Although big crises demand big solutions, transforming the IMF into the world’s leading fiscal body would require adjustments to ensure equity between developed and developing countries.
Rotterdam – The current health crisis has revealed the importance of coordination on a global level. COVID-19 is demonstrating that the efforts of one government can affect the health of citizens on the other side of the globe, as well as the inefficiency of national central banks’ responses.
Times of deep crisis may be turned into times of deep reform. Some world leaders are capitalizing on the opportunity, raising their voices to call for creating a truly global, centralized, multilateral fiscal body. Transforming the International Monetary Fund (IMF) appears the leading way to achieve centralization.
Special times, special measures
Governments worldwide have already called on the IMF to make use of its Special Drawing Rights (SDRs) mechanism during the pandemic. SDRs are a “basket” of international currencies that serve the role of a reserve asset and may be used in times of crises—as SDRs were in the aftermath of the 2008 financial crash.
The measures available in regular times, or for “regular” crises, are not suitable for the COVID-19 pandemic and most likely will not suit the climate crisis. Voicing these fears and pointing to the inadequacy of regional responses, prominent economists Gordon Brown and Lawrence H. Summers called for IMF reform in an April 14 Washington Post column.
The two economists envision the IMF expanding Special Drawing Rights to the role of an international currency. Such a development would transfer the governmental power and responsibility for crisis mitigation to the IMF. Not only would a centralized IMF be more efficient in managing global crises, but it would also ensure an adequate response, the economists add, highlighting that many developed countries’ governments have failed in effectively financing the current crisis.
Morocco may find the IMF as the world’s centralized bank beneficial—but only if the fund undergoes major changes and distributes the power-sharing more equally.
Morocco, the regional ‘getaway’
The IMF and Morocco have enjoyed an amicable and mutually respectful relationship for over 60 years.
The North African country received its first Precautionary and Liquidity Line (PLL) loan, of $6.21 billion, in August 2012 to protect the country from swinging oil prices. The second loan, worth $5 billion, came in July 2014. The IMF approved the third in July 2016 at a value of $3.42 billion. The fund granted each loan for a period of 24 months.
PLL is a fiscal instrument designed to support the liquidity needs of member countries that have a strong economic basis, yet remain with some economic vulnerabilities. Dominique Guillaume, the IMF’s mission chief in 2012, compared PLL to an insurance policy “in the event of external shocks or a worsening international situation.”
Morocco purchased all available funds on April 20 as a fourth PLL lending. The loan, worth $3 billion, will help mitigate the effects of the crisis on the country’s economy. COVID-19 hit Morocco’s main source of foreign currency—the tourism industry—the hardest, causing an unparalleled drop in earnings, but Morocco did not request SDRs.
IMF officials have widely praised Morocco as the “source of stability in the [MENA] region” and as “a gateway between Africa, Europe, and the Middle East.” Morocco’s “economic vulnerabilities” manifest mostly in social inequalities regarding education and access to the labor market, according to the bank.
Morocco will be the first African country to host the Annual Meeting of the World Bank Group and the IMF in 47 years. The meeting will take place in Marrakech in October 2021. Christine Lagarde, the IMF’s managing director, declared in a speech during the official signing ceremony that Morocco is “a country that perfectly illustrates the convergence of the humanitarian values that unite us all.”
IMF as the world’s centralized bank
Special Drawing Rights are crucial to the idea of making the IMF the world’s centralized bank. At the moment, they are international reserve assets in the form of five major global currencies. The distribution of SDRs follows the voting power distribution in the IMF: It varies depending on a member state’s financial contribution to the shared pool. Currently, the US contributes the most, so the country enjoys a 16.5% voting share.
The current distribution is unfavorable for developing countries with lower contributions. One can speculate that this is why Morocco opted for PPL, not SDRs, in the time of COVID-19.
Making SDRs an instrument of reserve that would be exchangeable in the international arena is the revolutionary idea that Jose Antonio Ocampo, a Colombian politician and economist, introduced in 2019. In his note on the IMF’s website, the economist mentions the benefits of such a change: Empowering countries to create an international currency, reducing demand from emerging economies for foreign currency as “insurance” (which is how Dominique Guillaume described Morocco’s PPL loans), and making the international monetary system more independent from US policies.
The move to make the IMF the world’s centralized bank would only succeed if inspired by the aim to realize true equity between countries. To ensure such equity, the member states would have to agree to scrap the quota system, a development that appears highly controversial to the US. Developing countries currently need to subordinate to the IMF’s lending conditions, which do not always prove beneficial for the borrowing states.
A common criticism against the IMF’s policies is the austerity measures that come as the loans’ conditionality. For example, in the COVID-19 context, the measures proved dangerous in Sierra Leone. The East African country has 0.2 doctors per 1,000 inhabitants because the government had to cut public spending following the IMF’s structural adjustment policy in the 1990s.
Nezha Lahrichi, a prominent Moroccan economist, warned against Western-style austerity measures as they could lead to “social disasters.” Her words find confirmation in the recent social tensions in Algeria, as described in the 2019 IMF “Global Development” report.
Establishing the IMF as the world’s centralized bank could work, but only if its transformation ensures a way for every country, regardless of economic status, to participate equally and in a manner that allows for prioritizing their citizens.