Thursday, February 4, 2016

IMF Issues New SDRs as 2010 Reforms Now in Effect

The IMF releases a press notice to state that the 2010 governance reforms and SDR quota increase are now effective. This is a story we have covered here thoroughly over the past two years. The reforms were expected to be implemented long ago but the US did not grant final approval until last December (2015). The US approval was quietly in included in a massive budget bill with virtually no advance notice or fanfare. Below are quotes from the IMF release and then some comments.

The conditions for implementing the International Monetary Fund’s (IMF) 14th General Quota Review, which delivers historic and far-reaching changes to the governance and permanent capital of the Fund, have now been satisfied.
The amendment to the IMF’s Articles of Agreement creating an all-elected IMF’s Executive Board (Board Reform Amendment) entered into force yesterday. The Board Reform Amendment was part of a broader package of quota and governance reforms, which also included a doubling of IMF quotas under the 14thGeneral Review of Quotas and a major shift in quota shares toward dynamic emerging market and developing countries. The quota increases under the 14th Review, which were conditional on the entry into force of the Board Reform Amendment, are expected to come into effect in the coming weeks. [Link:]
The reforms represent a major step toward better reflecting in the institution’s governance structure the increasing role of dynamic emerging market and developing countries. The entry into force of these reforms will reinforce the credibility, effectiveness, and legitimacy of the IMF. For the first time four emerging market countries (Brazil, China, India, and Russia) will be among the 10 largest members of the IMF. The reforms also increase the financial strength of the IMF, by doubling its permanent capital resources to SDR 477 billion (about US$659 billion).
“I commend our members for ratifying these truly historic reforms,” IMF Managing Director Christine Lagarde said. “These reforms will ensure that the Fund is able to better meet and represent the needs of its members in a rapidly changing global environment. Today marks a crucial step forward and it is not the end of change as our efforts to strengthen the IMF’s governance will continue.”

My added comments: What media attention you see on this tends to focus on the increase in voting power for China and the other BRICS nations. Certainly, that is important in terms of keeping those countries engaged at the IMF. However, I would suggest that the doubling of the quota of SDR's is perhaps more significant news.

In order for the IMF to step in as "global lender of last resort" in the next major global financial crisis (worse than 2008) as Jim Rickards has predicted, this first step had to be taken. The precedent for sharply increasing SDR's to "increase the financial strength of the IMF" has now been set. This does "reinforce the legitimacy of the IMF" as stated in the press release. It adds validity to Jim Rickards forecast regarding use of the SDR at the IMF in the future which we have covered here. Now we wait to see if we get a major crisis worse than 2008 as Jim has also predicted.

Meanwhile, Dr. Warren Coats (former IMF) has called upon the Asian Infrastructure Investment Bank (AIIB) to issue all its loans in SDRs to promote its use as a global currency.

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