Public Information Notice: IMF Executive Board Discusses Quota Formulas

June 14, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On June 4, 2002, the Executive Board of the International Monetary Fund (IMF) held further discussions on possible revisions of the formulas used to calculate members' quotas.1


Based on 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 the 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. Further discussions based on follow-up work by the staff took place at an Executive Board seminar in October 20012 and at this latest meeting.

The paper discussed by the Executive Board addressed comments and suggestions made by Directors during earlier discussions and presented further illustrative calculations based on formulas using different specifications and weights for the variables considered at the earlier discussions, including GDP, openness, variability of current receipts and net capital flows, and official reserves. During the meeting Directors expressed a range of views both on the specification of the variables that should or could be included in quota formulas and on the weights to be assigned to these variables. While no consensus was reached at the meeting on new formulas, progress was made in advancing the thinking on the development of a simpler and more transparent approach. Directors recognized that judgments on appropriate quota formulas are linked to other quota-related issues such as the overall size of quotas and access to IMF resources, and decided that further work on quota formulas should be undertaken following discussion of these issues, which are included in the Board's work program for the period leading up to the Annual Meetings in October 2002.

Executive Board Assessment

Deputy Managing Director and Acting Chairman, Shigemitsu Sugisaki, summarized the discussions as follows:

"The meeting today provided a further opportunity for Directors to consider the various issues involved in revising and updating the quota formulas to reflect changes in the world economy and measure more adequately countries' relative positions. Progress has been made in advancing our thinking on the development of alternative formulas that, based on an updating of the traditional variables, are intended to be simpler and more transparent than the current formulas. Moreover, it is apparent from our discussions that the selection of weights for the variables and the distribution of quotas are inextricably linked, and that decisions on possible changes in quota shares will need to take account of other quota-related issues, including the size of the Fund and access. With this approach, we should also be in a better position to respond to the concerns of Directors who have cautioned against overloading the quota formulas with too many objectives, including the determination of members' contributions to the Fund, their access to Fund resources, and their relative voting power. With these remarks, let me turn now to today's discussion, which focused on the specification of the variables to be included in an updated quota formula; on possible approaches to setting the weights of the variables; and on proposals to address issues related to relative voting power in the Fund.

"Directors had a useful discussion of issues related to the specification of the variables for inclusion in the formulas, complementing the views expressed and guidance given at their October 2001 discussion on this topic.

· Directors generally agreed that GDP is the most important variable to be included in any new formula. However, differences of view remain regarding the method of converting national data to a common SDR base, with a majority of the Board preferring the continued use of market exchange rates and many Directors favoring the use of purchasing power parities for GDP conversion. Directors noted that using a 3- or 5-year average for GDP would make little difference in the distribution of the calculated quotas at the group level. Most Directors agreed that a 3-year average provides a reasonable balance between the objective of currentness of the data and smoothing out unwarranted fluctuations, although a few Directors saw merit in averaging over a longer period.

· Most Directors reiterated their support for including an openness variable in the quota formulas, although a number of Directors considered that the inclusion of such a variable raises methodological difficulties, such as the correlation of openness with other variables, or the appropriate treatment of trade within currency unions. The staff will continue to examine how to address issues of correlation between the formula variables. Directors discussed the possibility of broadening the openness measure by including a variable for financial openness and took note of the difficulties noted in the staff paper that would be involved at this stage, given current data limitations on international investment positions and capital flows. Many Directors urged additional work on data issues related to international investment positions and capital flows, and the staff will examine how to make further progress in this area.

· To capture countries' vulnerability in the quota formula, many Directors continued to support the inclusion of a measure of variability of current receipts and net capital flows, although a number of Directors cautioned that this might reward unstable policies. In discussing the specification of the variability indicator, Directors recognized that use of a 3- or 5-year average would not have a significant impact at the group level and generally agreed that a 3-year measure would serve to smooth trends while adequately capturing the fluctuations in capital flows.

· The Board was divided over the appropriateness of retaining reserves as a separate variable in the formulas. A number of Directors considered that, for many members with access to capital markets, reserves are of declining importance, and should therefore be excluded from the formulas. Many other Directors, however, felt that reserves remain a useful indicator of members' financial strength in many cases, and should be retained as a variable.

"Turning to the issue of weights, Directors recognized that the choice of weights for the variables in quota formulas and the distribution of calculated quota shares among member countries are closely related and will ultimately require the Executive Board to exercise judgment regarding an outcome that can command wide support. Today's discussion provided the opportunity for a wide-ranging exchange of views on a variety of approaches for addressing these issues.

"Although no consensus has yet emerged at the present preliminary stage of discussions on weights, many Directors supported the view that the weights should be selected mainly on the basis of judgments about the relative importance of individual variables on economic grounds. For example, many Directors suggested that GDP, as the most important variable, should have the highest weight. Illustrative staff calculations based on different weighting formulas suggest that, under this approach, the distribution of the underlying data would generally result in calculated quota shares for the advanced countries that are larger than their actual quota shares. To achieve a different outcome, weights would need to be selected that give very large effect to those variables for which the advanced countries account for a relatively smaller share in world totals. However, such an approach might not adequately reflect countries' relative economic positions and capacity to provide resources to the Fund.

"Against this background, Directors also considered alternative approaches that could result in a broad adjustment of calculated quota shares, including an approach in which the calculated quota shares of particular groups are predetermined and the formulas are used to determine calculated quota shares within the group. Most Directors saw little or no merit in pursuing this approach, and stressed the difficulties involved, including the need to agree on the desired share of the groups and the composition of the groups. However, some Directors urged further consideration of this approach, noting that agreement on the quota formulas would, in any event, require judgments on the key political issue of quota distribution among broad country groups.

"Another approach would be to let members select the formula that would provide the most favorable outcome from two, or more, formulas with different weights assigned to the agreed variables. A number of Directors saw merits in such an approach as it would be based on allowing each country to self-select the formula it would use, thus avoiding the need to determine which countries would be included in each group. Under this approach, the outcome in terms of group shares would depend on the choices made by members. However, a number of other Directors were skeptical that such an approach would facilitate agreement on the formulas, due to the difficulty of determining the form and variable weights for multiple formulas. They were also concerned that using multiple formulas would be inconsistent with the objective of having a simple, transparent approach.

"Directors also observed that the staff paper identifies a number of countries for which actual quota shares are considerably lower than calculated quota shares, almost regardless of the specific formulas used. The suggestion was also made that, according to additional indicators, an even larger group of countries might be seriously out-of-line. Many Directors supported the view that consideration be given to adjustments for countries in this category, either in the context of a general quota review or as a separate ad hoc increase. Some Directors cautioned, however, that decisions on ad hoc increases should carefully consider how the resulting declines in quota share for other countries would be apportioned.

"Many Directors underscored the desirability of ensuring the proper representation in the Fund's decision making of developing countries, especially the Fund's poorest member countries, particularly those in Africa. Directors acknowledged the role that quotas play in providing the basis for relative voting power in the Fund, but many Directors cautioned against addressing voting issues through changes in quota shares. Many Directors considered that changes in voting power would best be achieved through an amendment of the Articles of Agreement to increase the number of basic votes, possibly through a percentage increase. A number of Directors, however, cautioned that, in exploring the scope for increasing basic votes, care should be taken to ensure that voting power in the Fund remains sufficiently linked to countries' relative economic and financial weight. A number of Directors considered that the representation of developing countries should be improved through increases in their quota shares, as well as in basic votes.

"As I noted at the outset, our discussions thus far have produced preliminary directions on the variables to be included in a revised quota formula, although additional work remains to be done. Furthermore, progress on weights and quota distribution will require judgments that will also need to take account of discussions on other quota-related issues, including the size of the Fund and access to Fund resources. I, therefore, propose that we next discuss the issues of Fund size and access, which are on the work program for this summer, and then return to the issue of quota formulas after those discussions. At that stage, it would be useful to try to make further progress on the basis of a more limited number of alternative quota formulas, which the staff could elaborate taking into account the views and preferences expressed by Directors in our discussions so far."

1 This PIN summarizes the views of the Executive Board as expressed during the June 4, 2002 Executive Board meeting based on the report titled "Alternative Quota Formulas-Further Considerations."
2 "Report to the IMF Executive Board of the Quota Formula Review Group," "Staff Commentary on the External review of the Quota Formulas," "External Review of the Quota Formulas--Quantification," and "Alternative Quota Formulas-Considerations."


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