IMF: WHY REFORMS?

International Monetary Fund (IMF)

• The International Monetary Fund (IMF) is an organization of 189 member countries,

each of which has representation on the IMF's executive board in proportion to its
financial importance, so that the most powerful countries in the global economy
have the most voting power
• Founded in  in July 1944.
Its Objectives:
• Foster global monetary cooperation
• Secure financial stability
• Facilitate international trade
• Promote high employment and sustainable economic growth
• And reduce poverty around the world
Functions

• Provides Financial Assistance: To provide financial assistance to

member countries with balance of payments problems, the IMF lends
money to replenish international reserves, stabilize currencies and
strengthen conditions for economic growth
• IMF Surveillance: It oversees the international monetary system and
monitors the economic and financial policies of its 189 member
countries
• Capacity Development: It provides technical assistance and training
to central banks, finance ministries, tax authorities, and other
economic institutions
Governance

• Board of Governors: It consists of one governor and one alternate governor

for each member country.
- Board of Governors is advised by two ministerial
committees, the International Monetary and Financial Committee
(IMFC) and the Development Committee
• Executive Board: It is 24-member Executive Board elected by the Board of
Governors
• IMF Management: IMF’s Managing Director is both chairman of the IMF’s
Executive Board and head of IMF staff.
• IMF Members: Paying a quota subscription. On joining the IMF, each
member country contributes a certain sum of money, called a quota
subscription, which is based on the country’s wealth and economic
performance 
 IMF Reforms-Overview
Significant Before After
Reforms
Surveillance Only bilateral surveillance Post 1999 to 2009- due to globalisation/integrated worls financial
Reforms assessing each country’s policies for its markets/ global financial crisis:- maintenance of external stability,
1973 to 1999/ own economic and financial stability no extensive disequilibrium in current& capital a/c balances,
1999 to 2009 Spill-over effect not considered reduced vulnerability to capital flights/ exchange rates ,
multilateral surveillance
Quota developed countries overrepresented After BRICS bank formation shifting 6% quota to under
Reforms 1958-1959/ DEC 2010 represented countries
Loan At its inception no such condition After Extended Fund Facility, it attached extensive conditions
conditionality attached to loans claimed to be bias
After 1974/1986 SAF-structural adjustment facility and enhanced SAF (structural
benchmarks) and One size fits all policy
Special SDR/basket currency- artificial In 1981, the SDR was greatly simplified to comprise only five
Drawing international reserve(1970), to alleviate major currencies, namely the U.S. dollar, German mark, Japanese
Rights the pressure on the dollar as the central yen, British pound, and France franc
Reforms reserve currency, weighted average of SDR comprised four major currencies, namely the U.S. dollar,
those 16 currencies whose share in the euro, British pound, and Japanese yen
world exports were more than 1% 2016- Chinese renminbi added

Bhasin et all Reforms in International Monetary Fund IMF:

Challenges and the road ahead
 The emergence of regional funds and IMF
Regional Funds Disagreements between RFA and IMF
• 1989-FLAR(Fondo Latino Americano de
Reservas)/Latin American Reserve Fund, Asian • ASEAN Comprehensive Agreement of 2009/ Arbitration
Monetary Fund(AMF), Chiang Mai • The arbitration body typically includes three members,
Institute(CMI),Chiang Mai Initiative
Multilateralization(CMIM), European Financial who decide by majority voting. Each side appoints a
Stability Fund(EFSF), European Stability member and these two members agree on the third
Mechanism(ESM) one, who is not associated with either side. This third
member will act as chair. In the present case, the RFA
IMF’s Response(2013b, 2017) and the IMF would appoint an arbitrator and the chair
• Equal treatment would be chosen from outside the region and the IMF.
• Respecting the mandates and independence of • Arbitration can be requested by either side. The RFA
RFAs. and the IMF would agree ex ante to the procedure and
• Single programe frameworks. commit to accept the decision of the arbitration body.
• First, macroeconomic and structural conditions • Transparency is desirable because the disputed issue is
should apply only to the country in balance-of- likely to be of considerable public interest.
payments difficulty. Transparency includes making public the recourse to
• Second, the IMF (2018) observes that even arbitration, the composition of the arbitration body,
when reassurances from a unionwide and the topic subject to arbitration
institution are deemed critical, they should be
 CRITICAL EVALUATION OF THE IMF
• “one-size-fits-all approach” to macroeconomic policy prescriptions, ignoring the borrowing countries’ political and
economic constraints at the expense of their needs (Stone, 2008)
• tight macroeconomic policies fail to cure but also make their economies sicker For example, in South Korea, the
government had been running a budget surplus for years (it was 4% of South Korea’s GDP in 1994-1996) and inflation was
low at about 5%. It had the second strongest financial position among the Organisation for Economic Co-operation and
Development (OECD) countries. Despite this, the IMF insisted on applying the same policies that it applies to countries
suffering from high inflation during the 1997 crisis. As a result, the IMF sparked a recession by raising the interest rates,
which led to more bankruptcies and unemployment.
• Moral hazard-The Mexican peso crisis of 1995. When the bubble popped, the IMF steeped in to bail out.
• To address the issue of accountability and conduct objective and independent assessment of the issues relevant to the IMF,
it introduced Independent Evaluation Office (IEO) in July 2001. But IEO is still internal organ.
• the European members and the United States have conspired to allow Europe to nominate the head of the IMF- European
MD. The IMF board is over-represented by the European chairs who play a major role in selecting 10 of the 24 executive
directors
• extension of its operations into areas in which it has no real authority such as microeconomic and structural issues (like
corporate governance, political governance, etc.) and asymmetry in following the loan conditionality as the rich member
nations are under no pressure
• redesign of its concessional lending facilities to strengthen the IMF’s capacity to provide short-term and emergency
financing to low-income countries. This would include efforts to at least double the Fund's concessional lending capacity for
low-income countries. Low-income countries will also benefit from the already adopted reform of structural conditionality,
as that reform covers Fund arrangements under all facilities, including those available only to LICs.
 Precautionary arrangements
Countries accumulate foreign exchange reserves to discourage speculative attacks and avoid having
to call on the Fund. But self-insurance is costly and weakens the principle of collective insurance that
underpins the Bretton Woods Agreement.
The IMF has therefore responded with precautionary arrangements.
• It first determines that a country’s economy is sound and that it therefore qualifies.
• In doing so, it agrees to extend an unconditional loan automatically on request.
In effect, prequalification provides authorization to draw funds unconditionally.
The expectation was that precautionary arrangements would make it easier for governments to ask
for help.
 Earlier precautionary measures
• The Contingent Credit Line (CCL), was created in 1999 as a response to criticism that the Fund had been unable to
mobilise financial support quickly enough during the Asian crisis. Amounts available under the CCL ranged from 300% to
500% of quota as under regular Standby Arrangements, but no countries applied to be prequalified for this facility. There
being no takers, the CCL was abolished in 2009.
• In 2008 the IMF created the Short-term Liquidity Facility (SLF) for countries with strong fundamentals that needed quick
access to resources in amounts up to 500% of quota with three-month maturity. Eligible countries were authorised to
draw up to three times in a 12-month period. Again, no country used this line, and it too was discontinued
• In 2011 the IMF created the Rapid Financing instrument (RFI) for emergency assistance to countries needing urgent
balance-of payments support. These lines have never been used.
• The Flexible Credit Line (FCL),was created in March 2009 for countries with strong fundamentals. This arrangement was
designed to be more attractive to potential borrowers by reducing associated conditionality and its effects and by setting
no cap on the amount to be borrowed.. The FCL was enhanced in 2010 by doubling the arrangement’s duration and
making other features of the programme more flexible. The Fund convinced three countries to apply: Colombia, Mexico
and Poland. Poland ended its precautionary FCL in November 2017, arguing that its economy was sufficiently strong
enough that it had no need for an FCL
• In August 2010, a Precautionary Credit Line (PCL) was established for countries with some degree of
.
vulnerability that would not qualify for the FCL. In addition, in November 2011 a new precautionary credit
line, the Precautionary and Liquidity Line (PLL),was introduced. The PLL is similar to the PCL, but the
qualification criteria are slightly relaxed. A commitment fee is required, as with the FCL. Two countries –
the Republic of Macedonia and Morocco – have used the PLL.

• IMF discussed the possibility of introducing a revolving credit line called the Short-term Liquidity Swap
(SLS) (IMF, 2017). It faced problems similar to FCL.

Reason of failure:
• Countries that could prequalify for precautionary arrangements don’t need them, while those standing to
benefit are unlikely to prequalify. Applying is seen as an admission of weakness that could trigger a crisis.
If only a few countries apply and qualify, participation may be a source of stigma.

• Then there is the problem of de-prequalification. If a country was regarded as possessing solid
fundamentals and granted a precautionary line, a deterioration of its macroeconomic conditions could
lead to disqualification, which could trigger market turbulences and even a crisis. Therefore, just as
precaution, a country may decide not to apply, to not to face this exit problem.
 A fast qualification facility
International Center for Monetary and Banking Studies and Centre for Economic Policy Research in
The Geneva Report on World Economy on IMF Reforms has formulated a proposal for a new facility
refered to as “Fast Qualification Strategy”
It would work as follows:
Fast qualification
Temporary arrangement: The line of credit should be temporary to eliminate the exit problem
No guarantee but transparent information: The Fund would have to publish general rules regarding
qualification. This would also contribute to limiting the signal and stigma effects, since a country that
would appear to be eligible would not have to apply. In addition, the risk of being denied
qualification, which could trigger a crisis, will be minimised
Large amounts
IMF resources: Temporarily and short term issue SDR
Issues due to current IMF Governance
Structure
• Fundamental problem of IMF governance – time inconsistent,
shaped by interest of principal shareholders.
• Eg. Greek program in 2010.
• Undue political influence of a subgroup of powerful European
shareholders.
• Committee members are not free agents. They must justify their
policy choices to their political masters
Recommendations
• IMF, urgent reforms are needed on four critical issues relating to the
governance, loan conditionality, quota system, and dominance.
• Address its governance structure
• Voluntarily rebalancing of quotas
• Composition of the executive board
• Expand its lending facilities
• Active role in information dissemination
• Expand its surveillance
• Training in political economy
Multiple role of quotas
• The IMF is a quota-based institution. Quotas are the building blocks of the
IMF’s financial and governance structure.
• An individual member country’s quota broadly reflects its relative position
in the world economy. Quotas are denominated in 
Special Drawing Rights (SDRs), the IMF’s unit of account.
• 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). For this purpose, GDP is measured
through a blend of GDP—based on market exchange rates (weight of 60
percent)—and on PPP exchange rates (40 percent).
• Access to finance - A member can borrow up to 200 percent of its quota
annually and 600 percent cumulatively
 Flaws noticed
•Need to strengthen IMF to tackle financial crisis.

•Quota reforms so that share of emerging nations increases in line with their
growing economic position.

•Both, enhancement in the Quantum of Quota Resources and Realignment of

Voting Shares should take place so that Quota Shares of EMDCs (Emerging
Market & Developing Countries) increase in line with its growing relative
economic position in the world,

Pointing out severe flaws in Human Capital Index, Garg said it will not succeed in
focusing the attention of the world on building the right kind of human capital,
which new technologies will need.
Why Reforms Required

• Higher IMF quota simply means more voting rights and borrowing
permissions under IMF. But it is unfortunate that formula is designed in
such a way that USA itself has 17.7% quota which is higher than cumulative
of several countries. The G7 group contains more than 40% quota where
countries like India & Russia have only 2.5% quota in IMF. Some countries
are over represented in the IMF and that’s why emerging countries are
against this quota scheme of IMF.
• Due to discontent with IMF, BRICS countries establish a new organization
called BRICS bank to reduce the dominance of IMF or World Bank and to
consolidate their position in the world as BRICS countries accounts for
1/5th of WORLD GDP and 2/5th of world population.
• Further it is almost impossible to make any reform in the current quota
system as more than 85% of total votes are required to make it happen.
The 85% votes does not 85% countries but countries which have 85% of
voting power and only USA has voting share of around 17% which makes it
impossible to reform quota without consent of developed countries.
Why reforms required
• IMF Board of Governors conducts quota reviews meetings at regular interval say in every
5 years. Any revision in IMF quota system shall be approved by at least 85% majority of
total voting power ad a member consent is necessary to change its quota in IMF.
• In 2010, the Board of Governors completed the 14th General Review of Quotas, which
involved a package of far-reaching reforms of the Fund’s quotas and governance. The
reform package is finally implemented in 2016 as US congress was reluctant to ratify the
proposal because reform package aims to reduce USA share in IMF.
• The reform package builds on earlier reforms from 2008, which became effective from
March 2011. These strengthened the representation of dynamic economies—many of
which are emerging market countries—through ad hoc quota increases for 54 member
countries.  They also enhanced the voice and participation of low-income countries
through a near tripling of basic votes.
15th review
• The bilateral borrowing arrangements are designed to augment IMF resources in
anticipation of the increase in IMF quotas in the 15th review of quotas; they will
expire in 2020.
• In addition, US participation in the NAB will expire in 2022 unless the United
States renews its commitment. That renewal must be approved by the US
Congress, which would not be easy under the best of circumstances and would
be next to impossible if the United States does not, in the meantime, agree to an
increase in IMF quotas in 2019.
• After the bilateral borrowing arrangements expire in 2020 and if other countries
also decline to renew their NAB commitments, the IMF’s financial resources will
be cut almost in half
Major questions
• Should the United States block agreement on an
increase in IMF quotas in the 15th review?
• Should the United States Participate in the Expansion
of IMF Quotas?
• Fault lines exposed as voting rights exacerbate power
imbalances

Findings
• If the United States pulls out of the NAB, other
countries will as well. In other words, the NAB would
collapse as a source of back-up funding for the IMF
Thank You