GS Paper II

News Excerpt:

International Monetary Fund executive board approves a proposal to increase IMF quotas.

About News: 

• The Executive Board approved a proposal to be considered by the Board of Governors to conclude the 16th General Review of Quotas (16th Review) with a significant increase in quotas. 
• The proposal follows the guidance from the International Monetary and Financial Committee (IMFC) at the 2023 Annual Meetings.
• The Executive Board has requested that the Board of Governors vote on this proposal by December 15, 2023. Approval by the Board of Governors requires an 85% majority of the total voting power.

Proposal of Quotas:

• The proposal is centred around an increase in quotas of 50%, allocated to members in proportion to their current quotas. The quota increase would enhance the IMF’s permanent resources and strengthen the quota-based nature of the Fund by reducing the reliance on borrowing and thus ensuring the primary role of quotas in Fund resources.

Effects of Quotas: 

• The proposal envisages that once quota increases are in effect, borrowed resources comprising the Bilateral Borrowing Agreements and New Arrangements to Borrow (NAB) would be reduced to maintain the Fund’s current lending capacity.

Urgence and importance of quota:

• The membership has also acknowledged the urgency and importance of quota share realignment better to reflect members’ relative positions in the world economy while protecting the quota shares of the poorest members, and many members would have supported a quota realignment now, together with the proposed quota increase.
• Hence, another critical element of the proposal is a call on the Executive Board to work to develop, by June 2025, possible approaches as a guide for further quota realignment, including through a new quota formula, under the 17th General Review of Quotas. Work to implement this guidance will begin as soon as feasible after the conclusion of the 16th Review.

Benefit of the Quotas:

• Concluding the 16th Review with a quota increase will help preserve a strong, quota-based and adequately resourced IMF at the centre of the Global Financial Safety Net. An adequately resourced IMF is essential to safeguard global financial stability and respond to members’ potential needs in an uncertain and shock-prone world.

How does the IMF use quotas?

• Resource Contributions:- Quotas determine the maximum financial resources a member must provide to the IMF.
• Voting Power:- Quotas are a key determinant of voting power in IMF decisions. Members get one vote per SDR100,000 of quota plus basic votes, which are the same for all members.
• Access to Financing:- Quotas determine the maximum amount of loans a member can obtain from the IMF under normal access.
• SDR Allocations:- Quotas determine a member’s share in a general allocation of SDRs.

Conclusion:

The proposed quota increase comes at a complex time for the global economy and the IMF’s membership. This decision would be a strong signal that the membership can still come together in support of cooperative solutions that instill confidence in the IMF’s ability to effectively support its membership navigate a challenging global landscape.

Prelims PYQ

Q. Recently, which one of the following currencies has been proposed to be added to the basket of IMF’s SDR?  (UPSC 2016)

(a) Rouble

(b) Rand

(c) Indian Rupee

(d) Renminbi

Q. “Gold Tranche” (Reserve Tranche) refers to  (UPSC 2020)

(a) A loan system of the World Bank

(b) One of the operations of a Central Bank

(c) A credit system granted by WTO to its members

(d) A credit system granted by IMF to its members