countries (topping the list is the UAE with a whopping $875 billion in assets). The IMF hasn’t been able to keep pace. Normally the Fund loans troubled nations a maximum of 3 times their quota, but in the case of Iceland and Ukraine, these numbers were 11 times and 8 times respectively. The customary loan would have only a limited effect on these failing economies. Organizational politics within the IMF has prevented many countries from increasing their quotas as large contributors are unwilling to give up some of their power (voting rights are tied to contribution size). In light of these limitations, countries in peril are turning to bilateral lenders that have more to offer and this in turn further reduces the IMF’s clout.

What role will the IMF play in the future? It currently is unprepared to assist larger developing markets simply because it does not possess the resources. The IMF has recently decided to make emergency loans available to poorer developing nations where the financial crises are, for a lack of a better word, cheaper to fix. Some argue this is a role for which the Fund is better prepared.