Concerns are growing over Washington’s potential withdrawal from global institutions, including the International Monetary Fund (IMF) and the World Bank. U.S. Treasury Secretary Scott Bassett’s absence from the G-20 summit has further intensified these concerns. If the United States withdraws from the IMF and the World Bank, what could happen?
- What Do the IMF and World Bank Do?
The United States and its allies established these two institutions in the aftermath of World War II to promote global solidarity and prevent future conflicts.
Since the global economic crisis of 1976, the IMF has become the lender of last resort, helping countries such as Greece, Argentina, and even the United Kingdom during financial turmoil. It provides emergency cash and loans to help nations stabilize their economies. However, IMF loans come with conditions requiring economic reforms, budget transparency, anti-corruption measures, and revenue enhancements.
Meanwhile, the World Bank provides low-interest loans for essential projects like railways, flood control, and green bonds. It also advises countries on financial transparency and risk management.
- Who Needs IMF Assistance?
Emerging market economies are heavily dependent on the IMF. For example, Argentina cannot pay government salaries without IMF support. Similarly, countries from Senegal to Sri Lanka rely on IMF funds.
Investors also see the IMF as a crucial factor in assessing private and bilateral financial stability in program-participating countries. According to Yarlun Sidikov, head of emerging markets at Amundi (Europe’s largest asset manager), the IMF has long been a trusted entity for debt investors.
Even bilateral lenders, such as Saudi Arabia, closely follow the IMF’s loan decisions. Saudi Finance Minister Faisal Ali Ibrahim has emphasized that every dollar or riyal lent through institutions like the IMF holds greater financial value.
- What Does the World Bank Do?
The World Bank plays a vital role in financing projects related to clean energy and infrastructure. It collaborates with public-private investment initiatives through its private investment arm, the International Finance Corporation (IFC).
Wealthy nations, including the U.S., fund these institutions to maintain global financial stability and encourage open economic models. Mark Sobel, chair of the U.S. Official Monetary and Financial Institutions Forum (OMFIF) and a former senior U.S. Treasury official, states that both institutions align with U.S. strategic interests by providing financial support to countries like Egypt, Pakistan, and Jordan.
“If economic instability develops in areas where the U.S. has interests, it could harm the American economy,” Sobel warned.
- Do Developing Nations Want the IMF?
The IMF often recommends unpopular reforms, such as cutting energy subsidies or increasing tax revenue. These measures sometimes trigger public unrest in developing countries.
For example, Kenya witnessed massive protests last summer following an IMF recommendation. The IMF also has some non-member nations, including Cuba, North Korea, and Taiwan.
- What Happens if the U.S. Withdraws?
According to Kan Nazli, director of emerging market debt at Neuberger Berman, “It would be a disaster.”
The U.S. is the IMF’s largest stakeholder, funding over 16% of the institution. It contributes a similar percentage to the World Bank. These institutions serve as major policy tools for U.S. decision-makers, helping Washington exert global influence at a relatively low cost.
If the U.S. withdraws, experts and investors will be alarmed. The move could allow China and other nations to expand their influence in global financial institutions.
Other countries could step in to fill the financial void, particularly China, which has shown increasing interest in playing a bigger role in global institutions. Beijing has previously pushed for IMF shareholding restructuring to give emerging economies more power. Currently, China holds just over 5% of IMF shares.
Sobel noted that a U.S. withdrawal would severely impact the effectiveness of both institutions and ultimately benefit China.