Fourteenth General Review of Quotas: Further Considerations
Author: International Monetary Fund
Publication Date:
09 Feb 2010
eISBN:
9781498336895
ISBN:
9781498336895
Language:
English
Keywords:
PP; quota share; director; GDP blend; share; quota country; share protection; PCDR-eligible country; Emerging and frontier financial markets
Download PDF (2.3 MB)

This paper provides the basis for the next round of discussions on the 14th General Review of Quotas.

Abstract

This paper provides the basis for the next round of discussions on the 14th General Review of Quotas.

I. Introduction1

1. This paper provides the basis for the next round of discussions on the 14th General Review of Quotas. The Committee of the Whole (COW) has so far met three times this year: in March and July to consider the realignment of quota shares, and in April for an initial discussion on the size of the overall increase.2 Directors also met informally with the Managing Director on July 22 to take stock of the remaining issues, keeping in mind the tight timetable for completing the review and the need for flexibility and compromise from all sides. As discussed at the informal meeting, the Board recess provided an opportunity to take stock of the different positions and seek guidance from capitals on possible ways forward, with the goal of reaching a pragmatic solution that could bridge the remaining gaps within the relatively short period of time still available.3

2. While considerable progress has been made, significant differences remain on many of the key issues:

  • Quota size: in April, many Directors expressed a preliminary view that broadly a doubling of quotas would ensure that quota resources remain adequate in most circumstances, with some arguing for a larger increase. A few others were skeptical about the need for an increase beyond that needed to achieve the targeted quota share realignment, and some considered it too early to express a specific view.

  • Quota realignment: at the most recent discussion in July, Directors remained committed to the IMFC-endorsed goal of a shift in quota share of at least 5 percent to dynamic emerging market and developing countries (EMDCs) from over- to under- represented countries, while protecting the voting share of the poorest members. Differences remained, however, on a number of important details, including the potential role of a compressed GDP blend variable in distributing ad hoc increases, the possible scope for mechanisms that could facilitate a larger net shift to EMDCs, and the precise modalities for protecting the voting share of the poorest countries.

3. This paper covers two broad topics. First, it revisits the issue of the size of the Fund in light of Directors’ views expressed in April and subsequent developments. Second, it provides further illustrative simulations of a possible realignment of quota shares, building on the approaches discussed in July. In general, it seeks to explore a somewhat narrower range of options than in previous papers. While recognizing that many Directors have expressed misgivings about some aspects of the approaches discussed in this paper, it is nonetheless hoped that these simulations could help begin to narrow the debate and provide a possible basis—no doubt with further refinements—for building the necessary broad consensus. Given that views remain wide-ranging, it would be premature to present specific staff proposals and the simulations in this paper remain purely illustrative. However, if sufficient progress is made in the discussions, staff could revert quickly with proposals for Directors’ consideration. In addition, staff has circulated separately a supplement presenting specific simulations that were requested by Directors in the previous discussion.4

II. Size of the Fund

Stocktaking

4. In April, Directors discussed a staff paper that considered the size of the Fund in light of a range of indicators and scenario analysis. The paper concluded that a substantial quota increase is needed, with some indicators pointing to a doubling, and other estimates pointing to even larger increases.5 It was noted that, with no general increase since the 11th Review in 1998, quota resources had declined markedly relative to standard economic indicators, including global GDP and international trade and capital flows. Scenario analysis, based on the Fund’s experience during previous crisis episodes and vulnerabilities during “tail” events, also pointed to the need for a sizable increase. The paper noted that a doubling of quotas, together with the expanded New Arrangements to Borrow (NAB), would increase the Fund’s lending capacity to about US$1 trillion, allowing the Fund to support its members under a broad range of scenarios.6 It was also recognized that possible reforms to the Fund’s crisis prevention and resolution instruments could add to these needs.

5. Directors expressed preliminary views, given the need for parallel progress on the quota distribution, the Fund’s future financing role and broader governance reforms.7 They emphasized that the Fund is, and should remain, a quota-based institution, notwithstanding the large increase in its borrowed resources. As noted, most Directors saw a strong case for a substantial increase, with many supporting broadly a doubling and some arguing for a larger increase. A few other Directors were skeptical about the need for a quota increase beyond the amount needed to achieve the targeted realignment of quota shares, and some Directors considered it too early to express a specific view, given the ongoing discussions on other work that might have a bearing on Fund resources.

Subsequent Developments

6. Subsequent developments have further strengthened the case for a substantial quota increase. In particular, the euro area crisis and the establishment of the new European Financial Stability Facility (EFSF) highlight the possibility that large financing needs could arise in support of adjustment programs by advanced countries. These developments have made some earlier scenarios more likely, even if the possibility of such financing needs was already envisaged in the tail risk scenarios prepared for the March paper. In particular, the amounts generated in those scenarios are broadly in line with the notional amounts of potential recourse to Fund financing outlined when the EFSF was announced. This package came on top of the agreement on an SBA for Greece involving the Fund’s largest non-precautionary commitment. These developments highlight the importance of ensuring that the Fund has adequate resources to provide a credible response to potential financing needs by a wide range of members, including advanced economies that may face sizable needs in the event of sudden stops associated with debt rollovers or deposit outflows.8 The availability of such resources may itself help to forestall a crisis even if the resources are never drawn.

7. A second development since the March paper has been the emergence of greater clarity regarding options for further reforms of Fund facilities. The recent Board decisions, including the elimination of the access cap under the FCL and the introduction of the PCL, would tend to raise the crisis prevention demand for Fund resources.9 However, it is also expected that such reforms would lower demand for crisis resolution resources from the Fund, as Fund support would be deployed in a more front-loaded and credible manner, if needed. Taking crisis prevention and resolution implications together, the updated staff analysis10 suggested that the overall resource envelope discussed in the March paper (i.e., a doubling of quotas plus the expanded NAB) appears broadly adequate. The greater role for crisis prevention could accelerate the demand for commitments in a crisis, and a large share of quota resources would ensure that the Fund is well placed to meet the greater potential for a surge in demand for commitments, as quota resources are more flexible than borrowing.

8. Staff has also revisited the indicator analysis prepared in the March paper. While the broad conclusions remain unchanged, some indicators would point to larger increases than previously estimated. One approach presented previously was the comparison of total quotas to a range of standard global indicators (see Table 2 of Fourteenth General Review of Quotas—The Size of the Fund—Initial Considerations (3/15/10). This analysis uses the quota database, which runs through 2008. Staff has examined the potential implications of extending this analysis through 2009 using available data from the IFS and the April 2010 World Economic Outlook (WEO) (see Figure 1). This exercise suggests that a 90 percent quota increase (relative to that agreed in the 2008 reform) would be needed to restore quotas relative to global GDP to the level agreed in the 1980s and 1990s, up from 80 percent reported in Fourteenth General Review of Quotas—The Size of the Fund—Initial Considerations (3/15/10). Based on the quota formula weighted variables, the needed increase would be 164 percent rather than 134 percent.

Table 2.

Summary of Illustrative Simulations: Shifts in Quota Share under Alternative Options 1/

article image

Results for quota increases of 75, 100 and 125 percent. See Tables 1-4 for details.

Includes all under-represented EMDCs plus other dynamic EMDCs defined as those whose PPP GDP share divided by post second round quota share is greater than 1 and who are not over-represented by more than 25 percent.

Figure 1.
Figure 1.

Indicators of the Size of the Fund Quota

(In percent)

Citation: Policy Papers 2010, 009; 10.5089/9781498336895.007.A001

Source: Finance Department.

9. The updated WEO projections also imply significantly higher estimates for members’ prospective external financing needs. In Fourteenth General Review of Quotas—The Size of the Fund—Initial Considerations (3/15/10), quota resources were compared with forward-looking estimates of members’ external financing needs (EFN) for 76 past GRA borrowers, as in previous reviews.11 This analysis suggested that a 110 percent increase would be needed to restore the ratio of quota resources to EFN to its 11th Review level—an estimate that rises to 138 percent when the updated WEO projections are used to project the EFN for this group through 2014. Figure 2 shows the projected path of quotas to EFN for the range of quota increases considered in the next section. In general, an increase of 100-125 percent would initially return the ratio to close to previous levels after which it would begin to decline again.

Figure 2.
Figure 2.

Quota Relative to Estimated Financing Needs of Previous GRA Borrowers

(In SDR billions and percent)

Citation: Policy Papers 2010, 009; 10.5089/9781498336895.007.A001

Source: WEO database and staff calculations1/ In the forecast period, quota resources are assumed to be unchanged in 2010 and to increase in 2011 by 75%, 100%, and 125% respectively, with respect to post second round quota of SDR 238 billion.

10. In sum, the above considerations further strengthen the case for a doubling of quotas. Developments since the April discussion only serve to further underline the potential for members to face large potential financing needs in a world of increasingly globalized capital and cross-border flows. It is important that the Fund has a credible resource base to give confidence to its members and markets that it can meet members’ potential financing needs under a broad range of feasible scenarios. Also, there is now greater clarity on further reform of the Fund’s lending toolkit and its resource implications. In general, this analysis continues to point to a range of quota increases broadly centered on a doubling. Together with the expanded NAB, a doubling of quotas would provide the Fund with a commitment capacity of over SDR 600 billion or close to $1 trillion (Table 1), putting it in a strong position to forestall or cope with potential crises in the coming years.

Table 1.

Commitment Capacity from Quota and NAB Resources

(In billions of SDRs unless otherwise noted)

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Source: Finance Department

NAB total is for activation of the full amount, although some participants in the expanded NAB are not currently in the FTP.

A liquidity buffer of 20 percent is assumed to be retained in the NAB to ensure the reserve asset status of NAB drawings.

Based on three-year average US$/SDR exchange rate of 1.55.

III. Realignment of Quota Shares

Stocktaking

11. The staff paper for the most recent COW meeting in July illustrated three broad approaches to the quota realignment. All three could result in sizable shifts in quota shares—meeting the IMFC-endorsed targets—as well as a significant realignment in rankings among the largest quota countries. The first approach built on that presented in the March paper, involving a combination of selective increases distributed according to the quota formula and ad hoc increases distributed mainly to dynamic EMDCs. The second and third approaches used an alternative key for distributing the ad hoc increases, based either on a mix of the formula and the compressed GDP blend variable, or solely on the latter. These alternative approaches sought to recognize some of the concerns that had been expressed about the formula by a number of Directors in the March discussion.

12. Two further elements were included to facilitate a larger shift to EMDCS: (i) in all cases, the ad hoc increases were concentrated on EMDCs that meet the specified criteria, though with under-represented advanced countries benefitting fully from the selective increases and over-represented advanced countries that are under-represented using the GDP blend protected at up to their post-second round quota share; and (ii) some of the simulations allowed over-represented countries to become modestly under-represented. Simulations were presented for a wide range of overall quota increases (50–150 percent) and for ad hoc increases ranging from 25–40 percent of the increase (a few simulations also included a modest equiproportional increase).

13. Directors expressed a range of views on these approaches. Many saw merit in exploring further the potential role of a compressed GDP variable in distributing ad hoc increases, with some also calling for a greater role for PPP GDP and for exploring alternative options. A number of Directors also encouraged further work along the lines illustrated by the staff to facilitate a larger shift to EMDCs. However, many Directors strongly favored approaches that would not assign effectively larger weights to variables already embedded in the formula, and considered that the formula should remain the primary mechanism for distributing quota increases. Also, many Directors objected to the mechanisms for facilitating a larger net shift to EMDCs, noting that all under-represented countries should be potentially eligible for ad hoc increases, and that all over-represented countries should contribute to the adjustment in quota shares.

14. Directors reaffirmed that the current quota formula should serve as the basis to work from. Many Directors maintained that the quota formula should not be reopened and, in addition, some were willing to proceed on the basis of the current formula, provided there is a commitment to revisit it again after the 14th Review is completed. Some other Directors preferred to modify the formula during this review.12

15. Directors also supported protecting the voting share of the poorest countries. A number favored protecting the quota share of PRGT-eligible countries individually, while a few preferred using the eligibility criterion adopted for the Post-Catastrophe Debt Relief (PCDR) Trust. Other Directors preferred to leave options open, including alternative approaches to defining the poorest members, and some also remained open to the possibility of a further increase in the share of basic votes, which requires an amendment of the Articles.

Illustrative Simulations

16. Based on Directors’ views at the July meeting, staff has prepared a further set of illustrative simulations for COW consideration. These simulations build on the second and third approaches presented in the previous paper. Specifically, they use a combination of selective increases distributed to all members based on the quota formula and ad hoc increases distributed to a subset of members based mainly or in part on their shares in the GDP blend variable. In this way, the approach continues to use the current formula as the primary distribution mechanism—which many have emphasized—but supplements it with use of the GDP blend variable as a key mechanism for distributing ad hoc increases. The latter could provide a possible compromise to help address the concerns of those Directors who argue that economic weight should play a larger role in the distribution of quota increases.

17. The simulations have several common elements:

  • They are based on a narrower range of overall quota increases, centered on a doubling (75, 100 and 125 percent), as requested by some Directors at the previous meeting;

  • They explore a relatively narrow distribution mix, with the largest share (55–65 percent) in all cases distributed as selective increases, and a smaller but substantial share (35–45 percent) as ad hoc increases;

  • An equiproportional element (which maintains current shares) is not included, given the limited support expressed to date. However, the relatively large selective component may be seen as a partial substitute, as it also goes to all members;

  • Under-represented advanced countries participate in the ad hoc increase to ensure that their increased share following the selective increase is not diluted;

  • Over-represented advanced countries also participate in the ad hoc increase if they are under-represented with respect to the GDP blend but are capped at their post-second round quota share;

  • Protection is applied on the extent to which over-represented countries (including EMDCs) can become under-represented, if at all;

  • The post-second round quota shares of the poorest members are protected, based on two alternative eligibility lists discussed previously (PRGT or PCDR eligible). In all cases, protection is applied to eligible members individually rather than as a group.

18. While a broad range of combinations is possible, four illustrative simulation sets are presented, with sets 2-4 variants of Simulation 1 with one element changed.

  • Simulation 1—uses a mix of the formula and the GDP blend as the distribution key for ad hoc increases (Simulation Tables 1 and A1). This “mixed” approach was previously shown as Set 2 in Fourteenth General Review of Quotas - Realigning Quota Shares - Further Considerations (6/22/10). Over-represented countries are fully protected at their calculated quota share and the post second round quota shares of PRGT-eligible countries are protected individually.

  • · Simulation 2—same as Simulation 1 but using only the compressed GDP blend as allocation key for ad hoc increases (Simulation Tables 2 and A2). This approach concentrates the ad hoc increases on EMDCs that are under-represented under the compressed GDP blend, generally resulting in larger realignments for those countries

  • (see also Set 3 in Fourteenth General Review of Quotas - Realigning Quota Shares - Further Considerations, 6/22/10).

  • Simulation 3—same as Simulation 1 but with less than full protection for over-represented countries (Simulation Tables 3 and A3). As illustrated in Fourteenth General Review of Quotas - Realigning Quota Shares - Further Considerations (6/22/10), allowing over-represented countries to become modestly under-represented can facilitate a larger shift in quota share to dynamic EMDCs. For illustrative purposes, protection is set here at 95 percent of calculated quota share (CQS), as in Fourteenth General Review of Quotas - Realigning Quota Shares - Further Considerations (6/22/10);13 alternative levels could also be considered.

  • Simulation 4—same as Simulation 1 but with PCDR-eligible countries protected (Simulation Tables 4 and A4). As noted above, alternative definitions of the poorest members can be considered. This simulation uses the eligibility list for PCDR, which comprises the 48 poorest members (a subset of the 71 PRGT eligible countries) with per capita incomes of less than $1,135 (and up to twice this amount for small states).

Table 1. Simulation 1:

Ad hoc Increase Allocated Based on Either the Formula or the GDP Blend; Full CQS Protection; PRGT-eligible 1/

(In percent)

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Source: Finance Department.

The simulations assume a 75, 100, and 125 percent increase of post second round quotas. The ad hoc increase is distributed to all countries that are under-represented with respect to the formula or with respect to the GDP blend (see footnote 3). Eligible EMDCs receive a uniform reduction in out-of-lineness based on the formula (for those EMDCs under-represented under the formula only), or the GDP-blend (for those EMDCs under-represented under the GDP blend only), or the greater of the two (for those EMDCs that qualify under both criteria). Eligible advanced countries are capped at their post second round or post-selective quota share, whichever is greater. Over-represented countries which would become under-represented as a result of the overall quota increase are protected at their calculated quota share. PRGT-eligible countries receive at least their post second round quota share.

Includes ad hoc increases for 54 eligible members that are not yet effective; also includes Kosovo and Tuvalu which became members on June 29, 2009 and June 24, 2010, respectively. For the two countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

GDP blended using 60 percent market and 40 percent PPP exchange rates, compressed using a factor of 0.95.

The overall increase is distributed to members on an equiproportional, selective and ad hoc basis in the proportion of x/y/z, respectively.

Including Korea and Singapore.

Includes all under-represented EMDCs plus other dynamic EMDCs defined as those whose PPP GDP share divided by post second round quota share is greater than 1 and who are not over-represented by more than 25 percent.

Uniform proportional reduction in the gap between calculated and post-selective quota share or GDP blend (see footnote 3) and post-selective quota share, whichever is applicable.

Table 2. Simulation 2:

Ad hoc Increase Allocated Based on the GDP Blend; Full CQS Protection; PRGT-eligible 1/

(In percent)

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Source: Finance Department.

The simulations assume a 75, 100, and 125 percent increase of post second round quotas. The ad hoc increase is distributed to all countries that are under-represented with respect to the GDP blend (see footnote 3). Eligible EMDCs receive a uniform reduction in out-of-lineness based on the GDP-blend. Eligible advanced countries are capped at their post second round or post-selective quota share, whichever is greater. Over-represented countries which would become under-represented as a result of the overall quota increase are protected at their calculated quota share. PRGT-eligible countries recev at least their post second round quota share. The quota shares of EMDCs and advanced economies that are under-represented under the formula but not eligible for the ad hoc are protected at their post-selective quota share.

Includes ad hoc increases for 54 eligible members that are not yet effective; also includes Kosovo and Tuvalu which became members on June 29, 2009 and June 24, 2010, respectively. For the two countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

GDP blended using 60 percent market and 40 percent PPP exchange rates, compressed using a factor of 0.95.

The overall increase is distributed to members on an equiproportional, selective and ad hoc basis in the proportion of x/y/z, respectively.

Including Korea and Singapore.

Includes all under-represented EMDCs plus other dynamic EMDCs defined as those whose PPP GDP share divded by post second round quota share is greater than 1 and who are not over-represented by more than 25 percent.

Uniform proportional reduction in the gap between GDP blend (see footnote 3) and post-selectv quota share.

Table 3. Simulation 3:

Ad hoc Increase Allocated Based on Either the Formula or the GDP Blend; 95 Percent CQS Protection; PRGT-eligible 1/

(In percent)

article image
Source: Finance Department.

The simulations assume a 75, 100, and 125 percent increase of post second round quotas. The ad hoc increase is distributed to all countries that are under-represented with respect to the formula or with respect to the GDP blend (see footnote 3). Eligible EMDCs receive a uniform reduction in out-of-lineness based on the formula (for those EMDCs under-represented under the formula only), or the GDP-blend (for those EMDCs under-represented under the GDP blend only), or the greater of the two (for those EMDCs that qualify under both criteria). Eligible advanced countries are capped at their post second round or post-selective quota share, whichever is greater. Over-represented countries which would become under-represented as a result of the overall quota increase are protected at 95 percent of their calculated quota share. PRGT-eligible countries receive at least their post second round quota share.

Includes ad hoc increases for 54 eligible members that are not yet effective; also includes Kosovo and Tuvalu which became members on June 29, 2009 and June 24, 2010, respectively. For the two countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

GDP blended using 60 percent market and 40 percent PPP exchange rates, compressed using a factor of 0.95.

The overall increase is distributed to members on an equiproportional, selective and ad hoc basis in the proportion of x/y/z, respectively.

Including Korea and Singapore.

Includes all under-represented EMDCs plus other dynamic EMDCs defined as those whose PPP GDP share divided by post second round quota share is greater than 1 and who are not over-represented by more than 25 percent.

Uniform proportional reduction in the gap between calculated and post-selective quota share or GDP blend (see footnote 3) and post-selective quota share, whichever is applicable.

Table 4. Simulation 4:

Ad hoc Increase Allocated Based on Either the Formula or the GDP Blend; Full CQS Protection; PCDR-eligible 1/

(In percent)

article image
Source: Finance Department.

The simulations assume a 75, 100, and 125 percent increase of post second round quotas. The ad hoc increase is distributed to all countries that are under-represented with respect to the formula or with respect to the GDP blend (see footnote 3). Eligible EMDCs receive a uniform reduction in out-of-lineness based on the formula (for those EMDCs under-represented under the formula only), or the GDP-blend (for those EMDCs under-represented under the GDP blend only), or the greater of the two (for those EMDCs that qualify under both criteria). Eligible advanced countries are capped at their post second round or post-selective quota share, whichever is greater. Over-represented countries which would become under-represented as a result of the overall quota increase are protected at their calculated quota share. PCDR-eligible countries receive at least their post second round quota share.

Includes ad hoc increases for 54 eligible members that are not yet effective; also includes Kosovo and Tuvalu which became members on June 29, 2009 and June 24, 2010, respectively. For the two countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

GDP blended using 60 percent market and 40 percent PPP exchange rates, compressed using a factor of 0.95.

The overall increase is distributed to members on an equiproportional, selective and ad hoc basis in the proportion of x/y/z, respectively.

Including Korea and Singapore.

Includes all under-represented EMDCs plus other dynamic EMDCs defined as those whose PPP GDP share divided by post second round quota share is greater than 1 and who are not over-represented by more than 25 percent.

Uniform proportional reduction in the gap between calculated and post-selective quota share or GDP blend (see footnote 3) and post-selective quota share, whichever is applicable.

Table A1. Simulation 1:

Ad hoc Increase Allocated Based on Either the Formula or the GDP Blend; Full CQS Protection; PRGT-eligible -- by Member 1/

(In percent)

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Source: Finance Department.

The simulations assume a 75, 100, and 125 percent increase of post second round quotas. The ad hoc increase is distributed to all countries that are under-represented with respect to the formula or with respect to the GDP blend (see footnote 3). Eligible EMDCs receive a uniform reduction in out-of-lineness based on the formula (for those EMDCs under-represented under the formula only), or the GDP-blend (for those EMDCs under-represented under the GDP blend only), or the greater of the two (for those EMDCs that qualify under both criteria). Eligible advanced countries are capped at their post second round or post-selective quota share, whichever is greater. Over-represented countries which would become under-represented as a result of the overall quota increase are protected at their calculated quota share. PRGT-eligible countries receive at least their post second round quota share.

Includes ad hoc increases for 54 eligible members that are not yet effective; also includes Kosovo and Tuvalu which became members on June 29, 2009 and June 24, 2010, respectively. For the two countries that have not yet consented to, and paid for, their quota increases, 11th Review proposed quotas are used.

GDP blended using 60 percent market and 40 percent PPP exchange rates, compressed using a factor of 0.95.

The overall increase is distributed to members on an equiproportional, selective and ad hoc basis in the proportion of x/y/z, respectively.

Includes China, P.R., Hong Kong SAR, and Macao SAR.