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ViewpointOctober 3 2016

Why India backs fast-tracking of the IMF's global quota and governance reforms

The IMF and World Bank must adapt their governance and quota reforms to reflect the growing global role of Asia and the rise of emerging economies, writes India's finance minister.
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Arun Jaitley

The implementation of the 2010 International Monetary Fund (IMF) quota and governance reforms, though delayed, is a milestone in extending the IMF’s effectiveness and legitimacy. However, even now, IMF quotas do not reflect the global economic realities, and the institution is still dependent on borrowed resources.

As a quota-based multilateral institution, the IMF’s prolonged dependence on borrowed resources is undesirable. It is imperative that the 15th General Review of Quotas (GRQ), including the quota formula, is suitably revised by October 2017, as per the agreed timelines. We must work together to achieve this objective.

A bigger voice

It is also important that the IMF quota formula review enhances the weight for purchasing power parity (PPP) gross domestic product (GDP) in the quota formula, so that the increased voice of the dynamic emerging market and developing economies is in line with their relative position in the world economy, while protecting the voice of low-income countries.

The IMF board of governors had adopted a resolution on the 14th GRQ and reform of the executive board of the IMF on December 16, 2010, so as to give emerging economies greater representation. The US, the IMF’s largest shareholder with 16.73% of voting power, was a key country that had not ratified the 2010 reforms, which resulted in them being delayed. The reforms were included in the US Bill for Legislation discussed in December 2015 and US Congress finally approved them.

As a consequence of the delay in the implementation of the 2010 reforms, the 15th GRQ, which was to be completed by January 2014 (and to which quota formula reform is also linked, so the completion of this also slipped from its January 2013 deadline), was also delayed. 

On January 26, 2016, the IMF announced the Seventh Amendment of the Articles of Agreement was coming into force. This amendment involves the reform of the IMF's Executive Board and general conditions aimed at improving the effectiveness of quota increases under the 14th GRQ.

India has paid for its quota increase. Its new quotas are effective from February 18, 2016, and its quota share has increased from 2.44% to 2.75%, making it the eighth largest quota holding country at the IMF (up from 11th). In absolute terms, India’s quota share has increased from 5.8 billion special drawing rights to 13.1 billion. 

World Bank changes

As far as the World Bank Group is concerned, today it is highly capital constrained. The International Finance Corporation (IFC) has no space to lend today even at the low-level volumes it has been doing for some years. The International Bank for Reconstruction and Development (IBRD) would not be able to maintain lending levels of even $20bn to $25bn per annum in two years’ time.

It is pertinent to highlight that for the World Bank Group as a whole, there is a need to expand the role of not only the International Development Association (IDA), but also the IBRD and the IFC. These three institutions provide approximately $50bn to $60bn per annum in concessional, non-concessional and private sector resources. Within the next five years, we should work to raise annual financing volumes from the World Bank Group to $100bn a year.

The IDA has an enormously useful role in financing development in low-income countries, but recognising IDA contributions in IBRD/IFC share capital has an adverse impact on the voting share of developing countries. Therefore, it would be more than fair if a weight of not more than 10% were given to IDA contributions in the dynamic formula. Such a weight should also recognise only recent contributions, to act as rightful incentive for emerging countries to contribute to the IDA, and it should also recognise multipliers based on burden share and generosity.

To better reflect the increasing weight of developing and transition countries (DTCs), rightfully their share and voice in the management of these institutions need to grow. Therefore, there is no way other than having a selective capital increase to raise DTCs’ voting share to 50% and a large general capital increase in the IBRD and the IFC for enabling the World Bank Group to finance $100bn a year going forward.

Raising the partnership of DTCs in the IBRD and the IFC to 50% would require that economic weight captured by GDP must remain the primary factor in the formula, with larger share of PPP-based GDP of not less than 60%. 

Global financial institutions have assumed an ever-larger role in the wake of ongoing international financial challenges. However, they are showing their age by continuing to reflect a reality of an old world order. As the world economy rebalances itself towards Asia, it is imperative that we fast-track the process of reforms in earnest.

Arun Jaitley is India's finance minister.

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