International Monetary Fund Annual Report 2016

Chapter

Spotlights

Author(s):
International Monetary Fund
Published Date:
September 2016
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Quota Reform for a More Representative, Modern IMF

The reforms significantly increased the IMF’s core resources, enabling the institution to respond to crises more effectively and also improve the IMF’s governance by better reflecting the increasing role of dynamic emerging market economies and developing countries in the global economy.

In December 2015, the U.S. Congress adopted legislation to authorize the IMF 2010 quota and governance reforms, and all the conditions for their implementation were met in January 2016. These wide-ranging historic reforms are a crucial step that has strengthened the Fund’s role in supporting global financial stability.

Implementation of the reforms, approved by the Board of Governors in 2010, has enabled a more representative, modern IMF that is better equipped to meet the needs of its member countries in the twenty-first century. The reforms built on an earlier set of institutional changes passed by the Board of Governors in 2008.

Main Outcomes of the 2010 Quota and Governance Reforms

More than 6 percent of quota shares are shifted to dynamic emerging market economies and developing countries, and also from overrepresented to underrepresented members.

All IMF members’ quotas increase as a result of the agreed bolstering of the Fund’s quota resources (measured in Special Drawing Rights or SDRs—see next page). Total quota resources rise to about SDR 477 billion (about $659 billion) from about SDR 238.5 billion (about $329 billion).

The quota shares and voting power of the IMF’s poorest member countries are protected.

Four emerging market economies (Brazil, China, India, and Russia) are now among the IMF’s 10 largest members, joining the United States, Japan, and the four largest European countries (France, Germany, Italy, and the United Kingdom).

Advanced European economies have committed to reducing their combined Executive Board representation by two chairs.

For the first time, all seats on the IMF Executive Board will be held by Executive Directors elected by IMF member countries. Previously, five of the seats on the Executive Board were reserved for Directors appointed by the members with the five largest quotas.

Multicountry constituencies with seven or more members may now appoint a second Alternate Executive Director so that their constituencies are better represented on the Executive Board.

Box 1.1:How do IMF quotas work?

Each IMF member country is assigned a quota, based broadly on its relative position in the world economy.

Quota subscriptions are a central component of the IMF’s financial resources. A member country’s quota determines its maximum financial commitment to the IMF, voting power, and access to IMF financing.

Quota Formula

The current quota formula is a weighted average of GDP (weight of 50 percent), openness to the global economy (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 purchasing-power-parity exchange rates (40 percent). The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members

Special Drawing Rights

Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account. The Imf’s largest member is the United States, with a quota (as of April 30, 2016) of SDR 83 billion (about $118 billion), and the smallest member is Tuvalu, with a quota of SDR 2.5 million (about $3.5 million).

Each member is obliged to provide financial resources based on its quota.

Subscriptions

A member’s quota subscription determines the maximum amount of financial resources the member is obliged to provide to the IMF. A member must pay its subscription in full upon joining the Fund: up to 25 percent must be paid in SDRs or other members’ currencies specified by the IMF, and the rest is paid in the member’s own currency.

Each member gets access to financing based on its quota.

ACCESS TO FINANCING

The amount of financing a member can obtain from the IMF (known as its access limit) is based on its quota. For example, under certain types of loans, a member can borrow up to 145 percent of its quota annually and 435 percent cumulatively, under normal access. Above these levels, “exceptional access” can be provided if specific risk-mitigating criteria are met.

A member’s quota largely determines its voting power in IMF decisions.

Voting Power

Each member gets an equal share of what are called “basic votes,” plus additional votes based on quota.

Annually, a member can borrow up to 145 percent of its quota.

Cumulatively, a member can borrow up to 435 percent of its quota.

SDR ALLOCATIONS

Quotas also determine how SDRs are allocated to countries.

Reform of the International Monetary System

As the international community continues to assimilate and build upon the lessons of the global financial crisis, the IMF has embarked on a process to better understand the challenges facing the international monetary system (IMS). This process includes a review whose purpose is to identify the system’s evolving shortcomings and lay the foundations for reforms that can strengthen resilience and long-term growth.

The work on the IMS also seeks to refine the IMF’s role at the center of the global economy, building upon the last review conducted in 2011. The current review began with a set of papers, issued in March 2016, designed to enrich policy discussions within the Fund and in other key international settings, including at the G20. It will provide a narrative for various projects incorporated into the IMF Work Program, including the global financial safety net, the size of the Fund, the role of the SDR, the Fifteenth General Review of Quotas, and analysis of capital flows.

The IMS review follows several IMF initiatives that were part of the reforms growing out of the crisis; for example, the introduction of integrated surveillance and the strengthening of financial sector surveillance, both intended to sharpen the Fund’s focus on risks and vulnerabilities; the broadening of spillover work; and the overhaul of the lending toolkit.

But the process of assessing the IMS requires that new challenges be taken into account: how to enhance the process of globalization to the broad benefit of all players in the global economy, address China’s rebalancing, and adjust to lower commodity prices and differences in monetary conditions among the world’s major economies. In particular, as the world navigates a low-growth environment and emerging market and developing economies continue to integrate and deepen their financial markets, risks and vulnerabilities associated with interconnectedness and openness need to be managed.

While the Fund is at the center of the IMS, it is part of a larger system with central banks and other standard-setting agencies. The Fund’s role is to provide analysis and a shared understanding: it will be up to the Fund’s membership to take reform forward.

The IMF also contributes to the international monetary system by providing part of a global financial safety net that is responsive to three imperatives: encouraging better policymaking, financing adjustment at a reasonable pace, and providing insurance to “innocent bystanders” that may be affected by instability. Another level of the safety net is regional financing arrangements, such as the Chiang Mai Initiative, and the IMF seeks ways to work more closely with them.

Box 1.2:How can the international monetary system be improved?

The IMF has conducted an assessment of the international monetary system. The first stage of the assessment is a set of analytical papers that the Executive Board discussed in informal sessions in March 2016. The first paper, “Strengthening the International Monetary System—A Stocktaking,” examines structural shifts that underline the need to continue to strengthen the system. It identifies potential areas for reform that would bolster crisis prevention efforts and global mechanisms for adjustment, cooperation, and liquidity provision.

The paper outlined three possible areas of reform:

  • ◾ Mechanisms for crisis prevention and adjustment;

  • ◾ Rules and institutions for enhanced global cooperation on issues and policies affecting global stability; and

  • ◾ The need to build a more coherent global financial safety net.

The second paper, “The Adequacy of the Global Financial Safety Net,” assesses the strengths, weaknesses, and challenges of the matrix of measures put in place to support the global economy in times of stress. These include international reserves, central bank swap arrangements, regional financing arrangements, IMF resources, and market-based instruments.

The paper establishes that the global financial safety net today is much larger and more multilayered than before and that it has been enhanced over time, notably with refinements to the IMF’s surveillance and lending frameworks. However, the study also recognizes that there is scope for improving the current configuration of the safety net to enhance the predictability, reliability, and speed of insurance and financing mechanisms against shocks and to provide the right incentives for countries to implement sound macroeconomic policies.

Chinese Currency Added to SDR Basket

On November 30, 2015, the Executive Board completed a regular five-yearly review of the basket of currencies that make up the SDR. The Board decided that the Chinese renminbi met all criteria for inclusion in the SDR basket, and, effective October 1, 2016, is determined to be a freely usable currency that will be included in the SDR basket as a fifth currency, along with the U.S. dollar, euro, Japanese yen, and British pound.

Under the SDR valuation method, the SDR currency basket is reviewed every five years unless developments in the interim justify an earlier review. SDR reviews evaluate the currency selection criteria, the selection of currencies, the weighting methodology, and the composition of the SDR interest rate basket, with a view to making the SDR more attractive as an international reserve asset.

After the Executive Board met and approved inclusion of the renminbi in the SDR basket, Managing Director Christine Lagarde issued the following statement:

The Executive Board’s decision to include the renminbi in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.

In making the decision to include the renminbi, Executive Directors “noted the substantial increase in the international use and trading of the renminbi since the last review, across all the indicators used to inform the assessment. They agreed that the renminbi can now be considered, in fact, widely used to make payments for international transactions” and “widely traded in the principal exchange markets”

The SDR interest rate will continue to be determined as a weighted average of the interest rates on short-term financial instruments in the markets of the currencies in the SDR basket.

Benchmark Interest Rates, 2010 and 2016

Benchmark rates used as representative interest rates for the five currencies in the basket on October 1, 2016 (once the inclusion of the renminbi in the SDR is effective):

  • ◾ U.S. dollar: market yield for three-month U.S. Treasury bills

  • ◾ Euro: three-month euro yield (three-month spot rate for euro area central government bonds with a rating of AA and above published by the European Central Bank)

  • ◾ Pound sterling: market yield for three-month U.K. Treasury bills

  • ◾ Japanese yen: three-month Japanese Treasury discount bill rate

  • ◾ Renminbi: three-month benchmark yield for China Treasury bonds (published by the China Central Depository & Clearing Co., Ltd.)

Benchmark rates used as representative interest rates for the four currencies at the 2010 review:

  • ◾ U.S. dollar: market yield for three-month U.S. Treasury bills

  • ◾ Euro: three-month Eurepo rate

  • ◾ Japanese yen: three-month Japanese Treasury discount bill rate

  • ◾ Pound sterling: market yield for three-month U.K. Treasury bills

Box 1.3:What is the currency weighting of the SDR basket?

The five currencies in the new SDR basket will be weighted as follows as of October 1, 2016, based on the formula agreed by the IMF Executive Board:

Figure 1.1SDR basket currency weighting, as of October 1, 2016

Figure 1.2SDR basket currency weighting, 2010

Year of Development Changing the Music

There is an African proverb: “When the music changes, so does the dance.” This year, we have the chance to take a new approach—to change the music—and put all countries firmly on the path to sustainable, inclusive growth.

—Managing Director Christine Lagarde, in a July 8, 2015, speech at the Brookings Institution

With 2015 designated the Year of Development, the international community focused on building a global partnership to enable low-income developing countries to lay the foundations for inclusive and sustainable growth in the coming decades. At the core of the effort are the Sustainable Development Goals (SDGs)— a set of targets adopted by the United Nations (UN) in September 2015 that span a range of economic, social, and environmental goals. The SDGs replace the Millennium Development Goals, a set of targets for the period 2000–15 that centered on halving global poverty and improving development indicators related to health and education. The challenge for donor countries and international financial institutions is to make the accomplishment of these goals a reality.

The IMF stepped up with a package of commitments that were presented at the Third International Conference on Financing for Development, held in Addis Ababa, Ethiopia, in July 2015. The measures were set out in two policy papers discussed by the Executive Board on July 1 and July 6. The Board approved a comprehensive approach that includes enhanced financial support and intensified policy advice, technical assistance, and capacity development. The Fund’s commitments were outlined in the speech by Managing Director Christine Lagarde to the Brookings Institution.

The Fund’s commitments to the international community go beyond financing, reflecting the fact that the SDGs address a broad range of issues at the core of the IMF’s mandate. These include domestic revenue mobilization, expenditure efficiency and effectiveness, attracting and managing capital flows, expanding public investment, and international policy issues such as maintaining global financial stability and international tax cooperation. Many of these issues were discussed in September 2015 when UN members gathered in New York City to launch the SDGs and were highlighted in an IMF Staff Discussion Note issued for that gathering. The IMF already devotes one-fifth of its capacity development spending to providing tax policy and tax administration assistance, and further resources will be allocated under the new measures (see Box 1.4 on IMF commitments, page 19).

Climate change is inextricably linked to sustainable development because the world’s poorest people are most affected by the issues raised by humans’ accelerating impact on the environment. A third international gathering on these issues took place in Paris in December 2015, producing a landmark agreement that provides a framework for meaningful progress on climate change mitigation. A Staff Discussion Note produced at that time outlined the fiscal, macroeconomic, and financial implications of climate change.

The IMF also plans to help countries address large infrastructure gaps more efficiently and sustainably by providing advice and technical assistance in key areas of public investment management needed for effective infrastructure spending. The IMF will deepen its analysis of the relationships between public investment, growth, and debt sustainability to help identify the appropriate pace for scaling up infrastructure spending.

The first steps toward inclusive and sustainable development were taken in 2015. The challenge is to continue that work into the future.

Financing for Development Policy Priorities

Early in 2016, the Fund assessed the initial progress on Financing for Development at a UN meeting. Four priorities were identified:

  • ◾ Each country must take the lead in establishing the economic and financial stability that is a prerequisite for sustainable development, but these efforts must be supported by international cooperation.

  • ◾ Greater international cooperation on tax issues is crucial to ensure enhanced resource mobilization, particularly to limit the shifting of profits to low-tax locations. The IMF is committed to stepping up technical assistance on tax policy and administration.

  • ◾ A focus on inclusive growth is needed in order to attain stronger overall economic growth. This means, for example, improving girls’ education and removing disincentives and barriers to women’s employment in tax and benefits systems.

  • ◾ Countries need to place more emphasis on energy taxation and less reliance on energy subsidies. Fund analysis shows that worldwide subsidies total $5.3 trillion, or 6.5 percent of global GDP. Reducing this spending will free up resources for more productive uses, including in developing countries.

Myanmar: Reforming Taxes for Inclusive Growth

After 50 years of relative isolation, Myanmar faced the challenge of modernizing its tax system to match the demands of a more open and dynamic economic environment and to mobilize revenue to fund overdue structural and social reforms. The country’s tax-to-GDP ratio stood at below 7 percent in 2012, one of the lowest in the world, and the authorities sought to boost tax revenues in a fair, equitable, and transparent manner.

The IMF helped design a reform strategy with the support of a multipartner trust fund, the Tax Policy and Administration Topical Trust Fund. The main goal of the reform is to strengthen the institutional capacity of Myanmar’s tax administration and prepare both the administration and the business community for longer-term tax reforms. Outcomes include a broadened tax base and improved compliance.

From a very low base, Myanmar has made progress:

Since 2012, revenues from major taxes have increased on average more than 20 percent annually.

Compliance by large taxpayers in the areas of registration, on-time filing, and payment is nearing international good practice.

Tax policy reforms focusing on broadening the base of indirect taxes have begun, and the tax department is better positioned to begin a review of the direct-taxes base.

An important task of the reform effort is to build stronger public understanding of the role of taxation in financing essential public goods and services and also to ensure an understanding that paying taxes is a hallmark of an effective modern nation. Myanmar will need wide-ranging support in its pursuit of inclusive growth for many years, but early results look promising.

Small States’ Resilience to Natural Disasters and Climate Change

At a time of climate change, small island states in the Pacific Ocean and the Caribbean Sea are among the countries most susceptible to natural disasters, including cyclones, tsunamis, and floods. Climate change itself poses risks to the continued survival of some Pacific islands.

The IMF’s ongoing work with small states encompasses a range of macroeconomic and related policy issues, and as the incidence of natural disasters affecting small states has increased in recent years, the focus of the work has shifted toward policies aimed at strengthening the policy response to natural disasters and climate change.

While analytical work had previously been conducted on a country-by-country basis, in June 2015 staff published the first cross-country study quantifying the impact of natural disasters: an IMF Working Paper titled “Enhancing Macroeconomic Resilience to Natural Disasters and Climate Change in the Small States of the Pacific.”

The paper concluded that assessing the prospective fiscal costs and growth impact of natural disasters is key to evaluating the Pacific island countries’ long-term prospects. Building estimates into the macroeconomic framework before an event occurs can help enhance countries’ disaster risk management and thus the ability to cope with such events, the paper said.

Integrating such prospective costs into each country’s debt sustainability analysis could help determine the magnitude of the need for fiscal and financial buffers and other sources of financing. Such a process also can determine the fiscal space available for building infrastructure to address natural disasters and climate change. These steps would enable IMF policy advice to be better tailored to each country’s needs.

The study will be followed in FY2017 by a policy paper on the same theme, assessing how the Fund can best support growth and boost resiliency in small states in the Caribbean and Pacific regions.

In May 2015, the staff report “Macroeconomic Developments and Selected Issues in Small Developing States” was publicly released. The paper developed the analysis from several previous papers on small states and was discussed by the Executive Board in an informal session during fiscal year 2015.

Box 1.4:What are the IMF’s commitments to Financing for Development?

The core IMF financing commitments under Financing for Development announced in July 2015 include three key elements:

  • ◾ Making more money available to eligible low-income countries by expanding access to IMF concessional facilities by 50 percent—a commitment that took on added importance during FY2016 as slowing growth in emerging markets and declining commodity prices put new pressure on many developing countries

  • ◾ Channeling concessional financing toward the poorest and most vulnerable countries

  • ◾ Setting the interest rate at zero for loans extended under the Rapid Credit Facility, which is designed to assist countries hit by natural disasters and fragile/postconflict states

The IMF also supports Financing for Development through its capacity development activities.

Capacity Development Tax Policy and Administration Reform

Boosting domestic revenue mobilization is a key area in which IMF expertise—and the support of its partners—is being tapped to help its member countries achieve the UN Sustainable Development Goals.

Peru

Since October 2011, the IMF—with support from the Swiss State Secretariat for Economic Affairs (SECO)—has been providing technical assistance to Peru’s revenue administration to strengthen revenue mobilization.

The core work of the project has focused on deepening taxpayer compliance. The project was developed in the customs and tax administration agency (SUNAT) and involved implementing a risk-based audit system for each taxpayer segment and an integrated taxpayer current account, centralizing systems for auditing tax and customs operations, and strengthening coordination between different levels of the agency.

During 2015, the SECO-financed program funded two IMF missions and three short-term expert assignments. A review found that the objectives had been achieved, with significant increases in tax collections (Figure 1.3) and substantial reductions in the value-added tax compliance gap (Figure 1.4).

Figure 1.3Peru: Five-year tax burden

(Tax collection as a percentage of GDP)

Source: SUNAT estimates.

Figure 1.4Peru: VAT compliance gap, 2003–13

(Percent of potential tax revenues)

Source: SUNAT estimates.

Mauritania

Mauritania has seen tax revenue collection increase significantly in recent years, well above the median for low-income countries. Between 2009 and 2014, total revenue increased from 20.4 percent to 27.6 percent of GDP, and total tax revenue increased from 11.5 percent to 18.5 percent of GDP (Figure 1.5). While booming mining activities drove economic growth, the country’s nonresource sector contributed most to the remarkable improvement.

Figure 1.5Mauritania: Government resource and nonresource revenues

(Percent of GDP)

Source: WEO database, country authorities, and IMF staff calculations.

The increase can be partly explained by a series of actions to simplify and improve the tax system following a multiyear IMF technical assistance program. The program was supported by two IMF topical trust funds, Tax Policy and Administration Topical Trust Fund and Managing Natural Resource Wealth.

Kosovo

As a postconflict country, Kosovo faced serious obstacles to ensuring adequate public revenues to fund services when it joined the Fund in 2009. Tax compliance had to be improved. Government institutions were new, and the economic situation was difficult.

The IMF has managed a tax administration modernization project for Kosovo since 2010 with funding from the Swiss development agency SECO. Through this project, the Tax Administration of Kosovo (TAK) has substantially improved its management and organizational arrangements.

TAK’s approach to tax compliance now can be considered regional best practice. Since 2012, TAK has allocated its operational resources by tailoring administrative activities to specific tax risks. The idea is to achieve the greatest impact on taxpayer behavior and administrative efficiency. A strong monitoring system has been established.

Improving fairness has also been a priority. TAK has taken steps to build trust and cooperation with taxpayers. As a result, tax collections have strengthened significantly, with revenues up 8.5 percent in 2015 compared with 2014 and a tax-to-GDP ratio that has steadily increased from 20.3 percent in 2009 to 22.2 percent in 2015.

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