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The Fifth General Review of Quotas

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1970
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David Williams

THE FUND has undertaken a general review of quotas every five years since its establishment. During the latter part of 1969 the Executive Directors of the Fund initiated its fifth general review of quotas in accordance with a Resolution of the Board of Governors which was adopted on the occasion of the Annual Meeting in September 1969. The Resolution stated “that the Executive Directors proceed promptly with the consideration of the adjustment of the quotas of members of the Fund and submit an appropriate proposal to the Board of Governors not later than December 31, 1969.”

The Executive Directors submitted a proposed Resolution and a Report, both of which are entitled “Increases in Quotas of Members—Fifth General Review”, to the Board of Governors on December 26, 1969. The Executive Directors proposed in their Report to the Governors that Fund quotas might be increased from the present total of $21.3 billion to approximately $28.9 billion as a maximum—an increase of about 35.5 per cent; an Annex to the Resolution which would give effect to the increase in quotas listed proposed maximum quotas for each member. On February 9, 1970, the proposed Resolution was approved by Governors representing more than the required 85 per cent of total voting power of the Fund. Consequently, a member will now be able to consent to an increase in its quota up to the proposed maximum quota listed in the Annex to the Resolution at any time on or before November 15, 1971. The date for consents to quota increases can be extended by the Executive Directors. However, no increase in quotas will be effective before October 30, 1970.

The General Review

The increase in member quotas which was approved by the Board of Governors in February 1970 was made within the context of a general review; this was only the second of five general reviews conducted since the establishment of the Fund which has led to an increase in quotas. The increase in quotas which took place in 1959 was outside a general, or, as it was formerly referred to, a quinquennial review of quotas. The maximum increase in the size of the Fund as a result of the fifth review is, at 35.5 per cent, only slightly larger than the increase which resulted from the fourth review of quotas undertaken in early 1965. Indeed, taking into account the increased membership of the Fund—from 102 members in 1965 to 115 members at the end of 1969-the over-all percentage increase is about the same size of increase as was approved in 1965.

A number of considerations have influenced the size of the increase in quotas. First, when measured by most criteria the world economy has grown very substantially since the previous increase in quotas. Though it is difficult to be precise in referring to the growth of the world economy,” it is sufficient to note that of the four economic elements used in the quota calculations three-exports (and current receipts), imports (and current payments), and national income-showed substantial increases. New calculations of quotas thus reflected the rise in world trade and income. For example, the average level of total exports of Fund members for the period 1963-67 (the relevant period used in the fifth review) was 51.4 per cent higher than in the period 1958-62 (the reference period used in the fourth review); the average level of imports for the period 1963-67 showed a rise of 51.9 per cent over the average for the previous five-year period; national income for 1967 was 49.8 per cent higher than in 1962. The fourth element used in the basic quota formula—reserves—showed a growth of only 14.8 per cent between 1962 and 1967.

Second, while the over-all growth of world trade and income indicates a prima facie need for an increase in Fund quotas, the growth of trade and income of individual countries might diverge, sometimes sharply, from the average increases of world trade and income. For those countries whose average economic growth is considerably faster than the average for the whole membership of the Fund, a general review of quotas offers an opportunity to take into account the increase in the relative economic and financial position of members in the world economy. This can be achieved by a relatively greater adjustment of some individual member quotas than might be regarded as appropriate for all members.

Third, as noted in J. Keith Horsefield’s companion article on quotas in this issue, an increase in quotas results in an increase of conditional liquidity—i.e., credit made available to members subject to the Fund’s policies on the use of its resources-which, for individual members, is about four times larger than the amount of gold paid to the Fund with the increase in quotas. Consequently, an increase in Fund quotas has to be regarded in the light of the potential need for conditional liquidity in the immediate future. It is difficult to be precise in forecasting the need for conditional liquidity in general and, in particular, the demands of individual members on the Fund’s resources. In the last resort, demands on the Fund’s resources depend not only on members balance of payments deficits, but on the availability of other resources to finance deficits and also on members preferences as to how their deficits could be financed—for example. by drawing on their own external reserves (i.e., using unconditional liquidity), or by borrowing directly from other countries or by utilizing any existing swap network to which countries might be partners. Increases in conditional liquidity that take place through an increase in the Fund’s resources must also be viewed, then, in the light of developments of, in particular, unconditional liquidity. It is, perhaps significant that when the Executive Directors decided not to recommend an increase in quotas in both 1950 and 1955, not only had members drawn on the Fund’s resources to only a limited extent but the level of the world’s reserves of gold and foreign exchange had been increasing rapidly. However, world reserves have risen very slowly since the early 1960’s. Furthermore, the increase in quotas which will come into effect in late 1970 should be placed within the context of the activation of the special drawing rights scheme and the allocation of the equivalent of about $9.5 billion to participants of that scheme for the first basic period of three years from January 1, 1970.

In recommending an increase in fund quotas, account was taken of the need to maintain a balanced distribution of quotas within the whole membership of the Fund. In this regard, it was important to weigh a number of considerations in the first instance, and as noted above, account needed to be taken of those members whose relative economic position had increased since the last quota review; second, as quotas also determine the voting rights of members in the Fund, it was also important to adjust quotas in such a manner that the voting structure in the Fund, which encompasses members in widely different stages of development and with large differences in quota size, was broadly and equitably maintained. This last consideration was important because quotas determine the relative voting strength of members, and this has significance not only for the election of Executive Directors but also for the particular geographical composition of the Executive Board which results from the election of Executive Directors. Furthermore, it was also of significance, from the point of view of the Fund’s liquidity, that the quotas of those members whose currencies were in relatively short supply in the Fund should be increased to an extent that might broadly be expected to accommodate the increased drawing possibilities of members that might need to use the Fund’s resources in the future without unduly straining the Fund’s liquidity. In other words, it was important to increase the quotas of potential creditor countries as well as potential debtor countries in the Fund.

Size of Quota Increases

The individual adjustments of members’ quotas were based on extensive and rather complex calculations resulting from the quota formulas, bearing in mind that the formulas and the resulting calculations are only a guide to the determination of quotas. The Articles of Agreement of the Fund do not provide any guidance or advance any criteria for the determination of members’ quotas or of changes in them. However, the quota calculations made in connection with the fifth review were based on the same formulas as were used on the occasion of the fourth review and, indeed, which were derived from the original quota formula which was developed at the time of the establishment of the Fund at Bretton Woods. Quota calculations based on the formulas and using recent economic data could then be compared with present quotas which could provide a guide in assessing not only whether members’ present quotas were adequate in light of the growth of members’ national income, trade, and reserves, but also the extent to which members’ quotas had changed in relation to one another. In that respect, the calculations were a guide not only for selecting members whose present quotas could be regarded as unduly low relative to their economic growth but they were also a measure of the extent to which some quotas could be regarded as low in comparison with other members’ quotas. In other words, apart from any adjustments that might be regarded as appropriate for all members, and which would be based on a generally applicable criterion, the new calculations provided a basis for further adjustments for those members’ quotas that seemed out of line.

It may be useful to trace some of the steps which influenced the size of the adjustments in individual quotas. As already mentioned, member quotas were recalculated using data ending in 1967 (the Fourth Quinquennial Review was based on data ending in 1962). The amount by which the newly calculated quotas exceeded current quotas was then totaled and the percentage share for each member of the total was determined; if the calculated quota was less than the present quota it was assumed equal to the present quota. It was thus possible to increase the over-all size of the Fund by a given amount and then distribute that total between those members whose calculated quotas exceeded current quotas in a generally equitable manner. A member’s increase would be proportionate to its share in the total of the excess of calculated over present quotas; if a member’s calculated quota was smaller than or equal to its present quota, it could not share in the distribution.

A comparatively large number of members would have been excluded from being offered increases in quotas if this method alone had been followed. Consequently, all quotas were first raised by a uniform percentage and further adjustments were made to a large number of quotas following the technique described above.

In addition, some members were still eligible to request an increase in their quotas under the Fund Executive Board Decision on “Compensatory Financing of Export Fluctuations” of 1963. The increases in quota under that Decision were incorporated in the Annex to the Resolution for those members still eligible to request an increase. Finally, calculated quotas below $250 million were rounded upward to the next $1 million; quotas between $250 million and $1 billion were rounded upward to the next higher multiple of $5 million, and quotas in excess of $1 billion were rounded to the next higher multiple of $10 million.

The calculations were made on a consistent basis for all members and in that respect could be regarded as providing a technique by which a desired calculated maximum in the over-all increase in the size of the Fund could be achieved. Further upward adjustments in individual quotas could be achieved, in terms of equity, only by adjusting the percentage increase which could be applied to all members or by adjusting the total to be allocated to those members whose calculated quotas were greater than their present quotas. Broadly, then, the aggregate increase in quotas—and, therefore, the increase in the size of the Fund—was determined by increasing present quotas proportionately, and also by distributing a further amount between those members whose quotas could be regarded as low in relation to other members; the basis of the distribution was the extent to which the newly calculated quota exceeded present quotas.

As pointed out above, the resulting increase in Fund quotas totaled about $7.6 billion. Almost all members—the exceptions are China and the United Kingdom—have been offered an increase in quotas of at least 25 per cent. About 75 members (out of a total of 116) have been offered increases in quota in excess of 30 per cent of their present quotas. Of these 75 members, 30 were offered increases of 50 per cent or more of their present quotas and included members such as Japan (an increase of 65.5 per cent), Italy (an increase of 60 per cent), Denmark (an increase of 59.5 per cent), Ivory Coast (an increase of 173.7 percent)1, Sierra Leone (an increase of 66.7 per cent), and Singapore (an increase of 106.7 per cent). On the two previous occasions when quotas were increased, some members were offered increases in quotas which specifically incorporated a selective increase in quotas as well as a general increase.2 On this occasion members have been offered a single maximum quota to which they might choose to consent; members can, however, choose less than the maximum quota shown in the Annex to the Governors’ Resolution; furthermore, they may consent to parts of the increases up to the maximum at different times up to November 15, 1971.

Gold Payments

For an increase in a member’s quota to become effective, the member must pay an additional subscription equal to the increase in its quota. Twenty-five per cent of the amount of the increase in quota is payable in gold and the remainder in the member’s currency. The payment of gold to the Fund can, however, be a burden to some members.

Some members might, for example, have difficulty in accommodating a fall in the total of their external reserves of gold and foreign exchange to the extent needed to pay gold to the Fund. This burden is, of course, lessened for those members whose currencies are held by the Fund in amounts equivalent to less than 100 per cent of quota, for, in that case, a member simply substitutes a “reserve position in the Fund” for the gold paid to the Fund. Under these circumstances, a change in the composition of a member’s reserves occurs, but there is no loss in the total of available reserves. A member could, if it wishes, make a drawing within the gold tranche which would provide it with immediately usable foreign exchange.

If the Fund holds a member’s currency in excess of 100 per cent of quota, a payment of gold to the Fund for payment of quota increases will cause an effective decline in reserves and, therefore, cause some strain on them. The increased gold payment to the Fund would be accompanied, of course, by a reduction in a member’s indebtedness to the Fund and, therefore, would increase its potential drawing power from the Fund.

Where difficulty arises in accommodating the fall in reserves to pay the gold subscription—the so-called primary burden—the Fund has, in the past, provided two forms of alleviation. First, members might take their quota increases by installments. That is, a member can consent to the full increase in quota to which it is entitled, but could decide to take only a part of the increase in any one year, and only pay to the Fund that part of the increase taken each year. In this way the effective increase in its quota, as well as the burden of paying its subscription for the increase, would be spread over a number of years.

Second, the Fund also permitted members to make special drawings from the Fund, thereby obtaining foreign exchange up to an amount needed to replace or buy gold for payment of gold subscriptions to the Fund.

For purposes of the Fifth General Review, the Board of Governors has provided in two ways for the alleviation of the primary burden on members’ reserves which might result from the payment of quota increases. However, members cannot make special drawing of an unconditional character in the credit tranches for the purpose of paying for quota increases on this occasion, as this is no longer permitted by the Articles. However, members might again consent to their increase in quota by installments. Furthermore, the Board of Governors has decided to use their discretion, as permitted by the Articles, to reduce the proportion of the increase in quota to be paid in gold. This is the first time in the Fund’s history that this discretion has been exercised.

Under Article III, Section 4 (a), the Fund permits members to pay in gold only that proportion of 25 per cent of the increase in quota which the member’s monetary reserves on the date of consent bear to the new quota. For example, if a member’s monetary reserves on the day it consents to the increase in quota are only half the amount of its new quota, it will pay only 12½ per cent of the increase in quota in gold; the balance of the increase will, of course, be paid in the member’s currency. Any member which pays less than 25 per cent of the increase in gold undertakes to repurchase from the Fund over a period of five years the balance between the amount of gold actually paid and the equivalent of 25 per cent of quota, unless the Fund’s holdings of that member’s” currency are otherwise reduced. By this means, not only will the burden of the gold payment be spread over, say, five years, but a member could repurchase its currency not only with gold but could also use convertible currencies, as determined by the Fund, or special drawing rights, under a general decision that is applicable for the discharge of other repurchases. It is, perhaps, of interest to note that the Articles of Agreement do not provide for special drawing rights to be used for the payment of increases in quotas in substitution of gold.

The two techniques of alleviation just described concern, essentially, the distribution of the burden of paying for quota increases over a number of years. The effect on members’ reserves would be minimized in any one year, though, over time, the total amount of the increase in quota would be paid in the proportion of 75 per cent currency and 25 per cent gold (or convertible currencies or special drawing rights).

QUOTA INCREASES, 1946—JANUARY 1, 1970(In billions of U.S. dollars)
Quotas, December 31, 19467.1
1947-50: New member.9
Special increases.03
Quotas, December 31, 19508.03
1951-55: New members.71
Special increases.02
Quotas, December 31, 19558.75
1956-58: New members.40
Special increases.04
Quotas, December 31, 19589.19
Quotas, December 31, 19599.2
1959 general quota increases:
First Resolution1 (excluding China)4.4
Second Resolution2.04
Third Resolution3.52
Fourth Resolution4.44
February 1959-June 30, 1962: 514.6
New members.27
Special increases.18
15.05
July 1962-February 26, 1965:
Special increases.31
Compensatory financing increases.04
New members.48
Quotas, February 26, 1965:15.88
Increases relating to Fourth Quinquennial Review:
First Resolution 6(excluding China)3.83
Second Resolution7.93
Compensatory financing increases plus 25 per cent.54
New members.16
Quotas, January 1, 197021.34
Maximum increase under Resolution 25-3,
Fifth General Review of Quotas:7.6

Adopted by Board of Governors February 2, 1959, provided “the quotas of members of the International Monetary Fund as of January 31, 1959, shall be increased by 50 per cent for each member.”

Provided for increases for 24 small-quota countries to obtain a quota equal to the amount available under the small-quota formula increased by 50 per cent.

Special increases for Canada, Germany and Japan.

Provided for special increases for Argentina, Brazil, Ceylon, Cuba, Denmark, Ghana, Iran, Mexico, Norway, Saudi Arabia, Thailand, Turkey, and Venezuela.

June 30, 1962, date of expiration for consents to 1959 general quotas increases.

Increases proposed in First Resolution of 25 per cent of quota in effect on February 26, 1965.

Provided for special increases for Austria, Canada, Finland, Germany, Greece, Iran, Ireland, Israel, Japan, Mexico, Norway, Philippines, South Africa, Spain, Sweden and Venezuela.

Adopted by Board of Governors February 2, 1959, provided “the quotas of members of the International Monetary Fund as of January 31, 1959, shall be increased by 50 per cent for each member.”

Provided for increases for 24 small-quota countries to obtain a quota equal to the amount available under the small-quota formula increased by 50 per cent.

Special increases for Canada, Germany and Japan.

Provided for special increases for Argentina, Brazil, Ceylon, Cuba, Denmark, Ghana, Iran, Mexico, Norway, Saudi Arabia, Thailand, Turkey, and Venezuela.

June 30, 1962, date of expiration for consents to 1959 general quotas increases.

Increases proposed in First Resolution of 25 per cent of quota in effect on February 26, 1965.

Provided for special increases for Austria, Canada, Finland, Germany, Greece, Iran, Ireland, Israel, Japan, Mexico, Norway, Philippines, South Africa, Spain, Sweden and Venezuela.

Secondary Mitigation

Some members do not hold sufficient gold in their reserves to pay for their increases in quotas. Consequently, these members might need to purchase gold for this purpose from other members, in particular reserve centers like the United States and the United Kingdom. The “burden” of the loss of gold is, thereby, transferred to other members.

In the past the Fund has alleviated in two ways the impact of the loss of gold experienced by those members which sold gold to other members to permit the latter to pay their quota increases. First, the Fund has sold gold to the gold selling members in replenishment of its currency holdings, thereby replacing the gold they had sold to others. At the time of the last review of quotas the Fund sold almost $150 million of gold to members. A second form of mitigation was used at the time of the Fourth Quinquennial Review when the Fund made provision for gold to be placed on general deposit with the United States and the United Kingdom up to a total amount not exceeding the equivalent of $350 million. The Fund thereby redeposited the equivalent amount of gold that the United States and the United Kingdom had sold to members in connection with their quota increases.

For the Fifth General Review of Quotas the Fund will follow only one form of alleviation of the secondary impact on members’ gold reserves. The Fund will sell gold for replenishment purposes up to the equivalent of $700 million to those members which sold gold to other members for purposes of their paying gold subscriptions to the Fund. By this means the Fund will replenish its holdings of usable currencies which it can then use in financing demands made by members on its resources. The sale of gold by the Fund also lessens the fall in countries’ gold holdings—thereby reducing the possibility of an adverse psychological reaction that is sometimes induced by a fall in a country’s gold holdings. Furthermore, to the extent that members buy gold from, for example, the United States, then a payment of gold to the Fund tends to reduce the level of international liquidity. Sales of gold by the Fund to the United States would offset the decline in liquidity.

Conclusion

The increase in the Fund’s resources through increased quotas will place the Fund in a stronger position to meet the needs of its members during the early part of the 1970’s. The Fund can, however, undertake a further general review of quotas at any time within the next five years, if circumstances would seem to warrant it, and is in any event required to review members’ quotas again not later than the end of 1974.

In addition, the burden of the gold payment to be made in connection with the quota increases seems to be considerably reduced not only by the mitigation provisions but also as a result of the allocations of special drawing rights, the first of which was made on January 1, 1970, and the second of which is expected to be made on January 1, 1971. Members with comparatively low reserves will pay a lower proportion of gold than hitherto and the balance of the equivalent of 25 per cent of the increase in quota can be paid in other media over a period of five years. Furthermore, the first two allocations of special drawing rights will be only slightly less than the amount of gold to be paid to the Fund in connection with the increases in quotas.

These provisions mean that payments for quota increases will not cause an undue strain on members’ external reserves. This is important not only from the point of view of individual members’ holdings but also in light of the fall in members’ gold holdings that has occurred since 1965. Indeed, as a result of the activation of the special drawing rights scheme and the increase in members’ quotas, the Fund is now likely to be the vehicle for supplying the bulk of the world’s increased needs for both unconditional and conditional liquidity.

1A number of large percentage increases in quotas under the fifth review incorporated increases in quotas for which members were eligible under the Fund’s compensatory financing decision.
2In 1959 all quotas were increased by 50 per cent and the larger adjustments were offered to a further 17 members. In 1965 a general increase in quotas of 25 per cent was approved and a further 16 members were offered larger adjustments.

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