An important factor that helps the IMF’s functioning is the quota. This quota is basically money that a member country has to give to the IMF.
As per the norms, each member has to subscribe a quota of the IMF. It is out of this quota which is basically money, that the IMF gives loans to its members.
How the size of quota for each member country 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 (applied for 14th quota review) is a weighted average of GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent). For this purpose, 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. Quota formula is also subjected to review.
The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members. Quotas are denominated in SDRs, the IMF’s unit of account.
After the 14th quota review (enforced on January 26, 2016), the United States, continues to be the largest quota holder (as of September 12, 2016) with quota holding of SDR 82.99 billion (about US$116 billion). The smallest quota holder is Tuvalu, with a quota of SDR 2.5 million (about US$3.5 million). India’s quota holding is SDR 13.11 bn.
Quotas of each of the IMF’s 189 members increased to a combined SDR 477 billion (about US$668 billion) from about SDR 238.5 billion (about US$334 billion) after the 14th quota review which was came into effect on January 26, 2016.
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).
Multiple purposes of Quotas
Quota with the Fund serves many purposes. Firstly, quota subscribed by the members indicates 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 basically 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 2.76%, her voting weight will be near to that ie it is 2.76 % a present (though India’s vote share is 2.64% after the 14th Quota review). 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 16.54 % of voting power, enjoys a veto power.
Thus, a member’s quota indicates basic aspects of its financial and organizational relationship with the Fund.