Warnings have risen towards the potential withdrawal of Washington’s potential withdrawal from global institutions, including the International Monetary Fund and the World Bank, and US Treasury Secretary Scott Bescent’s no-show at the G20 Conference has increased anxiety. So what will happen to the IMF and the World Bank, and what will happen to the US if they pull back from them?
What do the IMF and the World Bank do?
The United States and its allies formed two institutions in the ashes of World War II, encouraging global integration and preventing future wars before they occur.
The IMF is the last lender to a country in trouble – from Greece during the financial crisis, debt defaults after the economic meltdown in 1976, and even Argentina in the UK.
Loans are the range from emergency cash to prevent crunches to balance payment crisis and to address precautions.
To ensure that the state enacts reforms by conditioning loans sent in the tranche, it usually reduces wasteful spending, cuts in more transparent budgets, eradicate corruption or raises tax revenues. Investors use IMF data on GDP and growth as triggers to determine whether a particular debt instrument that links payments to economic performance will give more, or sometimes less money.
The World Bank lends at low rates to help the country build everything from railways to flood barriers, creating the frameworks needed for innovative financial tools such as green bonds and providing risk insurance.
Both lenders provide expertise on issues ranging from irrigation to central bank transparency.
Who needs the IMF?
Emerging market countries rely heavily on the IMF. Without it, Argentina cannot pay government workers, and people from Senegal to Sri Lanka are now relying on cash.
Having an IMF program is also concerned about both individuals and bilateral investors.
“The IMF has long been an anchor for debt investors,” said Yerlan Syzdykov, head of emerging markets at Amundi, Europe’s largest asset manager.
Bilateral investors such as Saudi Arabia are also increasingly paying attention to the IMF as the anchor for loans. Economy Minister Faisal Alibrahim said linking loans to institutions including the IMF would ensure “more value from all dollars, every real, dedicated to supporting other economies.”
What about the World Bank?
Investors are working closely with the International Finance Corporation, the World Bank’s private investment arm, to co-invest in public/private partnerships for countries seeking the estimated trillions of dollars needed for cleaner electricity and infrastructure.
Developed countries that fund institutions, including the United States, are using them to ensure global financial stability and encourage them to stick to an open economic model that is financially responsible.
Both institutions were supporting countries such as Egypt, Pakistan and Jordan where the US has strategic interests, at the request of their biggest shareholder, the US, said Mark Sobel, a veteran leadership division official and former US chairman of the IMF Board’s Official Financial Institutions Forum (OMFIF).
“If there is economic instability overseas, it could hurt the US economy,” Sobel said.
What happens if the US gets its support?
“It’s going to be a disaster,” said Khan Nazli, Neuberger Berman’s emerging market debt portfolio manager.
The US, a founder member, holds the largest single share of each institution. It’s just over 16% of the IMF and just 16% of the World Bank. This has had a strong influence on the decisions that global economic leaders have relied on.
The US withdrawal will also surprise experts and investors, as the institutions impact Washington at a relatively low cost. They say that retreating is a gift for China and others who try to drive it away as a global leader.
Other countries can close the financial gap. China was keen on a bigger role in the global group. It has pushed for IMF stock restructuring and strengthened the voices of emerging markets. China’s current share is just over 5%.
The US exit “will take a big blow to their functioning, and it will only help China,” Sobel said.
At the World Bank, US companies have less access to contracts and the group is funded. Changes to the IMF shareholder structure will result in a promotion of the balance of power, lower decision-making and potentially less transparent.
Losing access to expertise from US Treasury officials can undermine trust, and rating agencies warn that US withdrawals could endanger multilateral lenders’ coveted triple-A credit valuations, limiting their ability to lend.
Do developing countries want them?
The IMF often wins the rage of protesters for advocating painful and unpopular reforms to balance budgets such as reducing fuel subsidies and increasing tax revenue.
Some Kenyans denounced the IMF during a fatal protest last summer, but the fund’s response to the 1997 Asian financial crisis was panned out.
However, a few countries such as Cuba, North Korea and Taiwan are not members of the IMF.
(Except for the headline, this story has not been edited by NDTV staff and is published by Syndicate Feed.)
