We have met the enemy and he is us.
—Walt Kelley, 1970
Once again, the US Congress has balked at approving the International Monetary Fund (IMF) reform package crafted by the United States in Korea four years ago. On Tuesday, March 25, the Democratic leadership in the Senate pulled the IMF reform provision from legislation intended to support Ukraine. In the process, they hung IMF Managing Director Christine Lagarde and Representative Maxine Waters (D-CA) out to dry, rebuffing their appeals on Tuesday to include the IMF in the legislation.
The complete whys and wherefores of the Senate leaders’ decision are not known, but outsiders should be discouraged and dismayed. Once again, the US Congress has undermined the legitimacy of the IMF and US leadership on Ukraine and many other important issues. The consequences will be devastating.
The ostensible argument by the Senate leadership for dumping the IMF provisions was to avoid a political fight about the supposedly unrelated IMF reform legislation because of the urgent importance of supporting Ukraine. Senator Harry Reid (D-NV), the Senate majority leader, was said to have not wanted to delay action to provide a trivial amount of financial support to Ukraine—$1 billion in loan guarantees.
The Senate leadership got it all wrong. They buckled to a campaign of misinformation. The campaign featured two intertwined myths: that the IMF did not need more financing to help Ukraine and, therefore, that the IMF could assist Ukraine in a major way without the need to approve the 2010 IMF reform package.
The first myth is based on a red herring. The IMF component of the legislation was not about providing the IMF with more financial resources; it was about the legitimacy of the IMF. At most the package would have increased total IMF resources by $80 billion, about 8 percent of the current total. The critics were right in theory: The IMF does not literally need the money. But they were wrong in their assertion that the legislation was about providing the IMF with more financial resources.
The second myth is more seriously dangerous. Despite the argument that the IMF reform measure was unrelated to Ukraine, the fact is that passage of the legislation would have facilitated substantially more financial support for Ukraine by shoring up support from other stakeholders at the Fund. The explanation for this point is complicated but worth reviewing.
If the IMF reform legislation were in place, Ukraine would have been eligible to borrow more from the IMF. Ukraine could immediately borrow about $500 million more from the IMF’s emergency financing facility (the Rapid Financing Instrument)—50 percent of the puny US long-term loan guarantees on offer. When, as is expected, Ukraine applies for a standard three-year IMF program, it would have been eligible to borrow roughly 50 percent more, $6 billion in the first year rather than $4 billion, and $18 billion over three years rather than $12 billion.
Critics say the IMF can override its guidelines on the size of normal lending arrangements to lend to Ukraine. They are right, but only in theory. It is important to remember that Ukraine has a dismal record of performance on IMF programs. To credibly override IMF guidelines on the size of programs, the United States and Europe need the agreement of other countries. Those are the countries (Brazil, China, Korea, India, Indonesia, Mexico, Turkey, etc.) that are in danger of resisting a package for Ukraine now that the US Congress has insulted them by failing to pass the IMF reform legislation that would increase their vote and voice in the IMF. The United States and Europe may be able to jam through approval for an oversized IMF program for Ukraine, but thanks to the US Congress, the task will not be easy.
The central issue in Ukraine is legitimacy under international law and conventions. It is ironic that in its rush to support Ukraine, the US Congress has undermined the legitimacy of the IMF, the institution that is crucial to the success of supporting Ukraine and stabilizing the world economy in general. When it comes to helping Ukraine, we are the enemy.