Context: As per the latest deal, Members of the International Monetary Fund (IMF) agreed to maintain its funding at $ 1 trillion but postponed changes to its voting structure.

Outcomes of the recent meet:

• The deal is a compromise with the U.S., the Fund’s largest shareholder, which has resisted changes to the organisation’s voting structure as well as increases in its permanent resource base.
• It will allow an extension of non-permanent, supplementary sources of funds – such as the New Arrangement to Borrow (NAB), a renewable funding mechanism that has existed since 1998, and bilateral borrowings from countries – the IMF had entered into these after the 2008 financial crisis to increase its lending ability.
• The agreement extended the bilateral borrowing facility by a year – to the end of 2020 and a potential doubling of the NAB.

Impact:

Specifically, the agreed package will leave IMF quotas (the primary source of IMF funds), which determine voting shares, unchanged. Instead, these will be reviewed before the end of 2023.

What are IMF Quotas?

The IMF is a quota-based institution. Quotas are the building blocks of the IMF’s financial and governance structure.

• An individual member country’s quota broadly reflects its relative position in the world economy. Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account.

How is it determined?

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.

Multiple roles of quotas:

Resource Contributions: Quotas determine the maximum amount of financial resources a member is obliged to provide to the IMF.

Voting Power: Quotas are a key determinant of the voting power in IMF decisions. Votes comprise one vote per SDR100,000 of quota plus basic votes (same for all members).

Access to Financing: The maximum amount of financing a member can obtain from the IMF under normal access is based on its quota.

SDR Allocations: Quotas determine a member’s share in a general allocation of SDRs.

Quota reviews:

The IMF’s Board of Governors conducts general quota reviews at regular intervals.

Any changes in quotas must be approved by an 85% majority of the total voting power, and a member’s own quota cannot be changed without its consent.

Need for reforms:

1. 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.
2. ndia’s quota is 2.76% and China’s is 6.41%, while the U.S.’s quota is 17.46 % (translates to a vote share of 16.52%) giving it a unique veto power over crucial decisions at the IMF, many of which require a supermajority of 85%.
3. The U.S. has resisted diluting its share, wary that it will benefit countries such as China.