IMF Quota Formula Review: still a long way to go
On January 30, 2013, the IMF Executive Board issued a short report on the outcome of its discussion regarding the quota formula review. Judging from the extent of remaining disagreement, the objective of completing the review by 2013 is not met and there is still a long way to go.
By Christophe Destais
Post
On January 30, 2013, the Executive Board (EB) issued a short (less than 4 pages) report on the outcome of its discussion regarding the quota formula review. This report diplomatically notes that “Important progress has been made in identifying key elements that could form the basis for a final agreement on a new quota formula." Hence, though progress was made, the January 2013 deadline for the Review to be completed, set in 2010, was not met. The Executive Board’s report goes on listing always in diplomatic terms the points of agreement and disagreement. Judging from the extent of remaining disagreement, there is still a long way to go.
IMF quotas represent the “share” each member state holds in the fund. They carry four functions. They represent the maximum financial commitment to the IMF of each member state. In reality, though, only a limited share of the quotas is actually mobilized by the Fund, partly because the less affluent members or the beneficiaries of Fund’s loans are exempted and partly because the actual drawings on the available quotas are limited to roughly 35% of their nominal amount. They are the base for calculating each member’s voting power. Quotas also determine the members’ shares in general allocations of Special Drawing Rights (SDRs), an international currency that was created at the end of the 60’s but that is little used. Finally, the amount of financing a member can obtain from the IMF is also a multiple of its quota, but this is theoretical and access to Fund’s money may be higher.
The agreement on the current quota formula dates back only to 2008 and it became effective on March 3rd, 2011. It was aimed at reinforcing the weight of developing and emerging countries with a shift of more than 6 percent of quota shares to dynamic emerging market and developing countries (EMDCs). China became the 3rd largest member country in the IMF and four EMDCs (Brazil, China, India, and Russia) are among the 10 largest shareholders in the Fund. The 2008 reform package also included an increase of the voting shares of developing countries.
A review (the “14th General Review of Quotas”) of the quotas was agreed in 2010 at the Seoul G20 meeting. It resulted in the doubling of quotas [1]. A reform of the EB of the IMF was attached to it. The reform of the EB has not been ratified by a qualified majority, mostly because the US has so far refrained from doing it and so far, this package has not entered into force. The 14th General Review did not change the 2008 quota formula but it was decided that a new comprehensive review of the quota formula be completed by January 2013.
The January 30th Executive Board report builds on this decision. It shows some progress but falls short of meeting the deadline. On the process, the report says that it was agreed to integrate and move in parallel the revision of the quota formula with the discussion on the 15th Review of the quotas, which will deal with the global volume of quotas with possible one shot changes in allocation between members. This review is due by January 2014, so this is equivalent to postponing the January 2013 deadline. It was also agreed that an agreement would require a global package, which means that partial agreements cannot be contemplated. Finally, the EB agreed that “measures should be taken to protect the voice and representation of the poorest members”.
However, the report shows that there is still disagreement as to whether a quota formula reform is necessary at all. Between 2005 and 2010, the aggregate calculated quota share of emerging market and developing countries increased by 7.7 percentage points. The report says that “Some [presumably among the industrialized countries] saw this shift as providing evidence that the current formula adequately captures dynamic developments in the world economy and is not in need of radical reform.”
Table 1 below further shows that there is a substantial amount of disagreement on the variables of the quota formula. In most cases, it is easy to read between the lines the divide between the industrialized countries and the emerging and developing ones. For example, the former are against increasing the weight of GDP at purchasing power price, the latter favor such an increase. Industrialized countries are presumably against increasing the weight of foreign exchange reserves, that many emerging countries have accumulated in large quantities, whereas these countries would favor such a move.
A final agreement is likely to be linked to the ratification by the US of the 14th General Review and its associated governance reform. If the US Senate goes ahead with the ratification, an obstacle on the way to the 15th General Review would be cleared. Should the US procrastinate, this would probably lead to a stop of the IMF institutional reform process that was launched in 2008 and a growing frustration of its emerging members.
IMF quotas represent the “share” each member state holds in the fund. They carry four functions. They represent the maximum financial commitment to the IMF of each member state. In reality, though, only a limited share of the quotas is actually mobilized by the Fund, partly because the less affluent members or the beneficiaries of Fund’s loans are exempted and partly because the actual drawings on the available quotas are limited to roughly 35% of their nominal amount. They are the base for calculating each member’s voting power. Quotas also determine the members’ shares in general allocations of Special Drawing Rights (SDRs), an international currency that was created at the end of the 60’s but that is little used. Finally, the amount of financing a member can obtain from the IMF is also a multiple of its quota, but this is theoretical and access to Fund’s money may be higher.
The agreement on the current quota formula dates back only to 2008 and it became effective on March 3rd, 2011. It was aimed at reinforcing the weight of developing and emerging countries with a shift of more than 6 percent of quota shares to dynamic emerging market and developing countries (EMDCs). China became the 3rd largest member country in the IMF and four EMDCs (Brazil, China, India, and Russia) are among the 10 largest shareholders in the Fund. The 2008 reform package also included an increase of the voting shares of developing countries.
A review (the “14th General Review of Quotas”) of the quotas was agreed in 2010 at the Seoul G20 meeting. It resulted in the doubling of quotas [1]. A reform of the EB of the IMF was attached to it. The reform of the EB has not been ratified by a qualified majority, mostly because the US has so far refrained from doing it and so far, this package has not entered into force. The 14th General Review did not change the 2008 quota formula but it was decided that a new comprehensive review of the quota formula be completed by January 2013.
The January 30th Executive Board report builds on this decision. It shows some progress but falls short of meeting the deadline. On the process, the report says that it was agreed to integrate and move in parallel the revision of the quota formula with the discussion on the 15th Review of the quotas, which will deal with the global volume of quotas with possible one shot changes in allocation between members. This review is due by January 2014, so this is equivalent to postponing the January 2013 deadline. It was also agreed that an agreement would require a global package, which means that partial agreements cannot be contemplated. Finally, the EB agreed that “measures should be taken to protect the voice and representation of the poorest members”.
However, the report shows that there is still disagreement as to whether a quota formula reform is necessary at all. Between 2005 and 2010, the aggregate calculated quota share of emerging market and developing countries increased by 7.7 percentage points. The report says that “Some [presumably among the industrialized countries] saw this shift as providing evidence that the current formula adequately captures dynamic developments in the world economy and is not in need of radical reform.”
Table 1 below further shows that there is a substantial amount of disagreement on the variables of the quota formula. In most cases, it is easy to read between the lines the divide between the industrialized countries and the emerging and developing ones. For example, the former are against increasing the weight of GDP at purchasing power price, the latter favor such an increase. Industrialized countries are presumably against increasing the weight of foreign exchange reserves, that many emerging countries have accumulated in large quantities, whereas these countries would favor such a move.
A final agreement is likely to be linked to the ratification by the US of the 14th General Review and its associated governance reform. If the US Senate goes ahead with the ratification, an obstacle on the way to the 15th General Review would be cleared. Should the US procrastinate, this would probably lead to a stop of the IMF institutional reform process that was launched in 2008 and a growing frustration of its emerging members.
Table 1 - Agreements and disagreements on the variables of the IMF quota formula
[1] From approximately SDR 238.4 billion to approximately SDR 476.8 billion, about US$720 billion at current exchange rates.
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