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Augmenting the IMF’S Resources

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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The how and why of the quota increase under the Ninth General Review, which strengthens the role of the IMF in the international monetary system

On June 28,1990, the Board of Governors of the IMF adopted a resolution—in connection with the Ninth General Review—providing for a 50 percent increase in the total of members’ quotas from SDR 90.1 billion to SDR 135.2 billion (about $190 billion). This is the seventh general increase in quotas in the IMF’s history (see Table 1), and, in absolute SDR terms, it is the largest. The decision came after nearly three years of discussions among the then 152 member nations, by far the IMF’s most protracted quota exercise. At stake were salient issues surrounding the overall size of the quota increase, the distribution of the increase among members, possible changes in rankings among the major industrialized nations, and the institution’s ability to deal with the problem of overdue financial obligations to the IMF.

Table 1Reviews of IMF quotas
ReviewBoard of Governors’

adoption of

resolution
General or equiproportional

increase in

quotas
Overall

increase1

in IMF

quotas
(In percent)
First quinquennialNo increase proposed
Second quinquennialNo increase proposed
1958/59February 2,195925060.7
April 6, 1959
Third quinquennialNo increase proposed
Fourth quinquennialMarch 31, 19652530.7
Fifth GeneralFebruary 9, 19702535.4
Sixth GeneralMarch 22, 1976Increases varied

by country

groups
33.6
Seventh GeneralDecember 11, 19785050.9
Eighth GeneralMarch 31, 19831947.5
Ninth GeneralJune 28, 19903050.0
Source: IMF Treasurer’s Department.Note: The IMF conducts a general review of quotas at intervals of not more than five years, and if appropriate, increases the quotas of its members.

Includes the effect of special increases for some members, as well as the general increase for all members as proposed under the quota review.

Provided for an equiproportional increase of 50 percent and special increases for 3 countries; the resolution adopted in April 1959 provided for special increases for 14 other countries.

Source: IMF Treasurer’s Department.Note: The IMF conducts a general review of quotas at intervals of not more than five years, and if appropriate, increases the quotas of its members.

Includes the effect of special increases for some members, as well as the general increase for all members as proposed under the quota review.

Provided for an equiproportional increase of 50 percent and special increases for 3 countries; the resolution adopted in April 1959 provided for special increases for 14 other countries.

The decision to raise quotas by 50 percent represents a strong commitment on the part of the international community to maintain the effectiveness of the IMF in fulfilling its central role in the international monetary system. The quota increase comes at a time when dozens of countries throughout the world are undertaking major programs of structural adjustment and implementing far-reaching market-oriented reforms, while still struggling with sizable debt burdens. In addition, several nations—particularly in Eastern Europe—have only recently joined the IMF, and others are expected to join in the months and years ahead. The quota increase will also reduce the IMF’s reliance on borrowing, protect the liquidity and usability of members’ claims on the IMF, signal to member countries and to other external creditors that the IMF stands ready to meet the legitimate needs of all members for balance of payments financing in the early 1990s, and help encourage the availability of other sources of external finance.

As of October 31, 1991, 89 members, having 61.12 percent of total quotas on May 30, 1990, had consented to the quota increase, and 50 members, having 44.06 percent of the total voting power, had accepted the proposed Third Amendment of the IMF’s Articles. Total membership during the Ninth Review was 152. At end-October, 1991. it stood at 156.

Certain conditions must be met, however, before the quota increase can take effect. First, to become effective on or before December 30, 1991, the proposed increases need to be consented to by members having not less than 85 percent of existing quotas; after December 30, 1991, the required level declines to 70 percent. This requirement—called the minimum participation requirement—reflects the cooperative nature of the quota increase and helps to stabilize the overall quota structure and members’ relative voting power while individual quotas are being adjusted (see box on functions of quotas).

Functions of Quotas

Each member of the IMF is assigned a quota, expressed in Special Drawing Rights (SDRs), which represents its share in the IMFs capital and determines many aspects of its relationship with the institution. Quotas have four main functions:

Subscription. Each member must pay its subscription to the IMF equal to the full amount of its quota.

Voting power. Each member has 250 basic votes plus one additional vote for each SDR 100,000 of quota. Many of the principal policy and operational decisions of the IMF require more than a simple majority of votes. A member’s voting power has a bearing on its representation on the Executive Board, the decision-making body that conducts the day-to-day business of the IMF.

Access. The upper limits to the amount of financing that a member can obtain from the IMF under the various lending facilities are determined in proportion to its quota.

SDR allocation. When the IMF determines that there is a need for an allocation of SDRs, each member shares in the allocation in proportion to its quota.

Second, as part of the overall quota increase package, it was agreed that no increase could become effective before a proposed amendment to the IMF’s Articles of Agreement, which is aimed at helping to solve the problem of arrears to the IMF, is in place. For this to happen, three fifths of the members, holding 85 percent of the total votes, must accept the amendment, as is the case with all amendments to the Articles. The Third Amendment provides for suspension of voting and other related rights for members that do not fulfill their obligations under the Articles. At its May 1990 meeting, the Interim Committee stated that “every effort should be made by members to ensure that both the quota increase and the amendment shall be effective before end-1991.”

Determining overall size

The IMF’s Articles of Agreement do not specify what factors should be taken into account when quotas are reviewed, or how quota increases should be determined. But draft proposals for the Articles in 1943–44 envisaged virtually automatic adjustment of members’ quotas based on an agreed formula, which included such variables as national income, international trade, reserves, and the size and magnitude of fluctuations of members’ balance of payments.

Over time, the nature of the quota discussions has evolved, increasingly taking account of the overall need for international liquidity. During this review, the focus was also on the tasks of the IMF and its size, concentrating on four critical factors: the IMF’s prospective role in the international monetary system in the early 1990s; the growth and changes in the world economy since the previous quota increase in 1983; the potential demand for IMF resources in support of members’ growth-oriented adjustment programs and the IMF’s policy on access to its resources; and the IMF’s liquidity position, including the need to reduce the institution’s reliance on borrowed resources, which increased sharply in the early 1980s.

Role of the IMF. The IMF’s work and policies are wide ranging, and reflect the diverse and changing needs of its member countries. First, the IMF gives confidence to its members by being in a position to provide them with sufficient resources should they encounter external payments difficulties. This encourages members to take adjustment measures at an early stage, before balance of payments problems become protracted and more difficult to resolve. It also encourages the adoption of more liberal trade and payments arrangements—despite possible adverse balance of payments effects in the short run—with anticipated substantial benefits for both the country itself and the world economy over the long term.

Second, the IMF serves as a catalyst for helping members attract the bulk of their needed balance of payments financing from other sources, typically from commercial banks and official lending and aid agencies. It does this by promoting structural and economic adjustment, which helps them achieve growth and a sustainable external payments position, thereby increasing the likelihood that they will be able to service their debts.

Third, the IMF’s role in the strengthened international debt strategy calls for it to be able to provide financing for debt and debt service reduction, as well as additional amounts for interest support, in accordance with guidelines agreed in 1989.

Fourth, the IMF is also a repository of members’ reserves. Its financial structure is unique and distinct from that of other multilateral financial institutions, such as the World Bank, in that the resources that member countries make available give rise in part to liquid claims on the IMF that the members may draw at any time. The IMF must preserve this monetary character of its liabilities not only by ensuring the revolving character of its resources—repayment by some members replenishes the pool of funds available to other members—but also by holding at all times sufficient resources to safeguard the liquidity and immediate usability of members’ claims on the IMF. These claims should be at least of equal standing—in terms of risk, return, and usability—as the alternative instruments customarily used by members for holding foreign reserves.

IMF quotas and world economic growth

(Index: 1972=100)

Source: IMF Treasurer’s Department.

Growth in the world economy. It may be expected that, for the IMF to be in a position to meet the prospective demands for balance of payments assistance from its members, the institution should expand broadly in line with growth in the world economy and international trade and capital flows. However, there is no single measure of the size of the world economy, or of other indicators relevant to determining the size of the increase in quotas.

Most indicators of the level of world output, international trade and payments and their variability, and international capital flows pointed to substantial growth since the previous increase in quotas. For example, the average level of current account payments of IMF members for the period 1981–85 (the period used in the Ninth Review—see box on formulas) was 62 percent higher than that for the previous five-year period 1976–80 used for the Eighth Review. Similarly, the aggregate GDP of IMF members in 1985 was some 46 percent above the level in 1980, while the variability of current receipts, which is an indicator of members’ potential current account imbalances, had increased by about 66 percent.

It was also recognized that there is no direct relationship between growth in the world economy and increases in the size of the IMF—indeed, quota increases have tended to lag behind the growth of world output and trade over the past two decades (see chart). Moreover, the growth rates recorded by individual IMF members’ economies sometimes diverge substantially from average quota increases for the membership as a whole.

Demand for IMF’s resources. Several considerations pointed to the likelihood of relatively strong demand by IMF members for balance of payments financing in the first half of the 1990s:

• External payments imbalances are projected to remain relatively large in the world economy generally, and in particular, among the developing countries—including many whose access to private market financing is limited and, in some cases, whose levels of international reserves are relatively low;

• Since the onset of the debt crisis in 1982, commercial banks have generally hesitated to provide new balance of payments financing on any significant scale, and it is expected that the resumption of such financing will be predicated mainly on the adoption of strong programs of adjustment supported by the IMF and in conjunction with IMF financing; and

• There will be additional demands associated with the IMF’s role in providing resources for debt and debt-service reduction, which was agreed in May 1989 to strengthen the international debt strategy, on top of the need to support both the recent moves by a number of centrally planned economies to institute far-reaching market-oriented reforms and measures taken by other member countries to liberalize trade barriers.

IMF liquidity, access, and borrowing. In light of the projected demand, changes in the world economy, and the importance of maintaining the role of the IMF, an important question then became how much of an increase would be needed to ensure that the institution has a sufficient pool of liquid assets in relation to members’ potential access to its resources, while simultaneously reducing the reliance on borrowed funds. Until the mid-1970s, the IMF had had little need to look beyond the resources generated by members’ quota subscriptions to meet the demands for credit by its members. But following the two oil price shocks and the rise in inflation in the early 1980s, it became clear that the institution would have to borrow from official sources. This trend was reinforced by the debt crisis and the consequent effective withdrawal by commercial banks from balance of payments lending in the 1980s. As a result, the IMF’s outstanding borrowings rose by more than SDR 10 billion in the period 1981–85, and for the past decade, almost half of the credit extended by the IMF has been financed by borrowed resources. As part of the Ninth Review, however, it was agreed that the IMF should reverse this trend and avoid any further borrowing, in the absence of abnormal circumstances.

Given the strong demand in the early 1990s projected by the IMF staff, this meant that the IMF’s liquidity position would deteriorate quite sharply unless quotas were raised. Other factors that figured in this reasoning were (1) the fact that the IMF was repaying borrowed resources, as scheduled under its agreements with official lenders; and (2) the recognition that there could be a decline in the usability of currencies, as had occurred on a number of occasions in the past.

As for the IMF’s policy on the amount that members could borrow (i.e., the limits on their access to IMF resources), the Interim Committee agreed at its May 1990 meeting that the existing access limits in terms of quotas should remain unchanged until the increase in quotas took effect. At that time, however, the access policy would be reviewed and new limits set based on the size of the quota increase.

Determining the distribution

The other major issue during the recent quota exercise was how the agreed upon increase would be distributed among the members, a matter that also influenced deliberations on the overall size of the increase. Four guiding principles governed the discussions: the need to take into account members’ relative positions in the world economy; the need to maintain a balance between different groups of countries; the need for all members to receive a “meaningful” increase (i.e., a credible minimum, given the expansion in the size of the world economy); and the desire to obtain a method of distribution that would apply equally to all members. It was also well recognized that the resulting distribution would determine members’ relative voting power and have a bearing on members’ representation on the Executive Board.

As it turned out, these guiding principles did not all point in the same direction. Providing a meaningful increase for all members and maintaining a balance between different country groups suggested that the distribution be preponderantly in proportion to members’ existing quotas. But reflecting the relative economic positions of individual member countries suggested a more differentiated approach, whereby relatively larger increases would be considered appropriate for those members whose actual shares in quotas had not kept pace with their relative economic positions. Such a “selective” distribution would also tend to strengthen the IMF’s liquidity position, because those countries with relatively high rates of economic growth over sustained periods have also tended to have relatively strong external positions, making their currencies more likely to be usable in IMF operations. The larger the size of the overall increase, the lesser is the conflict between these various objectives. This occurs because it will be easier to provide all members with both a meaningful increase in their quotas and an element that reflects differential rates of economic growth among them.

Quota formulas

Quota formulas, based on economic data, are used to derive a calculated quota for a member, which provides an important, if approximate, quantification of the relative size of the member’s economy. The calculated quotas thereby provide a basis for measuring in a consistent and comprehensive manner adjustments in individual quotas that reflect members’ relative positions in the world economy.

Under the Ninth Review, a calculated quota was determined for each member on the basis of the following five formulas:

Reduced Bretton Woods formula:

(0.01Y + 0.025R + 0.05P + 0.2276VC) x (1 + C/Y)

Other modified formulas:

Scheme III formula:

(0.0065Y + 0.0205125R + 0.078P + 0.4052VC) x (1 + C/Y)

Scheme IV formula:

(0.0045Y + 0.03896768R + 0.07P + 0.76976VC) x (1 + C/Y)

Scheme M4 formula:

0.005Y + 0.042280464R + 0.044(P + C) + 0.8352VC

Scheme M7 formula:

0.0045Y + 0.05218008R + 0.039(P + C) + 1.0432VC,

where Y is GDP in 1985; R is average monthly reserves in 1985; P is annual average current payments in 1981–85; C is annual average current receipts in 1981–85; and VC is variability of current receipts, defined as one standard deviation from the five-year moving average in 1973–85.

The results of each of the four modified formulas were first uniformly adjusted so that for each formula the sum of calculations for all members equaled that derived from the reduced Bretton Woods formula. A member’s calculated quota was then derived as the larger of (1) the result of the Bretton Woods formula and (2) the average of the lowest two results of the other four formulas.

In the end, the distribution technique adopted resulted from a balancing of these different objectives. The Executive Directors decided that 60 percent of the overall increase would be allocated as a general increase to all members in proportion to their present quotas (i.e., each member received a general increase of 30 percent of present quota). The remaining 40 percent would be distributed to all members on a selective basis, in proportion to their shares in the total of so-called “calculated quotas.” These calculated quotas provide a measure of members’ relative economic positions, using a set of formulas that employ recent data on each member’s GDP, current account transactions, and official reserves (see box on quota formulas).

This 60/40 distribution arrangement was similar to the one adopted under the Eighth Quota Review, except that the relative sizes of the general and selective elements were reversed (i.e., under the Eighth Review, 40 percent went for a general increase, and 60 percent for a selective increase). The proportions chosen for the Ninth Review reflected the concern that all members should receive a meaningful increase in quota and the desire to maintain a balance between the major country groups. Indeed, the agreed distribution will moderate the decline in the aggregate quota share of the group of non-oil developing countries.

The Ninth Review also included two sets of special adjustments. The first involved a restructuring of quota shares among the Group of Seven industrial nations, using essentially an ad hoc method, though generally in the direction of their respective shares in calculated quotas. The United States will continue to hold the largest quota and thus the highest number of votes (see Table 2); indeed the voting power of the United States was unchanged as a result of the Ninth Review. Japan—which received a special increase—will now move up from fifth to second, along with Germany. The United Kingdom and France will both rank fourth under an agreement on an equal distribution of quotas between themselves under the Ninth Review and subsequent reviews of quotas, with Italy holding seventh place and Canada eighth. Saudi Arabia was unaffected by this realignment and will hold to the sixth largest quota.

Table 2Ten largest quotas in the IMF(In millions of SDRs)
MemberEighth ReviewMemberNinth Review
United States17,918.3United States26.526.8
United Kingdom6.194.0Germany8,241.5
Germany5,403.7Japan8,241.5
France4.482.8France7,414.6
Japan4,223.3United Kingdom7,414.6
Saudi Arabia3.202.4Saudi Arabia5,130.6
Canada2,941.0Italy4,590.7
Italy2,909.1Canada4,320.3
China2,390.9Netherlands3,444.2
Netherlands2,264.8China3,385.2
Source: IMF Treasurer’s Department.
Source: IMF Treasurer’s Department.

The second special adjustment was made for members with very small quotas. Four countries—Antigua and Barbuda, Bhutan, Maldives, and Seychelles—received increases to fully reflect their shares in calculated quotas. It was also agreed, as under the Eighth Review, that the new quotas for the 20 countries with existing quotas of less than SDR 10 million would be rounded up to the nearest SDR 0.5 million, rather than to the nearest SDR 0.1 million, as agreed for all other members. These adjustments were made to allay concerns that some of these countries faced particular problems because of their small size—including a greater need for external financing—that might not be adequately captured by the quota formulas. In addition, it was felt that the quotas of certain countries in this group were low relative to their calculated quotas in comparison with other members with very small quotas.

As for the formulas used to make these quota calculations, the Executive Board decided not to make any changes at this time, although it discussed possible modifications, such as including a measure of per capita income or of members’ relative importance in international finance. The topic will be taken up again when the preparatory work begins for the Tenth Review. The IMF must undertake the next general review of quotas by March 31,1993, though it may conduct such a review earlier if there is a clear need to do so.

Determining payment method

The means of payment was not changed in this latest quota exercise. As before, part of the subscription (not more than 25 percent) must be paid in reserve assets—formerly in gold, until the Second Amendment of the Articles in 1978, and currently in SDRs or any usable currency; the balance must be paid in the member’s own currency. Help will also again be available for those members (typically, with relatively low holdings of external reserves) who have difficulty meeting the reserve asset portion of their quota increase—they may borrow SDRs from other members. Under the Ninth Review, a member in arrears to the IMF may not consent to, nor pay for, the increase in its quota until it has become current in its obligations. The IMF’s Executive Board, however, may extend the period for consent and payment, in light of the situation of members that have not yet consented or paid, including those countries in arrears to the IMF that are judged to be cooperating with the IMF toward the settlement of these arrears.

Orlando Roncesvalles and Andrew Tweedie

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