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# Reforms in IMF Quota

International Monetary Fund (IMF) is an international organization which was conceived at UN conference in Bretton Woods in 1944. IMF’s primary aim is to ensure stability of international Monetary System (i.e. exchange rates etc.) for the purpose of smoother transactions among member countries or all over the world. It does it in three ways: surveillance of economy of all188 member countries, lending to countries with balance of payments difficulties, and giving practical/technical help to members by helping in framing economic or financial policies etc.

IMF QUOTA: Introduction

When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members of broadly comparable economic size and characteristics. The IMF uses a quota formula to help assess a member’s relative position.

The current quota formula is a weighted average of GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent). For this purpose, GDP is measured through a blend of GDP—based on market exchange rates (weight of 60 percent)—and on PPP exchange rates (40 percent). The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members.

Quotas are denominated in Special Drawing Rights (SDRs). The largest member of the IMF is the United States, with a current quota (as of January 25, 2016) of SDR 42.1 billion (about \$58 billion), and the smallest member is Tuvalu, with a current quota of SDR 1.8 million (about \$2.5 million).

IMF QUOTA: Rolein IMF

A member's quota determines that country’s financial and organizational relationship with the IMF, including:¬

Subscriptions:It can be called subscription fee that a member have to pay when member joins IMF and subscription is decided by help of IMF quota. A member must pay its subscription in full upon joining the Fund: up to 25 percent must be paid in SDRs or widely accepted currencies (such as the U.S. dollar, the euro, the yen, or the pound sterling), while the rest is paid in the member's own currency.

Voting power:IMF quota determines voting power of any member in IMF decisions. Each IMF member’s votes are comprised of basic votes plus one additional vote for each SDR 100,000 of quota. The number of basic votes is fixed at 5.502 percent of total votes under 2008 reforms which is almost 3 times higher than basic votes percentage in previous quota system.

Access to finance from IMF:IMF quota is used to decide amount of finance a member can obtain from IMF.  For example, under Stand-By and Extended Arrangements, a member can borrow up to 200 percent of its quota annually and 600 percent cumulatively. However, access may be higher in exceptional circumstances.

Why Reforms Required

Higher IMF quota simply means more voting rights and borrowing permissions under IMF. But it is unfortunate that formula is designed in such a way that USA itself has 17.7% quota which is higher than cumulative of several countries. The G7 group contains more than 40% quota where countries like India & Russia have only 2.5% quota in IMF. Some countries are over represented in the IMF and that’s why emerging countries are against this quota scheme of IMF.

Due to discontent with IMF, BRICS countries establish a new organization called BRICS bank to reduce the dominance of IMF or World Bank and to consolidate their position in the world as BRICS countries accounts for 1/5th of WORLD GDP and 2/5th of world population.

Further it is almost impossible to make any reform in the current quota system as more than 85% of total votes are required to make it happen. The 85% votes does not 85% countries but countries which have 85% of voting power and only USA has voting share of around 17% which makes it impossible to reform quota without consent of developed countries.

IMF Board of Governors conducts quota reviews meetings at regular interval say in every 5 years. Any revision in IMF quota system shall be approved by at least 85% majority of total voting power ad a member consent is necessary to change its quota in IMF.

In 2010, the Board of Governors completed the 14th General Review of Quotas, which involved a package of far-reaching reforms of the Fund’s quotas and governance. The reform packageis finally implemented in 2016 as US congress was reluctant to ratify the proposal because reform package aims to reduce USA share in IMF.

The reform package builds on earlier reforms from 2008, which became effective from March 2011. These strengthened the representation of dynamic economies—many of which are emerging market countries—through ad hoc quota increases for 54 member countries.  They also enhanced the voice and participation of low-income countries through a near tripling of basic votes.

Major Facts: Proposed 2010 Reforms

• The combined quotas (or the capital that the countries contribute) of the IMF’s 188 members will increase to a combined SDR 477 billion (about \$659 billion) from about SDR 238.5 billion (about \$329 billion),

• 2010 reforms make overall 6% increase for developing countriesand reduce quota share of developed or over represented countries in almost same proportion.

• India’s share has been increased to 2.75% from current level of 2.44% and by jumping 3 spots, India become 8th largest shareholder in IMF.

• China becomes the third largest member country in the IMF, and there will be four developing countries (Brazil, China, India, and Russia) among the 10 largest shareholders in the Fund.

• Preserve the quota and voting share of the poorest member countries. This group of countries is defined as those eligible for the low-income Poverty Reduction and Growth Trust (PRGT) and whose per capita income fell below \$1,135 in 2008 (the threshold set by the International Development Association) or twice that amount for small countries.

• Implementation of 20100 reforms paves the way for comprehensive review of the current quota formula and bringing forward the completion of the 15th General Review of Quotas.

• The 2010 reforms also include an amendment to the Articles of Agreement that would facilitate a move to a more representative, all-elected Executive Board. Once the quota and governance reforms are in effect, there will be two fewer Board members from advanced European countries, and all Executive Directors will be elected rather than appointed, as some are now. The size of the Board will remain at 24, and its composition will be reviewed every 8 years.

Recent reforms

Finally, the International Monetary Fund has made country quota reforms agreed by the G20 in 2010 a reality.

Under this emerging and developing economies gained more influence in the governance architecture of the International Monetary Fund (IMF).

India’s voting rights increase to 2.6 per cent from the current 2.3 per cent, and China’s, to six per cent from 3.8, as per the new division. Russia and Brazil are the other two countries that gain from the reforms.More than six per cent of the quota shares will shift to emerging and developing countries from the U.S. and European countries.

The reforms represent a major step toward better reflecting in the institution’s governance structure the increasing role of dynamic emerging market and developing countries. The entry into force of these reforms will reinforce the credibility, effectiveness, and legitimacy of the IMF. For the first time four emerging market countries (Brazil, China, India, and Russia) will be among the 10 largest members of the IMF. The reforms also increase the financial strength of the IMF, by doubling its permanent capital resources to SDR 477 billion (about US\$659 billion).

These reforms will ensure that the Fund is able to better meet and represent the needs of its members in a rapidly changing global environment. It marks a crucial step forward and it is not the end of change as the efforts to strengthen the IMF’s governance will continue.

However these reforms are just a start but not the end and a long way to go for achieving the goals of liberty and democracy in all over the world.

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