Mnuchin call for sweeping IMF and World Bank reform

US Treasury secretary Steven Mnuchin has called for major changes in the way the International Monetary Fund and World Bank operate as the Trump administration used the institutions’ annual meetings in Washington to lay out reform plans. 

In a move likely to generate resistance from other members, Mr Mnuchin called for the IMF to revamp the way it conducts bailouts and urged the World Bank to re-examine its lending to middle-income countries such as China.

The statements to the governing bodies of the two sister organisations released on Friday came just days after the Trump administration reacted angrily to what it read as the IMF’s criticism of planned US tax cuts.

It also follows concerns over what many see as a brewing attack on the multilateral system and key international agencies like the IMF and the World Bank by the US under President Donald Trump and his “America First” agenda. 

“As the IMF moves into the post-global financial crisis period, we urge the institution to structure its lending programmes to prioritise reforms that drive private sector-led economic growth,” Mr Mnuchin said. “In too many countries a large public sector crowds out the private sector.”

The demands for the IMF echo the Trump administration’s own much-debated plans for the US economy where it wants to use tax cuts and an aggressive deregulation agenda to spur growth. But members of the Trump administration have also expressed concern over the broad scope of many IMF rescue programmes, arguing that they are too long and too complicated and do too little to quickly bring back growth in countries mired in crisis.

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Mr Mnuchin said it was also time for the IMF, which in crisis countries such as Greece has been constantly criticised for imposing tough demands for fiscal austerity, to make “tough choices” and look at its own operational costs including its notoriously generous staff salaries and benefits.

“As a public institution . . . the IMF should serve as a model on budget discipline and efficient use of limited resources,” he said. “Achieving this goal will necessarily entail tough choices.”

The World Bank, which has been through a controversial restructuring in recent years, also needed to do more to rein in its costs, Mr Mnuchin said, especially as its president, Jim Yong Kim, and many other shareholders were seeking a capital increase to expand its financial resources. 

“More capital is not the solution when existing capital is not allocated effectively,” Mr Mnuchin said. “Demand for cheap capital [such as the World Bank’s low-interest loans] will invariably exceed its supply — the key is to ensure that these resources are deployed where they are needed most and can achieve effective and sustainable results.” 

Among the chances needed, he said, was a “significant shift” in funding so that it targeted the poorer countries that needed it rather than wealthier economies that could easily access other sources of capital.

While he did not single out China, it was the bank’s largest single borrowers in fiscal 2017, benefiting from some $2.4bn in loans, and as a result would be the biggest target in any change in World Bank lending policy towards middle-income countries. 

“We recognise that the World Bank has a role to play among its wealthier and more creditworthy borrowers, but in our view this role should focus on knowledge transfer, and engagement should be tailored to help fully transition these borrowers off donor assistance,” Mr Mnuchin said.

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“In addition, we want the bank to put forward a framework that can create a financially self-sustaining World Bank in which organic capital accumulation is sufficient to support future lending targets,” he added. 

Among the measures needed to help that, he said, was “further budget discipline”, pointing to the costs associated with staff compensation and the bank’s resident executive board.