Markets Wired

As Prepared for Delivery

Thank you, Nancy, for the introduction. And thank you to the Center for Global Development for hosting me.

Our meeting comes at an important moment for the international financial architecture.  One year ago, Secretary Yellen stood right here, at the CGD, and shared her ideas on development finance.  She issued an urgent call for the evolution of the multilateral development bank system – for bold action to meet the challenges of the 21st century.  The United States led this call, and we are now part of a broad coalition – with fellow shareholders and with MDB management and staff – so that the evolution agenda delivers in tangible ways for emerging markets and developing countries.

Today, I want to focus on the IMF to complete the picture of how the Treasury Department sees international financial institutions delivering for emerging markets and developing countries.  I want to share my vision for the IMF and discuss how it can be strengthened to meet the challenges facing the global economy.

The Role of the International Monetary Fund

Since its founding, the United States has strongly supported the IMF both for the good of the world and because we have recognized that we benefit from greater growth and economic stability in the rest of the world.  Stronger economies abroad and sound policy advice from a high standards international organization help raise living standards around the world and are very much in the U.S. national interest.

Established in 1944, in the wake of the Great Depression and second world war, the IMF was charged with overseeing the international monetary system – to help maintain exchange rate stability and support global growth.

Decades later, the fixed exchange rate system under Bretton Woods gave way to new exchange rate arrangements, and the IMF adapted its role and its policy advice to fulfill its mandate of overseeing the stability of the international monetary system.  It helps monitor exchange rate developments, guides countries through challenging macroeconomic issues, and works to facilitate financial stability and economic growth.

The IMF has been an invaluable – and indispensable – partner.  

Time and time again, the IMF has adapted to the needs of the moment, without shying away from undertaking institutional reforms to make it fit for purpose.  It is as essential today as it was at its founding.  Even if it did not exist, we would need something like it nonetheless.

This is why we are making a commitment to reinvest in the IMF. This year, we will support an increase in quotas – for a broad increase across all members – with the goal of strengthening the IMF as a shareholder institution at the core of the global financial safety net.  

We are pressing forward to meet the financing needs of the Poverty Reduction and Growth Trust, so that the IMF can continue to lend to low-income countries now and in the future.

We want to work with IMF shareholders and management on ways to elevate the voices of emerging markets and developing countries.  

We want to make sure the IMF delivers on its core mandate of surveillance, capacity development, and lending, and demonstrates a strong track record of guiding countries back onto sustainable macroeconomic trajectories.  

We also need the IMF to play its role in an unflinching and rigorous way so that countries make needed adjustments to bring their economies to a sound footing.  No other institution can provide macroeconomic guidance along with funding to steer countries to better macroeconomic outcomes.  

Macroeconomic Challenges and Priorities

Let me set the current context.  Our discussion comes on the back of two massive global shocks—the loss of life and economic disruption from the COVID-19 pandemic; and the destruction, elevated energy and food prices, and other spillovers from Russia’s illegal and immoral war against Ukraine.

For emerging markets and developing countries, the impact of these shocks has been especially severe.  First came the immense fiscal needs to support individuals and families during the pandemic.  Then Russia’s war against Ukraine led to a spike in commodity prices, putting further pressure on public finances and creating food insecurity for many.  Heightened debt vulnerabilities and tighter financial market conditions limited access to international capital markets.

The IMF responded quickly and forcefully to these shocks.  It tailored its lending toolkit to provide emergency financing at an unprecedented scale to countries facing acute economic downturns.  It stood up new facilities to meet growing balance of payments pressures from the food crisis and mounting transboundary challenges, such as climate change.  And it has played a key role in implementing G20-led initiatives on debt service suspension and debt relief, including by co-chairing the Global Sovereign Debt Roundtable to address key bottlenecks in the debt restructuring process.

The IMF is full of incredibly talented people who can contribute positively to a wide range of challenges facing the global economy, but we cannot let the temptation to address every problem pull the IMF away from its core mission of macroeconomic and exchange rate surveillance and guidance.  That mission is too essential to stray from.

Often, the IMF can best contribute to new challenges through its core mission.  Take climate as an example.  Through strong macro guidance, the IMF can help countries undertake fiscal reforms to reduce distortionary energy subsidies that also have bad climate outcomes.  It can help countries strengthen their macroeconomic frameworks so that they can return to market access and better mobilize private capital to invest in climate resilient infrastructure.  Through capacity development, it can help countries better raise revenue, which is crucial for macro stability, but also an essential part of funding both climate mitigation and adaptation.  When climate risks present a balance of payments strain, the IMF can provide lending (for example, via the Resilience and Sustainability Trust).  At the same time, the IMF should not be experts on climate issues.  Instead, it should focus on macro-critical issues and rely on the World Bank and others for sectoral expertise.  In short, solving major world challenges should involve reinforcing the core mandate, not straying from it.  

IMF Priorities

In this context, I would like to lay out three priorities for the IMF.

First, the IMF must provide sound, even-handed policy advice to all members in its core areas of expertise, particularly fiscal, monetary, and financial sector issues.

Surveillance is one of the IMF’s core tools to provide this policy advice.  The IMF regularly monitors the economic and financial developments and policies of its members – bilaterally and globally.  This work is crucial for revealing systemic risks and vulnerabilities, both within member countries and with respect to the global economy, before they turn into crises.  

And it helps countries identify the right policy mix to achieve their economic objectives.  Debt overhang remains one of the most significant economic headwinds.  And many low-income countries are confronting difficult policy tradeoffs to strengthen their fiscal positions to support debt sustainability, while still achieving progress on sustainable development goals and addressing the economic challenges posed by climate change.  The IMF offers invaluable advice, including through its rigorous debt sustainability analysis framework.  

The IMF must be candid in this effort.  It must be willing to have difficult conversations with member countries, especially when there are downside risks, or policies that could have adverse spillovers to the global economy.  It must be willing to provide unwelcome advice.  This includes calling out harmful external sector policies and exchange rate regimes that distort the domestic economy and push the cost of adjustment onto trading partners.  From its founding, the IMF has been charged with monitoring exchange rates and considering how policies in one country may have spillovers to the globe.  The IMF must be clear when countries violate these norms.  The widespread belief that a major shareholder intervenes in opaque ways flies in the face of what the IMF is supposed to be.  The IMF must urge members to adopt best practices such as transparency on foreign exchange intervention.

IMF advice should address balance sheet vulnerabilities that could pose systemic financial stability risks.  This should also mean advocating for difficult policy corrections that pay dividends over time, including pressing countries to address governance or corruption issues that squander resources and limit growth.

We all have a stake in making sure that surveillance remains front and center at the IMF’s mission and that it offers effective policy advice for its entire membership – for both big and small economies.  

The IMF’s new Strategy for Fragile and Conflict-Affected States is one example where the institution has stepped up to meet members’ needs.  The strategy builds on the IMF’s longstanding experience with fragile and conflict-affected states to provide more robust, more tailored approaches to reflect the country-specific fragility context.

The IMF’s work on AML/CFT – or anti-money laundering and countering the financing of terrorism – is another example of where the IMF provides policy advice on macro-critical issues.  Effective implementation of AML/CFT regimes is essential to the integrity and stability of the international financial system, global growth, and rule of law.  

IMF surveillance is critical not only for individual members but for the global system.  For surveillance to be most effective it should also be transparent, and here, the IMF has made significant strides over the past few decades.  The IMF publishes detailed information on country data, financial membership, and Executive Board decisions.  We welcome the IMF’s ongoing efforts to boost transparency, and urge the IMF to press for greater transparency on exchange rates, borrowing and lending, and financial system data.

Second, the IMF must continue to advance its work in capacity development.  Robust capacity development, paired where needed with programs, can help countries establish sustainable medium-term macroeconomic frameworks.  IMF surveillance and lending relies on an understanding of a country’s economy which depends, at its core, on data quality and availability.  The IMF needs to uphold its rigorous data standards for surveillance, supported by valuable technical assistance to members to improve data gathering, quality, and transparency.

Capacity development has helped countries to strengthen their economic institutions and facilitate stronger macroeconomic policymaking.  This includes the IMF’s critical work in helping countries to bolster public finances, modernize their monetary and exchange rate regimes, and strengthen governance and anticorruption efforts.  Over the years, the IMF has expanded access to advice, peer-to-peer learning, and trainings with country authorities which we value and welcome.

The IMF’s assistance is increasingly needed, for example in the remote reaches of the Pacific Islands in areas such as public financial management, taking into account the impact of climate change, and financial supervision and regulation as the loss of correspondent bank relationships threaten connectivity to the international financial system.  

Third, the IMF must create and sustain high-quality lending programs.  

The IMF’s most public-facing role is that of crisis response.  When countries experience balance of payments crises, the IMF provides financing at reasonable rates to smooth over immediate liquidity needs.  It provides financial space for member countries to implement reform programs, helping them avoid choices that could exacerbate financial stresses and inequality.  And an appropriately designed IMF program, with strong policy credibility, can help catalyze financial flows over time from other parties, particularly the private sector.

In response to the pandemic and Russia’s war against Ukraine, the IMF rapidly scaled up emergency financing to help countries in a time of crisis – to weather these acute exogenous shocks.  This lending helps not just the individual members, but the global economy as well.  

As countries look toward recovery, we are encouraged that more countries are transitioning away from emergency financing assistance, and instead are seeking high-quality programs.  These programs must be accompanied by policy reforms that restore economic stability with an eye toward sustainable growth.

The IMF must embrace its role and help countries correct underlying macroeconomic imbalances.  It must promote policies that support fiscal and debt sustainability, address exchange rate misalignment, and strengthen structural reforms to catalyze sustainable and inclusive growth.

The IMF must work closely with a country’s fiscal and monetary authorities to identify the macroeconomic reforms needed to achieve economic objectives.  And once they do, the IMF should remain steadfast in its advice.  

But to be effective, the IMF must be willing to walk away if a country will not take needed steps.  It is essential that programs not just provide funding.  The funding must serve a purpose and come with policies that return a country to stability.  A program with insufficient adjustment will just leave the country back in the same or worse economic position, often with more debt.  And, if a program lacks credibility, it cannot bring new private financing along with it.

We rely on the IMF to help countries emerge from a crisis better than where they were before.

To this end, traditional programs that help countries resolve immediate balance of payments problems should be temporary in nature.  IMF programs are structured to provide temporary financing in response to acute crises, and the revolving nature of IMF financing is intrinsic to the IMF’s mandate.  We want to see an IMF where countries can seek assistance from the IMF and then emerge from programs on more stable economic footing.  We know, though, that some countries, in particular open emerging markets, can face external shocks that may overwhelm even robust macroeconomic buffers.  For countries that meet the highest standards for economic policy and governance, the IMF’s Flexible Credit Line can offer additional reserve coverage to bolster the strength of independent central banks.

Credibility is also at stake.  We expect the IMF to play a catalytic role in helping a country regain market access.  This requires the IMF to quickly step into crisis situations, with substantial financing backed by macroeconomic adjustment and robust reforms.    

We must do what we can to bolster the IMF’s track record, and that might mean making difficult decisions with members.  

We understand that in some cases, a country will require a follow-on program to resolve its balance of payments problems.  But repeated programs that merely roll over IMF debt without policy reforms that restore sustainability and improve the lives of a country’s citizens only worsen the debt situation of a country, waste finite shareholder resources, and harm the credibility of the IMF.  

In these moments, the IMF must be willing to hold firm on the policy adjustments that are necessary.  We recognize that this is not an easy thing to expect of an institution that exists to help its members meet temporary shocks as well as more protracted constraints on growth.  And we cannot be cavalier about the difficulties of advising national authorities in an apolitical manner on policy choices that are intrinsically political.  But it cannot be the policy of the IMF to roll over programs, or approve reviews, only to avoid arrears without sound policy reforms in place.

Next Steps

We ask so much of the IMF because there is simply no other institution that can fill its role in the global financial system.  

For the IMF to play its role well – across all areas of surveillance, capacity development, and lending – it needs to be responsive to the needs of its membership.  It must strive to be a reliable partner that countries can turn to in times of crisis.  This will mean implementing policy reforms where needed and seeking opportunities to better reflect the voices of its membership.

I’d like to conclude by laying out how the U.S. Treasury believes we should strengthen the IMF.

First, we must make sure that the IMF has the resources it needs to lend.  

We see a pressing need to bolster the finances of the IMF’s flagship trusts that tackle poverty and build resilience, and we will continue to work with our Congress to do so.

The Poverty Reduction and Growth Trust – or the PRGT – is the IMF’s concessional financing facility for eligible low-income countries.  For the poorest PRGT-eligible members, the interest rate is currently zero percent.

The IMF’s new Resilience and Sustainability Trust – or RST – is intended to address balance of payments risks from longer-term macro-critical challenges such as climate change and pandemics and helps countries build resilience when paired with traditional IMF programs underpinned by strong policies.  Ten countries have already benefitted from the RST, and demand is strong.

The United States contributed $70 million to the PRGT’s subsidy reserve account last year.  And the Biden Administration continues to call on Congress to authorize the United States to lend $21 billion to the IMF for the PRGT and the RST.

But in light of higher lending in the wake of the pandemic and Russia’s war against Ukraine, PRGT resources are falling short, particularly subsidy resources needed to sustain the PRGT’s interest-free lending.  IMF management are urgently calling for additional pledges of $1.2 billion for subsidy resources.  Although donor resources can help to meet the immediate need, putting the subsidy account on a sustainable footing will require further action.  

This is why Secretary Yellen and I have called on the IMF to table options by the time of the Annual Meetings next month to close the longer-term financing gap so that the IMF can continue to provide concessional lending now and into the future.

One idea the IMF should consider is using its internally generated resources to support the PRGT subsidy account.  This is a way for the entire membership of the IMF to show its strong support for its most vulnerable members.  In the near term, the IMF could fill a majority of the PRGT subsidy gap though a distribution and transfer of internal resources from the IMF’s reserves, while still maintaining a very strong buffer of precautionary resources due to the recent uptick in lending.

Second, we strongly support making the IMF a more quota-based institution through an equiproportional increase in quotas – an increase that is allocated to all members in proportion to their existing shares, combined with a corresponding decline in the IMF’s borrowed resources.

Quotas are core to the IMF – they determine members’ voting power and access to IMF financing.  

An equiproportional quota increase that restores the IMF as a quota-based institution will reduce its reliance on borrowed resources and provide the IMF with a more consistent and predictable level of resources.  It would safeguard the IMF’s role as the center of the global financial safety net.  And it could raise borrowing access for low-income countries, allowing for larger IMF programs when needed and consistent with their debt sustainability.  It would also remove the need for the IMF to set up ad hoc bilateral borrowing arrangements that are an opaque and less reliable source of financing.

The United States will continue to advocate for changes to the quota formula to make it more reflective of the global economy, including by giving more weight to dynamic emerging market economies.  An important part of that process will be that all countries – especially those that would see an increase in share – are respecting the roles and norms of the IMF and working to strengthen the international monetary system.  We look forward to working with other countries on a new quota formula that ensures that all voices are heard in the process.  Changing shares without an agreed framework would result in upweighting a handful of countries at the expense of many others in an ad hoc manner.

Third, we must work together to make sure the IMF represents its diverse membership.  

As emerging markets and developing countries have become an increasingly significant part of the global economy, they have called for increasing their representation at the IMF.  Absent a durable change in quota shares, we think more could be done to elevate the voices of these countries.  

In particular, it is my view that senior IMF management should be more representative of the membership they serve.  

One way to do this could be to add a fifth Deputy Managing Director position.  For over a decade, the IMF senior leadership has had four Deputy Managing Directors, a first deputy position traditionally held by the United States, a deputy position traditionally held by Japan, a deputy position traditionally held by China, and one deputy for all emerging markets and developing countries. Adding a new slot would help to broaden the perspectives of the IMF’s senior leadership team.   If designed well, it could mean that at all times, both emerging markets and low-income countries would have a voice at the most senior level.

Stronger representation could also mean strengthening the voice of emerging markets and developing countries at the IMF Executive Board.  To that end, we are open to engaging with sub-Saharan African members on whether they would find value in the creation of a 25th chair at the Board to provide a third chair for the region.

For other policies, our priority is simply to listen, whatever the issue.  An example here is surcharge policy.  We are open to hearing views on surcharge policy reform that balance the need to address members’ concerns, and the objective of adequately protecting the IMF’s balance sheet and incentivizing the short-term nature of IMF finance.

Conclusion

The IMF has been an important anchor for the global financial system.  And we need to make sure that it can continue to play that role.  Shocks will hit countries – especially the most vulnerable – and the IMF must stand ready to support countries in their immediate response and help countries build resilience to future shocks.

The world needs the IMF to be a trusted voice.  One that comes through with policy advice and resources, but also one that provides the tough advice needed to steer policy back to sound footing.  

Though I conclude my opening remarks here, I view this as the start of many policy discussions.  
I invite the international community, particularly emerging markets and developing countries and IMF management and staff, to partner with the United States to drive these reforms forward.  Over the last year, the United States has worked closely with a range of country partners and with World Bank management to push the MDB evolution agenda forward.  This is already delivering tangible results in how the Bank operates and the resources it can use to better support emerging markets and developing countries.  Now is time to show how the United States supports emerging markets and developing countries at the IMF as well.

There is a lot more work to do and I look forward to tackling those challenges together.

Thank you.

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