Public Information Notice

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 July 31, 2003, the Executive Board of the International Monetary Fund (IMF) discussed quota distribution issues. Executive Directors revisited technical issues related to the quota formulas, reviewed the quota adjustment process, and discussed basic votes.¹

Background

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. ² Further discussions based on follow-up work by the staff took place at an Executive Board seminar in October 2001 and at an Executive Board meeting in June 2002.³

The resolution of the Board of Governors that concluded the Twelfth General Review of Quotas on January 31, 2003 without an increase in quotas noted that the Executive Board intended to conduct follow-up work on quota-related issues and to report on its discussions to the International Monetary and Financial Committee (IMFC) by the 2003 Annual Meetings. The paper discussed by the Executive Board in July 2003 responds to this request for follow up and discusses technical issues related to the specification of an alternative quota formula, the process of adjusting members' quotas, and basic votes.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss further a number of issues related to the distribution of quotas of Fund members. Building on progress achieved during earlier discussions, the views expressed by the Board today will provide the basis for a status report to the IMFC, in accordance with the resolution of the Board of Governors of January 2003, which concluded the Twelfth General Review of Quotas without an increase in quotas. The resolution noted the Executive Board's intention to monitor closely and assess the adequacy of its resources, to consider measures to achieve a distribution of quotas that reflects developments in the world economy, and to consider measures to strengthen the governance of the Fund.

As part of this work program, Directors discussed how the broad consensus for arriving at new quota formulas might develop going forward, and considered certain issues involved in revising and updating the quota formulas to reflect changes in the world economy and measure more adequately countries' relative positions. They also had a useful exchange of views on possible approaches to accomplish broad changes in quotas and voting power.

Today's discussion confirmed the broad support that has emerged for a formula that is simpler and more transparent than the traditional formulas. The formula would be based on an updating of the traditional economic and financial variables, and comprise at most four variables, including GDP as the most important indicator of countries' economic size, along with measures of openness, variability of current receipts and net capital flows, and reserves. Our discussion also reiterated the various concerns that have been expressed in previous discussions on the inclusion of some of these variables and on different aspects of the quota formulas. Those views and concerns have been reflected in concluding remarks or summings up of the previous discussions.

Directors reviewed the issue of the high correlation among the economic and financial variables in the existing quota formulas as well as among the updated variables. Most Directors saw this correlation as unavoidable, noting that approaches to reducing or eliminating the correlation would entail significant drawbacks, including reduced transparency of the formula. A few Directors nevertheless saw merit in further work to try to reduce the correlation among the variables. Because the variables are correlated, Directors acknowledged that the coefficient attached to each variable cannot be taken to represent each variable's relative economic importance. Directors recalled, in this context, the conclusion of previous discussions that the precise choice of weights will ultimately require the Executive Board to exercise judgment regarding an outcome that could command wide support.

Directors had a further discussion on options to modernize the quota formulas by including measures of capital flows. Many Directors continued to support including a measure of the variability of net capital flows and current receipts, to reflect countries' balance of payments vulnerability in the quota formulas. Directors also discussed possible approaches to introducing an outcome-based indicator of financial openness in the quota formula. A few Directors expressed interest in using a measure of capital flows, and a number of other Directors encouraged further efforts towards the inclusion of a stock variable capturing the asset and liability positions of a member. It was widely recognized, however, that, at present, such a variable cannot yet be operationalized due to lack of data for many members.

Directors noted that preliminary results of calculated quotas, using variables broadly endorsed for including in a new quota formula, would not lead to a significant change in calculated quota shares across country groups. However, they underscored that a new quota formula would make a significant difference in measuring the out-of-lineness of the quotas of individual countries. Many Directors also observed that, for a number of countries, actual quota shares are considerably lower than calculated quota shares, almost regardless of specific formulas, whereas the opposite appears to be true for many other countries. A number of Directors considered that these outcomes underscore the need for a political decision by the membership to secure quota shares that would strengthen the representation of developing countries in the Fund. A number of other Directors cautioned that changes in quota distribution should not target an a priori distribution between groups of countries. A few Directors expressed interest in the suggestion that a subgroup of members could voluntarily accept to transfer quota shares to other members. A few other Directors called for a better representation of transition countries in the Fund.

In discussing how best to move forward toward achieving adjustments in quota shares, Directors recognized the potential benefits that a package of changes in quotas, based on a new quota formula, could confer. They observed that significant adjustments in quota shares have tended to take place in the context of general quota increases, given the opportunity that general quota increases have provided to include elements that benefit the membership as a whole. Most Directors therefore saw considerable merit in a package that would involve-in the context of the next general quota increase-the following elements: a general increase with a relatively large selective element allocated by means of a new quota formula; ad hoc quota increases aimed at addressing the clearest cases of out-of-lineness; and an increase in basic votes specifically aimed at correcting the erosion of the voting power of the smallest members. It was noted, however, that an increase in basic votes would require an amendment of the Articles of Agreement.

Most Directors recognized that, in view of the Fund's satisfactory liquidity position, there is no need for a quota increase at present. Noting that changes in the world economy are hard to predict, many Directors nevertheless underscored the need for continued strong efforts to build a consensus among the membership on the elements of a package, including on a new, improved quota formula. Many Directors also encouraged continued exploration of the scope for more limited ways of changing quotas, in particular by ad-hoc quota adjustments that would address cases of serious out-of-lineness. Most Directors indicated their willingness to consider an increase in basic votes outside the context of a general quota increase, as a direct means of responding to calls for enhancing the voice of developing countries, in particular of the smallest members, although it was acknowledged that, at this stage, the required majority does not exist.

Directors supported the proposal that future work by the staff on quota related topics include updating the data used to calculate variables and alternative quota formulas. Many Directors also saw a need for further work on measuring capital flows and financial openness and more generally the availability of capital account data that could be used to capture these concepts.

Directors recognized the importance of the Fund having adequate resources to fulfill its critical responsibilities. In this regard, the most recent review of the Fund's liquidity position in April 2003 concluded that the Fund's current and prospective position is adequate. They urged the staff to continue to monitor and assess the adequacy of Fund resources through periodic liquidity reviews.

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¹ This PIN summarizes the views of the Executive Board as expressed during the July 31, 2003, Executive Board meeting based on the report entitled "Quota Distribution-Selected Issues."

² "Report to the IMF Executive Board of the Quota Formula Review Group," "Staff Commentary on the External Review of the Quota Formulas," and "External Review of the Quota Formulas-Quantification."

³ "IMF Executive Board Informally Discusses Quota Formulas," PIN No. 01/118 (11/7/01), Alternative Quota Formulas-Considerations," "IMF Executive Board Discusses Quota Formulas," PIN No. 02/59 (6/14/02), and "Alternative Quota Formulas-Further Considerations."