Emerging market countries will now have more influence and access to capital at the International Monetary Fund. More than five years after the organization's board of governors passed the quota reforms, the U.S. Congress approved them, providing the necessary majority for them to be enacted.
So what exactly does it mean to reform quotas at the IMF?
What is an IMF ‘quota’?
IMF member countries are each assigned a quota — a value of its share in the IMF financing system that is tied to its impact on the world economy.
A country’s quota at the IMF determines its voting power, the amount of financial resources it must provide to the IMF and its access to IMF financing. The larger a country’s quota, the more say that country has in the governance of the international financial institution.
Quotas are based on a weighted average of GDP, openness, economic variability and international reserves. They are expressed in a value known as Special Drawing Rights, an international reserve asset determined by the value of the U.S. dollar, euro, Japanese yen and pound sterling.
The United States currently has the largest quota, with SDR 42.1 billion, or approximately $59 billion.
What does IMF quota reform entail?
This latest reform will boost the quotas for all 188 members, doubling the overall quota resources for the IMF. Much of these added resources will come from extra funding that many member countries contributed to the IMF after the global financial crisis of 2008, and will boost the financial power of the institution to respond in times of financial crisis.
The reform will also give emerging economies such as Brazil and China larger quota shares at the institution. This means that relative to other member countries — all of which are gaining larger quotas — emerging market countries will have an increased share of the total quotas available.
About 6 percent of quota shares will shift to emerging market countries. As a result, quota shares of traditionally strong economies such as the United States, Saudi Arabia and European countries will be diminished — in most cases by marginal amounts of less than half a percent. The quota shares of the poorest member countries will largely remain the same.
Notably, the redistribution of quota shares means that China will jump from the sixth to the third largest member country, behind the United States and Japan, according to the IMF. China’s quota share will increase by more than 2 percent.
In contrast, Saudi Arabia’s share will drop by nearly a full percentage point, placing it below India, Russia and Brazil.
China and Russia are among the 10 largest shareholders but as a result of reforms Brazil and India will join that group as well.
In addition, the selection process for executive directors on the IMF's board will change. Once the reforms are in place, all positions will be determined by election, rather than the previous system where the member countries with the five largest quotas would each appoint an executive director.
Why is reform necessary?
IMF shareholders decided the reforms were necessary in order to more accurately reflect the growing global influence of emerging market economies, and to boost the IMF’s legitimacy as a global financial institution.
The reform will boost the IMF’s “core resources,” which will allow it to more effectively respond to financial crises, said the IMF Managing Director Christine Lagarde, adding that the reform “will strengthen the IMF in its role of supporting global financial stability.”
Senior leadership at the IMF is expected to implement the reforms in the coming weeks.
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