IMF: Christmas Ghosts visit US Congress

Rethinking Bretton Woods | Mon, Dec 28, 2015

By Aldo Caliari

As if inspired by the Ghost of Christmas Past, a few days before Christmas US Congress cleared the way for the US government to support long-awaited reforms of the capital and governance of the International Monetary Fund (IMF). In this article RBW Project Director Aldo Caliari assesses what the reform package, which had been agreed by the G20 back in 2010, will mean for the institution. (Photo credit: CC/Flickr/Ralph Keating).

As if inspired by the Ghost of Christmas Past, a few days before Christmas US Congress cleared the way for the US government to support long-awaited reforms of the capital and governance of the International Monetary Fund (IMF). The reforms had been agreed by the Group of 20 (G20) Summit in Seoul already back in 2010.

The reforms, required the approval by members holding at least 85 per cent qualified majority (numerical and in weighted votes) of IMF members. Without the more than 15 per cent of voting share held by the United States, they could not pass. So they had been effectively held up by the repeated refusal from US Congress to pass them. This was in spite of the fact that they would not require increasing the United States’ financial contribution and would not compromise the veto power the US holds when it comes to the Board’s most significant decisions. It was also in spite of the strong political support they had at the level of the US Administration, which had lobbied for their approval, especially to avoid the ritual embarrassment of having to face up to claims by allies and partners. In fact, not a few analysts credit the slow pace of these reforms for China’s decision to actively spearhead creation of two alternative lending organizations: the New Development Bank (commonly known as “BRICS Bank”) and the Asian Infrastructure Investment Bank.

The significant consequence for the capital base of the institution is that it will double from current levels. After the 2008-09 global financial crisis, to up the lending resources of the institution several members had committed bilateral credit lines in an amount of approximately USD 500 billion. While the bilateral credit lines increased the lendable resources, they were not the same as if such amount had been committed in capital to the institution. They could be withdrawn after a certain time[1] and, being a bilateral commitment, there was a risk their disbursement could be held up by the particular member committing it on the basis of changing political considerations. They had also given rise to a quite anomalous situation, first in the IMF history, in which bilateral commitments by members dwarfed capital-based contributions as the source of resources to lend. As per the 2010 reforms agreement, the bilateral credit lines would decrease to balance the increase in capital – or, in other words, the lendable resources of the institution will remain the same as now, but the proportions of their sources (capital contributions versus credit lines) will shift, with capital-based contributions becoming, again, the majority of lendable resources.

More anxiously expected elements of the reform are the changes to the governance of the institution, granting developing nations more influence.

One aspect of the governance reforms was made possible by the quota increase. This is because in the IMF the voting power of each member largely depends on its quota contribution.[2] The quota contributions are, in turn, based on a complex and anachronistic formula that is systematically biased against developing countries and largely responds to the geopolitical demands of the mid-twentieth century world, rather than the current one. The increase in quotas came with an agreement to rearrange quota proportions so as to transfer voting power to what the IMF called “under-represented” countries, thereby complementing reforms adopted in 2006 and 2008. According to the IMF, under the approved quota reform the “total shift in voting share [from advanced economies] to emerging market and developing countries as a whole will be 5.3 percent.”[3] Advanced economies, which before the 2006 reforms held 60.6 per cent of voting power, now will hold 53.3 per cent.[4] (All references in the rest of the article also take the pre-2006 situation as the benchmark to evaluate change).

However, the limitations of the reform become apparent when considering that the advanced economies are only 36 of the 188 IMF members. Furthermore, the increase in the voting share of China, Mexico, Brazil and Turkey amount for 5.05 of the 5.3 transfer of voting shares.[5] This explains why many developing countries actually saw their voting share reduced.[6]

For instance, the group of Middle Eastern countries will lose collectively 1.3 per cent of voting shares. In contrast to the IMF’s assertion that the reforms were designed to protect the share of the poorest countries, African countries as a whole will go from a meager 6 per cent to an even lower 5.6 per cent, and so on.[7]

This is why a pending aspect of the governance reforms, namely, reforming the quota formula, remains critical. In fact, without a more dramatic change to the variables the actual quota formula comprises, a fairer and more democratic decision-making processes will remain distant. One criterion often proposed by civil society organizations has been that the quota should reflect in a more balanced manner not just supply (ability to contribute) but also demand (likelihood of use) of the Fund resources. In choosing such variables, economic power considerations should also be balanced with the need to ensure democratic representation and preserve the voice of the poorest.

As part of the 2010 package of reforms, IMF member countries committed to a comprehensive review of the quota formula by 2013, to be implemented in a new quota review that would be brought forward to January 2014. However, the failure to finalize implementation of the capital increases meant the deadline for the review of the quota formula had to be repeatedly moved. At the last meeting of the International Monetary and Financial Committee, in Lima, members did not even attempt to set a new deadline[8] – though stating that the review was “well underway” with the “key issues and differences” “clearly identified.” Expectations are high, therefore, that now the way is open for a review of the formula that can more deeply address current inequities to proceed.

Another decision reached in 2010 whose implementation the US Congressional agreement unblocked is the commitment by advanced European countries to reduce their combined Board representation by two chairs. However the significance of that decision will be very diminished if some circulating rumors prove to be true. According to these, there is a strong likelihood that the freed up chairs will go one to Turkey and the other to a non-advanced economy in the European Union (probably Poland). The opportunity to offer some relief to the more than 40 Sub-Saharan African countries now crowded in just two chairs, should that be the case, would be wasted.

Summing up, while the reforms go some way to address  criticism about the IMF not responding to geopolitical changes in the world, especially those reflected in who has more money now, this was always a rather limited perspective on which to base reforms. In her statement released on December 18, IMF Managing Director Christine Lagarde welcomed the movement by US Congress as a “crucial step forward that will strengthen the IMF in its role of supporting global financial stability.” Be that as it may, reform of the essential principles driving governance at an institution called to perform functions of global macroeconomic coordination remains far from being addressed. Those are the steps that should follow now. The Ghost of Christmas Future might, yet, be the most important one to listen to.

[1] According to the terms of the last renewal, the bilateral credit lines were set to expire in November 2017. (IMF 2014. IMF Executive Board Approves Activation of Standing Borrowing Arrangements for a Further Six-Month Period, Press Release No. 14/147. April 1).

[2] Largely but not entirely since a small component of the voting power is given by a number of “basic votes,” of which each member receives an equal number, to partially honor the principle of “one nation, one vote.” However, while the proportion of basic votes in the vote of each member was an 11 per cent at the time the IMF was founded, it is currently set at a ratio of approximately 5.5 per cent of total votes. In fact, before 2008 it went as low as 2 per cent due to increases in quotas not being matched by increases in basic votes (see Caliari, Aldo 2005. Long Due Reform? The International Monetary Fund, the World Bank, and Global Economic Governance 60 Years Later, A CIDSE Position Paper). It was only after an amendment of the Articles of Agreement passed in 2011 that basic votes were determined as a ratio of total votes instead of a fixed number.

[3] IMF 2010. IMF Executive Board Approves Major Overhaul of Quotas and Governance, Press Release No. 10/418.

November 5.

[4] Ib.

[5] Based on IMF, Illustration of proposed quota and voting shares (Tables available at

[6] Ib.

[7] Ib.

[8] Caliari, Aldo 2015. “Miracle-makers” IMF, World Bank found wearing no clothes at Lima Annual Meetings (available at