(Ecofin Agency) - The IMF's spring meetings in Washington, D.C., provided an opportunity for financial and economic policymakers to discuss the challenges they face. At the end of a meeting on the sidelines of that event, G-24 countries took stock of the multiple crises and shocks that threaten the world and proposed solutions.
Last Tuesday, the Group of 24 (G-24) met on the sidelines of the International Monetary Fund (IMF) spring meetings. At the end of the discussions, the organization recommended some reforms aimed at enabling the IMF to address some pressing economic and financial challenges.
In its final communiqué, the group called on the IMF to apply a strategy to improve global liquidity in a context where many developing countries are still struggling to secure the financing needed to ensure economic resilience. To this end, the G-24 suggested a reform of the IMF's precautionary financing instruments such as the Flexible Credit Line (FCL), the Precautionary Liquidity Line (PLL), and the Short-Term Liquidity Line (SLL), including raising the SLL access limit. It also believes that additional drawing rights should be allocated to strengthen government reserves.
“An additional SDR allocation would mitigate balance of payments (BOP) and debt crises, including by lowering countries’ borrowing costs. However, any new allocation of SDRs must be accompanied by a commitment from countries with large quota shares to increase the level of re-channeling of new SDRs to countries most in need,” the communique reads.
This proposal comes at a time when rich countries are still unable to fulfill their commitment to reallocate $100 billion of their SDRs to support needy countries. The IMF places solidarity at the heart of its activities. However, many observers estimate that it needs concrete and proactive actions because, since the Covid-19 period, rich countries are slowing their support of its initiatives. Those proactive actions are needed more than ever because new crises are exacerbating financing needs worldwide.
"We reiterate our call for additional pledges from willing countries to re-channel their SDRs to meet the global ambition of USD 100 billion of voluntary contributions. While this would support more concessional lending from the IMF, it would not be enough to meet the urgent need for financial support. Therefore, an urgent solution towards addressing global liquidity is required. We encourage exploring other viable mechanisms to voluntarily channel SDRs including through regional development banks (RDBs), multilateral development banks (MDBs), and through regional financing arrangements," the G-24 indicated.
Reforming the quota system and suspending surcharges
Despite their large numbers, developing countries have just a small share in the IMF quota system. For instance, despite being the continent with the largest number of countries (54), Africa is entitled to about 6% of shares in the Fund’s quota system. This situation creates inequalities in the distribution of resources, particularly in times of crises when support resources are allocated. In 2021, when the IMF approved $650 billion in special drawing rights to boost global liquidity, African countries found themselves with just $33 billion. This amount was far below their needs while rich nations found themselves with significant funding that was not urgently needed as they had already deployed strategies to deal with the crises the SDRs were approved for. Faced with that situation, the IMF had to propose a voluntary reallocation, which has not yet been implemented.
During its April 11 meeting, the G-24 suggested reforming the Fund's quota system to definitively address this problem in anticipation of the crises that a growing number of experts are predicting.
"The fundamental goal of quota and governance reform should be to enhance the voice and representation of EMDEs, at the same time protecting the share of least developed countries (LDCs) while shoring up IMF finances. Therefore, the review should recognize the growing weight of EMDEs in the global economy, but not at the expense of other EMDEs," said the G-24, which hopes that the reform will be adopted this year. This reform "should provide enough resources to allow the IMF to comply with its mandate with quotas as the main source of financing, while leveraging borrowed resources that have worked well and remain a more efficient means to cover tail risks in the future,” it advises.
The G-24 also advises suspending surcharges. Introduced in 2000, the surcharge is an additional interest system to levy additional fees on loans that exceed a defined percentage of borrowing countries’ quotas.
“Due to its regressive and pro-cyclical character, we reiterate our calls for a comprehensive review of the policy to partially compensate the substantial increase in the financing burden of membership while allowing for the required accumulation of precautionary reserves in the medium term. The review should consider a suspension of surcharges [...] or their elimination. We underscore that in the medium term, the IMF should review its income model to reduce reliance on income from lending,” the group wrote.
Improving the Representation of Sub-Saharan Africa
In its advocacy, the G-24 called for an additional seat for Sub-Saharan Africa on the IMF board.
"We reiterate our calls for the creation of a third chair for Sub-Saharan Africa on the IMF Executive Board to improve the representation of the region. This should not come at the expense of other EMDE and LDC chairs," the G-24 members said. This call echoes that of several African leaders, including Ivorian President Alassane Ouattara, former IMF Africa Director, who, in 2021, asked the Fund to adapt to the times.
Moutiou Adjibi Nourou