International payments: The silence of the Fund

3 June 2022

The International Monetary Fund (IMF) laments the risk of deglobalisation. At the IMF Spring Meetings in April, it warned about a fragmentation of the global economy. At Davos it did the same. Yet it remains vague and distant to possible remedies to arrest such trends. As the only multilateral institution with some though declining heft, the silence of the Fund is problematic. It has repeatedly failed to address the flagging governance of the institution and has not taken any visible measure to advance international payments reforms. Both are critical to avert deglobalisation.

IMF Managing Director Kristalina Georgieva co-authored a blog post also presented at Davos citing four priorities for restoring trust in the global system. One is to improve cross-border payments by “countries working together to develop a global public digital platform to connect various forms of money including central bank digital currencies.” In addition, it outlines the need to “reshaping global cooperation and resisting fragmentation” through better governance at the multilateral institutions. In both the Fund lacks either a meaningful initiative or needed progress.

The IMF has remained on the side-lines of the debate about improving international payments. This is astonishing given that it is one of its core competences. The Fund has not engaged in any institutional proposal to improve international payments to accommodate new use cases and harness financial innovations. The recent allocation of SDRs has added international financial resources but to an unused facility that entrenches existing deficiencies. Menacingly, U.S. Secretary Janet Yellen recently stressed that the IMF needs to change to address modern-day challenges. The Bank of International Settlements (BIS) has taken up the slack, setting up a series of BIS Innovation Hubs, to support central banks with the adoption of digital currencies.

The idea of a global digital payment platform is sensible. The Fund could be the institution to drive formulation and adoption of such a platform to overcome possible coordination costs. Such a platform could help for example to mobilise a broad range of national currencies to help conduct international payments. While the Fund had been established with a view to use the currencies of all its members, including through arcane constructs like scarce currency provisions, its operations have been relying mostly on a most narrow set of currencies undermining rather than supporting the proliferation of national currencies. A common platform could help using a greater variety of currencies towards a more diversified and resilient international monetary system raising incentives to participate in such system.

The IMF has struggled to advance needed governance reforms. IMF member countries hold quotas representing the financial and governance structure of the institution that determine among other the voting share of each member country. Quotas are broadly allocated on the basis of the relative position—other variables also play a role—of a country in the world economy such that big economies have a big say. The IMF acknowledges that the quotas are no longer aligned with economic weights causing some countries to be not adequately represented in its decision making. While the Fund aspires to be governed by consensus, for difficult decisions and in particular where super majorities are needed, voting power counts.

China remains significantly under-represented at the Fund. China’s share in world GDP is 19.5 percent and yet its voting share is 6.1 percent just behind Japan (IMF). The U.S as the biggest economy at 24.8 percent of world GDP has the largest voting share at 16.5 percent. It means that while the U.S. economy is about 1.3 times bigger than China’s its voting share is about 2.7 times bigger. However, the U.S. has been under-represented at the IMF for decades to allow voting shares to be reallocated while preserving a voting share greater than 15.0 percent critical to be able to veto the most important decisions at the Fund that require an 85.0 percent majority. The countries that are most over-represented are Japan, France, Germany and Italy. While the E.U. represents 16.8 percent of world GDP it has 24.5 percent of the voting shares. Efforts to align China and reducing the E.U. though not only the E.U. have proven elusive with the last quota reform agreed in 2010.

The expected changes in the global economy ought to catapult the Fund into action. The challenges at hand are those for which the institution was made. The IMF sits at the centre of the international monetary system and should drive needed changes in international payments and governance. The IMF could take up the initiative and build a global public digital platform to promote economic and financial integration. It needs to convince its membership that further quota reforms are necessary to strengthen cooperation. Otherwise, it risks seeing its relevance erode further with countries seeking increasingly alternative arrangements. The Fund’s silence risks advancing deglobalisation itself.

Economics Advisory, June 2022