Headline : IMF members delay quota changes, agree to maintain funding
- Members of the International Monetary Fund (IMF) have agreed to maintain its funding at $1 trillion but postponed changes to its voting structure.
Highlights of the deal
- The deal will allow an extension of non-permanent, supplementary sources of funds, such as the New Arrangement to Borrow (NAB) and the bilateral borrowing facility.
- The agreement extended the bilateral borrowing facility by a year —to the end of 2020 — and a potential doubling of the NAB.
- The agreed package will leave IMF quotas (the primary source of IMF funds), which determine voting shares, unchanged. Instead, these will be reviewed before the end of 2023.
About: IMF Quotas and Voting Share:
- An important factor that helps the IMF’s functioning is the quota. This quota is basically money that a member country has to give to the IMF and as per the norms, each member has to subscribe a quota of the IMF.
- For any member country, out of the quota, 25% should be paid in the form of foreign currency or gold (called as reserve tranche or gold tranche) to the Fund.
- The remaining 75% in the form of domestic currency (called as credit tranche).
How the size of quota for each member country is determined:
- When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members that are broadly comparable in economic size and characteristics.
- The IMF uses a quota formula to guide the assessment of a member’s relative position, which depends on its economic importance.
- The current quota formula (applied for 14th quota review) is a weighted average of GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent).
- India’s quota is 2.76% and China’s is 6.41%, while the U.S.’s quota is 17.46 %.
Multiple purposes of Quotas:
- Quota subscribed by the members indicates funds provided by the members to the IMF, and hence it constitute to the resource base of the IMF.
- A member country’s loan availability depends upon size of its quota. The amount of financing a member can obtain from the IMF (called as access limit) thus depends upon its quota.
- The size of quota basically determines voting power of a member.
- As per the IMF rules, for an important resolution to be passed, at least 85% of the votes should be secured. This means that the US, with 16.54 % of voting power, enjoys a veto power.
- Thus, a member’s quota indicates basic aspects of its financial and organizational relationship with the Fund.
Review of Quotas:
- Quotas are supposed to be reviewed every five years although these reviews can be delayed — as was the case with the 14th review.
- That process, completed in 2010, needed approval of the U.S. Congress, and it was not closed out till early 2016.
- The review’s outcomes included a doubling of the quota total and a shift in some voting rights to under-represented and emerging market countries.
About: Permanent Resource Base
- Quotas are the IMF’s main source of financing, wherein each member of the IMF is assigned a quota, based broadly on its relative position in the world economy.
- Quotas of each of the IMF’s 189 members increased to a combined SDR 477 billion (about US$668 billion) from about SDR 238.5 billion (about US$334 billion) after the 14th quota review.
About: New Arrangements to Borrow (NAB)
- It is a renewable funding mechanism that has existed since 1998. Through the New Arrangements to Borrow (NAB) a number of member countries and institutions stand ready to lend additional resources to the IMF.
- The NAB constitutes a second line of defense to supplement IMF resources to forestall or cope with an impairment of the international monetary system.
- Concurrent with the quota increases under the 14th Review, the NAB was rolled back from SDR 370 billion to SDR 182 billion in February 2016.
- The activation of NAB requires support from 85% of creditors eligible to vote
About: Bilateral Borrowing Agreements
- The IMF had entered into Bilateral Borrowing Arrangements after the 2008 financial crisis to increase its lending ability. BBAs serve as a third line of defense after quotas and the NAB.
- In 2016, in view of continued uncertainty in the global economy, the membership committed to maintain access to bilateral borrowing, under a revised borrowing framework.
- The initial term was till the end of 2019 extendable for a further year with creditors’ consents.
- Activation of the agreements requires support from 85% of creditors eligible to vote
Criticisms and call for governance reforms at IMF
Domination of developed countries:
- Some IMF members are frustrated with the pace of governance reforms, as the balance of economic and geopolitical power has shifted, becoming more dispersed, particularly with the emergence of China and India.
- Developed countries have been seen to have a more dominant role and control over less developed countries (LDCs).
- The scholarly consensus is that IMF decision-making is not simply technocratic, but also guided by political and economic concerns.
- The United States has historically been openly opposed to losing its “leadership role” at the IMF, and its “ability to shape international norms and practices
- The criticism of the US-and-Europe-dominated IMF has led to what some consider ‘disenfranchising the world’ from the governance of the IMF.
Discrepancy in the calculated and actual quotas:
- While quotas as computed by the above formula are the basic starting point in allocating shares, they serve as guidance rather than as a rigid rule, since the IMF’s Board of Governors has full discretion in decisions about shares.
- There are significant differences between actual and calculated quotas. Notably, for Europe and the euro area, actual quotas are higher than calculated quotas.
- For China, the actual quota, at 6.4 percent, is only about half of the calculated quota.
- Many developing countries are up in arms that this discrepancy in particular merits quick correction.
Over reliance on non-permanent sources of funding:
- Out of the three main financing sources, only one is a permanent feature and there has been an overreliance on non-quota sources of funding.
- This is inconsistent with the IMF’s basic principle that quota subscriptions should be the main source of IMF resources. Hence, the reliance on alternate funding sources should be reduced.
Narrow development concerns:
- The IMF is only one of many international organisations, and it is a generalist institution that deals only with macroeconomic issues, while its core areas of concern in developing countries are very narrow.
- Hence, the IMF should work towards close partnerships with other specialist agencies such as UNICEF, the Food and Agriculture Organization (FAO), and the United Nations Development Program (UNDP).