|Demand of the question |
Introduction. Contextual Introduction.
Body. What are IMF quotas? Why IMF quota is important especially for India’s interests?
Conclusion. Way forward.
IMF’s primary aim is to ensure stability of international Monetary System (i.e. exchange rates etc.) for the purpose of smoother transactions among member countries or all over the world. It does it in three ways: surveillance of economy of all the member countries, lending to countries with balance of payments difficulties, and giving practical/technical help to members by helping in framing economic or financial policies etc.
What are IMF quotas?
- 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.
- The current quota formula is a weighted average of GDP (weight of 50%), openness (30%), economic variability (15%), and international reserves (5%). For this purpose, GDP is measured through a blend of GDP—based on market exchange rates (weight of 60%)—and on PPP exchange rates (40%). The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members.
Why IMF quota is important especially for India’s interests?
- 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 some countries are over represented in the IMF and that’s why emerging countries are against this quota scheme of IMF.
- BRICS countries accounts for 1/5th of world GDP and 2/5th of world population but still hold less quotas and thus under-represented.
- IMF quota determines voting power of any member in IMF decisions. Thus less quota means less voting rights.
- IMF quota is used to decide amount of finance a member can obtain from IMF. Thus lesser quits lead to lesser amount of money from IMF to its members that hinders its development objectives.
- 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. India has been pressing for IMF quota reforms as it would give more say to developing nations in the activities of the multi-lateral organisation.
- In the current 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.
India’s share has increased to 2.75% from 2.44%, making it the 8th largest shareholder in the quota system. The quota system of is most controversial due to its asymmetric power structure. Today the world is looking towards developing countries due to their fast growing economy, but their say in IMF is minimal. Hence considering the current economic scenario there is an urgent need to make comprehensive reforms in the current quota system.