IMF needs a lending hand to be relevant

IMF is losing its relevance as a lending agency to struggling economies because of the lopsided quotas that govern how much it can lend and to whom. Advanced economies that have little need for IMF loans hold most of the quotas. The multilateral lender conducts periodic reviews to increase the overall size of quotas and its distribution among member countries. This process is slow, and emerging economies such as India want it to get a move on. This faces a pushback from, say, the US that is loath to trim its biggest quota and veto rights. G20, which is the most powerful lobby available, has been treading cautiously on IMF reform. The current round of quota review is three years overdue, while successive global financial crises push the UN financial agency further towards the margins.

Bilateral lending has become the option of choice for distressed borrowing nations. IMF, too, finds itself lending an undue amount of money borrowed from rich members. These go against the basic principle of founding IMF – multilateral lending with fewer strings. Since the voices that carry at IMF have less skin in the development game, conditions follow a template. Emerging economies appreciate the burden of IMF conditionalities – having faced some of it themselves – and are creating their own pools of pliant collective credit as a backstop. Neither bilateralism nor regionalism can, however, do justice to the role IMF was created to play.

India, as rotating G20 president this year, has put considerable effort into forging consensus on reforming the governance of multilateral lending institutions. Its call for an overhaul of IMF’s quotas is timely in an environment of debt distress. The fund agency faces a stark choice: reform or risk irrelevance.