In a little more than a week, finance ministers and central bankers from around the world will convene in Washington, DC for the spring meetings of the International Monetary Fund (IMF) and World Bank. This year’s meetings come amidst a backdrop of uncertainty over the Trump administration’s commitment to these institutions, raising the specter of a diminished U.S. role in international monetary cooperation.
The tension surrounding the meetings is especially strong throughout the Americas, where the lack of clarity over U.S. policy is compounded by political and economic unrest across the Andes. Added to that are a number of wildcards that could trigger financial instability and the need for emergency financing—among them the future of interest rates in the U.S, the Trump administration’s proposed budget cuts and intentions toward the international financial community, and China’s slowing economic growth.
As the U.S. considers its commitment to global financial leadership, Andean countries have a viable alternative in the Latin American Reserve Fund (FLAR).
Trump’s proposed budget would cut U.S. contributions to key international financial institutions like the World Bank and IMF. While the budget will likely not look the same after it makes it way through Congress, more concerning is the appointment of Adam Lerrick, a vocal critic of post-war liberal order institutions, as Deputy Under Secretary of the Treasury for international finance. In his position, Lerrick will be able to shape the Trump administration’s policy stance towards international organizations like the World Bank and IMF.
At the same time, China’s slower economic growth has translated into lower levels of imports and investments. While China has reduced capital outflows through the tightening of capital controls, the downward trend of its foreign exchange reserves means that its total reserve level could reach the key $2.5 trillion level in the next one or two quarters. In addition, an increasing amount of loans from the shadow banking sector is leading to an increase in systemic risk. In this case, Chinese banks have moved loans off-balance sheets through partnerships with non-bank financial institutions, avoiding capital requirements intended to ensure financial stability.
In Latin America, where China maintains a number of key relationships, depressed commodity prices have led to a sharp decline in government revenues, making previously manageable levels of indebtedness unsustainable. While some of this debt is the result of government investments in projects intended to diversify their economies, much of the money borrowed merely went to cover budget deficits with the expectation that commodity prices would recover. If commodity prices remain low, a number of countries could soon be in the market for a loan.
But many Andean finance ministers are reluctant to go to the IMF in times of trouble. Past IMF loans have been controversial, and the IMF has—to put it lightly—a reputational problem in the region, as it does in Asia and elsewhere. Historically, IMF programs, by their own admission, have promoted pro-cyclical austerity policies while increasing levels of indebtedness. This is because cuts to government services exacerbate contracting economic conditions precisely when governments should be putting a floor under the economy. These policies slash social expenditures on social welfare programs that disproportionately affect the most vulnerable. One need not look further than Bolivia’s disastrous experience with the IMF in the 1980’s to understand the financial institution’s negative reputation in the region.
As Latin American governments look for means to address possible liquidity crises, the FLAR may present a viable option. Founded in 1978, the FLAR is a reserve pooling arrangement with paid-in capital of $2.76 billion and access to credit markets at some of the lowest rates in the region (thanks to a AA credit rating). The organization has proven a valuable resource for its eight member countries: Bolivia, Colombia, Costa Rica, Ecuador, Paraguay, Peru, Uruguay and Venezuela. As opposed to the historically burdensome conditionality of IMF loans, the FLAR issues conditionality-free liquidity and balance-of-payment-support loans of up to 2.5 times a member’s paid-in capital. What’s more, it does so in an average of just 32 days and every loan it has issued has been repaid in full.
While there are numerous instances of member countries successfully avoiding the IMF thanks to FLAR loans, Latin America’s recent move to the right will provide an interesting test for southern-led mechanisms in the region. Forthcoming research from the United Nations and the Global Economic Governance Initiative at Boston University finds that since 2008 FLAR loans approved for member countries have totaled $2.25 billion, whereas approved IMF loans to the same countries totaled $735 million.
Andean countries have a local lifeline during this new era of financial and political uncertainty. As a local institution, FLAR can serve as an alternative to Washington-based financial institutions in times of significant uncertainty like these—not necessarily in competition with them but as a compliment to them, when they are working well. The FLAR’s greatest challenge may be coming, though, if the region’s political and financial turbulence accelerates in the next few years. In that case, with a small pool of funds and limited capacity, FLAR would be hard-pressed to come to the rescue for multiple countries simultaneously. And that’s precisely why Washington’s actions next week should seek to diffuse political and economic uncertainties, not exacerbate them.
William Kring is Assistant Director and Kevin P. Gallagher is Director of the Global Economic Governance Initiative at Boston University’s Pardee School of Global Studies. Follow them on twitter @WilliamNKring and @KevinPGallagher
