IMF resources should be boosted further in order to better equip the institution to deal with the fallout of a worsening of the eurozone crisis, Japan’s top international financial official has said.
Takehiko Nakao, the country’s vice finance minister for international affairs, told Emerging Markets in an interview that the IMF meeting could be used as an opportunity to launch a review of the Fund’s ability to cope with mega crises, with the global economy heading for what some analysts fear could be a harder landing than generally expected.
Up to the time of the eurozone crisis, IMF resources were required to deal only with limited crises in emerging economies, noted Nakao, whose country is the fund’s second largest shareholder.
But “because there is free flow of money between countries of the euro area, if something happens, the financing gap to be met by IMF resources tends to become very large,” he said. “That’s why we must prepare larger resources.”
However, he added that any capital increase – including the $456 billion resource boost agreed in June - could be pared back when the global environment stabilizes.
“Should we do this as a permanent thing? Once the crisis is over, one idea is that we should reduce the size of the IMF again.”
His comments came amid lingering divisions between shareholders on how to best to carve up voting power at the Fund. A general increase in IMF quotas was agreed to in October 2010, but has yet to be implemented.
“The question is whether this [$460 billion] should be translated into a quota increase in coming years or whether it should be just [borrowing] resources,” said Nakao. At $60 billion, Japan has been the biggest contributor of borrowing resources.
“In this quota reform, the US will remain the biggest shareholder [in the IMF] and Japan the second, but China will become third instead of sixth,” he said.
“But discussion at the US Congress has not progressed well and we really hope that this quota increase which reflects recent developments [affecting] economic reality can be implemented. After that, we should start thinking about the [next] quota review.”
Nakao said that at this point there was a sense of relief that the eurozone crisis had subsided, reinforced by the monetary easing actions in Europe and Japan. But he warned: “at the same time we cannot afford to be complacent.”
“There could be a possible initial discussion [during the annual meeting] on the next IMF quota increase following the ratification of the present agreement,” he said.
Before the Lehman shock in 2008 the IMF had a lending capacity of $250 billion. But after the global economic crisis, this was tripled to $750 billion and subsequent borrowing facilities of $460 billion made available to the IMF have raised its total lending capacity to over $1 trillion today.
Views are split among IMF members over whether the Fund can afford to revert to a more “normal” size once the eurozone crisis is finally resolved or whether it needs to be maintained at or above its current size in order to be able to deal with mega crises, Nakao said.
Saudi Arabia is expected to use the annual meetings to promote its claims to a bigger say in the IMF.