Public Information Notice No. 01/118

Public Information Notice: IMF Executive Board Informally Discusses Quota Formulas

November 7, 2001

On October 15, 2001, the Executive Board of the International Monetary Fund (IMF) held further discussions on possible revisions of the formulas used to calculate members' quotas.¹

Background

Pursuant to understandings reached during the Eleventh General Review of IMF quotas the Executive Board has been conducting a comprehensive review of the formulas used to calculate quotas. As a first step in this process, a group of external experts was established to provide the IMF with an independent review of the quota formulas and a report was submitted to the IMF's Executive Board with recommendations, which were discussed at an Executive Board seminar in August 2000.² At that time Directors agreed on the need to carry forward the work of the panel with a view to developing quota formulas that more fully reflect members' positions in the world economy.

The paper discussed by Executive Directors at the latest seminar examined issues related to the choice and specification of variables that could be included in a quota formula as well as the mathematical properties of formulas. The paper also provided illustrative calculations based on preliminary data to demonstrate the properties of alternative formulas and solicited views of Executive Directors on the direction of further work.

Executive Board Assessment

Mr. Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, made the following remarks at the conclusion of the seminar:

"Our seminar today provided a useful opportunity to continue the Board's work program on possible revisions of the quota formulas; enabled Directors to give preliminary views on the issues raised and the illustrative alternative formulas contained in the staff paper; and provided guidance on future work on quota formulas. A wide range of views was expressed on the structure and content of alternative quota formulas. Directors concurred that further work is needed to develop quota formulas that more fully reflect members' roles in the world economy, though many noted that this is a difficult task because quotas are overburdened by having to perform a variety of roles. Directors recognized that the impact of the existing formulas on the distribution of actual quotas has been modest—reflected in the divergence of actual from calculated quotas—as other considerations have tended to predominate. Nevertheless, they believed that revised formulas that command wide support could contribute to the gradual adjustment of quotas. At the same time, many Directors considered that, apart from the choice of formula, it is important to address without delay the situation of countries whose actual quotas are significantly below their calculated quotas.

"Directors generally endorsed the evolutionary approach the staff has followed. They considered that quota formulas should be simple and transparent, reflect the financial functions of quotas, and produce results that are broadly acceptable to the membership. Directors recognized that the variables in a quota formula have to be economically sound, that formulas need to be specified in a way that produces consistent results, and that the weights assigned to variables should be economically meaningful and produce a quota distribution that is considered reasonable. They noted that the staff's calculations are based on preliminary and incomplete data, which will need to be refined and improved. Therefore, the calculations should be considered as purely illustrative.

"Many Directors noted that the economic variables in quota formulas could not adequately capture the role that, by providing the basis for voting power, quotas play in the governance of the Fund. These Directors expressed concern about the continuing decline of the quota share of developing countries, particularly the poorest members. Many Directors were of the view that the governance of the Fund would be strengthened by raising the quotas of developing countries, notably but not exclusively those in Africa. In this regard, they raised the possibility of amending the Articles of Agreement to increase the number of basic votes, or, alternatively, of introducing a constant in a future quota formula. Several Directors supported an ad hoc quota increase for African countries, while some noted that concerns about access to Fund resources could be addressed through access policy as well as through quotas.

"Regarding variables to be included in quota formulas, Directors focused on those that have traditionally been used to reflect the Fund's financial functions. They noted, however, that these variables might need to be modernized to take account of changes in the world economy and to deal with certain specification problems. Directors supported the inclusion of GDP in quota formulas, as an indicator of countries' economic size and of their potential to either provide resources to the Fund or use Fund resources. A majority of the Board considered that market exchange rates should be used to convert GDP to a common currency, so as to obtain the best measure of the total amount of resources generated by a country. However, many other Directors argued that conversion using purchasing power parities would better reflect the real value of total output produced by developing countries. Directors agreed that, to help smooth possible large cyclical and exchange rate fluctuations, GDP should be averaged over a number of years. Some Directors preferred a longer period for averaging than the three years proposed in the staff report.

"Many Directors supported the inclusion of an openness variable in the quota formulas to reflect countries' integration in the world economy. Most of these Directors considered the absolute sum of current receipts and current payments to be an appropriate measure of openness, although a few preferred a ratio—such as a ratio of current receipts and payments to GDP—observing that a reduction of a country's calculated quota if GDP grows faster than exports would only reflect less openness. A few Directors, however, noting that current receipts and payments on the one hand, and GDP on the other hand, are highly correlated, were doubtful of the case for including both in the formulas. A few Directors made the suggestion to include a measure of financial openness.

"Many Directors supported inclusion of a measure of vulnerability in the quota formula to capture countries' potential need for Fund resources, and saw the variability of external receipts as an appropriate measure. However, some Directors noted that inclusion of this variable would favor countries with high vulnerability, and stressed the importance of creating incentives to reduce vulnerability. Some of those Directors who favored inclusion of an openness variable in the formulas were doubtful of the case for also including a vulnerability variable: they considered that measures of openness could also be indicative of vulnerability.

"Directors agreed that a measure of capital flows should be included in the definition of variability, since such flows have become an increasingly important source of balance-of-payments vulnerability. In this regard, some Directors considered that net flows of capital, both short- and long-term, should be taken into account, as both are subject to variability. However, there was support from some other Directors for use of gross flows and/or for excluding short-term flows. Most Directors supported the use of the variability of the sum of current receipts and net capital flows as the measure of vulnerability and potential financing need, while others preferred that the variability of capital flows be included as a stand-alone measure to avoid combining gross and net concepts.

"A number of Directors considered that external reserves should be retained as an indicator of capacity to provide resources to the Fund, while others did not support the inclusion of this variable. In future work staff will examine different formulas with and without reserves. A few Directors suggested additional variables to better reflect the role of developing countries in the governance of the Fund and to increase their access to Fund resources, such as population and a poverty index.

"Directors agreed that quota formulas should be simple and transparent, and should produce consistent and reasonable results. Some Directors considered that for these reasons a single formula should be used, while others observed that more than one formula might be needed to reflect the diversity of the membership. Some Directors stated a preference for the use of nonlinear formulas, as they considered that linear formulas could only produce acceptable calculated quota distributions if the distributions of the variables that are included are not skewed toward advanced economies. However, a few Directors expressed the view that linear formulas, with variables expressed in levels or shares, would be satisfactory because they are simple and produce consistent results.

"Directors recognized that the weights of variables in the formulas are an issue for political judgment by the membership. They noted that the weights used in the paper are intended only to illustrate the properties of various formulas, and not the basis for final decisions.

"I have noted the view expressed by many Directors that, precisely because the issues are complex, our work should go forward in a pragmatic spirit, seeking a broad consensus among the membership. After careful reflection on the comments and suggestions made today, a follow-up staff paper on quota formulas will be prepared for consideration after the December 2001 Board seminar on the size of the Fund. We will also intensify our work on data issues, including the provision of technical assistance to member countries, in order to have comprehensive and consistent information for as many members as possible to use in our consideration of quota formulas," Mr. Sugisaki said.