Need to Review of IMF Role: Experts

In News

• Recently, experts have suggested the need to review the role of the IMF.
  • The experts made suggestions to change the economic weights of emerging countries, stressing completing quota reforms and maintaining data integrity.

About

• Former Deputy Governor of the Reserve Bank of India analysed the issue of IMF quota reforms in a research paper last year. 
• Each member’s quota determines its voting power as well as its borrowing capacity.

Image Courtesy: IMF 

IMF Quota

• Meaning: 
  • A member country’s quota determines its maximum financial commitment to the IMF, its voting power, and has a bearing on its access to IMF financing. 
  • When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members of broadly comparable economic size and characteristics. 
  • The IMF uses a quota formula to help assess a member’s relative position. 
• Global representation: 
  • An individual member country’s quota broadly reflects its relative position in the world economy. 
• SDRs: 
  • Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account.
• Calculation: 
  • IMF quotas are distributed according to a four-pronged formula that considers:
    • a member country’s GDP, 
    • its economic openness, 
    • its “economic variability” and 
    • international reserves.

Need of Reforms

• Slow pace of governance reforms: 
  • Some IMF members have become frustrated with the pace of governance reforms, as the balance of economic and geopolitical power has shifted, becoming more dispersed across the world, particularly with the emergence of China and India – among the world’s largest and fastest-growing economies.
• Unequal representation: 
  • A higher IMF quota simply means more voting rights and borrowing permissions under IMF. But it is unfortunate that the formula is designed in such a way that the USA itself has a 17.7% quota which is higher than the cumulative of several countries. 
  • The G7 group contains more than 40% quota where countries like India & Russia have only a 2.5% quota in the IMF. 
  • Some countries are over-represented in the IMF and that’s why emerging countries are against this quota scheme of the IMF.
• Rising competitors:
  • Various regional banks are coming up which work on the fallback of the IMF like, New Development Bank by BRICs, Asian Infrastructure Investment BAnk (AIIB).
• Article 4 restructuring:
  • A restructuring of the Article IV consultations, under which the IMF holds bilateral discussions with its members usually every year and its staff prepares a report, is also being sought. Article IV consultation is the most powerful instrument and it needs to be restructured and sharpened to make it more useful by using the new technologies and access to public data.
• Changing dynamics:
  • With rapidly evolving global arrangements of developed and developing economies, it is necessary to bring about the important reforms in the IMF.
  • Else, it could be slowly but steadily pushed into irrelevance.

Significance for India

• Though developing countries hold less than half the overall quota at the moment, with their rapidly increasing economic heft they have demanded a greater share. 
• India has been pressing for IMF quota reforms as it would give more say to developing nations in the activities of the multilateral organisation.

Challenges

• Voting share will remain less:  
  • For decades, Europe and the United States have guaranteed the helm of the IMF to a European and that of the World Bank to an American. 
  • The situation leaves little hope for ascendant emerging economies that, despite modest changes in 2015, do not have as large an IMF voting share as the United States and Europe.
• Stringent and tough conditions: 
  • Conditions placed on loans are too intrusive and compromise the economic and political sovereignty of the receiving countries. 
  • ‘Conditionality’ refers to more forceful conditions, ones that often turn the loan into a policy tool. 
  • These include fiscal and monetary policies, including such issues as banking regulations, government deficits, and pension policy. 
  • Many of these changes are simply politically impossible to achieve because they would cause too much domestic opposition.
• Change “one size fits all” approach: 
  • The IMF imposed the policies on countries without understanding the distinct characteristics of the countries that made those policies difficult to carry out, unnecessary, or even counter-productive.
• Impossible to reform: 
  • It is almost impossible to make any reform in the current quota system as more than 85% of total votes are required to make it happen. 
  • The 85% vote does not cover 85% of countries but countries that have 85% of voting power and only the USA has a voting share of around 17% which makes it impossible to reform quota without the consent of developed countries. 

What should the IMF do?

• Focus on least developed countries: 
  • Most of the Asian countries including India can now raise funds on their own on the basis of the strength of their forex reserves and do not have to necessarily go to the IMF like in the past to tide over a crisis. 
  • Therefore, they should now really focus on the much lower income groups and those who are not able to go to the market at all to raise funds and so, that is one thing that the IMF has to do.
• Emergency situations can still come up:
  • Even though the countries like India and others are no longer clients, there will still be occasions when because of the sudden rise in the price of petroleum products or something, there may be a need and therefore, they need to look at the problems that may arise because of certain situations

Way Ahead

• The US and China should jointly lead the efforts on the transformation of relative quota shares in the IMF and associated reforms in the international monetary system. 
• As China approaches or even surpasses the United States in its share of global GDP at market exchange rates its quota share would have to be of a magnitude similar to that of the United States. 
• The share of the European Union countries, including that of the UK, will have to reduce significantly. 
• The quota share of BRICS countries would have to increase significantly.

Source: IE