The International Monetary Fund (IMF) is a crucial player in the international monetary system, providing financial support to countries in crisis. However, several emerging market economies, such as Sri Lanka and Pakistan, have experienced balance of payment difficulties.
To maintain its role, the IMF has three mechanisms to secure resources for crisis-affected countries. Firstly, the IMF assigns each member country a quota, which is a member’s contribution to the revolving pool of resources. The IMF’s quota for financial support is around $635 billion, which governments can borrow from the pool through a ‘drawing’.
If quota resources are insufficient, the IMF can borrow from willing member countries through the General Arrangements to Borrow (GAB), which was superseded by the New Arrangements to Borrow (NAB). If this is insufficient, bilateral borrowing agreements can be activated. Lastly, the IMF occasionally allocates Special Drawing Rights (SDRs) to member countries in proportion to their quotas. A quota review, which involves adjusting quota shares, has become a protracted exercise, with industrial countries facing pressure to yield more of their voting power. In 2020, the 15th review ended with no agreement on a quota increase.
The IMF’s quota has been decreasing in relation to the world economy, but this may not mean the institution’s ‘fire power’ has become inadequate. The quota’s share of world GDP declined from 0.85 to 0.69% from 1990 to 2021, but if the GAB/NAB borrowing limit is included, the share would have risen from 0.96 to 1.22%. The IMF’s founders envisioned quota-based institutions, and many voices are calling for an increase in quota resources if the SDR allocation is included.
However, the outcome of the 16th IMF review remains uncertain. A strict application of the 2010 quota formula would require an adjustment of 12.44 percentage points between overrepresented and underrepresented countries, with China being the biggest winner with a gain of over 7% and the United States as the biggest loser with a loss of 2.47%). The 16th quota review complicates the situation by eliminating a clear-cut dichotomy between advanced and emerging market economies, requiring an 85% majority and a US veto.
The US Treasury has proposed a proportional increase in the IMF quota, which has received support from China. However, this proposal is unlikely to be approved by a Republican-controlled US Congress. If the review is prolonged, another round of SDR allocation could be considered.
The 2021 allocation reduced sovereign risk premia and allowed vulnerable countries to obtain over $140 billion in freely usable currencies, alleviating pressure on IMF resources during the COVID-19 pandemic. These temporary fixes can delay the need to address the issue until a new wisdom emerges, indicating a clear path to reform.