Time for the IMF to Get Back to Basics

Daniel Runde

As the IMF’s managing director, Kristalina Georgieva, heads for her second term, she must refocus her institution’s attention on four key issues.

Kristalina Georgieva, the current Managing Director of the International Monetary Fund (IMF), will finish her first five-year term on September 30, 2024. She is seeking a second term and will cruise to re-election later this year or as soon as this week. Georgieva, a well-regarded and politically astute Bulgarian economist, will undoubtedly have a full “inbox” for a second term. We should hope that she gets “back to basics,” focusing on economic growth and financial stability rather than what might be described as “fads” or “mission creep” pushed by some of the IMF’s shareholders, including the United States.

The IMF is confronting a host of global challenges in 2024, including post-COVID financial recovery, tightening credit conditions likely to impact developing countries’ debt sustainability, economic disruptions from Russia’s ongoing war in Ukraine, and growing economic fragmentation driven by great power competition.

Established at the 1944 Bretton Woods Conference, the IMF and the World Bank are the twin pillars of international financial architecture. The United States would have led both the World Bank and the IMF. However, U.S. Treasury Department official Harry Dexter White was a Soviet spy. To prevent him from getting to the top IMF job, the Truman Administration offered the top job to a Belgian, creating the long-standing, unwritten “gentlemen’s agreement” under which the IMF Managing Director is European, and the World Bank President is American.

For over eighty years, these two institutions split their work. The IMF is the “financial firefighter” ensuring global macroeconomic stability by providing short-term lending, while the World Bank finances longer-term global development.

Georgieva should take on the following four issues before the conclusion of her second term on September 30, 2029:

First, the IMF must deliver a “win” on one of the world’s financial crises. The IMF has been struggling to manage a series of repeat offenders. For example, Pakistan has spent fourteen of the last twenty-three years in an IMF “emergency triage”—having managed to repay three of its seven lending packages, nor has it reformed its tax system nor met fiscal and structural conditions. Egypt has hosted four programs in under a decade, consistently failing to reduce military interference in the economy and pivot to export-led growth. Nigeria, which currently owes the IMF $2.8 billion, is struggling to implement economic reforms amid spiraling inflation, low revenue collection, and an escalating cost-of-living crisis. Argentina, the worst offender, recently received another $4.7 billion in IMF funds in response to President Milei’s bold economic policies after missing critical targets in the $44 billion program granted in 2022.

Second, the IMF needs to push China to help resolve the sovereign debt crisis in emerging markets. In the last fifteen years, developing countries haveincreasingly resorted to the more expensive private sector and Chinese lendersoperating outside the official Paris Club system, creating a more diffuse credit landscape with a far riskier profile. At least fifty-three economies have defaulted on some of their debts or have debt levels that the IMF considers unsustainable. This “debt tsunami” threatens global financial stability and sustainable development, preventing government spending on essential public services like education and health.

As the world’s largest official lender to developing countries, China is the major stumbling block. Beijing’s lack of transparency and reluctance to forgive debthas paralyzed the Fund’s ability to implement financial stabilization programs, provide technical assistance, or offer debt relief. Emergency programs such as the G20’s Common Framework have been plagued by delays, coordination issues, and enforcement challenges, in large part due to Chinese intransigence and concerns that IMF bailouts would flow directly into the pockets of Chinese lenders, as well as Eurobond holders and commercial creditors, and connected domestic bondholders. Given Georgieva’s political experience, she is well-suited to brokering a political deal between President Biden and President Xi to push through a true “debt standstill” and explore ways to fix the current multilateral arrangement.

Third, the IMF must be more active in addressing China’s outrageous status as a “developing country.” The People’s Republic of China is the world’s second-largest economy, ranks in the top five nations for trade and foreign investment, has the world’s largest number of middle-class consumers, and provides an estimated $3 billion per year in foreign aid—yet the United Nations (UN) still classifies it as a developing economy. This status allows China to exploit a range of unique benefits, such as lowering China’s UN dues by nearly $50 million in 2023, giving China longer periods to meet various financial and trade obligations under the WTO, and providing China billions in World Bank loans. In 2023, the U.S. House of Representatives unanimously passed a bill to strip China of its “developing country” label, but China’s IMF status has remained unchanged. Georgieva should help fix this issue in her next term.

Fourth, the IMF should remove the Renminbi (RMB) from the so-called “Special Drawing Rights” (SDRs) of the IMF. The SDR is an international reserve asset created by the IMF to provide access to hard currency. The SDR basket includes five different “reserve” currencies: the U.S. dollar, the Euro, the Japanese Yen, the British Pound Sterling, and the Chinese Renminbi. The 2016 edition of the RMB—approved despite China’s tight capital controls and the RMB’s marginal role as a reserve currency—was a political decision that signaled China’s growing role in international trade and the global financial system. Being in the SDR helps Beijing’s campaign to “internationalize” its currency and, more importantly, to “de-dollarize” the global financial system at America’s expense. China should help with global debt crises, or the IMF should kick China out of the SDR basket.

In recent years, the IMF has suffered from “mission creep,” taking on side hustles driven by the progressive preferences of Europe and the Obama and Biden Administrations. Since 2010, the Fund has championed (arguably essential but irrelevant to the core mission of the IMF) causes ranging from gender equality to health and climate change. In the words of Kenneth Rogoff, the Fund’s Chief Economist from 2001-2003, “turning the IMF into the World Bank is not going to work.”