G20 Must Push for the IMF Quota and Governance Reforms
The G20 must address the unfinished agenda of advancing fundamental reforms of the International Monetary Fund’s resources, governance, and policy frameworks. These reforms are becoming increasingly urgent, as the global economy faces multiple challenges, from a global economic slowdown to growing debt burdens and climate change. At several international forums, including the G20, India has consistently pushed for the IMF’s quota and governance reforms. Therefore, India could make a significant contribution in this policy area under its G20 presidency.
Why should the G20 take the lead on instituting IMF reforms? Because the G20 has assumed primary responsibility to safeguard and strengthen global financial stability since the 2008 global financial crisis. The forum has reaffirmed the IMF’s central role in the international financial system. Since 2008, the G20 has been working to advance the reform of the international financial architecture, including reforms of the IMF, along with the Financial Stability Board established in the 2009 Pittsburgh Summit.
More importantly, at the London summit in April 2009, the G20 leaders agreed to triple IMF resources to $750 billion (both quotas and additional borrowing arrangements) and proposed reforms in the governance of the Fund.
Furthermore, G20 members also hold the majority of IMF shares. Together, the G20 countries account for 81 percent of the Fund’s quotas and 78 percent of its voting shares. Therefore, it is within the collective powers of G20 members to steer reforms at the IMF and to ensure that appropriate governance arrangements are introduced so that a more effective, legitimate, and accountable IMF emerges as a multilateral institution to tackle the problems of the 21st century.
Why Reforms?
The reforms should focus on the IMF’s outdated governance structure and business practices, given its preeminent role as a lender of last resort to countries facing balance of payments crises and its surveillance and technical assistance activities, which have expanded significantly in recent years.
Since its founding in 1944, the Fund’s membership has quadrupled and its role has expanded far beyond its original mission; however, its governance structures and business practices have not evolved in line with these changes. If the IMF is to play an important role within the multilateral financial system in the coming years, it needs to be reformed and restructured to reflect current global realities. A restructured IMF is essential for ensuring its effectiveness, legitimacy, and accountability.
At the heart of the reform agenda is the need to restructure the ownership structure of the IMF, often referred to as quota reform, to reflect the increasing weight of emerging markets and developing economies (EMDEs). The reform agenda also includes key demands that emerging markets and developing economies be given voting rights beyond their quotas, and that the Fund’s decisions and decision-makers are held accountable.
Despite dramatic changes in the composition of the global economy in recent decades, the IMF continues to be disproportionately dominated by advanced economies in its governance structure. Since its inception, a European has held the position of Managing Director at the IMF, with a representative from the United States as a deputy.
Unlike the United Nations General Assembly, where each country has one vote, voting rights and decision-making at the IMF are tied to the size of a member country’s quota share, which reflects its relative size within the global economy. The quota shares determine each member country’s financial contribution to the IMF as well as its voting rights.
Consequently, a few advanced economies have relatively much higher voting power than a large number of the Fund’s members belonging to low-income and developing economies. A quick glance at the latest quota and voting shares of the IMF shows a majority of its members have individual quotas of less than 0.1 percent.[1] Calculations done by Lara Merling show that advanced economies remain overrepresented, with 59.1 percent of the vote in the IMF, despite making up only 13.7 percent of the world’s population.[2] While 54 countries of Africa with a population of 1.4 billion collectively have only 6.4 percent voting rights in the IMF.
The largest shareholder of the IMF is the United States, with 16.50 percent of all voting shares, followed by Japan with 6.1 percent. Under IMF rules, major changes, such as amendments to its articles of agreement, quota increases, voting share distribution, and new allocations of SDRs, require an 85 percent majority. Since the United States alone controls over 15 percent of votes, it has de facto veto power over important reforms and policy issues.
The disproportionate quota and voting structures not only undermine the voice and representation of the low- and middle-income countries within the IMF, but also determine the policy advice and conditionalities attached to its lending programmes to such borrowing countries. Most of the IMF’s lending programmes are directed towards low- and middle-income countries, which have little or no influence in designing and evaluating these programmes within the organisation.
Quota Reforms
A fundamental reform of the IMF should focus on its quota system, which plays a prominent role in its financing and governance structures. It is the Fund’s quotas that determine its financial resources, members’ financial contribution, voting power, access to borrowing by members, and the allocation of Special Drawing Rights (SDRs). The quota reforms should include both an increase in quotas and a realignment of quota shares.
Not long ago, G20 leaders called for a strong, quota-based, and adequately resourced IMF to strengthen the Global Financial Safety Net (GFSN). “We support work to further strengthen the GFSN, with a strong, quota-based and adequately resourced IMF at its center, equipped with a more effective toolkit, and with more effective cooperation between the IMF and regional financing arrangements (RFAs), respecting their mandates”, stated the G20 Leaders’ communiqué issued at the Hangzhou Summit on September 5, 2016.
Currently, the IMF has approximately $1 trillion in total lending resources. Some may argue that $1 trillion seems large, but compared to the global GDP and debt metrics, it is a relatively modest sum. This represents 1.1 percent of global GDP and 0.35 percent of total global debt. This sum is insufficient to deal with major crises (financial and real) across emerging market economies, as the current globalised economic and financial environment has made them highly exposed to external shocks. Can the IMF respond adequately if some big EMDEs or advanced economies face a severe financial crisis tomorrow?
The COVID-19 pandemic and the associated global recession in 2020, causing a surge in global debt levels, have already shown that the IMF’s lending firepower was insufficient to meet the potential needs of its member countries. Particularly in the present times when global financial conditions are tight and new financial risks are emerging, the IMF must scale up its lending capacity to meet the external financing needs of all its members.
While making efforts to scale up the IMF’s overall lending resources, attention should be paid to altering the composition of its funding towards permanent, quota-based resources. Currently, quotas contribute $425 billion (45 percent) to the total IMF resources, while the remainder consists of contributions from the New Arrangements to Borrow (NAB) and the Bilateral Borrowing Agreements (BBA).
Unlike quotas that are contributed by all 190 IMF member countries, NAB and BBA are temporary and voluntary lending commitments at the discretion of donor countries. As these temporary commitments are continually renegotiated, uncertainty arises about the Fund’s financial resources.
Without significantly increasing its lending capacity through permanent, quota-based resources, the IMF cannot maintain its position as the anchor of the Global Financial Safety Net (GFSN). Therefore, it is imperative that the IMF should predominantly rely on quota subscriptions and temporary arrangements should be completely phased out.
Closely related to these reforms is the need for a major realignment of quotas and voting rights in the IMF in line with current global realities, while protecting the shares of the poorest members in the voting structure. The reforms should be intended to ensure that no individual country has a veto power. The formula for calculating the quotas and voting rights of members can be fine-tuned to better reflect the relative positions of the emerging markets and developing economies in the world economy.
There is no denying that attempts to eliminate the veto power may face significant resistance from the United States, but G20 members should use moral suasion and peer pressure to convince American policymakers that equitable representation and democratic functioning are essential for the legitimacy of the IMF.
In many ways, it is a test for the United States as to whether it can fulfill its stated commitment to reforming multilateral financial institutions. The same applies to other G7 members, who currently possess a disproportionate voting power in the IMF despite their shrinking share of the global economy.
There is no dearth of proposals to issue new SDRs and allocate them to the countries that need them the most, rather than distributing them proportionally based on a historically skewed quota system. As witnessed during the COVID-19 crisis, two-thirds of the 2021 SDR allocation went to advanced economies and China, and most of them did not utilize their SDRs. However, low-income countries that desperately needed SDRs did not benefit much from the issuance of additional liquidity.
To address this anomaly, several proposals have been made in the past, including delinking the issuance of new SDR allocations from the IMF’s quota system. Such proposals may require necessary changes to the IMF’s Articles of Agreements.
Upcoming 16th General Review of Quotas
The G20 played a key role in designing and implementing reforms under the 14th General Review of Quotas, which was completed in 2010 and came into force in 2016. These reforms resulted in a doubling of quotas and a shift of more than 6 percent of quota shares to dynamic emerging markets and developing countries and more than 6 percent from over-represented to under-represented countries, while preserving the quota shares and voting power of the poorest members.[3]
These reforms resulted in China becoming the third-largest shareholder of the IMF with a 6.01 percent share, but advanced economies still maintained their majority shareholding. India’s quota share improved marginally, from 2.44 percent to 2.75 percent.
Although the implementation of the 2010 reforms was delayed by five years, as the US Congress did not ratify them until December 2015, it is important to note that the push to build political consensus came from the G20 leaders and not the IMF leadership.
The 15th General Review of Quotas concluded in 2020 without increasing quotas or redistributing them. Unlike the 15th Review, the upcoming 16th Review should deliver on a quota increase and a quota share realignment to better reflect members’ relative positions in the world economy, while protecting the quota shares of the IMF’s poorest members.
Therefore, the G20 under the Indian Presidency must advance a comprehensive reform package for the IMF’s 16th General Review of Quotas featuring quota and governance reform commitments to ensure greater voice and representation of emerging markets and developing countries, in line with their weights and positions in the global economy. The upcoming quota review provides an opportunity to strengthen the IMF’s financial firepower and credibility.
Policy Reforms
In addition to restoring the primacy of quotas and the aforementioned reforms, several credible proposals are on the table to enhance the IMF’s lending to low- and middle-income countries, which are often exposed to external trade and financial shocks but choose bilateral swaps or regional arrangements over multilateral solutions given the IMF’s funding constraints and conditionality. Although these countries are the most likely to borrow from the IMF, they have limited influence in determining the policy advice and conditionality attached to loans.
Another major criticism of the IMF concerns the asymmetrical treatment of its member countries. Some members have accused the Fund of failing to treat members with similar circumstances equally in its surveillance and lending activities.
Some of these concerns have been widely reported and discussed, including the IMF’s Independent Evaluation Office, which was established in 2001 to conduct an independent evaluation of the Fund’s policies and activities. In its 2011 report, the IEO noted that “self-censorship appeared to be a significant factor even in the absence of overt political pressure. Many staff members believed that there were limits as to how critical they could be regarding the policies of the largest shareholders—that ‘you cannot speak truth to authorities’ since ‘… you’re owned by these governments.’”[4] In the report, the IEO stressed “the need to modify institutional structures and incentives to strengthen accountability and to foster better assessment of risks, candor and clarity in messages, and the ability to ‘speak truth to power.’”[5]
The IEO recommended that additional changes are needed to reform the IMF’s culture, governance, and practices so that it is better prepared to confront future challenges.
In conclusion, under the Indian Presidency, the G20 has a unique opportunity to usher in fundamental reforms at the IMF that will enhance its permanent resources, legitimacy, and effectiveness in dealing with multiple risks and challenges confronting the global economy. India should convince the G20 members that it is in the common interest of all members to have a well-funded, democratic, and accountable IMF.
Notes and References
[1] “IMF Executive Director and Voting Power”, IMF, March 2023. Available at https://www.imf.org/en/About/executive-board/eds-voting-power.
[2] Lara Merling, “No Voice for the Vulnerable: Climate Change and the Need for Quota Reform at the IMF,” GEGI Working Paper 057, 2022. Available at https://www.bu.edu/gdp/files/2022/10/GEGI_WP_057_FIN.pdf.
[3] “Historic Quota and Governance Reforms Become Effective”, Press Release, IMF, January 27, 2016. Available at https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr1625a.
[4] “IMF Performance in the Run-up to the Financial and Economic Crisis: IMF Surveillance in 2004–07”, Evaluation Report, IEO, IMF, 2011. p. 20. Available at https://ieo.imf.org/en/our-work/Evaluations/Completed/2011-0209-imf-performance-in-the-run-up-to-the-financial.
[5] Ibid, p. vii.
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