IMF Chief urges G20 countries to restore primacy of quota resource

Subject :Economy

Section: External Sector

Context : IMF chief has stressed the need for prioritising quota revision, to enhance lending capacity.

Key Points:

IMF has nearly $1 trillion in lending capacity based on the quota resources—which are critical to ensure the predictability of the IMF’s firepower
The resources have shrunk in relative terms. It is thus important to enhance the IMF quota resources by successfully completing the 16th quota review.
There is also a need to replenish subsidy resources in the Poverty Reduction and Growth Trust (PRGT).
IMF’s newest instrument, the Resilience and Sustainability Trust (RST) funded through on-lending SDRs.
The G20 has recently reached its target of committing $100 billion for SDR channeling to vulnerable countries.

Concepts

Quota System

A quota formula is used to help assess members’ relative position in the world economy and it can play a role in guiding the distribution of quota increases. The current formula was agreed to in 2008. Sixteenth review is now undergoing. India’s share in quota is 2.75 per cent.
The quota is based on a formula that combines 4 parameters, namely GDP, openness, economic variability and international reserves.
The weighted parameters are: GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent).
GDP is measured through a blend of GDP based on market exchange rates (weight of 60 percent) and on PPP (Purchasing Power Parity) exchange rates (40 percent).
The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members.

Resilience and Sustainability Trust (RST)

The IMF’s Resilience and Sustainability Trust (RST) helps low-income and vulnerable middle-income countries build resilience to external shocks and ensure sustainable growth, contributing to their longer-term balance of payments stability.
It complements the IMF’s existing lending toolkit by providing longer-term, affordable financing to address longer-term challenges, including climate change and pandemic preparedness.

Poverty Reduction and Growth Trust (PRGT)

The Poverty Reduction and Growth Facility (PRGF) is an arm of the International Monetary Fund which provides concessional lending to the world’s poorest countries. It was created on September 16, 1999, replacing the Enhanced Structural Adjustment Facility.

Which IMF instruments can be used to provide support to LICs?

All IMF members have access to the General Resources Account on non-concessional loans. The IMF also provides concessional financial support to its low-income members through the Poverty Reduction and Growth Trust (PRGT), which has three lending facilities:

Extended Credit Facility (ECF):Sustained medium- to long-term engagement in case of protracted balance of payments problems.
Standby Credit Facility (SCF):Financing for low-income countries with actual or potential short-term balance of payments and adjustment needs caused by domestic or external shocks, or policy slippages. It can also be used on a precautionary basis during times of increased risk and uncertainty.
Rapid Credit Facility (RCF): One-off disbursement for low-income countries facing urgent balance of payments needs. Repeated disbursements over a limited period are possible in case of recurring or ongoing balance of payments needs.