Draft International Monetary Fund (Limit on Lending) Order 2010

The Committee consisted of the following Members:

Chair: Jim Dobbin 

† Adams, Nigel (Selby and Ainsty) (Con) 

† Birtwistle, Gordon (Burnley) (LD) 

† Chishti, Rehman (Gillingham and Rainham) (Con) 

Clappison, Mr James (Hertsmere) (Con) 

† Collins, Damian (Folkestone and Hythe) (Con) 

† Fallon, Michael (Sevenoaks) (Con) 

† Goodwill, Mr Robert (Scarborough and Whitby) (Con) 

† Hoban, Mr Mark (Financial Secretary to the Treasury)  

† Hopkins, Kelvin (Luton North) (Lab) 

† McGovern, Alison (Wirral South) (Lab) 

† McGovern, Jim (Dundee West) (Lab) 

† Mordaunt, Penny (Portsmouth North) (Con) 

† Mudie, Mr George (Leeds East) (Lab) 

† Smith, Angela (Penistone and Stocksbridge) (Lab) 

Stringer, Graham (Blackley and Broughton) (Lab) 

† Thomas, Mr Gareth (Harrow West) (Lab/Co-op) 

† Williams, Stephen (Bristol West) (LD) 

Wilson, Sammy (East Antrim) (DUP) 

Alison Groves, Sara Howe, Committee Clerks

† attended the Committee

The following also attended ( Standing Order No. 118(2) ) :

†Cash, Mr William (Stone) (Con) 

Second Delegated Legislation Committee 

Monday 19 July 2010  

[Jim Dobbin in the Chair] 

Draft International Monetary Fund (Limit on Lending) Order 2010 

4.30 pm 

The Chair:  Before I call the Minister, I should say that it is a bit stuffy in here, so if hon. Members wish to remove their jackets, they are free to do so. 

The Financial Secretary to the Treasury (Mr Mark Hoban):  I beg to move, 

That the Committee has considered the draft International Monetary Fund (Limit on Lending) Order 2010. 

It is a pleasure to serve under you chairmanship, Mr Dobbin. Like a number of Labour Members, I found it difficult to work out on which side of the Committee I was meant to be. This is the first statutory instrument I have done as a Minister, but it is a relatively straightforward one to open with, because it increases the limit on the amount that the International Monetary Fund can borrow from the UK. Last April, the G20 reached an agreement to increase the IMF’s resources by $500 billion, and around half of that has been provided. It is now crucial that all countries take the necessary steps to finalise their full commitments. As the Committee will know, the IMF has been at the centre of the international response to the economic crisis, and demands for assistance from the IMF remain at record levels, with almost $200 million currently being provided to 27 countries through IMF programmes. Recent events in Europe have underscored the need to ensure that the IMF is adequately equipped to fulfil its core role of promoting financial stability and economic growth. 

The G20 agreement substantially to increase the IMF’s lending capacity was envisaged as a two-step process. As a first step, countries have made additional resources available to the IMF through bilateral loan arrangements. That was the quickest way to mobilise the additional resources needed by the IMF. As part of that effort, the previous Government signed a $15 billion contingent bilateral loan to the IMF in September last year. However, the bilateral arrangements are only temporary measures. The G20 agreed to deliver its full commitment to an established framework for lending to the IMF. That framework—known as new arrangements to borrow, or NAB—has been reformed and made more flexible. Bilateral loan arrangements must now be incorporated into the reformed NAB framework, together with the additional resources that the G20 has pledged. 

During international negotiations last year, the UK agreed to provide up to an additional $11 billion on top of existing commitments to the NAB, which brings the UK’s total commitment to about $28 billion. 

Mr Gareth Thomas (Harrow West) (Lab/Co-op):  The Minister is right when he says that the order is relatively straightforward. However, a series of issues on the

reform of the IMF are kicking around, particularly in relation to its mandate and governance issues. Those issues have implications for the role of special drawing rights, which are pertinent to the debate. On the question of the mandate, can he indicate to the Committee what the Government’s view is of the role of special drawing rights going forward and whether they might become a principal reserve asset in the international monetary system, as has been suggested by some of those who are considering the future role of the IMF? 

Mr Hoban:  The hon. Gentleman raises quite a broad issue that falls outside the scope of the order we are considering. Clearly, as with other international bodies, the IMF keeps its role and mandate under review. The Chancellor, as governor of the IMF, will participate in those debates as appropriate. If that leads to any need for legislative reform, the matter will be brought before the House. 

Mr Thomas:  Surely the Government have a view. 

Mr Hoban:  The UK will respond to those changes. One of the challenges for the IMF is, as the global economy develops and developing countries increase their economic importance, there will be a view about who should be a governor of the IMF and what the contribution of quota shares will be. The UK is strongly committed to playing its part in strengthening the accountability, governance and legitimacy of the IMF. We will take part in international debates to achieve that goal. 

Returning to the subject before us, the order does not represent an up-front financing commitment for the UK. The NAB has always served, and will continue to serve, as a backstop to the IMF’s normal source of finance. The NAB can be called upon only if the IMF needs additional resources to deal with exceptional circumstances, for example, if there were a systemic crisis that threatened economic stability at a regional or global level. 

If the IMF should call upon the UK, any loan will be repaid in full and with interest and it will be financed from the UK’s foreign exchange reserves. As a claim on the IMF is itself held as an asset of the UK’s reserves, resources provided through the NAB do not increase public sector net debt. 

Mr Thomas:  The Minister may be familiar with the debate about the future size of the IMF board and whether Britain will retain its seat on that board, which clearly is important for our ability to track how the special drawing rights will be used in practice. What is the Government’s position on whether Britain should retain its seat on the IMF board? 

Mr Hoban:  The UK is one of five countries that have permanent representatives on the IMF board, and that is driven in part by size. The IMF was a creature of the post-war settlement and the Bretton Woods arrangements, but as the global economy changes there will clearly be debates and we will need to look at the IMF’s governance arrangements. If the UK continues to be a major contributor through its quota share arrangements, we would expect to retain a seat on the board. It is important

that we are able to continue to track the UK’s commitments, how money we pledge to the IMF is spent and the conditions attached to the loans to other countries. 

Mr Thomas:  The Minister is generous in giving way, and I am encouraged that he is determined to fight to retain Britain’s seat on the IMF board. The review of the quotas under the IMF is fast approaching—it is due to be completed by January 2011—which has potential implications, as he will be aware, because of how the new arrangements for borrowing have been amended for the retirement of lending capacity under the special drawing rights. What is the coalition Government’s position on the next review of the quotas? 

Mr Hoban:  The hon. Gentleman has served as a Minister in the Department for International Development, so he will know those arrangements well and will understand that several emerging and developing countries are currently under-represented, in terms of quota shares. Those countries will be the principal beneficiaries of that realignment. Alongside the quota review to which he referred, the UK also expects that a broader package of reforms will be agreed, including reforms to increase ministerial engagement with the fund. It is important to reflect the changing dynamics of the global economy. I understand that some of those shares under the NAB have already been adjusted to reflect the change in the distribution of wealth around the globe. 

The expended participation in the NAB will also ensure that the responsibility for providing those resources will be shared more fairly across IMF members. Contributions from other countries are in line with their economic weight in the world. The US contribution will be the largest, at $110 billion. Key emerging markets will also participate: China with $50 billion; and Brazil, Russia and India with $14 billion each. If the IMF needs to call upon NAB resources, it will spread the burden equally across those commitments. 

All countries that have made commitments to the NAB have completed or are in the process of finalising their own domestic legislative requirements. That is why the Government are seeking to increase the limit that the IMF can borrow under the International Monetary Fund Act 1979. The limit is denominated in the IMF’s unit of account—the special drawing right—and currently stands at 12.47 billion SDRs, which is approximately $18.7 billion or £12.2 billion at today’s exchange rate. The order will raise the limit to 18.66 billion SDRs, which is equivalent to about $28 billion, or just over £18 billion. That increase will accommodate the UK’s existing commitments to the IMF and allow the UK to finalise the additional commitment to the NAB of up to $11 billion that was announced last year. 

All hon. Members will appreciate the importance of the measure as the UK must play its full part in ensuring that the IMF remains at the centre of the economic recovery and that it is equipped to fulfil its role in promoting strong, sustainable and balanced economic growth. I hope that hon. Members will support the statutory instrument that is before us today. 

4.40 pm 

Mr Thomas :   I am grateful for the opportunity to serve under you, Mr Dobbin, on what I understand is your first statutory instrument, and for your relaxed

attitude to what we wear in the Committee Room. Let me say at the outset that I do not expect to encourage my colleagues to divide on this order. Indeed, we warmly welcome it. As the Financial Secretary said, it is one of the outcomes of the G20 London summit, which was held in April 2009, and of the subsequent discussions that took place after the G20 summit in late April and November on how to expand the NAB. Indeed, the order is a reminder of the extraordinary challenges that the G20 and many other nations had to confront as a result of the global financial crisis. 

Let me say gently that the coalition Government have sought to paint a picture for the British public that somehow our economic position is unique, that our deficit is the only one that needs reducing and that our challenges are worse than any other nation the world over. In the communiqué from the G20 summit, the world’s most powerful nations agreed that we were facing the deepest challenge to the world economy in modern times, which is affecting the lives of women, men and children in every country. They specifically noted that it was a global crisis, not a British one, that required a global solution. The agreements, an element of which we are now discussing, went some considerable way towards helping to maintain stability and to increase confidence across the global economy. 

Kelvin Hopkins (Luton North) (Lab):  I agree entirely with my hon. Friend. Given the Government’s present policies, does he not agree that if we were driven back into recession our esteem in the world might not be quite as high as it is now? 

Mr Thomas:  My hon. Friend makes a very good point. It was salutary for the coalition Government to have the IMF downgrading our growth prospects so soon after the Budget. My hon. Friend alludes to our standing in the G20. One fundamental element of the package that was agreed last April was an agreement to increase the resources available to the IMF. I join the Financial Secretary, and no doubt many others, in welcoming the process of completing the granting of that lending capacity to the IMF. None the less, I have a number of questions. Will the Minister give us an update on the progress that other members of the G20 are making to agree their share of this increase in the IMF’s lending capability? 

The Financial Secretary said that some 27 countries were receiving help from the IMF. Has he or his colleagues in the Treasury had any indication that the IMF will want to draw down access to further UK resources this year? Perhaps he can tell us how the IMF is involved in monitoring the impact on European and global financial markets of the stress tests of European banks that are taking place at the moment. There are worries that those stress tests may throw up further concerns about levels of liquidity in the world’s capital markets. 

As I alluded to earlier, the IMF is seeking to amend the framework under which the new arrangements to borrow are organised. One issue that is flagged up in the document is the suggestion that there remains an issue for the IMF as to whether or not it will be appropriate to use some part of the increased quota resources to retire borrowing from the NAB in full or in part. The Minister began to give me an answer to that question, but could he give us further detail of the Government’s position, given the proximity of the January quota

deadline? That would be helpful. Is the IMF seeking a significant increase in its funding from the UK as a result of the quota review? 

The agreement to expand the IMF’s new arrangements to borrow was part of a package of measures agreed last April, not only to modernise the IMF but to boost the capacity generally of multilateral financial institutions. As the Minister alluded to, that meant extra money being immediately available to the international financial institutions; additional longer-term lending capacity, which is part of today’s discussion; and reform. He must recognise, as I am sure the rest of the Committee does, that the IMF has a crucial role in supporting the stability of the international monetary system, with core responsibilities of economic surveillance and providing financial assistance. 

Given the Financial Secretary’s experience in the brief, I suspect that he also recognises that the question of how to reinvigorate, revitalise and further legitimise the role of the IMF has been the subject of some discussion internationally, for some time. Intertwined in the G20 deal last April, and confirmed as recently as in Toronto, was a commitment by all those nations to complete a series of reforms on quota and voice issues, and a call for the acceleration of the substantial work still needed on other IMF governance and mandate reforms. 

The first set of reforms was agreed back in April 2008, including proposals for a new quota formula, ad hoc quota increases and an increase in the voice of low-income countries. To become effective, the package of reforms on voice and participation needed the backing of 112 member countries—some 85% of total voting power. How close are we to getting that 85%? 

A further commitment was to end the existing convention whereby the president of the World Bank always has to be from the United States and the managing director of the IMF always from Europe. Does the Minister support an end to that convention? What steps are he and his colleagues in the Treasury and in the Department for International Development taking to realise that commitment? In short, when can we expect a genuinely open, transparent and merit-based selection process for those two key appointments? 

As I said in an intervention, how the IMF’s governance could change has been debated for some time. The Financial Secretary is, I am sure, aware of the eminent persons group headed by Trevor Manuel. I am sure, too, that he is aware of the work of the Stiglitz commission and, indeed, of the various G20 working groups that looked at such issues. 

On mandate, I mentioned the role of special drawing rights as principal reserve assets. Secondly, some argue that the fund lacks an explicit global mandate to oversee financial stability in all its dimensions going forward. Where do the Financial Secretary and his colleagues stand on that question? Thirdly on the mandate, where does he stand on the suggestion that the IMF should be able to advise nations on the pace of financial liberalisation? 

Lastly, the Financial Secretary touched on political oversight of the IMF’s work in his answer to one of my interventions. Ideas include the possibility of creating a ministerial council with decision-making powers; a smaller board with chairs for more emerging and developing

country; the modification of voting rules; deputy managing director posts being opened up not only to geographical appointments but to much more merit-based processes. Can he give the Committee some indication of where the Government stand on those questions? What steps are they taking to deliver change in that area? 

4.49 pm 

Michael Fallon (Sevenoaks) (Con):  I shall be brief. I will not follow the hon. Member for Harrow West in some of his initial remarks and his attempt to portray our own financial mismanagement over recent years as somehow being on a par with the financial mismanagement of other countries. I understand the sensitivities on that point, and I shall not pursue it. 

However, the hon. Gentleman is right about one thing: this is a big increase in the special drawing rights, which, as I understood it, was always meant to be accompanied by structural reform, not just reform of the lending framework. He is right about that, and I look forward to hearing from my hon. Friend the Financial Secretary where we are on some of the structural reform issues. 

My second point may assist my hon. Friend in answering the first. The previous Government introduced, but then lost enthusiasm for, a way of keeping Parliament more informed about progress in the IMF. They used to produce an annual report on the United Kingdom Government’s role and decision making inside the IMF, including, where necessary, a report on the various votes that had taken place. Later, they lost interest in it, and the report appeared intermittently. Does my hon. Friend see any merit in reviving some better mechanism whereby Parliament can be kept properly informed about what our representative, Ministers and Chancellor are doing on our behalf in the IMF, and where we are on reform? 

Finally, we had a fleeting glimpse of my hon. Friend the Member for Stone (Mr Cash). Even if he is not with us in person, he is almost always with us in spirit. I would like to ask how much of the £18 billion is actually available should further crises develop within the eurozone. It has been suggested that some of the eurozone crises could be tackled by a combination of European Central Bank action or some new European monetary fund, but when problems approach and firm up, and action has to be taken, the expertise and facilities of the IMF are almost always brought more rapidly into play. I would like to know how this big increase in the drawing rights extends our liability should future IMF loans be required if the balance sheets of some of the larger eurozone countries deteriorate further. 

Kelvin Hopkins:  It is a pleasure to serve under your chairmanship, Mr Dobbin. I did not intend to speak, but I was tempted to do so by the previous presentation. 

Special drawing rights and the IMF were part of a package created by Keynes and others at Bretton Woods, but also part of the package was a world where there was the possibility of flexible exchange rates. If countries are locked into an exchange rate not of their own choosing, and which they cannot sustain, simply throwing good money after bad is not sensible. 

I would suggest to my hon. Friend the Member for Harrow West and to the Financial Secretary that they should perhaps argue for some of the eurozone countries

re-creating their own currencies and using currency depreciation as part of the measures to overcome their problem. They should not simply rely on endless bail-outs which, in the end, will not work. 

4.53 pm 

Mr Hoban:  I thank hon. Members for their contributions to the debate, and I shall deal with the questions that have been raised. 

The hon. Member for Luton North and my hon. Friend the Member for Sevenoaks asked about bail-outs to eurozone countries, and the hon. Member for Harrow West referred to the stress testing that is occurring at present. We want to be careful about linking those issues. The stress testing is meant to assess the stability of the European banking system. If banks fail the tests, it is the responsibility of national Governments, along with their regulators and the banks themselves, to determine how best to respond to the issues thrown up by the tests, and that may require public or private intervention to strengthen the banks. 

The stress tests do not necessarily relate to the IMF, although, in connection with Greece, there is clearly an issue about whether the IMF would lend money to Greece—that is where the interaction comes. It is important that the stress tests are transparent and credible; frankly, if they are not, the whole exercise will be a waste of time. It is important that they are seen to be credible, and that a plan is in place should banks fail those stress tests. 

In terms of progress from others, countries are at various stages in implementing measures through domestic legislation. However, the expanded NAB will become effective only once all countries have completed their domestic legislative procedures. It is not a case of one country going first and being exposed; all countries need to go through the process. If the NAB is activated, the IMF would draw evenly across all participating countries to ensure that the burden is shared. 

A number of questions have been asked about the governance of the IMF. That is an ongoing issue; it is not related to the NAB, but it will be related to the review of quota shares. Alongside the quota review, the UK expects a broader package of reforms to be agreed, including reforms to increase ministerial engagement within the fund. There is also—this reflects a point raised by the hon. Member for Harrow West—the need for an open, transparent and merit-based selection process in all international financial institutions, as well as further work on reforming IMF surveillance and lending instruments. The Government are committed to ensuring that we look carefully at how the IMF is governed. With all international bodies, it is important to have a sense that people are selected on their merits rather than on where they come from. 

The hon. Gentleman raised the issue of the role of the IMF and the oversight of the financial system, and he asked a question about the banking crisis and the eurozone banking system. There is an urgent need for a better understanding of the links between the financial sector and the real economy, and of the cross-border spill-over effects. Work was done at the G20 conference and through the Financial Stability Board to address those issues, but the IMF should lead the international community’s approach to that challenge, and must shift some of its focus on surveillance to look at the financial

sector and macro-financial stability. Action has been taken at an UK and European level to look more closely at the stability of the macro economy, and that needs to be done at an international level. It is vital to do that at a global level so that we have a common understanding of global vulnerabilities and can ensure the underpinning of effective global co-operation. We are placing our trust in a series of interlocking bodies. 

My hon. Friend the Member for Sevenoaks raised the prospect of the UK lending to eurozone countries through the IMF. In that situation, the UK will assess and vote on any programme put to the executive board on the basis of its own merits. In assessing the programme, the executive board will focus mainly on three things: the appropriateness of reform plans and political commitment to the authorities; the impact on debt sustainability; and whether the programme is fully financed. That potentially relates to the suggestion that any bail-out of the eurozone would be jointly financed by the eurozone countries and the IMF. A rigorous process is in place to check that where IMF money is deployed, good reform plans are in place and there is a political commitment to deliver. 

Mr Thomas:  The hon. Member for Sevenoaks asked an interesting question about the opportunity for further parliamentary discussion on the work of the IMF. I do not recognise his description of the final part of the last Government’s approach to that issue, but he raises an important point about the opportunity for a more ongoing discussion between Ministers and Parliament about ministerial engagement in the work of the IMF and the IMF’s work more generally. What opportunities does the Minister think will be made available to Parliament to provide the opportunity for such a discussion? 

Mr Hoban:  Unlike the hon. Gentleman and my hon. Friend the Member for Sevenoaks, I have not looked at what engagement the previous Government had with Parliament on the IMF, other than the debate that took place on the topic last year. I will look into that matter, and see how best we can engage Parliament in further debate on the role of the IMF. The International Development Committee, the Treasury Committee or the Back-Bench business committee could also consider the issue as a topic for debate. There is no shortage of parliamentary opportunities these days to raise such issues and engage in that discussion about the future role of the IMF. 

The hon. Gentleman referred to the conclusion of the G20 summit in April last year. The G20 recently concluded that countries such as the UK with significant deficits should take action to curb those deficits and reduce them, and was very positive about the work done by this Government to tackle the issue and deal with the inheritance left us by the hon. Gentleman and his colleagues. I hope that the Committee will support the statutory instrument. 

Question put and agreed to.  

Resolved,  

That the Committee has considered the draft International Monetary Fund (Limit on Lending) Order 2010. 

5.1 pm 

Committee rose.