US approval of IMF reforms likely to impact Asia significantly

Tokyo

A RELATIVELY low-key announcement made at the weekend by the International Monetary Fund (IMF) on financial "quota" and governance reforms at the Washington-based institution could have major significance for Asia - China especially - in 2016, according to informed sources.

The reforms, delayed for five years by a US Congress wary of the IMF's role in global monetary and financial affairs, were finally agreed at a time when US influence on Asian economic development is being challenged by the China-led Asian Infrastructure Development Bank (AIIB).

Under the reforms, China will see its status in the IMF rise from sixth to third largest member behind the US and Japan, and its voice in the Washington institution will increase proportionately. This follows a decision to admit China's renminbi to the IMF's special reserve currency, the SDR.

For China, whose decision to launch the AIIB appears to have been motivated partly by its failure until now to secure more say within the IMF, these two moves will strengthen its position in influencing global monetary affairs - a long sought-after objective of Beijing.

The timing of the unexpected announcement on quotas and governance is more than coincidental, sources said. "The event related to this is (the launching of) the AIIB", which is expected to begin business early next year, a former IMF deputy managing director told The Business Times.

"The AIIB will begin operating without US participation - which will certainly impact the legitimacy of Bretton Woods institutions (the IMF and World Bank) and US influence," he said. "There are some in the US who believe it was a mistake for the White House to decide against joining the AIIB."

US engineering and construction giants fearful of losing out to competitors from the 57 countries that have joined the AIIB when bidding on multi-billion-dollar projects have probably influenced Congress's decision to support China-benefiting reforms at the IMF, sources suggest.

Washington could opt to join the AIIB (whose doors are still open to new members, according to president-designate of the Beijing-based bank Jin Liqun) under a new US president in 2017. In that case, Japan - the only other major holdout against joining the AIIB - would probably follow suit.

The significance of the decision by the Republican Party-dominated US Congress to free up funds for the IMF may also be related to the fact that emerging markets are coming under considerable financial and other stress as their growth slumps, and some could require emergency assistance.

Under proposals originally agreed by most IMF members in 2011, the IMF will see its quotas double from approximately 238.5 billion SDRs (Special Drawing Rights) to approximately 477 billion SDRs (US$670 billion at current exchange rates) and its financial muscle improve accordingly.

Mainly because of US Congressional opposition to the 2010 reforms, the IMF has had to use special borrowing arrangements as bridging finance to help maintain operations at a time when demand on its resources is growing - and could accelerate sharply.

US Congressional approval of the reforms is "a welcome and crucial step that will strengthen the IMF in supporting global financial stability", IMF managing director Christine Lagarde said. They "significantly increase IMF core resources,enabling us to respond to crises more effectively".

The reforms also "improve the IMF's governance by better reflecting the increasing role of dynamic emerging and developing countries in the global economy", she said. "A more representative IMF will be better equipped to meet the needs of all its 188 member countries in the 21st century."

The moves will shift more than 6 per cent of quota shares from over- represented to under-represented "dynamic emerging market and developing countries". China will become the third largest member while Brazil, India and Russia will be among the 10 largest shareholders.

Quotas are a central component of IMF financial resources, says the IMF. "Each member is assigned a quota based on its relative position in the world economy. A country's quota determines its maximum financial commitment to the IMF, voting power, and has a bearing on its access to IMF financing."

The relatively sudden decision by Congress to free up funds for the IMF could have even more far-reaching significance for the future, some sources close to the IMF have suggested to BT.

There could possibly be a "deal" whereby Europe, which has long dominated the IMF and supplied its managing directors, would renounce this unwritten right while the US does the same in respect of World Bank heads. IMF first deputy managing director David Lipton has suggested that the next head of the IMF will not be a European.

Ms Lagarde's term of office is due to expire next July and while she has indicated that she is "willing" to serve another term, she is still the subject of legal investigations in France related to her term as finance minister there from 2007 to 2011.