A stronger IMF will bolster the US recovery

All indications are that global economic recovery from the COVID-19 pandemic will be a daunting challenge. The International Monetary Fund (IMF) is already stepping up to help emerging markets and developing countries by approving several emergency loans. This will complement the actions of Congress, the Trump administration and the Federal Reserve to implement far-reaching programs to support U.S. economic activity.  These measures will help restore demand and enable businesses to rehire, and consumers to spend, once the pandemic subsides. 

The global economy will benefit when the U.S. economy reopens. But U.S. households and businesses may be slow to return to previous spending levels, including on imports. 

Emerging market and developing countries will be particularly hard hit, first by the human toll of the pandemic and then by their inability to deploy the same powerful monetary and fiscal policy tools that the United States and others are implementing. 

Fortunately, Congress included funding for the IMF, World Bank and other international institutions in the CARES Act. These institutions are responding quickly to the many countries requesting loans and are evaluating further steps they can take.    

Given the severity of the pandemic and its aftermath, the United States should take the initiative and propose additional increases in IMF funding to further strengthen the IMF’s crisis response powers. A faster recovery in emerging market and developing countries will add to demand for U.S. goods and services. 

The benefit of using the IMF and other multilateral institutions is that other countries, who provide more than 80 percent of the IMF’s budget, will be contributing to the response. As the IMF’s largest member, the United States retains significant influence over lending policies. Many U.S. priorities have become IMF priorities, including countering corruption, money laundering and terrorist finance; improving transparency in government budgets; and reforming weak financial sectors. 

Three initiatives should be considered: A further increase in the New Arrangements to Borrow (NAB); an allocation of Special Drawing Rights (SDRs); and for low income countries in particular, a U.S. contribution to the IMF trust fund that provides grants to crisis countries that are unable to cover their IMF payments coming due. 

Another large increase in the New Arrangements to Borrow could be quickly agreed upon by the IMF and those countries participating in the NAB. This would sustain a formal structure for backup IMF resources where the U.S. retains its veto over activation of this line of credit. The U.S. would need congressional approval for such funding, but the worsening global downward spiral argues for an even stronger role for the IMF.  

The U.S. should also support an IMF allocation of Special Drawing Rights, an IMF created reserve asset. While SDRs are allocated on the basis of quota shares, all IMF members would receive some and could convert them into reserve currencies usable for paying for imports. An IMF allocation of SDRs equal to $600 billion would keep the U.S. share below the threshold for needing congressional approval. Instead, advance notification to Congress would be required. Such a large allocation would be helpful to many struggling countries.

Given that low-income countries require concessional support, the Trump administration could seek congressional approval of a contribution to the IMF’s Catastrophe Containment and Relief Trust (CCRT). The Trust provides grants to low-income countries to cover their debt service to the IMF when struck by natural disasters or health crises. While an IMF gold sale could be pursued to finance an increase in this Trust, it would be preferable to retain gold on the IMF’s balance sheet, given the rapid expansion in IMF lending now underway. 

Other means of expanding IMF resources are possible, but less desirable. An increase in IMF quotas (membership shares) would increase the IMF’s permanent resources. But IMF members are unable to agree on a new formula that better reflects the larger share of emerging market and developing countries in the global economy. Or the U.S. could provide a bilateral loan to the IMF and join those countries recently agreeing to extend their bilateral loans for a few more years. But it makes more sense to keep a larger share of back-up IMF funding in a formal, transparent mechanism such as the NAB.

Administration consultations with congressional leadership are needed to determine the best path forward. Action is urgent, as the unfolding global economic contraction is worsening the already deep human suffering brought by the pandemic. A stronger IMF will cushion that downturn and help turn the global economy around more quickly, bolstering the U.S. recovery.

Meg Lundsager is a public policy fellow at the Wilson Center and formerly U.S. executive director and alternate executive director at the International Monetary Fund.