IFI governance


Clock is ticking: Will IMF’s 16th Quota Review mean a further loss of legitimacy for the Fund?

4 October 2023

BRICS leaders’ official photo at the XV BRICS Summit in Johannesburg, South Africa, August 2023.

BRICS leaders’ official photo at the XV BRICS Summit in Johannesburg, South Africa, August 2023. Credit: Ricardo Stuckert/PR

As the global system faces complex challenges of a slower growth outlook, high inflation, and surging debt levels, the enlargement of the BRICS group following the Johannesburg Summit in August represents the latest attempt to reshape the global world order. In their Summit declaration, BRICS leaders demanded a bigger say in global affairs, repeatedly calling for “greater representation of emerging markets and developing countries” in international institutions, underscoring the urgency of reforming the IMF’s governance structure. This governance structure – based on a quota system that concentrates formal decision-making power in the hands of a few wealthy countries – is not only undemocratic and neo-colonial, but no longer reflects current economic realities (see Inside the Institutions, IMF and World Bank decision-making and governance).

The first BRICS expansion in 13 years is set to double the group’s membership and extend its global reach, adding new pressure for reform of the IMF, which is currently engaged in its 16th General Review of Quotas, due to be completed by December 2023. The group’s attempt to shift the global balance of power is gaining support in the Global South, where many countries feel marginalised by an international system they see as dominated by the US and its wealthy allies. The IMF is no exception, with the EU and the US dominating the decision-making structure of the institution with voting shares of 29 and 16.5 per cent respectively, giving them de facto veto power over all major decisions of the Fund, which require an 85 per cent majority.

Legitimacy is waning as US and Europe run out of excuses for blocking reform

The goals and commitments for the current quota review have been on the table with similar language for at least 15 years, namely, continuing “the process of IMF governance reform, including a new quota formula as a guide” and ensuring “the primary role of quotas in IMF resources.” These goals, however, contradict what is geopolitically possible. The rise of middle-income countries (MICs), principally China, means that a quota review that adequately reflects current economic realities would give China a significant quota share, making it the second biggest IMF shareholder, easily overtaking Japan (see Observer Winter 2017). Given that such a shift would have to come at the expense of European powers and the US would lose its veto power, a full realignment of quotas will likely be blocked by the West.

“What is mostly lacking are not new ideas or new formulas, but the political will on the part of the dominant shareholders to cede space to dynamic developing economies”Paulo Batista Nogueira Jr., former Brazilian IMF Executive Director and Vice-President of the New Development Bank.

With the BRICS expansion, it seems that China is working hard to expand alliances and forge alignment amongst MICs. This will be difficult as the group is a mix of powerful autocracies, and middle-income and developing democracies with widely diverging interests. Aligning MICs around a shared quota reform strategy will be even harder as the group is nearly equally under- and over-represented by the existing formula.

In this geopolitical game, vulnerable low-income countries (LICs) have the most to lose. While most likely to borrow from the IMF, they have limited influence to determine the frameworks for policy advice and conditionality attached to their loans (see Inside the Institutions, What are the main criticisms of the World Bank and the IMF) – which often include stringent fiscal consolidation policies such as privatisation of public services (see Observer Winter 2018) and cutting social protection programmes, measures with adverse impacts on poverty, inequality and human rights (see Observer Summer 2023).

IMF decries fragmentation, while doing little to heal wounds

In this context, the current prospects for meaningful quota reform are limited. The IMF’s main ambition is to achieve an equiproportional increase of quotas, by keeping existing quota shares but increasing their absolute value, thereby ensuring an increase in IMF resources. In particular, the Fund’s quotas would need to increase by as much as 267 per cent, or $1.16 trillion, to cover the gross external financing needs of the most vulnerable countries. But even that might be hard to achieve if some countries hold this hostage to force other reforms. “What is mostly lacking are not new ideas or new formulas, but the political will on the part of the dominant shareholders to cede space to dynamic developing economies,” highlights Paulo Batista Nogueira Jr., former Brazilian IMF executive director and vice-president of the New Development Bank.

Advanced economies should, at the very least, work to align MICs overrepresented by the current quota formula and bring to their side LICs by offering some valuable concessions such as increasing the proportion of basic votes, implementing the G24’s long-standing request to allocate one more seat on the IMF executive board to Sub-Saharan Africa, or decoupling Special Drawing Rights allocations from the quota system, as proposed by United Nations Conference on Trade and Development. Although this falls well short of the major reforms needed, such measures would at the very least ensure that the IMF avoids further deterioration of its legitimacy.