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TWN Info Service on Finance and Development (June07/01)

15 June 2007


IMF AGENDA TO FOCUS ON SURVEILLANCE AND NEW QUOTA ALLOCATION

The International Monetary Fund (IMF) will concentrate on revising its surveillance framework; reaching a consensus on a new formula for quota allocations and reviewing its income model in the run-up to its Annual Meetings in October this year. The Fund's Executive Board agreed upon a six-month work programme focused primarily on these three areas in a meeting in Washington DC last Thursday.

These issues - especially surveillance and the new quota allocation - are controversial and have divided the IMF membership, mainly along North-South lines and it remains to be seen if the substantive aspects of this work programme can be achieved during this time period.

According to a statement by IMF Managing Director Rodrigo De Rato, this work programme builds on elements of the Fund's Medium-Term Strategy (MTS) “on which discussions are most advanced”. The Executive Board is also under a strict timeline to reach an agreement on the new quota formula by this year's Annual Meetings and no later than the 2008 Spring Meetings.

Below is a report outlining aspects of the IMF’s work programme and some of its contentious issues. The report was published in SUNS #6271 Thursday 14 June 2007.

With best wishes
Martin Khor
TWN

IMF Agenda to Focus on Surveillance and New Quota Allocation

By Celine Tan

The International Monetary Fund (IMF) will concentrate on revising its surveillance framework; reaching a consensus on a new formula for quota allocations and reviewing its income model in the run-up to its Annual Meetings in October this year. The Fund's Executive Board agreed upon a six-month work programme focused primarily on these three areas in a meeting in Washington DC last Thursday.

These issues - especially surveillance and the new quota allocation - are controversial and have divided the IMF membership, mainly along North-South lines and it remains to be seen if the substantive aspects of this work programme can be achieved during this time period.

According to a statement by IMF Managing Director Rodrigo De Rato, this work programme builds on elements of the Fund's Medium-Term Strategy (MTS) “on which discussions are most advanced”. The Executive Board is also under a strict timeline to reach an agreement on the new quota formula by this year's Annual Meetings and no later than the 2008 Spring Meetings.

At the top of the agenda for the coming months are negotiations towards an updated surveillance framework through primarily a revision of the “1977 Decision on Surveillance over Exchange Rate Policies”.

Executive Directors are expected to review proposed amendments this month with an aim to secure broad support among the Fund membership for the scope and operational modalities of the proposed revisions. Much of this focus on revising IMF surveillance policies to include greater oversight of members' domestic policy frameworks, have been driven by developed country members.

Among the proposals expected would be a revision of the guiding principles to encompass bilateral surveillance over domestic policies, including monetary and fiscal policies, which affect external stability as opposed to surveillance over exchange rate policies per se. This would enable the Fund to focus on identifying areas where a member's policy framework may be unsustainable or inconsistent with external stability.

The IMF's Board of Governors through its political oversight body, the International Monetary and Financial Committee (IMFC), has reiterated that these proposals must be cognisant of its guiding principles formulated by the Executive Board in February this year, namely, that there should be no new obligations introduced; due regard should be paid to country circumstances and the need for evenhandedness; and flexibility should be maintained to allow the evolution of surveillance.

Nonetheless, some developing countries have expressed discomfort with the proposals which are expected to increase the scope of IMF oversight over domestic policies of member states. The Group of 24 developing countries at the IMF (G24) have expressed doubt that a revision of this decision is necessary to achieve the IMF's stated objective of “more focused and effective surveillance”, particularly given the fact that the inefficacy of current IMF surveillance stems from the reluctance of systemically important economies to follow the Fund's policy advice.

In their Communique at the recent IMF Spring Meeting, G24 ministers had expressed concern that “expanding the principles for the guidance of members in the Decision would blur the distinction between surveillance over exchange rate policies and over domestic policies” and cautioned against a move towards a compliance-based relationship between the Fund and their members as a consequence of any surveillance reform.

There have also been divisions between developed and developing country members at the IMF on the quotas and voice reform issue which features prominently in the Fund's upcoming work programme. While there has been some consensus on the reform agenda, particularly on the issue of increasing the basic votes, there remains conflict over the other elements of the reform package adopted by the Board of Governors at the Annual Meetings in Singapore last September. Specifically, countries have been unable to agree on a new formula which will guide new quota allocations under the two-stage reform process.

Under the reform programme, the first phase involved ad-hoc increases for four countries considered most under-represented at the Fund - China, Korea, Mexico and Turkey - which were implemented with immediate effect last year while the second phase of the reforms would involve ad-hoc increases for another yet-to-be-determined set of countries based on a new quota formula contingent upon at least a doubling of the basic votes for all countries to maintain the representation of low-income member states.

According to De Rato's statement to the Executive Board, progress has been made on “the design of an amendment of the Articles of Agreement regarding basic votes” but that “much work remains to be done in the period ahead in moving forward to build a consensus” for the reform package as a whole. He said that an “immediate objective” of the Executive Board in the run-up to the Annual Meetings would have to be making progress on developing the elements for the new quota formula.

However, so far, there has been little agreement on what would constitute the basis of the new formula. Negotiations have been complicated by the fact that quotas serve three purposes at the IMF: determining the amount of subscriptions members pay to the IMF; their voting power at the institution; and the amount of financing they can draw upon in times of financial crises.

Developing countries, especially emerging market economies, have argued for the new formula to reflect the relative economic size of countries in the world economy and to ensure, aside from conferring more adequate representation to developing countries at the institution, that the new formula gives potential borrowers sufficient weight in resources to reduce the need for self-insurance.

The G24, for example, have argued for the new formula measured at purchasing power parity (PPP) to be used as the principal measure in determining a country's economic weight for the purposes of quota calculations. They have rejected proposals by developed countries to introduce openness, including openness to trade, as a variable in the calculation, arguing that it is “neither a good proxy for the ability to contribute nor of potential need for Fund resources”.

In an effort to address the inadequacy of the IMF to serve the interests of its larger developing country members, the Fund will also focus on elements of its engagement with emerging market economies in the upcoming work programme. These discussions will be focused primarily on the design of the new liquidity instrument for market access for countries, tentatively named the Reserve Augmentation Line (RAL), which will, among other things, allow countries automatic and upfront access to financing from 300% to 500% of their quota reserves.

At present, countries are allowed up to 100% of quotas annually and 300% of quotas cumulatively although exceptions have been made in varying circumstances. Concessional borrowers from the Poverty Reduction and Growth Facility (PRGF) are limited to access to 140% of quotas (184% in exceptional cases).

The development of this new instrument has also been a response to the IMF's financial marginalisation by its developing country membership, which has precipitated a financial crisis at the Fund after the prepayment of loans by its major clients, including Argentina, Brazil, Indonesia and Uruguay, over the past two years. The Fund currently faces an increasingly yearly deficit and extra funds are needed to plug an estimated shortfall of $900 million by the year 2010.

An external report by an expert group released in January this year criticised the IMF's current revenue model as unsustainable and inequitable and said that a more diversified income stream needs to be developed to guarantee the institution's financial future. Consequently, the new work programme of the Fund will also concentrate pressingly on developing a more sustainable income model for the institution.

The Executive Board has been charged with working on developing an income model that is consistent with the Fund's mandates and a reduced expenditure envelope for the institution as a whole. It is also expected that the Executive Directors will discuss the proposals contained in the expert panel report, known as the “Crockett Report” after its chair, Andrew Crockett, former director-general of the Bank for International Settlements (BIS).

According to De Rato, broad support across Fund members will be needed to move forward with some of the recommendations, as two of the elements of the proposed revenue framework - broadening the investment mandate for existing reserves and using quota resources for investment - requires amendments to the Fund's Articles of Agreement, while the third - the sale of gold to defray administrative costs - will require 85% majority of voting power at the Fund.

(Note: A statement by Rodrigo De Rato on the IMF's work programme for the next six months can be found here:

http://www.imf.org/external/np/pp/2007/eng/053007.pdf ) +

 


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