One of the concrete outcomes from last week?s G-20 summit in London was the decision to revive the International Monetary Fund with a cash infusion of $500 billion. The move was aimed primarily at shoring up ailing Eastern European economies, which could not be given direct economic assistance by France or Germany due to European Union regulations. The IMF came in as deus ex machina, whereby the EU, the US, Japan, Canada and Norway pledged large amounts to it, which in turn would be transferred as loans to Eastern Europe?s tottering economies.
The announcement fortifying the IMF came at a time when its total available lending was languishing around $250 billion. So dire was the situation at the Fund last year that it was declining or deferring new bailout requests. This had raised questions about the viability of this institution, with some predicting its demise. The G-20 resuscitated the IMF and the World Bank (expected to receive $100 billion per annum for the next three years).
Liberals hailed the move as a much needed alternative financing option at a time when interest rates on foreign borrowing are peaking for countries in the Global South due to competition from depressed advanced economies.
Radicals are disappointed that the IMF and World Bank were gifted a fresh lease of life to further choke least developed countries with structural adjustment and fiscal conservatism nooses. For the radicals, the double standard of IMF?s benefactors indulging in rabid Keynesianism while it imposes ?financial responsibility? on poor countries is annoying.
The G-20 summit also permitted the IMF to raise an additional $250 billion by issuing Special Drawing Rights (SDR), the artificial currency which the organisation uses to settle accounts among its members. SDR?s value is based on a basket of currencies (primarily the US dollar, the British pound, the Japanese yen and the Euro) and is therefore considered more stable. SDR was in the news recently owing to the suggestion of the Governor of the Chinese central bank that it be converted into a new global reserve currency to replace the dollar. So alarming was the proposition to the US Treasury Secretary that he immediately issued a reassurance that the dollar ?remains the world?s dominant reserve currency.?
The G-20?s decision to allow a nine-fold increase in the size of SDRs can be interpreted as the concretisation of the Chinese threat to the dollar?s hegemony. British premier Gordon Brown announced at the summit that China would be pumping in $40 billion to the IMF without specifying whether the sum was for the general lending pool of $500 billion or for the $250 billion of SDR. If it is for the latter, then the extrapolation is that China wants to secure SDR-denominated debt for its currency reserves at the expense of the dollar. Beijing?s rapid negotiation of currency swap deals with as many as six countries to date also raises speculation about the yuan being positioned to replace the dollar, at least in international economic transactions involving China.
Not to be left behind, Russian President Dmitry Medvedev raised the taboo topic of the unsuitability of the dollar as reserve currency at the G-20 summit. For all the smiles and handshakes with US President Barack Obama, Medvedev once again sowed doubts about the future prospects of the dollar by arguing that ?it would be wise? to support a new basket of strong regional currencies along lines suggested by the Chinese. Moscow is also canvassing for the rouble and the yuan to be added to the SDR basket.
The G-20 summit thus reopened the can of worms on dollar hegemony, a fundamental pillar of the contemporary world order. Should the dollar cave in to structural weaknesses of the US economy in the medium to long terms, the IMF?s re-capitalisation will turn out to be a sideshow.
?The author is a researcher on international affairs at the Maxwell School of Citizenship & Public Affairs in Syracuse, New York