We have noted on the blog here that 2015 looks like it will be an interesting year on several fronts. One story we have followed since this blog started up in January 2014 is the fate of the 2010 IMF reform package. These are the reforms that would double the quota of SDR's at the IMF and also rebalance the quota between member nations. These reforms still have not been approved because the US Congress is not willing to approve them and the US has veto power at the IMF. To pass, the reforms need more than an 85% total vote and the US alone has a 17% vote.
In a recent press conference the IMF spokesperson provided an update on this situation in response to a question asked by a reporter. We will post that question and answer below. He basically said since the US has not approved the 2010 reforms by year end of 2014, that the IMF will hold a meeting in January 2015 and a be given a draft report on the new 15th General Review of Quotas upcoming in 2015. Let's try and understand what all this means. First some basics for readers that may not be familiar with these terms and issues.
What are IMF Quotas? For in depth answer go to the IMF Factsheet here. Here are some key concepts from the Fact sheet:
"When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members of broadly comparable economic size and characteristics. The IMF uses a quota formula to help assess a member’s relative position."
How Does the IMF Decide what quota a nation gets?
"The current quota formula is a weighted average of GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent)."
"Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account. The largest member of the IMF is the United States, with a current quota of SDR 42.1 billion (about $65 billion), and the smallest member is Tuvalu, with a current quota of SDR 1.8 million (about $2.78 million)."
What does a quota do for a country at the IMF?
A member's quota determines that country’s financial and organizational relationship with the IMF, including: 1) how much money they contribute to the IMF 2) its voting power at the IMF and 3) how much money the country can borrow from the IMF
Short summary of the above: Think of IMF quotas as the number of chips your country gets to use at the international money table. The chips are called SDR's at the IMF. You can exchange the chips for US dollars, Euros, Yen, or British pounds so that you can use them in the real world outside the IMF. The bigger your "quota", the more chips you have contributed. This gives you more voting power and a bigger line of credit if you run into trouble and have to borrow some chips. The US has the most chips and influence right now.
With that basic background. let's move on. Every so often the IMF does a review of the quotas (allocation of chips) to see if they are accurately reflecting the real world economy. In 2010, they determined that the quotas were too small (they want to double the amount of SDR's to better be able to respond to a crisis) and that the allocation of SDR's needed to be changed to give more to China and other BRICS nations and less to the US and Europe. The IMF has pushed hard to get these reforms approved, but the US Congress never approved them. Now it is nearly 2015 and the IMF has stated that if they US did not pass the reforms by year end 2014, they would look at "alternative options".
Now we can post the Q&A from the IMF press conference on December 11th where this whole topic was discussed. Here is that:
QUESTIONER: The US Congress has made clear that they're not going to pass quota reform in the budget. There's a pretty clear signal. Ted Truman said it looks like it's dead now. The Managing Director said, look, she'd give them to the end of the year and then start working on plan B. So, first of all, what is plan B? Second of all, wouldn’t plan B require U.S. approval, executive director approval? Finally, one of the main arguments presented is that giving up the veto on the NAB relinquishes some control over the financing. Can you respond to that argument?
MR. MURRAY (IMF spokesperson) : Okay. Thanks, Ian, for that. Let me just comment first on developments. We are following developments on Capitol Hill very closely. Our position regarding the need to rapidly advance the Fund's quota and governance reforms remains unchanged. Full stop. The work program, and for those of you online you may have an easier chance of pulling the work program document up, but if you open the work program document, paragraph 12 touches upon some of the items just mentioned in the question.
Let me just read that paragraph for the record. It's entitled, governance and resources. A prompt entry into force of the 2010 quota and governance reforms is of utmost importance to preserve the quota based nature of the IMF, and strengthen its legitimacy, effectiveness, and relevance. In line with the IMFC's commitment to maintaining a strong and adequately resourced IMF steps will also be taken to ensure the availability of sufficient Fund resources for crisis prevention and resolution.
As flagged in the spring work program, in the event that the 2010 Board Reform Amendment and the 14th general review of quotas have not become effective by the end of 2014, a Board meeting on alternative options for rebalancing quotas and increasing Fund resources will be scheduled for January 2015. The Board will discuss a draft report to the Board of Governors on the 15th General Review of Quotas before the end-January deadline for the completion of the review. The timing of Board meetings on the 15th General Review and our revisions to the quota formula will be determined taking into account progress made in ratifying the 2010 reforms.
This is basically all I have to say today on this matter. We will follow-up with you when we have more to elaborate on. Thanks for asking a question.
My review and concluding comments on the above:
This IMF statement gives us the latest update on the situation. To briefly recap, the proposed changes to the IMF quotas made in 2010 are stalled and not likely to pass the US Congress for now. The IMF had said if they were not passed by year end 2014, they would move forward to look at alternative options. This latest statement in the press conference indicates that process will start up in 2015 but provides no details on what the "alternative options" might be.
We can point to a couple of key parts to the answer given above though.
First, notice that the IMF wants more SDR's (money) from all the member nations in order to "ensure the availability of sufficient Fund (IMF) resources for crisis prevention and resolution." We have explained here that doubling the IMF resources would be a big signal and huge first step towards the IMF becoming a global "lender of last resort" (kind of like a global US Fed).
Secondly, note the comment that the IMF will take into account "progress made in ratifying the 2010 reforms" as they discuss new revisions to the quota formula. Since we know now that the US Congress is not going to approve the reforms (and the IMF knows this), this is an interesting comment. We can only speculate what this comment means. But it is reasonable to guess that the IMF is signaling that they will find some way to revise the quotas more like want them one way or another. It sounds like they are saying 'Because there is no progress on ratifying the 2010 reforms, we will factor that in when we revise the quotas next year.' They don't explain what they mean and end the press conference by saying they have no further comment for now. Also, they did not respond at all to the question about whether any "alternative options" they decide on will need US approval to implement. So, once again, 2015 should be interesting.