## _080406a

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---

### Introduction and objectives
- Central objectives of the two-year package:
  - (i) make significant progress in realigning quota shares with economic weight in the global economy, and make quota and voting shares more responsive to changes in global economic realities in the future;
  - (ii) enhance the participation and voice for low-income countries.
- Package designed to be measured and respectful of all members; compromises will be required.

### A. Realigning quotas — overview
- Strategy:
  - initial ad hoc increases for a small group of underrepresented countries;
  - agreement on a new quota formula;
  - a second round of ad hoc increases based on the new formula;
  - measures to ensure future realignment in general quota reviews.
- Board timing: decide to carry out the necessary work on a new quota formula within two years.

### B. Initial ad hoc increases — eligibility, size, allocation, impacts
- Country coverage (eligibility):
  - Four countries proposed for initial ad hoc increases: China, Korea, Mexico, and Turkey.
  - These four are the only countries both substantially underrepresented on the basis of the existing quota formulas and underrepresented based on all four variables (GDP, openness, variability, and reserves) considered appropriate for inclusion in a new quota formula.
  - These four are also the only countries underrepresented based on each of the five variables used in the existing quota formulas.
- Aggregate size scenarios for initial ad hoc increases:
  - Scenarios illustrated for overall ad hoc increases of 1.5 percent, 2.0 percent, and 2.5 percent of total quotas.
  - The group feels that aggregate increases somewhere in this range would strike a reasonable balance.
- Allocation method:
  - Proposed simple and transparent link to degree of underrepresentation.
  - Possible approach: achieve a uniform proportional reduction in the gap between calculated and actual quota shares using existing quota formulas.
- Illustrative impacts (uniform proportional reduction approach):
  - With an overall amount of 1.5 percent:
    - Achieves about 28 percent reduction of the current difference between calculated and actual quota shares for the four eligible members.
    - Individual quota increases would range from 18 percent for Mexico to 67 percent for Korea.
    - New Actual Quotas (SDR million) and New Actual Quota Shares (in percent):
      - China: 7,817.6; 3.604
      - Korea: 2,722.5; 1.255
      - Mexico: 3,063.0; 1.412
      - Turkey: 1,155.3; 0.533
  - With an overall amount of 2.0 percent:
    - Allows a 37 percent reduction in underrepresentedness for these members.
    - Individual increases ranging from almost 25 percent for Mexico to almost 90 percent for Korea.
    - New Actual Quotas (SDR million) and New Actual Quota Shares (in percent):
      - China: 8,300.4; 3.808
      - Korea: 3,085.4; 1.415
      - Mexico: 3,222.1; 1.478
      - Turkey: 1,219.1; 0.559
  - With an overall amount of 2.5 percent:
    - Would reduce the degree of underrepresentedness for these members by close to one half.
    - New Actual Quotas (SDR million) and New Actual Quota Shares (in percent):
      - China: 8,783.2; 4.009
      - Korea: 3,448.4; 1.574
      - Mexico: 3,381.1; 1.543
      - Turkey: 1,282.8; 0.586
- Robustness:
  - Under all scenarios the four eligible members remain underrepresented based on GDP and the other individual quota variables (except variability in the case of China), reducing the risk of creating new anomalies.
- Illustrative pre-increase baseline (Table 1 selected figures):
  - China: Actual Quota (SDR million) 6,369.2; Actual Quota Share (in percent) 2.980; Calculated Quota Share (in percent) 5.197.
  - Korea: Actual Quota (SDR million) 1,633.6; Actual Quota Share (in percent) 0.764; Calculated Quota Share (in percent) 2.508.
  - Mexico: Actual Quota (SDR million) 2,585.8; Actual Quota Share (in percent) 1.210; Calculated Quota Share (in percent) 1.928.
  - Turkey: Actual Quota (SDR million) 964.0; Actual Quota Share (in percent) 0.451; Calculated Quota Share (in percent) 0.741.

### C. New quota formula (second-stage element)
- New quota formula is a key element for further rebalancing.
- Broad agreement that the new formula should be simpler and more transparent than existing formulas.
- Wide support for including a significantly higher weight for GDP in a new formula, while other variables would likely continue to play a role.
- Work on the new formula should start soon, with a decision to carry out the necessary work within two years to enable a second round of ad hoc increases based on the new formula.

### D. Second round of ad hoc increases
- Triggered once a new quota formula is agreed, allowing a broader range of countries to be included.
- To achieve meaningful further rebalancing for a wider group, a significantly larger total amount would need to be provided in the second round.
- Aggregate size and country composition of second-round increases would be decided as part of the second stage and would be linked to any increase in basic votes.
- Managing Director intends to ask large advanced economies that are eligible in the second round to forgo or limit requested increases to augment availability for other underrepresented members.

### E. Ensuring ongoing quota rebalancing
- Past general quota increases were mainly distributed in proportion to existing quota shares, with smaller selective elements; distribution has not kept pace with global economic developments.
- Proposal: Board of Governors adopt a resolution confirming that in future general reviews the Fund will seek to further realign quotas with economic weight while ensuring the maintenance of the Fund’s liquidity is not compromised.
- Consideration could be given subsequently to amending the Articles to specify this objective.

### IV. Voice and participation for low-income countries — overview
- Ensuring adequate voice for low-income countries is a central element of the package.
- Key mechanisms: increase in basic votes and measures to strengthen capacity of the two African Executive Directors’ offices.

### A. Basic votes — rationale, proposal, quantitative observations, safeguard
- Rationale:
  - Basic votes reflect the principle of equality of states and are the appropriate mechanism to increase voice for the smallest members.
  - Changing basic votes requires an amendment to the Articles of Agreement.
- Proposal elements:
  - Agreement in principle in Singapore that basic votes be increased; precise size to be determined concurrently with the second round of ad hoc increases.
  - It is envisaged that the increase would involve at least a doubling of basic votes.
- Quantitative observations:
  - Current basic votes are specified in the Articles of Agreement as 250 basic votes for each member.
  - The proportion of basic votes to overall votes has declined progressively from 11 percent to just over 2 percent.
  - A doubling of basic votes would allow total ad hoc increases (first and second round) of more than 8 ½ percent of current quotas without eroding the voting shares of low-income countries.
- Safeguard mechanism:
  - Proposal to include in the amendment a mechanism to safeguard the proportion of basic votes in total voting power to prevent future erosion of low-income members’ voting share (example cited: Asian Development Bank’s mechanism to maintain a constant ratio of basic votes to overall votes).

### B. Additional resources and capacity for African chairs
- Challenges:
  - The two African Executive Directors face special challenges due to large constituencies and heavy workload from advisory and financing relationships with many member countries.
- Immediate step:
  - Increase staffing entitlement for Senior Advisors appointed by the two African Executive Directors; decision could be taken expeditiously after the Singapore Annual Meetings based on a proposal by the Board’s Committee on Administrative Matters.
- Further option:
  - Increase the number of Alternate Executive Directors via amendment to Article XII, Sections 3 (e) and 3 (f).
  - Amendment could provide that Executive Directors elected by more than a certain threshold of members would have the right to appoint more than one Alternate; the Board of Governors would determine the threshold and modalities.
  - This would enhance African offices’ capacity and signal the membership’s commitment to effective participation of low-income members.

### Intensifying Dialogue with African Ministers
- Management has been intensifying contacts with leaders in Africa in different fora to consult them on issues confronting the Fund.
- Dialogue channels used:
  - Meetings between management and African governors at the Annual and Spring Meetings.
  - Frequent visits to Africa.
- Proposed institutional mechanism:
  - Establish an African Consultative Group comprising Fund management, Executive Directors representing Africa, and African Governors to provide a formal channel for issues of concern to Africa and recommendations to management.
- Staffing note:
  - In April 2003, their staffing entitlement was increased from four to five Senior Advisors and providing for two additional advisor positions.

### Size and Composition of the Executive Board; Selection of the Managing Director
- Size and composition:
  - Important but proposals should not be put forward in Singapore; linked with evolution of voting shares and quota realignment and will follow a slower track.
  - Issue raised automatically every two years with regular election of Executive Directors.
- Selection of the Managing Director:
  - Broad agreement on need for open and transparent procedures as called for in the Managing Director’s April 2006 report on implementing the medium-term strategy.
  - Article XII, Section 4(a): Executive Board shall select the Managing Director who shall not be a Governor or Executive Director.
  - Past practice: selection by consensus after broad informal consultations; 2004 selection involved an informal confidential straw poll and then formal selection by consensus on May 4, 2004.
  - Proposal: Executive Board should consider whether further steps are needed to ensure a fully transparent process for selection of the Managing Director, as part of the two-year program of governance reforms.

### Timetable and Next Steps — Two-Year Program to be Completed by Annual Meetings in 2008
- Rationale for two-year timetable:
  - Short timetable needed for credibility and to allow broad participation in benefits in near term.
  - Issues are complex; sufficient time required to reach agreement.
  - Two-year period is ambitious but feasible and a reasonable compromise.
- Objective for Singapore Annual Meetings (start of two-year program):
  - Reach final agreement on composition and size of the first round ad hoc quota increases.
  - Agree on additional elements of the reform package to be taken up over subsequent two years.
- Envisaged Board of Governors resolution elements (selected):
  - Quota increases:
    - (i) Increases in the quotas of the agreed-upon group of members by a specified amount; effective once members consent and make necessary payments in accordance with Fund policy.
    - (ii) Request that, by the Spring Meetings of 2008, the Executive Board completes its work on the revision of the formulas.
    - (iii) Confirmation that, following completion of formula revision, the Board of Governors would give favorable consideration to requests by members for an adjustment in their quotas with a view to improved alignment with economic weight.
    - (iv) Confirmation that, in the context of the Fourteenth General Review of Quotas and all General Reviews thereafter, the Board of Governors would consider increases in members’ quotas with a view to achieving greater alignment while ensuring adequate Fund liquidity.
  - Basic votes:
    - Request that the Executive Board, by the Annual Meetings in 2008, propose an amendment that would:
      - (a) provide for at least a doubling of the basic votes of members; and
      - (b) ensure that the ratio of basic votes to total voting power remains constant following the increase under (a) above.
  - Additional resources for Executive Directors elected by African members:
    - (i) Request that the Executive Board act expeditiously to increase resources to assist Executive Directors elected by a large number of members with heavy workloads.
    - (ii) Request that the Executive Board consider an amendment enabling each elected Executive Director to appoint more than one Alternate Executive Director where elected by a large number of members.
- Managing Director selection timetable:
  - Executive Board will establish the agenda of reform; proposed that the Executive Board consider how to respond further to calls for a transparent process for selection of the Managing Director by the Annual Meetings of 2008.

### Suggested Issues for Discussion (numbered as in source)
- 1. Agreement with main elements of the package summarized in paragraphs 24 and 25, and the two year timetable proposed.
- 2. Agreement that the first round of ad hoc quota increases should be limited to only four countries (China, Korea, Mexico, and Turkey)?
- 3. Appropriate total size of first round ad hoc increases? Agreement that increase should be allocated to individual countries on basis of achieving a uniform proportional reduction in the difference between calculated and actual quota shares using existing quota formulas?
- 4. Agreement that a significant second round of ad hoc quota increases based on a new quota formula as part of the two-year package would be important for strengthening the credibility of the Fund?
- 5. Agreement that, while precise size of the increase in basic votes will be decided after Singapore as part of second stage, objective should be to at least double them?
- 6. Agreement that an objective should be to at least preserve the voting share of low-income countries, including by an amendment to the Articles to preserve the new level of basic votes as a share of total voting power?
- 7. Agreement with proposals for strengthening the capacity of the offices of African Executive Directors?

### Key quantitative illustrations and allocations (selected figures preserved)
- Countries proposed for first round ad hoc increases: China, Korea, Mexico, Turkey.
- Example allocation scenarios (uniform reduction of out-of-lineness):
  - 1.5% Overall Quota Increase:
    - China new actual quota: 7,817.6 (SDR million); New actual quota share: 3.604 (in percent).
    - Korea new actual quota: 2,722.5 (SDR million); New actual quota share: 1.255 (in percent).
    - Mexico new actual quota: 3,063.0 (SDR million); New actual quota share: 1.412 (in percent).
    - Turkey new actual quota: 1,155.3 (SDR million); New actual quota share: 0.533 (in percent).
  - 2.0% Overall Quota Increase:
    - China new actual quota: 8,300.4 (SDR million); New actual quota share: 3.808 (in percent).
    - Korea new actual quota: 3,085.4 (SDR million); New actual quota share: 1.415 (in percent).
    - Mexico new actual quota: 3,222.1 (SDR million); New actual quota share: 1.478 (in percent).
    - Turkey new actual quota: 1,219.1 (SDR million); New actual quota share: 0.559 (in percent).
  - 2.5% Overall Quota Increase:
    - China new actual quota: 8,783.2 (SDR million); New actual quota share: 4.009 (in percent).
    - Korea new actual quota: 3,448.4 (SDR million); New actual quota share: 1.574 (in percent).
    - Mexico new actual quota: 3,381.1 (SDR million); New actual quota share: 1.543 (in percent).
    - Turkey new actual quota: 1,282.8 (SDR million); New actual quota share: 0.586 (in percent).

### Measures of Out-of-Lineness After Ad Hoc Increases (selected ratios and figures)
- Table 4 selected entries (New Actual Quota; New Actual Quota Share; Calculated Quota Share; Existing Five Formulas ratios):
  - China (1.5%): 7,817.6; 3.604; 5.197; ratios: 1.442 1.261 1.403 0.840 4.297.
  - Korea (1.5%): 2,722.5; 1.255; 2.508; ratios: 1.999 1.334 1.855 1.990 4.284.
  - Mexico (1.5%): 3,063.0; 1.412; 1.928; ratios: 1.366 1.275 1.468 1.507 1.368.
  - Turkey (1.5%): 1,155.3; 0.533; 0.741; ratios: 1.391 1.236 1.358 3.148 2.024.
  - China (2.0%): 8,300.4; 3.808; 5.197; ratios: 1.365 1.193 1.328 0.795 4.067.
  - Korea (2.0%): 3,085.4; 1.415; 2.508; ratios: 1.772 1.183 1.645 1.765 3.798.
  - Mexico (2.0%): 3,222.1; 1.478; 1.928; ratios: 1.305 1.218 1.402 1.440 1.307.
  - Turkey (2.0%): 1,219.1; 0.559; 0.741; ratios: 1.325 1.177 1.293 2.998 1.927.
  - China (2.5%): 8,783.2; 4.009; 5.197; ratios: 1.296 1.133 1.261 0.755 3.862.
  - Korea (2.5%): 3,448.4; 1.574; 2.508; ratios: 1.594 1.064 1.479 1.587 3.415.
  - Mexico (2.5%): 3,381.1; 1.543; 1.928; ratios: 1.249 1.166 1.343 1.379 1.252.
  - Turkey (2.5%): 1,282.8; 0.586; 0.741; ratios: 1.265 1.124 1.235 2.863 1.840.
- Footnote: Variability of current receipts and net capital inflows, measured as a standard deviation from centered three-year trend.

### Combinations of Increases in Basic Votes and Total Quotas (Figure 1 summary)
- Figure examines combinations of increases in Basic Votes (0%, Doubling, Tripling) and Percent Increase in Total Quotas (0% to 20%) that preserve African and PRGF-Eligible Countries' current voting shares.
- Footnote: Total quota increases reflect combined effects of ad-hoc increases in rounds 1 and 2. As a simplifying assumption, no allowance made for possible ad-hoc increases for African or PRGF-eligible countries in the second round; such increases would add to the size of the total increases possible without eroding voting shares for these two groups.

### Quota and Voting Shares by Member (selected rows preserved exactly)
- Selected small-member rows (New Actual Quota Share and New Voting Share 1/ in percent) preserved exactly as listed:
  - Congo, Republic of: 0.040 0.050 0.039 0.049 0.039 0.049 0.039 0.049
  - Haiti: 0.038 0.049 0.038 0.048 0.038 0.048 0.037 0.048
  - Somalia: 0.038 0.049 0.038 0.048 0.037 0.048 0.037 0.048
  - Rwanda: 0.037 0.048 0.037 0.047 0.037 0.047 0.037 0.047
  - Burundi: 0.036 0.047 0.035 0.046 0.035 0.046 0.035 0.046
  - ... (additional rows retained in source table).
- Footnote: Source: Finance Department. 1/ For Liberia, Somalia, and Sudan Eleventh Review proposed quotas are used. Liberia and Zimbabwe are included although their voting rights have been suspended.

### ANNEX I. Appointment of Alternate Executive Directors — legal provisions and practice
- Article XII, Section 3(e): “Each Executive Director shall appoint an Alternate with full power to act for him when he is not present. When the Executive Directors appointing them are present, Alternates may participate in meeting but may not vote.”
- Article XII, Section 3(f) last sentence: “While the office remains vacant, the Alternate of the former Executive Director shall exercise his powers, except that of appointing an Alternate.”
- Key practice points:
  - The Alternate is a representative of the appointing Executive Director and should act in accordance with that Executive Director’s instructions.
  - If the Executive Director’s office becomes vacant and a new elective Executive Director is named, the Alternate’s office becomes vacant and an Alternate shall be named by the newly elected Executive Director (By-Laws, Section 17).
  - The Articles leave it to each Executive Director to determine whom to appoint as an Alternate; the Alternate serves at the pleasure of the appointing Executive Director.
  - Constituency members often informally agree on which member designates the Executive Director candidate and who is appointed as Alternate.
  - Executive Directors and Alternates have the same rights and obligations, except Alternates cannot vote when the appointing Executive Directors are present.
  - Duty: an Executive Director and his Alternate must devote all the time and attention to the business of the Fund that its interest require, and, between them, be continuously available at the principal office of the Fund (By-Laws, Section 14 (d)).
  - Attendance and participation rights: Executive Director and his Alternate may attend and participate in all meetings of the Board of Governors (By-Laws, Section 5) and meetings of the Executive Board and its committees (Rules B-1 and B-3), though voting rights at Board of Governors meetings depend on status as Governor or Alternate/temporary Alternate Governor.

*Source: IMF staff paper segment and Finance Department extracts from source PDF _080406a.*

### 1. Countries Underrepresented Relative to Existing Formulas and Four Variables Relevant

### 1. Countries Underrepresented Relative to Existing Formulas and Four Variables Relevant for Quota Calculations

### Introduction and objectives
- Central objectives of the two-year package:
  - (i) make significant progress in realigning quota shares with economic weight in the global economy, and make quota and voting shares more responsive to changes in global economic realities in the future;
  - (ii) enhance the participation and voice for low-income countries.
- The package is designed to be measured and respectful of all members; compromises will be required.

### A. Realigning quotas — overview
- Strategy: a series of measures including initial ad hoc increases for a small group of underrepresented countries, agreement on a new quota formula, a second round of ad hoc increases based on the new formula, and measures to ensure future realignment in general quota reviews.
- The Board should decide to carry out the necessary work on a new quota formula within two years.

### B. Initial ad hoc increases
- Country coverage (eligibility):
  - Four countries proposed for initial ad hoc increases: China, Korea, Mexico, and Turkey.
  - These four are the only countries both substantially underrepresented on the basis of the existing quota formulas and underrepresented based on all four variables (GDP, openness, variability, and reserves) considered appropriate for inclusion in a new quota formula.
  - These four are also the only countries underrepresented based on each of the five variables used in the existing quota formulas.
- Aggregate size scenarios for initial ad hoc increases:
  - Scenarios illustrated for overall ad hoc increases of 1.5 percent, 2.0 percent, and 2.5 percent of total quotas.
  - The group feels that aggregate increases somewhere in this range would strike a reasonable balance.
- Allocation method:
  - Proposed simple and transparent link to degree of underrepresentation.
  - Possible approach: achieve a uniform proportional reduction in the gap between calculated and actual quota shares using existing quota formulas.
- Illustrative impacts (using the uniform proportional reduction approach):
  - With an overall amount of 1.5 percent:
    - Achieves about 28 percent reduction of the current difference between calculated and actual quota shares for the four eligible members.
    - Individual quota increases would range from 18 percent for Mexico to 67 percent for Korea.
  - With an overall amount of 2.0 percent:
    - Allows a 37 percent reduction in underrepresentedness for these members.
    - Individual increases ranging from almost 25 percent for Mexico to almost 90 percent for Korea.
  - With an overall amount of 2.5 percent:
    - Would reduce the degree of underrepresentedness for these members by close to one half.
- Robustness:
  - Under all scenarios the four eligible members remain underrepresented based on GDP and the other individual quota variables (except variability in the case of China), reducing the risk of creating new anomalies.

### C. New quota formula (second-stage element)
- A new quota formula is a key element for further rebalancing.
- Broad agreement that the new formula should be simpler and more transparent than existing formulas.
- There appears to be wide support for including a significantly higher weight for GDP in a new formula, while other variables would likely continue to play a role.
- Work on the new formula should start soon, with a decision to carry out the necessary work within two years to enable a second round of ad hoc increases based on the new formula.

### D. Second round of ad hoc increases
- Triggered once a new quota formula is agreed, allowing a broader range of countries to be included.
- To achieve meaningful further rebalancing for a wider group, a significantly larger total amount would need to be provided in the second round.
- Aggregate size and country composition of second-round increases would be decided as part of the second stage and would be linked to any increase in basic votes.
- Managing Director intends to ask large advanced economies that are eligible in the second round to forgo or limit requested increases to augment availability for other underrepresented members.

### E. Ensuring ongoing quota rebalancing
- Past general quota increases were mainly distributed in proportion to existing quota shares, with smaller selective elements; distribution has not kept pace with global economic developments.
- Proposal: Board of Governors adopt a resolution confirming that in future general reviews the Fund will seek to further realign quotas with economic weight while ensuring the maintenance of the Fund’s liquidity is not compromised.
- Consideration could be given subsequently to amending the Articles to specify this objective.

### IV. Voice and participation for low-income countries — overview
- Ensuring adequate voice for low-income countries is a central element of the package.
- Key mechanisms: increase in basic votes and measures to strengthen capacity of the two African Executive Directors’ offices.

### A. Basic votes
- Rationale:
  - Basic votes reflect the principle of equality of states and are the appropriate mechanism to increase voice for the smallest members.
  - Changing basic votes requires an amendment to the Articles of Agreement.
- Proposal elements:
  - Agreement in principle in Singapore that basic votes be increased; precise size to be determined concurrently with the second round of ad hoc increases.
  - It is envisaged that the increase would involve at least a doubling of basic votes.
- Quantitative observations:
  - Current basic votes are specified in the Articles of Agreement as 250 basic votes for each member.
  - The proportion of basic votes to overall votes has declined progressively from 11 percent to just over 2 percent.
  - A doubling of basic votes would allow total ad hoc increases (first and second round) of more than 8 ½ percent of current quotas without eroding the voting shares of low-income countries.
- Safeguard mechanism:
  - Proposal to include in the amendment a mechanism to safeguard the proportion of basic votes in total voting power to prevent future erosion of low-income members’ voting share (example cited: Asian Development Bank’s mechanism to maintain a constant ratio of basic votes to overall votes).

### B. Additional resources and capacity for African chairs
- Challenges:
  - The two African Executive Directors face special challenges due to large constituencies and heavy workload from advisory and financing relationships with many member countries.
- Immediate step:
  - Increase staffing entitlement for Senior Advisors appointed by the two African Executive Directors; decision could be taken expeditiously after the Singapore Annual Meetings based on a proposal by the Board’s Committee on Administrative Matters.
- Further option:
  - Increase the number of Alternate Executive Directors via amendment to Article XII, Sections 3 (e) and 3 (f).
  - Amendment could provide that Executive Directors elected by more than a certain threshold of members would have the right to appoint more than one Alternate; the Board of Governors would determine the threshold and modalities.
  - This would enhance African offices’ capacity and signal the membership’s commitment to effective participation of low-income members.

*Source: IMF staff paper segment on quotas and voice reform proposals.*

### 21.      Management intends to further intensify its dialogue with African Ministers. As

### _080406a - 21.      Management intends to further intensify its dialogue with African Ministers. As

### Intensifying Dialogue with African Ministers
- Management has been intensifying contacts with leaders in Africa in different fora as a means for consulting them on issues confronting the Fund.
- Dialogue channels used:
  - Meetings between management and African governors at the Annual and Spring Meetings.
  - Frequent visits to Africa.
- Proposed institutional mechanism:
  - Establishment of an African Consultative Group comprising Fund management, Executive Directors representing Africa, and African Governors.
  - Purpose: provide a formal channel through which issues of concern to Africa could be raised and recommendations made to management.
- Staffing note:
  - In April 2003, their staffing entitlement was increased from four to five Senior Advisors and providing for two additional advisor positions.

### Size and Composition of the Executive Board
- Principle:
  - Size and composition are important but proposals should not be put forward in Singapore.
- Rationale:
  - Issue is closely linked with evolution of voting shares and realignment of quotas and increasing basic votes; premature to make proposals ahead of quota realignment.
  - Will follow a slower track than other elements of the two-year program.
- Procedural note:
  - Issue is raised automatically every two years with the regular election of Executive Directors.

### Selection of the Managing Director
- Broad agreement on need for open and transparent procedures for selection, as called for in the Managing Director’s April 2006 report on implementing the medium-term strategy.
- Background:
  - Boards of the Fund and the World Bank discussed selection procedures in 2000–2001.
  - Article XII, Section 4(a) of the Fund’s Articles of Agreement provides that “[the] Executive Board shall select the Managing Director who shall not be a Governor or Executive Director.”
  - While selection can be made by a majority of the votes cast, selection has been made by consensus after broad informal consultations.
  - Past practice and review:
    - Following the Managing Director’s selection in 2000, the Executive Board established a Working Group to review the Fund’s experience with the process; a similar Working Group was established by the World Bank.
    - A draft joint report recommended certain principles and procedures; when considered in April 2001, Executive Directors endorsed the Report as guidance but endorsement did not constitute a formal decision adopting specific recommendations.
    - IMFC took note of the Working Groups’ report in its April 2001 communiqué.
    - In the 2004 election: initial nomination of three candidates; subsequently two more; three of five nominees withdrew prior to an informal meeting on April 27, 2004; the remaining two met with Executive Directors; the current Managing Director was selected on May 4, 2004 in a two-stage process involving an informal confidential straw poll and then formal selection by consensus.
- Proposal:
  - The Executive Board should consider whether further steps are needed to ensure a fully transparent process for the selection of the Managing Director, as part of the two-year program of governance reforms.

### Timetable and Next Steps — Two-Year Program to be Completed by Annual Meetings in 2008
- Rationale for two-year timetable:
  - Short timetable needed for credibility and to allow broad participation in benefits in near term.
  - Issues are complex; sufficient time required to reach agreement.
  - A two-year period is ambitious but feasible and a reasonable compromise.
- Objective for Singapore Annual Meetings (start of two-year program):
  - Reach final agreement on composition and size of the first round ad hoc quota increases.
  - Agree on additional elements of the reform package to be taken up over subsequent two years.
- Envisaged Board of Governors resolution elements:

  A. Regarding Quota Increases
  - (i) Increases in the quotas of the agreed-upon group of members by a specified amount. The increase becomes effective once members consent and make necessary payments in accordance with Fund policy.
  - (ii) Request that, by the Spring Meetings of 2008, the Executive Board completes its work on the revision of the formulas that provide an important basis for the assessment of the adequacy of members’ quotas in the Fund.
  - (iii) Confirmation that, following the Executive Board’s completion of its work regarding revision of the quota formulas, the Board of Governors would give favorable consideration to requests by members for an adjustment in their quotas, with a view to achieving improved alignment of their quotas with their economic weight in the world economy, taking into account Executive Board recommendations.
  - (iv) Confirmation that, in the context of the Fourteenth General Review of Quotas and all General Reviews thereafter, the Board of Governors would consider increases in members’ quotas with a view to achieving greater alignment of their quotas relative to their economic weight while also taking into consideration the need to ensure that the Fund has adequate liquidity to achieve its purposes.

  B. Regarding Basic Votes
  - Request that the Executive Board, by the Annual Meetings in 2008, propose to the Board of Governors an amendment of the Fund’s Articles of Agreement that would:
    - (a) provide for at least a doubling of the basic votes of members; and
    - (b) ensure that the ratio of basic votes to total voting power remains constant following the increase under (a) above.

  C. Additional Resources for Executive Directors Elected by African Members
  - (i) Request that the Executive Board act expeditiously to increase the resources available to assist those Executive Directors that are elected by a large number of members and whose workload is particularly heavy given the technical and financial assistance provided by the Fund to these members.
  - (ii) Request that the Executive Board, after taking the steps in (i), give consideration to the merits of an amendment of the Articles that enables each elected Executive Director to appoint more than one Alternate Executive Director in circumstances where the Executive Director concerned is elected by a large number of members.

- Managing Director selection timetable:
  - The Executive Board will establish the agenda of reform; proposed that the Executive Board consider how to respond further to calls for a transparent process for selection of the Managing Director by the Annual Meetings of 2008.

### Suggested Issues for Discussion (numbered questions as in source)
- 1. Agreement with main elements of the package summarized in paragraphs 24 and 25, and the two year timetable proposed.
- 2. Agreement that the first round of ad hoc quota increases should be limited to only four countries (China, Korea, Mexico, and Turkey)?
- 3. Appropriate total size of first round ad hoc increases? Agreement that increase should be allocated to individual countries on basis of achieving a uniform proportional reduction in the difference between calculated and actual quota shares using existing quota formulas?
- 4. Agreement that a significant second round of ad hoc quota increases based on a new quota formula as part of the two-year package would be important for strengthening the credibility of the Fund?
- 5. Agreement that, while precise size of the increase in basic votes will be decided after Singapore as part of second stage, objective should be to at least double them?
- 6. Agreement that an objective should be to at least preserve the voting share of low-income countries, including by an amendment to the Articles to preserve the new level of basic votes as a share of total voting power?
- 7. Agreement with proposals for strengthening the capacity of the offices of African Executive Directors?

### Key Quantitative Illustrations and Allocations (selected figures preserved exactly as in source)
- Countries proposed for first round ad hoc increases: China, Korea, Mexico, Turkey.
- Example allocation scenarios in Table 2 for uniform reduction of out-of-lineness:
  - 1.5% Overall Quota Increase — China new actual quota: 7,817.6 (SDR million), New actual quota share: 3.604 (in percent); Korea new actual quota: 2,722.5 (SDR million), New actual quota share: 1.255 (in percent); Mexico new actual quota: 3,063.0 (SDR million), New actual quota share: 1.412 (in percent); Turkey new actual quota: 1,155.3 (SDR million), New actual quota share: 0.533 (in percent).
  - 2.0% Overall Quota Increase — China new actual quota: 8,300.4 (SDR million), New actual quota share: 3.808 (in percent); Korea new actual quota: 3,085.4 (SDR million), New actual quota share: 1.415 (in percent); Mexico new actual quota: 3,222.1 (SDR million), New actual quota share: 1.478 (in percent); Turkey new actual quota: 1,219.1 (SDR million), New actual quota share: 0.559 (in percent).
  - 2.5% Overall Quota Increase — China new actual quota: 8,783.2 (SDR million), New actual quota share: 4.009 (in percent); Korea new actual quota: 3,448.4 (SDR million), New actual quota share: 1.574 (in percent); Mexico new actual quota: 3,381.1 (SDR million), New actual quota share: 1.543 (in percent); Turkey new actual quota: 1,282.8 (SDR million), New actual quota share: 0.586 (in percent).
- Table 1 illustrative figures (selected):
  - China: Actual Quota (SDR million) 6,369.2; Actual Quota Share (in percent) 2.980; Calculated Quota Share (in percent) 5.197.
  - Korea: Actual Quota (SDR million) 1,633.6; Actual Quota Share (in percent) 0.764; Calculated Quota Share (in percent) 2.508.
  - Mexico: Actual Quota (SDR million) 2,585.8; Actual Quota Share (in percent) 1.210; Calculated Quota Share (in percent) 1.928.
  - Turkey: Actual Quota (SDR million) 964.0; Actual Quota Share (in percent) 0.451; Calculated Quota Share (in percent) 0.741.

*Italic: Extracted from source PDF _080406a - 21.      Management intends to further intensify its dialogue with African Ministers. As*

### 2.0 percent2.5 percent

### 2.0 percent2.5 percent

### Quota and Voting Shares by Member (concluded)
- Table presents New Actual Quota Share and New Voting Share 1/ for many members (in percent). Selected rows (values preserved exactly as in source):
  - Congo, Republic of: 0.040 0.050 0.039 0.049 0.039 0.049 0.039 0.049
  - Haiti: 0.038 0.049 0.038 0.048 0.038 0.048 0.037 0.048
  - Somalia: 0.038 0.049 0.038 0.048 0.037 0.048 0.037 0.048
  - Rwanda: 0.037 0.048 0.037 0.047 0.037 0.047 0.037 0.047
  - Burundi: 0.036 0.047 0.035 0.046 0.035 0.046 0.035 0.046
  - Turkmenistan: 0.035 0.046 0.035 0.045 0.034 0.045 0.034 0.045
  - Togo: 0.034 0.045 0.034 0.044 0.034 0.044 0.034 0.044
  - Nepal: 0.033 0.044 0.033 0.043 0.033 0.043 0.033 0.043
  - Fiji: 0.033 0.044 0.032 0.043 0.032 0.043 0.032 0.043
  - Malawi: 0.032 0.043 0.032 0.043 0.032 0.042 0.032 0.042
  - Macedonia, FYR: 0.032 0.043 0.032 0.042 0.032 0.042 0.031 0.042
  - Barbados: 0.032 0.042 0.031 0.042 0.031 0.042 0.031 0.041
  - Niger: 0.031 0.042 0.030 0.041 0.030 0.041 0.030 0.041
  - Estonia: 0.031 0.041 0.030 0.041 0.030 0.041 0.030 0.040
  - Mauritania: 0.030 0.041 0.030 0.040 0.030 0.040 0.029 0.040
  - Botswana: 0.029 0.040 0.029 0.040 0.029 0.040 0.029 0.039
  - Benin: 0.029 0.040 0.029 0.039 0.028 0.039 0.028 0.039
  - Burkina Faso: 0.028 0.039 0.028 0.038 0.028 0.038 0.027 0.038
  - Chad: 0.026 0.037 0.026 0.037 0.026 0.036 0.026 0.036
  - Central African Republic: 0.026 0.037 0.026 0.036 0.026 0.036 0.025 0.036
  - Lao, People's Dem. Republic: 0.025 0.036 0.024 0.035 0.024 0.035 0.024 0.035
  - Mongolia: 0.024 0.035 0.024 0.034 0.023 0.034 0.023 0.034
  - Swaziland: 0.024 0.035 0.023 0.034 0.023 0.034 0.023 0.034
  - Albania: 0.023 0.034 0.022 0.033 0.022 0.033 0.022 0.033
  - Lesotho: 0.016 0.027 0.016 0.027 0.016 0.027 0.016 0.027
  - Equatorial Guinea: 0.015 0.026 0.015 0.026 0.015 0.026 0.015 0.026
  - Gambia, The: 0.015 0.026 0.014 0.025 0.014 0.025 0.014 0.025
  - Belize: 0.009 0.020 0.009 0.020 0.009 0.020 0.009 0.020
  - San Marino: 0.008 0.019 0.008 0.019 0.008 0.019 0.008 0.019
  - Vanuatu: 0.008 0.019 0.008 0.019 0.008 0.019 0.008 0.019
  - Eritrea: 0.007 0.019 0.007 0.018 0.007 0.018 0.007 0.018
  - Djibouti: 0.007 0.019 0.007 0.018 0.007 0.018 0.007 0.018
  - St. Lucia: 0.007 0.018 0.007 0.018 0.007 0.018 0.007 0.018
  - Guinea-Bissau: 0.007 0.018 0.007 0.018 0.007 0.018 0.006 0.018
  - Antigua and Barbuda: 0.006 0.018 0.006 0.017 0.006 0.017 0.006 0.017
  - Grenada: 0.005 0.017 0.005 0.017 0.005 0.016 0.005 0.016
  - Samoa: 0.005 0.017 0.005 0.017 0.005 0.016 0.005 0.016
  - Solomon Islands: 0.005 0.016 0.005 0.016 0.005 0.016 0.005 0.016
  - Cape Verde: 0.004 0.016 0.004 0.016 0.004 0.016 0.004 0.015
  - St. Kitts and Nevis: 0.004 0.016 0.004 0.015 0.004 0.015 0.004 0.015
  - Comoros: 0.004 0.016 0.004 0.015 0.004 0.015 0.004 0.015
  - Seychelles: 0.004 0.015 0.004 0.015 0.004 0.015 0.004 0.015
  - St. Vincent and the Grenadines: 0.004 0.015 0.004 0.015 0.004 0.015 0.004 0.015
  - Timor-Leste: 0.004 0.015 0.004 0.015 0.004 0.015 0.004 0.015
  - Maldives: 0.004 0.015 0.004 0.015 0.004 0.015 0.004 0.015
  - Dominica: 0.004 0.015 0.004 0.015 0.004 0.015 0.004 0.015
  - Sao Tome and Principe: 0.003 0.015 0.003 0.015 0.003 0.015 0.003 0.014
  - Tonga: 0.003 0.015 0.003 0.014 0.003 0.014 0.003 0.014
  - Bhutan: 0.003 0.014 0.003 0.014 0.003 0.014 0.003 0.014
  - Kiribati: 0.003 0.014 0.003 0.014 0.003 0.014 0.003 0.014
  - Micronesia, Fed. States of: 0.002 0.014 0.002 0.014 0.002 0.014 0.002 0.013
  - Marshall Islands: 0.002 0.013 0.002 0.013 0.002 0.013 0.002 0.013
  - Palau, Republic of: 0.001 0.013 0.001 0.013 0.001 0.013 0.001 0.013
- Footnotes:
  - Source: Finance Department.
  - 1/ For Liberia, Somalia, and Sudan Eleventh Review proposed quotas are used. Liberia and Zimbabwe are included although their voting rights have been suspended.

### Measures of Out-of-Lineness After Ad Hoc Increases (Table 4)
- Table reports New Actual Quota (SDR million), New Actual Quota Share (in percent), Calculated Quota Share (in percent) using Existing Five Formulas and ratios of Calculated Share to New Actual Quota Share under different overall quota increases (1.5% Overall Quota Increase; 2.0% Overall Quota Increase; 2.5% Overall Quota Increase). Selected entries (values preserved exactly):
  - China:
    - New Actual Quota: 7,817.6; New Actual Quota Share: 3.604; Calculated Quota Share: 5.197
    - Existing Five Formulas ratios: 1.442 1.261 1.403 0.840 4.297
  - Korea:
    - New Actual Quota: 2,722.5; New Actual Quota Share: 1.255; Calculated Quota Share: 2.508
    - Existing Five Formulas ratios: 1.999 1.334 1.855 1.990 4.284
  - Mexico:
    - New Actual Quota: 3,063.0; New Actual Quota Share: 1.412; Calculated Quota Share: 1.928
    - Existing Five Formulas ratios: 1.366 1.275 1.468 1.507 1.368
  - Turkey:
    - New Actual Quota: 1,155.3; New Actual Quota Share: 0.533; Calculated Quota Share: 0.741
    - Existing Five Formulas ratios: 1.391 1.236 1.358 3.148 2.024
  - Additional rows for China, Korea, Mexico, Turkey with updated New Actual Quota figures and corresponding shares and ratios:
    - China: 8,300.4; 3.808; 5.197; 1.365 1.193 1.328 0.795 4.067
    - Korea: 3,085.4; 1.415; 2.508; 1.772 1.183 1.645 1.765 3.798
    - Mexico: 3,222.1; 1.478; 1.928; 1.305 1.218 1.402 1.440 1.307
    - Turkey: 1,219.1; 0.559; 0.741; 1.325 1.177 1.293 2.998 1.927
    - China: 8,783.2; 4.009; 5.197; 1.296 1.133 1.261 0.755 3.862
    - Korea: 3,448.4; 1.574; 2.508; 1.594 1.064 1.479 1.587 3.415
    - Mexico: 3,381.1; 1.543; 1.928; 1.249 1.166 1.343 1.379 1.252
    - Turkey: 1,282.8; 0.586; 0.741; 1.265 1.124 1.235 2.863 1.840
- Footnotes:
  - Source: Finance Department.
  - 1/ The variables shown here differ from the formulation used in the existing quota formulas.
  - 2/ Variability of current receipts and net capital inflows, measured as a standard deviation from centered three-year trend.

### Combinations of Increases in Basic Votes and Total Quotas (Figure 1)
- Figure title: Combinations of Increases in Basic Votes and Total Quotas that Preserve African and PRGF-Eligible Countries' Current Voting Shares 1/
- Axis and legend elements preserved as stated:
  - Increases in Basic Votes: 0%, Doubling, Tripling
  - Percent Increase in Total Quotas: 0% to 20% (axis labels shown)
  - Groups: PRGF-eligible, African Countries
- Footnote:
  - 1/ Total quota increases reflect combined effects of ad-hoc increases in rounds 1 and 2. As a simplifying assumption to facilitate the calculation, no allowance has been made for possible ad-hoc increases for African or PRGF-eligible countries in the second round. Such increases would add to the size of the total increases that are possible without eroding voting shares for these two groups.
  - Source: Finance Department

### ANNEX I. Appointment of Alternate Executive Directors
- Legal provisions and practical arrangements preserved exactly:
  - Article XII, Section 3(e): “Each Executive Director shall appoint an Alternate with full power to act for him when he is not present. When the Executive Directors appointing them are present, Alternates may participate in meeting but may not vote.”
  - Article XII, Section 3(f) last sentence: “While the office remains vacant, the Alternate of the former Executive Director shall exercise his powers, except that of appointing an Alternate.”
- Key points on role and practice:
  - The Alternate Executive Director is a representative of the Executive Director appointing him and should act in accordance with the instructions given by that Executive Director.
  - If the office of the Executive Director becomes vacant, when a new elective Executive Director is named the office of the Alternate becomes vacant and an Alternate shall be named by the newly elected Executive Director (By-Laws, Section 17).
  - The Articles leave it entirely to each Executive Director to determine whom to appoint as an Alternate and the Alternate serves at the pleasure of the Executive Director appointing him.
  - In practice, constituency members often informally agree which member designates the Executive Director candidate and which person is appointed as Alternate.
  - Executive Directors and Alternates are subject to the same rights and obligations, with the only limitation that Alternates cannot vote when the Executive Directors appointing them are present at a meeting.
  - Duty: an Executive Director and his Alternate must devote all the time and attention to the business of the Fund that its interest require, and, between them, be continuously available at the principal office of the Fund (By-Laws, Section 14 (d)).
  - An Executive Director and his Alternate may attend and participate in all meetings of the Board of Governors (By-Laws, Section 5). However, they are not entitled to vote at those meetings unless entitled to vote as a Governor, or an Alternate or temporary Alternate Governor), as well as in all the meetings of the Executive Board and its committees (Rules B-1 and B-3).

*Source: Finance Department.*

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