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The IMF inflection point

China has in the past felt compelled to accept the terms of IMF programmes in struggling nations without due consideration of its own views.

Photo: iStock

The IMF stands at an inflection point. A war is raging in Europe, and clamour is growing for the Fund to assist in meaningful scale.

At the same time, its role in supporting economies struggling under more conventional financial pressures is also being challenged by what is now the biggest lender to poor countries, China.

Can the Fund respond to both challenges? Can it respond to either?

Ukraine presents the clearest case. IMF programmes have traditionally required a visible plan for debt sustainability before being agreed. Such a plan is patently impossible for Ukraine, resulting in the cancellation of the IMF’s previous standby programme after Russia launched its invasion.

It is imperative that the pace of individual countries’ restructuring discussions be accelerated

What the IMF needs, as Ukraine’s debt management chief Yuriy Butsa tells us in this issue, is a new toolkit.

It may also need a new approach in other areas too. Over the past 15 years, China has emerged as a formidable actor in the international lending sphere.

In 2006, the Paris Club’s share of the public debt of low-income countries stood at about $50 billion, or about 75%. China’s share was less than $10 billion.

Fast forward to the end of 2020, and the Paris Club was at a little over $60 billion but China had ballooned to more than $110 billion, accounting for about 60% of the total.

Its Belt and Road Initiative (BRI) has recently paused its headlong financing of emerging-market infrastructure, as our feature this month explains. Nevertheless, the programme has simply moved into a different phase – one that is no less impactful, given the influence the country has bought around the world by virtue of its lending power.

Bitter medicine

A network of client states, many of whom are struggling under the weight of debt, must now engage with China, seeking flexibility or forbearance and swallowing bitter medicine in return.

Unlike with IMF agreements, however, it is less clear what countries seeking assistance from China must do in return. What may initially appear to be a more attractive prospect than an IMF-imposed programme of reform may be nothing of the sort in the long term if it merely postpones corrective action – or avoids it entirely.

The West has been slow to grasp China’s reach and its determination. Belated attempts by Western nations to compete in the area of infrastructure investment will struggle more than ever now that the developed world is battling inflationary problems at home.

China is the biggest bilateral lender to a string of economies that are currently engaged in debt restructuring negotiations, including Sri Lanka, Suriname and Zambia. The greatest challenge, say those involved in working through these restructurings, is engaging with China and its lending institutions.

There can be little doubt that some of that intransigence will be down to China’s longstanding perception that it is under-represented and under-respected within the IMF, where it has just over 6% of voting power, just behind Japan and far from the 16.5% wielded by the US.

China has in the past felt compelled to accept the terms of IMF programmes in struggling nations without due consideration of its own views. It has a marked preference for extension of debt rather than haircuts, for example.

China’s presence in the G20 Common Framework for debt restructuring is at least encouraging. But it is imperative that the pace of individual countries’ restructuring discussions be accelerated. The fact that negotiations over Suriname and Zambia have been going on for years is disastrous to those economies.

As the IMF approaches the end of its eighth decade, it must embrace the need to engage more nimbly with both of these formidable challenges. This is its moment: for the sake of the world’s most pressured economies, it must grasp it.

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