The International Monetary Fund (IMF) is in the process of developing frameworks and policies for incorporating climate-related issues into its operations. The IMF’s quota governance structure, which bases formal voting power on the size of a country’s economy, will impact the decision-making process on how these frameworks are developed.
Concurrently, the IMF is conducting a regular review of the quota system, providing a timely opportunity to reconsider the concentration of decision-making power with a handful of advanced economies.
A new working paper by the Boston University Global Development Policy Center illuminates how decision-making power is distributed within the IMF, as well as the implications of the quota share on the IMF’s lending practices, fee structures and distribution of newly allocated reserves.
The paper finds climate vulnerable countries have little to no formal decision-making power over how the IMF frames its policies around climate.
Main findings:
- The largest IMF shareholder is the United States, with 17.4 percent of all quota shares, followed by Japan with 6.5 percent, while a majority of member countries have individual quotas of less than 0.1 percent.
- Given its effective veto power, any changes to the quota formula must be approved by the US.
- If quotas were redistributed based on the formula approved during the last increase, the US would lose its veto, and China would double its current quota.
- The 2016 increase was one of two increases in the last 30 years. Compared to 1980, the size of the world economy in 2022 is 9.2 times larger, and 12 times larger when adjusted for purchasing power parity, while IMF quotas are only 6.4 times larger
- From 2002-2022, seven of 275 IMF programs were completed in advanced economies. Most programs are concentrated outside of advanced economies, with 117 in sub-Saharan Africa and 104 in climate vulnerable countries.
Figure 1: Voting Shares at IMF and Number of Completed Programs
Source: Boston University Global Development Policy Center, 2022.
- The V20 has almost 17 percent of the world population (close to 1.3 billion people) but holds about 5 percent of voting power at the IMF. However, in the last 20 years, over one-third of all IMF programs have been in V20 countries.
Figure 2: The V20 and the IMF
Source: Boston University Global Development Policy Center, 2022.
- With 13.7 percent of the world’s population, advanced economies have 59.1 percent of the votes at the IMF. By contrast, sub-Saharan Africa, with a slightly larger population, holds 4.6 percent of the voting power. Emerging and developing Asia is the most underrepresented region, both in terms of its share in the global economy, as well as the share of population living there.
Figure 3: IMF Quotas and Voting Shares Compared to Share of Population and Global Economy
Source: Boston University Global Development Policy Center, 2022.
- The Group of 20 (G20) has about 78 percent of voting shares together and are home to most of the world population. While the G20 format still excludes many countries, it is more representative than the Group of 7 (G7), which has 41 percent of voting power and 10 percent of the world population.
Figure 4: G20 and G7 Share of Votes and Population
Source: Boston University Global Development Policy Center, 2022.
- For many emerging and developing countries, voting power is weaker on the Executive Board based on the makeup of the Executive Director office they are a part of. For example, this Executive Director office has 12 countries, but the weight of Canada alone is sufficient for it to have a majority:
Figure 5: Example of Composition of IMF Executive Director Office
Source: Boston University Global Development Policy Center, 2022.
- For the V20 at the IMF Executive Board, they effectively have no voting power; by contrast, voting power increases for the G7 and G20 based on Executive Board distribution.
Figure 6: Voting Power on Executive Board
Source: Boston University Global Development Policy Center, 2022.
- The IMF charges penalties to countries that borrow above 187.5 percent of their quota through the main lending account. Of 16 active loans, 12 countries have agreed to borrow amounts that are above the threshold for paying surcharges. With a majority of countries requiring loans that surpass that threshold, it raises the question of the adequacy of quotas and borrowing access limits.
Figure 7: Current IMF Loan Agreements as Share of Quota, as of July 31, 2022
Source: Boston University Global Development Policy Center, 2022.
Quotable quotes
Author – Lara Merling, Senior Policy Advisor, Boston University Global Development Policy Center:“The needs of climate vulnerable countries and developing countries more broadly are not prioritised at the IMF when formal decision-making power is concentrated in the hands of a handful of wealthy countries.
The lopsided voting structure means that those designing and evaluating IMF policies and their results are not accountable to borrowing countries, or for that matter, the governments and people in those countries.
The ongoing review of quotas offers an opportunity to reform the international financial architecture to meet the challenges of the 21st century by recalibrating the balance of power and providing a basis for reshaping global rules.”
Commentator – Sara Jane Ahmed, Finance Advisor, Vulnerable Group of Twenty (V20) Ministers of Finance of the Climate Vulnerable Forum: “V20 members are the most climate vulnerable economies and yet have little to no say in the process of developing climate-related frameworks and policies at the IMF.
The debt crisis is the climate crisis. The IMF needs to work with and benefit from vulnerable country experience and expertise so it can establish a truly effective, enduring global response. The IMF can course-correct immediately by recognising the V20 as a constituency group to engage with on the climate emergency.
When members of advanced economies talk about the importance of a rules-based multilateral system, they fail to acknowledge that they are favoured by the current rules.
Advanced economies do not face the same constraints they impose on other countries within the IMF, and their ability to respond to the pandemic and provide record stimulus serves as a stark reminder of the asymmetries within the international financial system.”
The bottom line
The lack of representation of climate vulnerable and developing countries in the IMF’s formal decision-making process stresses the need to reform the current quota system if the IMF is to maintain both its legitimacy and relevance in the coming decades. The current quota review is a timely opportunity for countries such as the US, or other members of the G7 who have stated their commitment to multilateralism, to prove they can deliver on a system that is both accountable to and meets the needs of all members.
Background on quotas
When joining the IMF, each country is assigned a quota share, based on several factors that are meant to reflect its relative size within the global economy. Voting power is directly linked to the size of a country’s quota, which means low- and middle-income countries that are most likely to borrow from the IMF and be subject to its conditions have limited influence on the IMF’s decisions.
Since the IMF was established, 15 reviews of quotas have been concluded, nine of which resulted in an increase of quota shares. The largest increase doubled quota shares and was agreed in 2010 and went into effect in 2016. This increased the voting shares of some developing and emerging countries, but overall, advanced economies kept their majority.
Background on climate vulnerable countries: The Vulnerable Group of Twenty (V20) Ministers of Finance of the Climate Vulnerable Forum is a dedicated initiative of 55 climate vulnerable countries working through dialogue and action to tackle global climate change. The V20 is at the epicenter of the looming debt and climate crises which threaten their ability to mobilise the necessary resources to build resilient and low-carbon economies.
When scarce public finances are mostly spent on debt service rather than on investments to build a more resilient economy, countries will be locking into a cycle of unsustainable debt further fueled by climate impacts.
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