The International Monetary Fund's (IMF) Proposed Quota Increase: Issues for Congress

Publication Date: January 1998

Publisher: Library of Congress. Congressional Research Service

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Research Area: Banking and finance

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Abstract:

The International Monetary Fund (IMF) is the international lender-of-last-resort. Each of the 182 members of the IMF have a "quota," which broadly reflects the size of its economy and its relative position in the world economy. Among other things, quotas determine the size of a country's contribution to the IMF's capital. Thus, they provide the funds out of which the IMF makes its loans.

Under the IMF's Articles of Agreement, a general review of the adequacy of the IMF's quota resources must be conducted at least every five years. The Eleventh General Quota Review has just been completed with a recommendation that quotas be increased by 45 percent. This would result in an SDR 66 billion increase (about $88 billion) in total IMF quotas, to SDR 212 billion ($283 billion).

The U.S. quota would increase by SDR 10.6 billion ($14.2 billion), to SDR 37.1 billion ($49.7 billion). The U.S. share of total quotas would drop from 18.1 percent to 17.5 percent. The United States, which would continue to have the largest quota, would retain its veto over major decisions in the IMF. Under the Bretton Woods Agreements Act, U.S. participation in the proposed quota increase must be authorized by Congress. In addition, under a compromise formula reached in 1980, the necessary funds must be appropriated.

Current proposals for funding the IMF — an increase in quotas and the "New Arrangements to Borrow" (NAB) — raise a variety of serious issues, including: contagion: how to prevent the spread of financial difficulties from one market and economy to others in an integrated world economy; moral hazard: whether "bailouts" and IMF financing, by sending the wrong signals, encourage precisely the type of economic behavior that they were meant to deter; conditionality: whether the economic policy changes and performance targets that the IMF requires of its borrowers in return for a loan are appropriate and effective; transparency: whether information on IMF program design, in particular, and government economic and financial information and data, in general, are accurate, timely, and widely available to the public, including investors, so as to allow for more accurate assessment and greater accountability; and, finally, asymmetry: the relative lack of leverage of the IMF over its non-borrowing members and the resulting limitation on its ability to prevent crises.

The crisis in Asia is eroding the IMF's financial base. Its "usable" resources are estimated to be not more than about $38.4 billion, with a liquidity ratio of 79.1%, and may be considerably less. Both are approaching historically low levels.