Fifty years have passed since the International Monetary Fund last held its annual meetings in Africa — in Nairobi in 1973. The last half century has brought astounding changes in the economic development of emerging economies such as sub-Saharan Africa, but also in the role of the IMF.
In 1973 the IMF was pretty much the only non-partisan lifeboat for emerging and developing countries. But the last decade has seen the rise to prominence of the Brics group of emerging economies led by China, the world’s second largest economy, along with Brazil, Russia, India and South Africa.
China has used its leadership of that grouping — as well as its own vast resources — to direct financial assistance to emerging markets and developing countries (EMDCs), making it an increasingly important player in crisis resolution.
This has been exemplified by the debt crisis in Zambia, which defaulted in 2020. A deal to restructure billions of dollars of debts was held up by an impasse between new creditors such as China and Western lenders. The IMF could not lend again until Zambia’s debt was “sustainable”, and for that, it needed “financing assurances” from China, which is owed $4.1bn.
In June, Zambia finally secured a restructuring agreement with its official creditors on $6.3bn of external debt. The deal was struck under the G20 Common Framework, which had been set up to bring together members of the Paris Club of mainly Western bilateral country lenders with these new creditors.
IMF managing director Kristalina Georgieva hailed the Zambia deal as a “significant milestone” for the Framework, when it unlocked a $1.3bn IMF bailout of the world’s second largest copper producer.
This is unlikely to be the last such pact. Chad, Ethiopia and Ghana are also operating within the Framework, while Sri Lanka and Suriname are undergoing debt restructuring as part of IMF rescues. Egypt, Nigeria, Kenya, Tunisia and Argentina have all been subject to default speculation this year.
According to Fitch Ratings, there were 14 separate sovereign default events in nine countries over the three years from the start of 2020 to March 2023. That is a marked increase in pace compared with 19 defaults in 13 countries between 2000 and 2019.
But the fact that the Zambia negotiations took three years will heighten the pressure on ministers at the IMF annual meetings to strive for a more streamlined debt resolution system. According to Hung Tran, non-resident senior fellow at the Atlantic Council’s GeoEconomics Center, further improvement on the sovereign debt restructuring framework will be on the table.
“The focus should be to switch from procedures and processes to focus more on substance — and substance is the degree of relief that countries should be prepared to give to debtor countries, to really meaningfully help them to cope with the difficulties,” says Tran, a former executive managing director at the Institute of International Finance and former deputy director at the IMF.
“That should be on the table, but how much agreement can we expect? I don’t expect a lot, but on these kinds of issues, continued pressure and visibility on a topic is important to get countries to feel that they need to move on.”
Staff of the Fund and World Bank should propose a roadmap to flesh out the Common Framework, Tran adds. It would specify a timeline of steps to be taken when a debtor country requests a restructuring, to give all stakeholders a sense of what to expect.
Building Brics
Two months after helping secure the Zambia deal, China used the 15th summit of the Brics nations to show that this association is positioning itself to exert more influence over the global economic trajectory and its decision-making processes.
At the summit in Johannesburg, the Brics admitted six new members — Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates — doubling its tally (and creating an acronym headache). The group also revealed that another 16 countries had formally applied to join, while a similar number had expressed interest.
The expansion of the Brics means it is likely to play a more significant role on the global stage and act as a counterpoint to the Group of Seven rich nations in international fora such as the IMF.
One aspect of the Brics’ ambition is to provide an alternative to the IMF. To that end, the Brics will make greater use of their Contingent Reserve Arrangement, according to Tran. This facility — which currently has funding of around $100bn, based on contributions by the first five members — aims to provide protection against global liquidity pressures.
Tran says it will, to a small extent, provide an alternative to the Fund by making loans of last resort and offering a financial safety net to countries in crisis. “I think that facility will be expanded to include more countries and … [especially] if in tandem with China stepping up the use of its half a trillion dollars of bilateral currency swaps, will be somewhat complementing — or even competing with — the IMF over emergency lending,” he reckons.
But he warns that the Brics’ potential will be stymied by competition between China and India over the direction it should take. China, with the support of Russia and new member Iran, will want it to become an organisation to support an “anti-US and anti-West polemic agenda”.
India, on the other hand, wants to become the voice of the Global South and focus on their needs, such as reform of the international financial institutions, efficient sovereign debt restructuring and climate financing. “These are concrete, practical issues, meeting the development needs of developing countries in the Global South.”
Quota review
But the Brics also have policy aims within the IMF. The Fund’s ability to provide a global safety net is about having resources as much as well oiled machinery. Georgieva has pointed out that financial reserves are very unevenly distributed between countries and dwarf the pooled reserves centred on the IMF. But boosting the Fund’s reserves will mean opening up another long-running rift between developed and emerging members.
One way would be to increase the amount of money each puts into the Fund. Every nation has a “quota” denominated in Special Drawing Rights (SDRs, the fund’s own currency) that determine its share in the Fund, how much it can borrow and its voting power.
But even after its recent expansion, the Brics members will hold 18% of the votes on the IMF’s executive board, less than the 41% held by the G7 and 55% in the hands of all advanced economies.
The Brics’ declaration called for a “quota-based and adequately financed IMF” at the centre of a global safety net. But it added: “Any adjustment in quota shares should result in increases in the quota shares of EMDCs, while protecting the voice and representation of the poorest members.”
The IMF’s board of governors conducts a quota review roughly every five years to address both the size of any overall increase and its distribution between members. A review in early 2016 doubled the total amount and made a 6% shift towards fast-growing emerging and developing nations.
The US, the Fund’s largest shareholder, sees the need for an increase in quota funding for the IMF that will make it less reliant on bilateral funding. While quotas provide around $630bn, that is just under half the Fund’s total resources. The balance is of made up $483bn under the New Arrangement to Borrow — multilateral credit provided by 38 advanced and emerging economies — and $188bn of bilateral borrowing arrangements.
“We must make sure the IMF has the resources it needs to lend,” said Jay Shambaugh, under-secretary for international affairs at the US Treasury, in a speech at the Center for Global Development thinktank in Washington, ahead of the annual meetings. He supported “a proportional increase in quotas [that would be] allocated to all members in proportion to their existing shares.”
Opaque lending
Shambaugh went further, saying the US would also support changes to the quota formula to make it more reflective of the global economy. The review is due to be wrapped up by the end of December, so will be a live issue this week.
In an essay for the Council of Foreign Relations thinktank, Georgieva said an increase in quotas would aid emerging and developing economies and reduce the Fund’s reliance on temporary credit lines.
“It is essential that the IMF’s membership come together to bolster the institution’s quota resources by completing the review by the December deadline,” she urged.
However, as Tran at the Atlantic Council points out, any increase in permanent resources is “married to the question of how you distribute the quota so as to change the voting powers. If you want to give a percentage point to developing countries, you have to reduce the share of the other countries.”
The US, whose quota edged down to 16.5% at the last review, will want to ensure it keeps enough votes to be able to veto any IMF decision that requires an 85% majority. Meanwhile, advanced European economies ceded enough votes at that review to cost them two seats on the executive board.
“They absolutely do not want to go any further now,” Tran says.
The US appears willing to give more weight to dynamic emerging markets, but ties that to concerns over certain emerging economies’ stances.
“An important part of that process will be that all countries, especially those that would see an increase in their share, are respecting the roles and norms of the IMF,” said Shambaugh.
He pointed to countries “not playing by the rules of the game” by offering “opaque” loans that can make it harder for countries to escape from debt distress. “If you’re doing a lot of lending, you need to recognise when that lending has gone bad, and work globally to get a country out of that position.”
Discussions over these issues in Marrakech look certain to be difficult, and hopes for a breakthrough are not high.
As Tran says: “If nobody is willing to give, then nobody will get. So I think that, given the geopolitical competition and tension we see now, I don’t see any progress on this front.”