IMF Reform Moves Forward

There are reports this morning that House and Senate legislators have included language authorizing U.S. support for International Monetary Fund (IMF) reform in the $1.1 trillion spending package funding the government for the rest of FY16.  If this language reaches the president’s desk and is signed into law, it would be an important achievement and a positive reflection on the perseverance of U.S Treasury officials and congressional leaders to get this deal done. The package—first agreed to by the Obama administration in 2010—changes voting shares and governance for the institution at a critical time, bolstering the IMF’s credibility and its ability to play a lead firefighting role at times of crisis.  Failure to pass the legislation had become a substantial irritant for U.S. influence internationally, and resolving this is a win for good global economic governance.

The price the administration paid included a commitment to seek to eliminate the “Systemic Exemption”, the rule that since 2010 has allowed lending even when there was a risk that the debt was unsustainable, and that was used to support loans for the periphery countries of Europe.  I have supported the rule, which recognizes the inevitable risk involved in these large scale programs where there are broad systemic effects, but giving up the rule is a small price to pay to get IMF reform passed. Should a global crisis threaten in the future, the IMF may again need to bend their rules to respond effectively. That discussion now will begin with a clean sheet of paper, and Congress will need to be informed. The administration also has promised to report to the Congress ahead of any vote supporting a large lending program.  While these commitments add an extra layer of process, I agree with others that requiring clear explanations before and after the use of such a policy can strengthen the legitimacy of such policy decisions.

The idea for this trade--IMF reform for the Systemic Exemption--originates with John Taylor, and I gave it a strong endorsement when I testified before the Senate Foreign Relations Committee earlier this year. Quietly, as a footnote to the broader budget deal, good policy is being made.