In the IMF, quota is the financial contribution made by a member. As per the working of the IMF, each member has to subscribe to the quota of the Fund. Quota constitutes the resource base of the IMF and it is out of the quota that the IMF gives loans to the needy members.
Quotas for member countries are initially determined by a calculation based on the size of the national economy (GDP, current account transactions in the balance of payments). They are periodically increased, in response to needs for the IMF’s operations through quota revisions. The Articles of Agreement provide for a general review of the quotas every five years.
For any member country, out of the quota, 25 % should be paid in the form of foreign currency or gold (called as reserve tranche or gold tranche) to the Fund, and the remaining 75% in the form of domestic currency (called as credit tranche).
Member Country’s Quota is determined?
The quota of a country depends on its economic importance. When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members that are broadly comparable in economic size and characteristics. The IMF uses a quota formula to guide the assessment of a member’s relative position.
The current quota formula is a weighted average of GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent).
Quotas are denominated in 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).
Multiple purposes of the Quotas
Quota with the Fund serves many purposes. Firstly, quota subscribed by the members is actually are funds provided by the members to the IMF, and hence it constitute to the resource base of the IMF.
Second; a member country’s loan availability depends upon size of its quota. The amount of financing a member can obtain from the IMF (called as access limit) thus depends upon its quota. For example, under Stand-By and Extended Arrangements, a member can borrow up to 200 percent of its quota annually and 600 percent cumulatively. However, access may be higher in exceptional circumstances.
Thirdly, the size of quota determines voting power of a member. The peculiarity of the decision making process of the IMF is that the voting power of a member country depends on the size of the quota. For example, if India’s quota share is 2.75%, her voting weight will also be near to 2.75%. As per the IMF rules, for an important resolution to be passed, at least 85% of the votes should be secured. This means that the US, with 16.75% of voting power, gets a veto power.
A member’s quota thus indicates basic aspects of its financial and organizational relationship with the Fund.