The battle for the future of Ukraine is not only a military battle, but also a battle for dollars and euros, as became clear at the end of this year. In both the United States and the European Union, financial support to the country severely affected by Russian military violence came under pressure. The Ukrainian budget deficit (19 percent of GDP this year, barely 16 percent next year) is unsustainable without Western support.
The fact that the government in Kyiv can still pay its bills at all is largely thanks to an organization that you may not immediately think of when considering international conflicts, but which nevertheless plays an important geopolitical role: the International Monetary Fund (IMF).
At the beginning of this year, the IMF member states approved a support package to Ukraine of 15.6 billion dollars (about 14 billion euros), in exchange for economic reforms in the country. The IMF package does not close the budget gap in Kyiv (33 billion dollars this year, expected 40 billion next year). But it does ensure macroeconomic stability in Ukraine, allowing donor countries to give or lend money to Kyiv with more confidence.
The IMF thus provides a lifeline for a European country at war. The Ukrainian example shows how essential the question now facing the Fund is: who exactly is in charge?
On Monday, the starting gun sounded for a discussion about the redistribution of the so-called ‘quota’ within the IMF, or the capital shares of the 190 member states. Roughly linked to this are the voting weights of countries. Proposals should be developed in this regard by mid-2025, he said a press statement of the IMF.
Western countries and Japan still have a dominant position within the Fund, which is based in Washington and is traditionally led by a European (currently: the Bulgarian Kristalina Georgieva).
But now that Western dominance within the Fund is under discussion. Relationships within the IMF should better “reflect the relative positions of member states in the global economy,” the press statement said.
The balance of power within the IMF has become considerably skewed. Compared to the size of their economies, emerging countries such as China, India and Indonesia have little say. European countries and Japan a lot.
You can calculate the relative size of economies in many ways. The current IMF formula for this has now been questioned by member states, which shows how tricky this discussion is becoming. But it is clear that the voting ratios are not fair at the moment.
Europe under pressure
After the US (16.5 percent of the votes within the IMF), Japan follows (with a voting weight of 6.1 percent) and only then China (6.1 percent). This while the weight of the three countries in the world economy in 2022 amounted to 21 percent, 5.2 percent and 17.5 percent respectively. This is according to an IMF calculation of GDPs, which takes into account differences in purchasing power.
European countries in particular will come under pressure to relinquish influence. Germany (5.3 percent of the vote), France and the United Kingdom (both 4 percent) have about a quarter more say in the IMF than their economies would justify. India (2.63 percent) has less voting weight than Italy (3 percent), while its shares in the global economy in 2022 were 4.7 and 2.1 percent respectively. Meanwhile, India is booming economically, while Italy is stagnating.
“This will be quite a fight,” says Paul Hilbers, the administrator of the Netherlands at the IMF, on the telephone. “I think everyone sees that something needs to be done. The IMF is an institution where we all, 190 countries, make decisions about the global economy.” If the voting ratios do not form a “mirror” of economic ratios, such as GDP and share in world trade, the idea quickly arises that IMF decisions are not representative, says Hilbers. “This could undermine the willingness of countries to accept IMF recommendations.”
The US, and European countries in its wake, have held off on major quota reform for a long time. During the IMF annual meeting in Marrakech last October, member states did not go further than increasing the IMF’s capital on the basis of current shares (each country contributes 50 percent more capital on a pro rata basis, as was the elaboration of this decision on Monday). . This strengthens the IMF financially, but the hot potato of voting relations was pushed aside, mainly under American pressure.
One of the US’s main goals: to keep its voting weight at at least 15 percent. Because with that 15 percent you can block decisions within the IMF. The US is now the only one with a veto within the IMF. Based on the size of their economy, that 15 percent of the US isn’t in danger any time soon. But Washington does not want major geopolitical rival Beijing to obtain such a veto: then the Chinese would become equally powerful within the Fund.
Chinese veto?
On the other hand, the US and Europe cannot alienate emerging countries such as China and India too much. Otherwise, you hear widely at the IMF, China and other emerging countries will set up their own institutions, outside the IMF. The Chinese are already providing their own IMF-like emergency loans to countries such as Pakistan, Sri Lanka and Suriname, countries that are important for Chinese trade routes. This makes it more difficult for the IMF to negotiate with these countries about how to tackle their national debts. China is now a separate creditor, putting its own interests ahead of those of the IMF.
The discussion about voting ratios “could hardly be more geopolitical,” says Sander Tordoir, researcher at the Center for European Reform think tank. “The big question becomes: are the West and its allies, such as Japan and South Korea, willing to give up ground?”
Tordoir, who previously worked at the European Central Bank delegation to the IMF, sees a “fundamental dilemma”. On the one hand, it is necessary to strengthen the IMF as a ‘multilateral club that belongs to everyone’. This requires a ‘fairer’ distribution of the quotas. On the other hand, a greater role for China is very risky, he believes. China is acting “uncooperatively” by obstructing IMF programs. For example, it long prevented restructuring of the debt of Ghana, Sri Lanka and Zambia, countries that have borrowed money from both the IMF and directly from China.
“You may sometimes hear that China will adopt a more cooperative position if it gains a stronger position within the IMF. But I have a hard time about that,” says the researcher. According to him, the Chinese are open in their ambition to reduce Western influence on the world stage. Chinese veto power within the IMF is a “huge risk” for the Americans – and quietly also for the Europeans – says Tordoir. “The IMF could then become unworkable.”
Not all emerging countries have the same interests as China. India, based on its fast-growing economy, wants to have a greater say within the IMF, but is wary of a quota formula that gives more influence to China, with which the Indians have a tense relationship.
For the poorest countries, which often depend on IMF support, loss of influence is a risk. The lower a country’s capital share, the lower its access to IMF support. The IMF currently has $111 billion in credit outstanding. Most of it has been lent to Argentina (31 billion), Egypt (12 billion) and Ukraine (8.6 billion of the promised 15.6 billion), but the list of clients also includes very poor countries such as Sudan (1 billion) and the Central African Republic (219 million). Monday’s press release states that the quotas of the poorest countries must be “protected.”
Also read
Poverty, war, pandemic, climate: the World Bank and IMF are running out of steam
‘Interest rate policy not geopolitically smart’
Some countries pay almost 8 percent interest on IMF loans, Tordoir calculated. “These high interest costs make budget problems even worse – which is not at all in the interest of the IMF.” A country like Pakistan, which barely has any reserves left, pays “full price” to the IMF. “Something like this is not morally defensible, but it is also not smart geopolitically: the IMF has become too expensive, debtor countries are then more likely to turn to China,” says Tordoir.
Sovereign debts have skyrocketed worldwide in recent years, partly due to the Covid-19 pandemic. A fifth of emerging countries and more than half of the poorest countries are at risk of defaulting on their debt, IMF chief Georgieva said recently.
The IMF interest rates differ per country and per program. The IMF base rate, based on interest rates in five major currency areas (US dollar, euro, Japanese yen, Chinese renminbi and British pound), was just above zero two years ago, now at 4.15 percent. On top of this there will be a margin to cover the costs of the IMF. Countries that borrow a lot or for a long time pay an interest surcharge (surcharge), intended as an incentive to get the budget in order. The poorest countries, such as Haiti or the Democratic Republic of Congo, borrow from the IMF at zero interest, from a special poverty desk.
Although market interest rates are falling again – the IMF interest rate follows with some delay – rates for most IMF-supported countries remain very high, says Tordoir, while the debt problem in the world is only increasing. He therefore advocates a temporary ceiling for the IMF base interest rate.
Hilbers, the Dutch IMF administrator, sees no signs that high IMF interest rates are worsening budget problems in countries. He has “some doubts” about the “image that the IMF is too expensive.” “The poorest countries borrow from us at a zero rate. In the other countries, they were very cheap for a long time, and are now a bit more expensive.” IMF programs often only represent a small part of what countries pay in interest, says Hilbers. “Our programs act as a catalyst: once we have given our confidence to a country, other lenders come forward. They often ask for lower interest rates.”
But according to Tordoir, the IMF’s high interest rates, and the burden this places on countries, actually deter other lenders.
Hilbers admits that there are “countries that find interest rates too high.” But, he says, “you also have to remember: the IMF has its own special role. The IMF intervenes when countries encounter payment problems and helps to adjust the economy. Poor countries receive subsidies, and our programs take social aspects into account, but we are not essentially a development organization.”
Reading list