March 28, 2024
Understanding the debate over IMF quota reform
On December 18, 2023 the International Monetary Fund (IMF) Board of Governors approved a 50 percent increase in the Fund’s quota resources, with contributions from members in proportion to their current share holdings. This would raise the Fund’s permanent resources to $960 billion, effective November 25, 2024 when members with 85 percent of the votes will have ratified changes in their quota contributions.
The Governors left unresolved the more challenging problem of changes in the relative distribution of quotas, and thus voting shares, in favor of emerging market and developing countries (EMDCs). Instead, Governors requested the Fund to develop and propose a new quota formula by June 2025.
Starting with the Spring 2024 meetings, the debate will focus on quota reform to better reflect the changing weights and roles of member countries in the global economy and financial system. There are two related issues to be addressed: changing the quota formula used to produce the so-called Calculated Quota Shares (CQS); and the political negotiations to determine the Actual Quota Shares (AQS). The current AQSs were set at the end of the 14th Quota Review in 2010 and are not aligned with the CQSs as last updated in 2021 by the IMF staff.
Changing the quota formula: More complicated than it looks
The IMF quota formula has been specified as follows.
CQS = (0.50 GDP + 0.30 Openness + 0.15 Variability + 0.05 Reserves)*k
GDP is a blend of 60 percent GDP at market rates and 40 percent at PPP exchange rates. Openness is the sum of annual current payments and current receipts on goods, services, income, and transfers. Variability is the standard deviation of current receipts and net capital flows. Reserves are twelve-month running averages of FX and gold reserves.
And k is a compression factor set to be 0.95 to reduce the dispersion of the results.
Quota is the basis to calculate members’ capital contributions to the Fund; to specify their access to Fund resources (borrowing up to 200 percent of a member’s quota annually, 600 percent cumulatively, and more in exceptional cases); and to help determine their voting shares. Specifically, each member has 250 basic votes (all together set at 5.502 percent of total votes). The rest of the voting shares are determined based on the actual quota shares (AQSs) and denominated in the IMF’s Special Drawing Rights (SDR): one vote per SDR 100,000 of quota. This arrangement with basic votes leads to a mathematical adjustment whereby big members’ voting shares are adjusted to be slightly less than their AQSs while the opposite is true for small members.
As mentioned above, the current AQSs are mis-aligned with the 2021 CQSs for important countries—basically China’s AQSs are significantly less than its CQSs, the US CQSs are substantially under-represented relative to its GDP, while Europe’s AQSs are way over-represented compared to its GDP. But a simple reform changing members’ AQSs to match their CQSs would lead to outcomes not necessarily welcomed by many countries.
Specifically, China is quite under-represented with AQS of only 6.389 percent compared with its CQS of 13.715 percent. However, boosting China’s AQS to its CQS means reducing the AQSs of many other countries towards their CQSs. For example, the United States would have to go from 17.395 to 14.942 percent (thus losing its veto power over important decisions requiring 85 percent support); the EU from 25.3 to 23.4 percent (its over-representation is more pronounced when compared to its blended GDP ranking of 17.29); Japan from 6.46 to 4.91 percent; Latin America from 8.1 to 6.55 percent and Africa from 5.25 to 3.93 percent. Except for China, this outcome is hardly what many EMDCs have in mind. Moreover, many in the United States could object to the fact that both its CQS and AQS significantly underweight its share of the global economy—at 21 percent on a blended basis and even more at 24.4 percent at market rates.
As a consequence, there will be intense debate on changing the quota formula itself to produce CQSs more favorable to different groups of members.
First of all, emerging market and developing countries, represented by the G24, have been pushing for only using purchase power parity (PPP) exchange rates in calculating GDP shares. This would increase their weight in the global economy from 42.7 percent at current market rates to 58.9 percent on a PPP basis—helping to boost their IMF quota shares. However, since the PPP methodology is designed to compare the purchasing power of people living in different countries, favoring those with low levels of prices of non-tradable goods and services, it is questionable if that is the right metric to compare the relative weight of countries in international economic interactions which are conducted at market rates.
Secondly, the importance given to the openness of the current account reflects the 1950-1970 era when trade dominated international economic interactions. Since the 1980s, capital flows— and with them, the size, liquidity, and sophistication of capital markets and the currencies most used in denominating international assets and liabilities—are becoming much more important in affecting global financial stability. Taking these developments into consideration would rank the United States higher than focusing only on current account transactions. By contrast, China would rank lower in such a comprehensive approach.
Finally, the emphasis on reserves is overstating their usefulness in contributing to global financial stability. Under the current dollar-based financial system, it is the US Federal Reserve (Fed) that can act as a lender of last resort to supply dollars to stabilize global financial crises—like in 2008 and subsequent dollar funding crises. To give the United States very low ranking on this variable (1.164 versus China’s 28.125) because it hardly needs to hold FX reserves—being the country issuing the reserve currency—doesn’t make a lot of sense.
What else should be included in quota calculations? Addressing efforts to deal with climate change, the Center for Economic and Policy Research (CEPR) has proposed adding a new variable in the formula to reflect members’ shares of cumulative CO2 emission since 1944. This approach would significantly reduce the voting shares of large CO2 emitters and increase those of low emitters. Consequently, the US voting share would fall from 16.5 percent to 5.65 percent, China from 6.08 percent to 5.26 percent, while the share of the Global South collectively would rise from 37 percent to 56.4 percent at the expense of advanced countries. The problem with this idea is that countries’ contributions to CO2 emission do not correspond to their relative capacity to support the IMF mandate of maintaining global economic and financial stability.
Further fragmentation is the path of least resistance
At the end of the day, the direction of any changes in the quota formula and relative distribution depends on political negotiation among members. Basically, there exists a gap between aspirations in the Global South for a “fairer and more just” distribution of voting power at the IMF and the reality of countries’ contributions to helping the Fund carry out its mandate. Africa vividly illustrates this gap: many have complained of the fact that the continent accounts for almost 18 percent of the world population but commands only 6.5 percent of the voting share at the IMF—however, its share of the global economy is only 2.7 percent.
But any aspiration for reform needs to account for the reality of political negotiation. In an international negotiation, positive outcomes depend on a sufficient degree of mutual trust among negotiating partners. Given the current geopolitical rivalry, trust has been replaced by mutual distrust and antagonism, making it extremely difficult to reach agreement among major countries to change the quota formula and relative distribution.
As a result, the path of least resistance for the international community is to continue the recent trend of fragmentation, particularly in global financial safety net arrangements. Countries have strengthened self-insurance by accumulating FX reserves—worth almost $12 trillion at last count, more than $7.5 trillion of which held by EMDCs. More efforts have been made to develop regional rescue facilities. These include the European Stability Mechanism (with maximum lending capacity of €500 billion or $540 billion), the Chiang Mai Initiative Multinationalization (with $240 billion of pooled reserves) and the BRICS Contingent Reserves Arrangements (worth $100 billion now but will be increased by contributions from new members such as Saudi Arabia and the UAE). More important has been the growth of major central banks’ currency swap and liquidity provision arrangements—such as the Fed’s unlimited swap lines with five major Western central banks, made permanent in 2013; and its standing repurchase agreement (repo) facility with foreign and international monetary authorities (FIMA repo facility) launched in 2021. China’s PBOC has concluded currency swap agreements with more than forty counterparties totaling more than $550 billion.
Naturally such a fragmented global financial safety net would be cumbersome and difficult to coordinate to reach a forceful and timely response to crises—let alone coping with the possibility of some of these facilities working at cross purposes—thus imposing a cost on the global economy in terms of lost efficiency. But as Walter Cronkite used to say: “That’s the way it is!”.
Hung Tran is a nonresident senior fellow at the Atlantic Council GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.