The Executive Board of the International Monetary Fund (IMF) has initiated formal discussions on the review of the quota formula, which provides the basis for allocations on various credit facilities to member countries, including Sri Lanka.
Three years ago the IMF approved a US$2.6 billion Stand-By Arrangement (SBA) to Sri Lanka which was 400% of the country’s quota, higher than the entitled 300 % quota.
In a recent statement, the fund said that as part of an agreement on quota and governance reform, the Board of Governors in December 2010 called for a comprehensive review of the quota formula, to be concluded by January 2013. The review would be followed by discussions of the 15th General Review of Quotas, to be concluded by January 2014.
The quota formula has served in the past as a guide to quota adjustments. The current quota formula, which replaced the previous five formulas in 2008, consists of four variables. Gross domestic product (GDP) has the largest weight (50 %), consisting of a blend of GDP converted at market exchange rates (30 %) and PPP-based GDP (20 %).
The other variables in the additive quota formula are openness, which measures the sum of current payments and receipts (30 % weight); variability of current receipts and net capital flows (15 % weight); and official foreign exchange reserves (5 % weight).
A compression factor (of 0.95) is applied to the weighted sum of these variables.
An IMF staff paper took stock of the role of the quota formula and discusses the key principles underlying the formula and its main properties.
Building on previous guidance by the Board of Governors and Executive Directors for further work, the paper analyzes, among others, the scope for measuring openness on a value added rather than a gross basis, the appropriate treatment of intra-currency union flows, options for capturing financial openness, and issues related to the measurement of variability and its ability to capture members’ potential need for Fund resources.
The scope for capturing members’ different financial contributions to the Fund was also explored.
Executive Directors welcomed the opportunity to initiate discussions on the quota formula review, which is to be concluded by January 2013. They recalled that the agreement to conduct a comprehensive review of the formula was an integral part of the quota and governance reform agreed in 2010.
IMF Directors have said the formula should be simple and transparent, consistent with the multiple roles of quotas, produce results that are broadly acceptable to the membership, and be feasible to implement statistically based on timely, high quality, and widely available data.
Directors also highlighted the need to ensure adequate voice and representation for the poorest members. “Directors generally concurred that GDP is the most comprehensive measure of economic size and should continue to have the largest weight in the quota formula,” the statement said.
Many Directors noted that openness is a measure of members’ integration into the world economy and should remain an important variable in the quota formula, with a few favouring an increase in its weight.
Most Directors considered that reserves remain an important indicator of a member’s financial strength and ability to contribute to the Fund’s finances, with some calling for an increase in its weight.