A call for reform on imf's quota system

A call for reform on imf's quota system

Finance Minister Arun Jaitley has demanded reforms to the International Monetary Fund’s controversial quota system, shedding light on the problems facing the Bretton Woods institution in today’s global economy. Quotas determine the size of contingency funds at the disposal of the IMF to lend to countries in need of help, as well as the power of individual countries to influence lending decisions and tap into the funds themselves. Though developing countries hold less than half the overall quota at the moment, with their rapidly increasing economic heft they have demanded a greater share — with limited success. In this context, speaking at the spring meetings of the IMF, Mr. Jaitley reiterated the need to reform the quota system further. Else, he warned, the legitimacy and credibility of the IMF could be eroded. The 15th General Review of Quotas (GRQ), the most recent attempt to revise the size and composition of the system, was to be completed by October 2017, but the deadline has now been extended to 2019. The delay was not unexpected, given the poor precedent set by the long delay in adoption in 2016 of the previous GRQ (originally approved in 2010). That had doubled the overall size of the quotas to $659 billion (from $329 billion) while allotting an additional 6% of quotas to the developing world. But with the rise of competing global institutions ready to meet the capital needs of the developing world, the patience of countries such as India may be tested more easily.
Also at stake is the potency of the IMF in keeping up with the changed fundamental needs of developing economies. The developing world is looking beyond the short-term crisis management tools that the IMF, as the sole international lender of last resort, has traditionally offered them for decades now — albeit in an unsatisfactory and politically biased way. China, for instance, with its steadily rising influence on the global economy, has grown to be the focal point for economies seeking alternative sources of capital to fund their long-term growth needs. This month, Mr. Jaitley announced that India is seeking $2 billion from the New Development Bank, set up by the BRICS countries in 2015 with a more equitable power structure, to fund infrastructure projects. The Asian Infrastructure Investment Bank, launched in 2014, could be an even bigger threat to the IMF’s influence given its larger membership, lending capacity and international reach. In this environment of competition, the IMF will have to do more than just superficially tinker with its asymmetric power structure and outdated quota system. Else, it could be slowly but steadily pushed into irrelevance. Meanwhile, it remains to be seen whether India will continue to push for reforms at the IMF even as it simultaneously seeks to diversify its funding base, or whether it will assume a bolder stance in openly favouring one over the other.