In light of the 2021 annual meetings of the World Bank Group and the International Monetary Fund (IMF), several leading experts have voiced the need to reassess the IMF’s role. The driving force behind this is the continuous trend of emerging markets increasing their contribution to the global Gross Domestic Product (GDP). There is also a call for streamlining data integrity, given that the World Bank has stopped publishing its Ease of Doing Business reports.
Post the Second World War, the IMF, along with the World Bank, was established to aid in the reconstruction of countries devastated by the war. These institutions were agreed upon during a conference in Bretton Woods, US, earning them the moniker “Bretton Woods twins.”
The Quota System and its Issues
The IMF’s quota system was established to generate funds for loans. Every IMF member country is assigned a quota or a contribution, representing the country’s relative size in the global economy. This quota determines their relative voting power and borrowing capacity. Wealthier countries thus tend to have more influence on the formation and amendment of rules.
However, this system often leads to under-representation of economically growing countries as their voting power lags behind their economic growth. The BRICS countries serve as prime examples of this issue. Quotas are denoted in Special Drawing Rights (SDRs), the IMF’s unit of account. SDRs represent potential claims on the freely usable currencies of IMF members and can be exchanged for these currencies. Reviews of quotas are conducted by the IMF’s Board of Governors at regular intervals, no more than five years apart.
Past Quota Reforms
In 2010, drafting of “the IMF’s Quota and Governance Reforms” took place, which became effective in 2016. These reforms shifted over 6% of the quota shares to emerging and developing countries from the US and European nations. Consequently, India’s voting rights increased by 0.3% to 2.6%, and China’s voting rights rose by 2.2% to 6%. As of now, India holds 2.75% of SDR quota and 2.63% of votes in the IMF.
Article IV Consultations
Under Article IV consultations, the IMF holds annual bilateral discussions with its members, and a report is prepared by its staff. The Article IV consultation is the most potent tool at the IMF’s disposal. It needs to be restructured and sharpened to be more efficient by leveraging new technologies and access to public data.
Proposed Reforms
Experts have proposed reforms to the quota system that reflect the changing economic realities, primarily focusing on the increasing capabilities of developing nations. For instance, the quotas of BRICS countries should increase, and those of European Union countries should decrease. A heavier weightage must be given to Purchasing Power Parity (PPP) GDP in the new quota formula to mirror the actual economic strength of emerging markets and developing economies.
PPP, a metric widely used in macroeconomic analysis, enables economists to compare productivity and living standards between countries by comparing their currencies through a “basket of goods” approach. Some countries adjust their GDP figures to be in line with PPP.
Aiding Lower Income Countries
The IMF should concentrate its efforts on supporting lower-income countries and other developing nations’ market funds-raising activities. The IMF’s Article IV consultation reports are often utilized by credit rating agencies, impacting fund-raising capacities of countries such as India. Today, most Asian countries, including India, can independently raise funds based on the strength of their forex reserves and do not necessarily need to approach the IMF to navigate financial crises like in the past.
Management Reforms
Suggestions have been made to modify the IMF’s management system. Currently, an informal arrangement dictates that the IMF head should be European and the World Bank head should be American. Critics argue that it is time to reassess this practice and urge the IMF to reconsider its management structure.
