The bipartisan agreement struck by the US government to avert threats of a shutdown undermines the International Monetary Fund’s status as a truly multilateral institution. 

The good news is that a bipartisan agreement on funding the US government should avert further threats of a shutdown. The bad news is that the package left out a capital increase for the International Monetary Fund (IMF) and so scuppered essential quota and governance reforms.

The result is that the IMF’s legitimacy as a truly multilateral institution has been tarnished and the drive towards regional alternatives will be stepped up.

The irony is that the US was the force behind the IMF reforms and failure to implement them undermines efforts to get the larger emerging markets to shoulder more of the burden of future programmes. The implicit contract at the G-20 was that the richer emerging markets would provide more largesse in return for a fairer distribution of quotas and a more representative IMF executive board.  

Currently Europe is over-represented at the IMF and this plays badly in the emerging world when recent programmes have been focused on Europe. There is concern as to whether they are being put together with the same robustness as the ones that accompanied the Asia crisis of the late 1990s.

As is so often the case in the US Congress, IMF funding got caught up in horse trading over various domestic budget issues with no relevance to multilateral lending. But the emotional idea of US taxpayer money being used to bail out feckless overseas governments obviously holds sway with some Republicans, even though the IMF deal did not involve new money, only the conversion of existing loans into capital. Furthermore, in any IMF programme, the IMF is always the first creditor to be repaid so its funds are probably the most secure on the planet.

Disappointed comments from emerging market officials have been accompanied by suggestions that alternative arrangements – the BRICS Development Bank and the Chiang Mai Initiative on currency swaps lines – may fill any void if the IMF’s position becomes permanently weakened.

But there is another alternative – the IMF goes ahead with a capital increase that does not involve the US, so losing the US government its controlling stake and power of veto. Is that what the Republicans had in mind?

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