Blog Post

IMF—Unfinished business

Bretton Woods Committee  | Mon, May 13, 2024

by Ousmène Jacques Mandeng

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During the IMF Spring Meetings on 16-18 April, while timidly celebrating the 80-year anniversary of the Bretton Woods Conference where the IMF was founded, some ventured into exploring the future of the institution. The current geopolitical climate could mean, though, that the future may very well be about the past of the IMF, creating a need to address important unfinished business.

 

One of the main purposes of the IMF is to assist in the establishment of a multilateral payment system for current transactions to settle international trade and external interest payments. To attain that, at the time, it meant a currency was convertible into gold, a necessary condition for a currency to be used in international payments. Most countries had abandoned gold convertibility prior to and during the war: “[…] means must be found to increase the international liquidity of all countries, to give them assurance that temporary deficits in their international balances of payments can be met […] as one of the ‘primary objectives of economic policy’ […] so that each country can count on using the proceeds of its exports to any part of the world to pay for imports from any part of the world.” *

 

At Bretton Woods, delegates were concerned about the implications if not all currencies were convertible or usable: “If imports from countries other than the United States and the United Kingdom must be paid for in dollars and sterling, […] other currencies [will be] of limited usefulness in settling international payments.” **

 

Yet while European currencies and sterling achieved convertibility by the end of the 1950s, the use of currencies in international payments remains to this day highly constrained. This even though gold convertibility was abandoned during the early 1970s. Most international payments continue to be conducted in a very narrow set of currencies. The IMF still today only considers 5 currencies—dollar, euro, renminbi, sterling and yen—as freely usable out of 145 currencies in circulation.

 

The narrow set of currencies useable in international transactions remains the most important challenge for the stability of the international financial system. It produces and perpetuates critical external vulnerabilities, in particular for foreign indebtedness. Without the ability to use their currencies in international exchange, countries will depend on holding foreign currencies that can.

 

Key emerging markets like China but more recently India have indicated their interest in having their currencies play a bigger role in international payments. While the renminbi does count as freely usable currency, it has failed to gain meaningful traction in international payments.

 

IMF operations themselves are biased towards the freely usable currencies. IMF resources, based on so-called quotas, are a combination of member countries’ currencies, gold and freely usable currencies or reserves. Countries pay quota subscriptions to the IMF with one quarter in reserves and the rest in their own currency. When countries borrow from the IMF, they “purchase” reserves by depositing their own currencies with the IMF, IMF holdings of member currency increase. The countries whose reserves are being used obtain in exchange a so-called reserve tranche position being a liquid claim on the IMF and encashable on demand. To repay the loan, borrowing members must “repurchase” their own currencies with freely usable currencies. IMF lending and capacity to meet external payments thus depends on the amount of freely usable currencies. The member currencies not considered freely usable sit idle.

 

To promote more currencies for international exchange, the IMF could use an extension of its existing toolkit. If the IMF were to allow countries to exchange currencies between them without recourse to IMF lending, the IMF’s holdings of member currency could be mobilized. If say a Thai bank on behalf of a Thai importer would like to pay for imports from Brazil in reais, the central bank of Thailand would ask the IMF to swap reais for baht by changing the composition of the quota subscription while keeping the amount of IMF holdings of member currency unchanged and perform transactions in reais on behalf of the Thai bank with the central bank of Brazil on behalf of the bank of the Brazilian exporter. An IMF-based mechanism could incentivize member countries to participate and give confidence in the swap also that sufficient balances would be available to facilitate international payments. The IMF could make available a mechanism by which unwanted member currency balances could be reconverted at the end of day.

 

The IMF has not done enough to support countries in using their currencies in international payments. Not all countries will agree and not all 145 currencies will benefit. 80 years on, installing a multilateral payment system still appears to be the IMF’s most important task. The impact on financial markets would be vast.


Ousmène Jacques Mandeng, Director, Economics Advisory Ltd, Visiting Fellow, London School of Economics and Political Science

 

* Report of Commission I (International Monetary Fund) to the Executive Plenary Session, 20 July 1944, United Nations Monetary and Financial Conference, Bretton Woods, N.H. 1-22 July 1944, Final act and related documents, 3 November 1944.

** Memorandum to Committee 2, Use of currencies held by the Fund, Kurt Schuler und Andrew Rosenberg, The Bretton Woods transcripts, New York, NY, 2012.

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