October 30, 2023
As the global economy confronts a myriad of challenges, the prospects for long-term growth and economic recovery look increasingly bleak.
The International Monetary Fund (IMF), the center of the Global Financial Safety Net (GFSN), is the pre-eminent multilateral institution tasked with addressing challenges that threaten global financial stability. Unfortunately, the lending capacity of the IMF has not kept pace with the global economy or global trade flows, and quota shares of emerging market and developing economies (EMDEs) are increasingly misaligned with their role in the global economy.
However, the IMF has a chance to rebalance itself during the 16th General Review of Quotas, scheduled to conclude in December 2023. But as world leaders convened in Morocco recently, it was disappointing to learn that the 16th General Review is likely to conclude with only an equiproportional increase in quotas, meaning that new IMF quota shares would be allocated proportionally based on existing shares. While such a move surely makes the IMF more quota-based, it is unlikely to provide the Fund with urgently needed and evenly distributed resources.
As the IMF strives to complete the 16th General Review and works towards some agreement on quota realignment as part of the 17th General Review, the IMF Board of Governors should strive to reach a consensus on three fundamental changes to the IMF’s resources and governance. First, the IMF’s quota resources must boost its lending capacity. Second, the IMF must move away from an over-reliance on temporary borrowed sources of funding. Third, voice and representation must be significantly increased for EMDEs.
Without these changes, the IMF risks undermining its legitimacy and credibility at a time when the global economy needs it most.
Quotas are the “building blocks” of the IMF’s financial and governance structure, where the quota allocated to an individual member country broadly reflects the size of its economy. The IMF’s Articles of Agreement mandate that quota reviews are performed every five years. This regular cadence is intended to not only ensure that the IMF has a sufficient resource base to perform its essential functions, but also so that the IMF keeps pace with changes in the global economy.
To begin rebalancing the Fund, IMF shareholders need to first increase the scale of the Fund’s lending capacity, as its current level of $926 billion falls short of the potential global liquidity needs and represents only 30 percent of the $3.5 trillion in GFSN lending firepower. For the IMF to meet the potential gross external financing needs of the most vulnerable countries, the IMF’s quotas would need to more than double.
Second, it is imperative that the composition of IMF lending resources shifts away from temporary sources of funding and towards permanent, quota-based resources. In the past, the IMF has had to draw upon temporary, non-quota based sources of funding to perform its essential functions when its lending has exceeded the amount of lendable, permanent and quota-based resources. It appears that there is a consensus to solidify the permanent, quota-based resources of the IMF by December 2023 through an equiproportional increase, though this unfortunately would not lead to any shift in the balance voting shares at the Fund.
Finally, IMF shareholders must agree to quota reforms that ensure more voice and representation for EMDEs. As of October 2022, the Vulnerable Group of 20, a bloc of 68 climate vulnerable countries, had almost 17 percent of the world population and yet only 5 percent of voting power at the IMF. The IMF must reduce the “out-of-lineness” of quota shares such that the levels of voice and representation of EMDEs better reflect their positions in the global economy. In addition to revisions to the quota formula to correct for biases, governance reforms must continue to enhance EMDE voice and representation, including through the creation of a third chair on the IMF Executive Board.
The IMF has an essential role to play in promoting financial stability and preventing financial crises. Failure to enhance the IMF’s quota resources to boost its lending capacity, an over-reliance on temporary borrowed sources of funding and further delays in increasing EMDE voice and representation all serve to undermine the legitimacy and credibility of the institution. Merely agreeing to an equiproportional increase in quotas that perpetuates the current imbalances in IMF governance will undermine the legitimacy of the IMF. Following the Annual Meetings, IMF shareholders must redouble their efforts to restore credibility and legitimacy to the institution and rebalance the GFSN to support the needs of the global economy.Learn more