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The writer is resident fellow at the Mossavar-Rahmani Center for business and government in the Harvard Kennedy School and former assistant secretary for international affairs at the US Treasury
Members of the IMF are gathering in Marrakech, Morocco, for their annual meeting this week. High on their agenda is the 16th review of IMF quotas, commitments by members to provide funds to the multilateral institution to be lent to other members.
IMF members have not changed the total size and distribution of quotas since 2010. Another failure to reach agreement on doing this would further imperil the status of the IMF as the central institution of the international monetary system. A perpetuation of the status quo would weaken its credibility and capacity to serve as lender of last resort and global standard-setter.
Members gather at IMF meetings and ritually declare that the lender should be a quota-based institution. But the truth today is that less than 50 per cent of resources available for the IMF to lend come from quota subscriptions. An agreement in Marrakech to change quotas requires a compromise on three issues that have led to a stalemate on negotiations for more than a decade.
The first issue is to reduce the IMF’s reliance on borrowed funds. This would be accomplished by an increase in total quotas large enough to allow the termination of the fund’s temporary bilateral borrowing arrangements — which today amount to 15 per cent of its lending capacity — without reducing resources potentially available to lend. The IMF would still have its semi-permanent borrowing capacity to bolster its financial resources, known as the new arrangements to borrow.
The second is reform of the formula that is the starting point for quota reviews. Emerging market and developing countries argue that the current formula supports advanced countries’ larger quota and voting shares (which are based on quota shares).
The third is redistribution of quota and voting shares in the direction of faster-growing member countries. China has the largest discrepancy between its actual quota share and what it would have if the current formula was applied to it.
Today, the US quota share is 17.43 per cent, and its voting share is 16.50 per cent. Consequently, America must agree to all the IMF’s major decisions, including any changes in quotas. In other words, whether we like it or not, any deal must satisfy the US Treasury.
China has the third-largest share in the fund after the US and Japan. The combined share of members of the EU is larger than that of any individual country by a wide margin. Key IMF members must compromise to ensure a successful meeting in Marrakech.
A compromise should start with agreement on a proportionate increase in each member’s quota by at least one-third. That would add sufficient quota resources from IMF members in strong external positions to allow the institution’s bilateral borrowing arrangements to lapse. It would also tip the balance of IMF resources back to a majority reliance on quota resources.
The second element is for the emerging market and developing countries to drop their insistence on a revision of the quota formula in this review. A proportionate increase in all quotas would increase these members’ capacity to borrow from the IMF. A failure of the quota review would freeze the current scope of their borrowing.
The third element is agreement on selective, or ad hoc, increases in the quotas of those members which have a quota most out of line with the current formula. The combined size of these selected increases must not threaten the US voting share, or Washington will block the compromise.
Under the current formula, the quotas of 25 IMF members should be at least 50 per cent larger than their current ones, led by China. If all 25 countries received selective quota increases that closed half the gap, the total increase would reduce the US voting share to close to 15 per cent.
Moreover, the US has made clear that it will not support an increase in any member’s quota share unless that country respects the rules and norms of the IMF, which in the US view China does not.
To remove this obstacle, China should agree not to accept the selective increase in its quota to which it would otherwise be entitled, and the US should support the compromise. As a result, both China and the US could take credit for avoiding another stalemate in Marrakech.
Source: Economy - ft.com
