One of the IMF’s three roles is lending to member countries with balance of payments difficulties, using resources provided by its other members. Unlike development banks, the IMF does not issue bonds on capital markets, with resources exclusively provided by countries. Generally, these resources come in two forms: quota contributions tied to voting rights in the institution, and bilateral contributions which do not affect countries’ voting rights.
The main source of IMF resources is supposed to be IMF quota contributions, the money countries pay into the Fund for their membership of the institution. The quota is used in three ways: to determine voting rights, to determine contributions, and to set a guideline for the level of resources a country can borrow. As of 2008, the total IMF quota for all countries was $366 billion. In 2010 it was agreed to double the size of the IMF quota to $732 billion, but this will not come into force until IMF members with 85 per cent of voting rights approve the change, which is expected by the end of 2012 (see Update 73). Normally IMF members contribute one-quarter of their quota in the form of widely accepted foreign currencies such as the dollar, euro, yen or pound sterling. The remaining three-quarters are committed to the Fund in the country’s own currency, though only paid in when the Fund demands the resources.
The size of a country’s quota is determined by the quota formula, which takes into account four factors: the size of the economy, the level of foreign reserves, the volume of foreign trade, and the variability of trade and capital flows. The quota formula was originally designed in 1945 in a political exercise to give a pre-determined outcome dictated by the US Treasury. Between then and 2006, the quota formula was tweaked several times, before finally being simplified in 2008. Still the formula only serves as a guide to how the quota is determined, with a political negotiation among IMF members resulting in changes to the final distribution of quota. Currently, the US has 17.7 per cent of the quota meaning a $65 billion contribution, while China has 4 per cent meaning about $15 billion.
Aside from the quota, the IMF has standing arrangements to bilaterally borrow money from its members. Contributions through these arrangements do not affect IMF voting rights. The most important of these is the New Arrangements to Borrow (NAB), which is designed as a “backstop to the Fund’s quota-based financing mechanism”, and which is “only to be used when supplementary resources to quota resources are required”. The NAB was first agreed in 1997 between the IMF and 25 high-income IMF member countries. In 2009, in response to the financial crisis, it was expanded from the 26 countries participating at the time, who had pledged about $52 billion, to take in 13 new countries, including large middle-income countries, with a total commitment of $568 billion (see Update 65).
Nearly 60 per cent of NAB commitments are from G7 countries, while the biggest emerging markets (Brazil, Russia, India, China and South Africa) represent just 15 per cent of the total. Regionally, European countries (excluding Russia) made the largest commitments at 39 per cent of the total, followed by East and South Asian countries at 31 per cent. With a commitment of about $106 billion, the US is the largest participant. Before 2009, activation of the NAB was on a case-by-case basis when a country requested a large loan. Since then, the NAB can be activated for a period of instability. It was last activated in October 2011 for a six-month period. Activation requires the consent of NAB participants representing at least 85 per cent of commitments.
The IMF can also find resources using the General Arrangements to Borrow (GAB). The GAB is an older instrument, established in 1962, and counts on the participation of 11 developed countries. The current commitments through the GAB are $26 billion, of which the US has committed $6.5 billion. While the GAB was used extensively up until the late 1990s, under current rules the GAB can only be activated if NAB activation has been refused. In 2009 a number of countries agreed bilateral loans with the IMF outside of the usual NAB and GAB arrangements, and the IMF also bilaterally sold bonds to some member countries, the first time it has done this. As of November 2011, there was an additional $87 billion provided in this way.
In early 2012, IMF managing director Christine Lagarde received the consent of the IMF executive board to explore ways to increase the resources available to the IMF by another $500 billion (see Update 79). European countries had in late 2011 already pledged another €200 billion ($259 billion). It is not yet clear whether the new resources will be delivered as bilateral commitments or quota-based contributions. The IMF agreed to look for new resources “to help defuse the current global economic weaknesses and regional challenges”.
At end November 2011, the IMF reported that it had potential resources of $836 billion from the above sources. After subtracting out existing commitments, credit outstanding, unusable currencies, and prudential balances, a mid January financial activities statement showed that the Fund had $389 billion it could commit to new lending.