India saved Rs 14k cr as US refuses higher IMF quota

The US Congress has not approved International Monetary Fund (IMF) reforms because it has refused to ratify a capital increase for the fund which was agreed to four years ago.

(In 2010, the United States of America agreed to double the IMF’s quotas to a total of US$720 billion). The reform seeks to increase the quota of developing countries in the IMF by six percentage points and also move two of the 24 directorships from European to developing countries.

• With the US refusal to sign off on a higher quota for developing countries viz. India, etc in the International Monetary Fund (IMF) has given the Indian government an opportunity to save Rs 14,000 crore that it had budgeted for this reform and could use it to support its fiscal deficit.
• With the delay of the reform, the Indian government has got some space at a time when the finance ministry has ruthlessly cut expenditure to stay within its fiscal deficit target of 4.8% of GDP for 2013-14.
• The government had budgeted Rs 56,574 crore for investment in international financial institutions this fiscal.

About International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Headquarters:Washington, D.C.

About IMF quota system

• The IMF’s quota system was created to raise funds for loans. Each IMF member country is assigned a quota, or contribution, that reflects the country’s relative size in the global economy. Each member’s quota also determines its relative voting power. Thus, financial contributions from member governments are linked to voting power in the organization.
• Quota formula is a weighted average of GDP (weight of 50 %), openness (30 %), economic variability (15 %), and international reserves (5 %). For this purpose, GDP is measured through a blend of GDP—based on market exchange rates (weight of 60 %)—and on PPP exchange rates (40 %). The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members.
• Quotas are denominated in Special Drawing Rights (SDRs), the IMF’s unit of account. The largest member of the IMF is the United States, with a current quota of SDR 42.1 billion (about $64 billion), and the smallest member is Tuvalu, with a current quota of SDR 1.8 million (about $2.7 million).