This chapter explains the sources of income for the IMF. It elaborates on how the IMF has adapted its financial structure to finance its administrative expenditures. The IMF’s income is generated primarily through its lending and investing activities (Figure 5.1).
Snapshot of the IMF Income Statement
(Millions of SDRs as of April 30, 2017)
Source: Finance Department, International Monetary Fund.Since its inception, the IMF has relied primarily on lending activities to fund its administrative expenses. Lending income is derived from the fees and charges levied on the use of credit from the General Resources Account (GRA; interest on loans). In addition to the basic rate of charge, the use of IMF credit is subject to surcharges under certain circumstances, and IMF credit from the General Resources Account is also subject to service charges and commitment fees on credit lines. A small amount of income is also generated by receipts of interest on the IMF’s holdings of Special Drawing Rights (SDRs).
A number of measures have been taken to allow the IMF to diversify its sources of income, but the most significant changes have occurred during the past 12 years. In 1978, the Second Amendment of the IMF’s Articles of Agreement authorized the IMF to establish an Investment Account (IA), but this account was not activated until after a review of the IMF’s financial structure that began in 2004. In 2006, largely because of a significant deterioration in the IMF’s income position that reflected a steep decline in credit outstanding, the Executive Board agreed on a set of measures to address a near-term projected income shortfall. These measures included activation of the Investment Account,1 a pause in the accumulation of reserves, and the use of the IMF’s existing reserves to meet the remaining income shortfall. In addition, the Executive Board requested an assessment of the full range of available options to place the IMF’s income position on a sustainable footing for the long term. In response, the IMF appointed the external Committee of Eminent Persons to study the “sustainable long-term financing of the Fund.” The committee’s final report was submitted to the Executive Board on January 31, 2007.2
A proposal that reflected most of the committee’s recommendations was endorsed by the Executive Board in April 2008. The reforms allowed the IMF to diversify its sources of income through the establishment of an endowment within the Investment Account, to be funded with the profits from a limited sale of the IMF’s gold holdings and income generated under a broadened investment authority. At the same time, the Executive Board endorsed a resumption of the practice of reimbursing the IMF for the expenses incurred in administering concessional lending activities through the Poverty Reduction and Growth Trust (PRGT).3
Broadening the IMF’s investment authority required an amendment to the Articles of Agreement, and in February 2011, that amendment (the Fifth Amendment) became effective, following ratification by the membership with the required majority of voting power. Currencies in an amount equivalent to the profits from the limited sale of IMF gold in the amount of SDR 6.85 billion were transferred from the General Resources Account to the Investment Account in March 2011.4 The amendment gave the IMF authority to invest the gold endowment in a broader range of instruments. The new Rules and Regulations for the Investment Account reflecting the expanded investment authority went into effect in January 2013 and have been amended subsequently.5
The remainder of this chapter discusses the IMF’s income position by elaborating on how income is generated from lending, explaining how the basic rate of charge is set, and describing various charges under the General Resources Account. The chapter then traces the development of the new income model, including the creation of an endowment with the profits from the limited gold sale and the IMF’s expanded investment authority. Next, it describes the subaccounts of the Investment Account and includes details on portfolio allocation, eligible instruments, and risk controls.
5.1 Lending Income
The IMF’s operational lending income is derived from the marginal return on the rate of charge (the interest rate assessed on IMF financing), service charges, and commitment fees. A multitiered system of charges compensates the IMF for the cost of its financing to members and is an important component of the institution’s risk-mitigation framework.6 The cost of financing includes remuneration to creditors and administrative costs associated with lending.
The basic rate of charge comprises the SDR interest rate plus a fixed margin that is set by the Executive Board every two years and subject to a midterm review. The margin, (expressed in basis points) was established under a rule for setting the basic rate of charge adopted by the Executive Board in December 2011 (Box 5.1). Under that rule, the level of the margin should be adequate to cover the IMF’s lending-related intermediation costs and allow for a buildup of reserves. In addition, the rule includes a cross-check to ensure that the rate of charge remains reasonably aligned with long-term credit market conditions.7
The rule, effective from FY 2013, was an important step in the implementation of the IMF’s new income model and was designed to move away from a reliance on lending income to finance the IMF’s nonlending activities. However, investment income, which is now the main source of nonlending income, has remained constrained by much lower-than-normal global interest rates amid highly accommodative monetary policies aimed at supporting economic activity in the wake of the global financial crisis. As a result, nonlending income has not been sufficient to cover the IMF’s short- and medium-term nonlending expenses. Therefore, in each two-year period since FY 2013/14, the margin has been adopted under an exceptional circumstances clause in the rule that allows the margin to be set at a level other than is needed to cover the IMF’s intermediation expenses and to generate an amount of net income for placement in reserves. For FY 2015/16 and FY 2017/18, the Executive Board agreed to keep the margin for the rate of charge unchanged at 100 basis points (Figure 5.2).
Weekly Interest Rates and Margins, 2004–18
(Percent)
Source: Finance Department, International Monetary Fund.Note: The basic rate of charge comprises the SDR interest rate plus a fixed margin.Surcharges contribute to the accumulation of the IMF’s reserves by generating income. They are an important component of the IMF’s risk-mitigation framework, by providing incentives for moderating large and prolonged use of IMF resources and for timely repurchases of outstanding credit. Surcharges apply to amounts of credit outstanding that exceed a defined threshold relative to a member’s quota (level-based surcharges), and they are higher in cases where this threshold has been exceeded for a defined period of time (time-based surcharges). The policy on level- and time-based surcharges was introduced in 2009. It replaced the previous Time-Based Repurchase Expectation Policy (TBRE) and simplified the complex system of surcharges that varied across facilities (Box 5.2). Following the latest review of the surcharge policy in February 2016, the level-based surcharge is set at 200 basis points on outstanding credit above 187.5 percent of quota, resulting from purchases in the credit tranches and under the Extended Fund Facility (EFF). An additional time-based surcharge of 100 basis points applies when that credit has been outstanding for more than 36 months in the case of purchases in the credit tranches, or more than 51 months in the case of purchases under the EFF. The levels of surcharges are calibrated to be broadly aligned with the market costs of borrowing for members emerging from balance of payments difficulties and are reviewed by the Executive Board on an as-needed basis.
In addition to charges and surcharges, the IMF levies service charges, commitment fees, and special charges. A service charge of 0.5 percent is levied on each purchase from the General Resources Account (GRA). A commitment fee is charged on undrawn amounts available under all GRA arrangements. The fee is refundable if purchases are made under the arrangement during the period covered by the fee, in proportion to the drawings made. The IMF levies special charges on overdue repurchases or repayments. For overdue obligations to the GRA, special charges apply only to arrears of less than six months’ duration (see Section 6.2.4, “Special Charges”).
The rationale for charging a commitment fee on undrawn amounts is to compensate the IMF for the cost of establishing and processing potential lending arrangements (which may not be actually drawn upon), and for the cost of setting aside resources to be used when a purchase is made. Commitment fees are levied at the beginning of each 12-month period on the amounts available for purchase during that period. The rate of the commitment fee charged increases with the amounts available for purchase within each 12-month period, which serves to discourage unnecessarily high precautionary access (Box 5.3). This upward-sloping commitment fee structure has three tiers: 15 basis points on amounts available up to 115 percent of a member’s quota, 30 basis points on amounts in excess of 115 percent and up to 575 percent of quota, and 60 basis points on amounts in excess of 575 percent of quota.
5.2 The IMF’s Income Model
Historically, the IMF has relied almost entirely on income from lending to meet the expenses incurred in conducting its business, including expenses for its nonlending activities. This meant that the IMF’s net income was largely dependent on interest and charges on lending to members, along with surcharge income and other charges. The activities supported by this income, many of which carry significant costs, include multilateral and bilateral surveillance, crisis prevention, research, gathering and reporting statistics, capacity building (including technical assistance and training), and concessional lending to low-income countries. Relying primarily on lending income to support these critical activities was not sustainable when credit outstanding declined, nor was it equitable for the cost of these activities to be borne primarily by those members receiving IMF financing from the General Resources Account.
In March 2006, the IMF’s Executive Board agreed on a two-pronged strategy to adapt the IMF’s financing model to changing circumstances and future needs (often referred to as the IMF’s “new” income model). The first prong addressed a looming shortfall in income for FY 2007. The board agreed on a package of measures that included the establishment and activation of the Investment Account, a pause in the accumulation of reserves, and the use of the IMF’s existing reserves to meet any remaining income shortfalls. No changes in these income policies were made for FY 2008, which was considered a transitional year during which a new income model would be developed.
The second prong of the strategy was to ensure a lasting frame-work for meeting the institution’s income needs over the long term. The IMF appointed an external Committee of Eminent Persons to study the issue (Box 5.4). The committee’s final report on “Sustainable Long-Term Financing of the IMF” was submitted to the Managing Director on January 31, 2007.
5.2.1 Features of the IMF Income Model8
Taking into consideration the report by the Committee on Eminent Persons, in April 2008 the Executive Board endorsed a new income model based on more robust and diverse sources of revenue that reflected the IMF’s multiple functions (Figure 5.3). This marked the first major change in the way the IMF generates income since its establishment. The package contained the following income-generating initiatives:
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Create an endowment with the profits from the sale of 403.3 metric tons of the IMF’s gold holdings to help diversify the sources of income. This amounted to one-eighth of the IMF’s total holdings of gold (see Section 2.3.3.3 IMF Gold Sales).
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Amend the Articles of Agreement to broaden the IMF’s investment authority to enhance the average expected return on investments and enable the IMF to adapt its investment strategy over time.
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Resume the long-standing practice of reimbursing the IMF’s budget for the cost of administering the trust fund for concessional lending to low-income countries from the Poverty Reduction and Growth Trust, while retaining the IMF’s capacity to provide concessional lending to low-income countries.
The IMF’s Income Model
The IMF implemented a plan to draw on additional revenue sources to better align the IMF’s income model with its activities.
Source: Finance Department, International Monetary Fund.Note: Green boxes represent elements that were added to the income model in 2008.1 As of December 31, 2017, the dividend policy had not been adopted by the membership.One element of the new income model is the expansion of the IMF’s investment authority, which allows it to generate higher returns. The Fifth Amendment to the Articles of Agreement of the International Monetary Fund to Expand the IMF’s Investment Authority entered into force in February 2011.9 The Board of Governors approved that the IMF’s Articles of Agreement be amended to broaden the range of instruments in which the IMF may invest. Such an expansion of the IMF’s investment authority would enable the IMF to adapt its investment strategy over time without the need of further amendments to the Articles. Given the public nature of the funds to be invested, the implementation of a broader investment authority would be conducted pursuant to investment policies that take into account, among other things, a careful assessment of acceptable levels of risk. It would also include safeguards aiming to minimize actual or perceived conflicts of interest. Finally, it was recognized that the evolution of the IMF’s investment policies would need to proceed gradually. To this end, on January 23, 2013, the Executive Board adopted the new Rules and Regulations for the IMF’s Investment Account that provided the legal framework for implementation of the expanded investment authority.10
5.3 Investment Income
The Second Amendment to the IMF’s Articles of Agreement in 1978 authorized the IMF to establish an Investment Account in order to generate income from sources other than lending operations.
The Investment Account was established by the Executive Board in 2006 in order to broaden the IMF’s income base. It was originally funded through the transfer of currencies from the General Resources Account in an amount equivalent to the IMF’s General and Special Reserves at the time of the decision authorizing the transfer (SDR 5.9 billion).11 This was the maximum transfer allowed by the Articles of Agreement.
While establishing the Investment Account was an important step toward reducing the IMF’s medium-term financing gaps and diversifying its sources of income, achieving a sustainable income position for the long term required additional measures. As discussed in Section 5.2, and following the proposals of the Committee of Eminent Persons, the Executive Board endorsed a new income model that also included a broadening of the IMF’s investment authority and the establishment of an endowment funded by limited gold sales (see Section 2.3) with new Rules and Regulations for the Investment Account.12,13
The Fifth Amendment to the Articles of Agreement, effective since 2011, authorized the broadened investment authority of the Investment Account. The Executive Board adopted new Rules and Regulations for the Investment Account in January 2013. The Rules and Regulations specify the objective of the Investment Account and the broad principles governing its operations. They establish two portfolios (subaccounts), define the investment objective of each portfolio, outline potential uses of investment income, and provide guidelines for investing the assets. They also further define the governance framework, including delegating the implementation of the investment policies set out in the Rules and Regulations to the Managing Director, while ensuring that the Executive Board is provided with regular and ad hoc reports on the operations and investment activities of the Investment Account and consulted on key topics, including conflict of interest policies. Finally, the Rules and Regulations also require that measures be taken to mitigate the risks of perceived or actual conflicts of interest. The Rules and Regulations have since been amended to reflect technical adjustments and the extension of the broadened investment authority to the Fixed-Income Subaccount.
5.3.1 Subaccounts
The Investment Account has two subaccounts: the Fixed-Income Subaccount and the Endowment Subaccount. The former has a dual objective of generating income while also protecting the IMF balance sheet in the event of an adverse shock on the institution; the latter’s sole objective is to generate income and has a longer investment horizon. As noted, the Investment Account was originally funded through the transfer of currencies from the GRA in an amount equivalent to the total amount of the IMF’s General and Special Reserves at the time (SDR 5.9 billion). The Fixed-Income Subaccount was created in 2013 when the new Rules and Regulations were adopted. All Investment Account assets not attributed to profits from gold sales were placed in this subaccount and initially continued to be invested under the mandate originally established in 2006. The Endowment Subaccount was funded in January 2013 with SDR 4.4 billion in profits from gold sales. This amount was gradually phased into investments after the investment strategy was approved in 2013. Table 5.1 summarizes the Investment Subaccounts and Figure 5.4 provides the asset size of the Investment Account over time.
Investment Account Subaccounts
Investment Account Subaccounts
Fixed-Income Subaccount | Endowment Subaccount | |
---|---|---|
Inception | Funded in June 2006 with SDR 5.9 billion | Funded in January 2013 with SDR 4.4 billion |
Funding Sources | Funded by transfers of currencies from the General Resources Account (GRA) in amounts equivalent to the IMF’s total reserves as of June 2006, plus subsequent transfers of GRA net income not associated with gold profits | Funded with gold profits (other than windfall profits) as part of the new income model, which aims at diversifying the IMF’s income sources |
Investment Objective | To achieve returns in SDR terms that exceed the three-month SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over an investment horizon of three to four years | To achieve a long-term real return target of 3 percent in US dollar terms. This is consistent with the objective of generating investment returns to contribute to the IMF’s income while preserving the long-term real value of these resources. |
Investment Strategy | Assets are managed in a high-quality, fixed-income portfolio with two tranches: a diversified short-duration tranche and a longer-duration buy-and-hold tranche mainly composed of highly rated bonds. | Assets are managed against a conservative diversified benchmark with a 65 percent share of global fixed-income instruments and a 35 percent share for global equities (including real estate investment trusts). |
Assets under Management (as of April 30, 2017) | SDR 14.1 billion | SDR 5.0 billion (including cash to be invested) |
Investment Account Subaccounts
Fixed-Income Subaccount | Endowment Subaccount | |
---|---|---|
Inception | Funded in June 2006 with SDR 5.9 billion | Funded in January 2013 with SDR 4.4 billion |
Funding Sources | Funded by transfers of currencies from the General Resources Account (GRA) in amounts equivalent to the IMF’s total reserves as of June 2006, plus subsequent transfers of GRA net income not associated with gold profits | Funded with gold profits (other than windfall profits) as part of the new income model, which aims at diversifying the IMF’s income sources |
Investment Objective | To achieve returns in SDR terms that exceed the three-month SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over an investment horizon of three to four years | To achieve a long-term real return target of 3 percent in US dollar terms. This is consistent with the objective of generating investment returns to contribute to the IMF’s income while preserving the long-term real value of these resources. |
Investment Strategy | Assets are managed in a high-quality, fixed-income portfolio with two tranches: a diversified short-duration tranche and a longer-duration buy-and-hold tranche mainly composed of highly rated bonds. | Assets are managed against a conservative diversified benchmark with a 65 percent share of global fixed-income instruments and a 35 percent share for global equities (including real estate investment trusts). |
Assets under Management (as of April 30, 2017) | SDR 14.1 billion | SDR 5.0 billion (including cash to be invested) |
Asset Size of the Investment Account
(Billions of SDRs as of April 30 each year, unless indicated otherwise)
Source: Finance Department, International Monetary Fund.Note: A portion of the profits from the sale of IMF gold was transferred to the Investment Account in 2011. Of that, SDR 4.4 billion was used to fund the Endowment Subaccount. This amount was gradually phased into investments after the investment strategy was approved in 2013.5.3.1.1 Investment Objectives
As outlined in Table 5.1, each subaccount in the Investment Account has different objectives and pursues different investment strategies:
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With a view to generating income while protecting the IMF’s balance sheet, the investment objective of the Fixed-Income Subaccount is to achieve investment returns in SDR terms that exceed the three-month SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over an investment horizon of three to four years.
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The investment objective of the Endowment Subaccount is to achieve a long-term real return target of 3 percent in U.S. dollar terms. This is consistent with the overall objective for the Endowment Subaccount of generating investment returns to provide a meaningful contribution to the IMF’s income while preserving the long-term real value of these resources.
5.3.1.2 Investment Strategy, Eligible Instruments, and Asset Allocation
Fixed-Income Subaccount
In August 2015, the Executive Board approved an amendment to the Rules and Regulations for the Investment Account to broaden the investment strategy for the Fixed-Income Subaccount into a more diversified portfolio. The amendment created two tranches of roughly equal sizes: the shorter-duration “Tranche 1,” to be managed actively against a zero- to- three-year government bond benchmark index, weighted to reflect the currency composition of the SDR basket; and the longer duration “Tranche 2 ,” to be managed according to a buy-and-hold approach against a zero-to-five-year government bond benchmark index, weighted to reflect the currency composition of the SDR basket. To mitigate market timing risk, interest rate risk, and risks of perceptions of conflicts of interest, investments in Tranche 2 are being phased in over five years. Eligible asset classes are listed in Table 5.2. 14
Eligible Asset Classes in the Fixed-Income Subaccount
Eligible Asset Classes in the Fixed-Income Subaccount
Tranche 1 | Tranche 2 | |
---|---|---|
SDR or SDR-Component Currencies | Sovereign bonds Bonds issued by members’ national agencies Bonds issued by international financial institutions Bank for International Settlements (BIS) obligations | |
SDR or SDR-Component Currencies | Subnational government bonds Mortgage-backed securities Asset-backed securities Covered bonds Corporate bonds Cash instruments | |
Non-SDR Currencies | Sovereign bonds | |
Derivatives allowed for hedging |
Eligible Asset Classes in the Fixed-Income Subaccount
Tranche 1 | Tranche 2 | |
---|---|---|
SDR or SDR-Component Currencies | Sovereign bonds Bonds issued by members’ national agencies Bonds issued by international financial institutions Bank for International Settlements (BIS) obligations | |
SDR or SDR-Component Currencies | Subnational government bonds Mortgage-backed securities Asset-backed securities Covered bonds Corporate bonds Cash instruments | |
Non-SDR Currencies | Sovereign bonds | |
Derivatives allowed for hedging |
Securities in the Fixed-Income Subaccount must have a minimum credit rating equivalent to A (based on Standard & Poor’s long-term rating scale), with higher minimum credit ratings established for certain asset classes. Hedging with derivative instruments is strictly monitored and is required for managing the currency risk in the case of allocations to non-SDR basket currencies.
Endowment Subaccount
Assets in the Endowment Subaccount are long-term reserves that aim to diversify the IMF sources of income across market cycles; they are invested with a long-term real return objective of 3 percent over inflation. To achieve this objective, at least 90 percent of assets in the Endowment Subaccount, are managed passively, pursuant to a strategic asset allocation that includes developed market sovereign bonds, developed market inflation-linked bonds, developed market corporate bonds, emerging market bonds, developed market equities, emerging market equities, and real estate investment trusts (Figure 5.5). The actively managed portion of the Endowment Subaccount is limited to a maximum of 10 percent of its total assets. Initially, 5 percent of the Endowment Subaccount assets were to be managed actively. The actively managed portion may be invested only in the same asset classes as the strategic asset allocation benchmark for the passively managed portion, with a 65 percent share of fixed-income instruments and a 35 percent share for equities (including real estate investment trusts), but with no specific allocation requirements for each asset class within these two categories (Figure 5.5).
Endowment Subaccount: Target Allocation
Source: Finance Department, International Monetary Fund.Note: DM = Developed Markets, EM = Emerging Markets, REITs = Real Estate Investment Trusts.Derivative instruments, including options, forwards, futures, and swaps, are allowed, to minimize transaction costs in the context of rebalancing and for benchmark replication. These activities are permitted but subject to adequate risk control parameters and safeguards.
5.3.1.3 Risk Controls
The investment mandates for the Investment Account’s asset managers explicitly set limits based on a range of acceptable risk exposures, including for risks related to interest rates, foreign exchange, liquidity, credit, and the operation of the Investment Account itself. Mechanisms are in place to monitor compliance. Direct investment in gold, short selling, and financial leveraging are prohibited. The following portfolio-specific risk controls apply.
Fixed-Income Subaccount
The interest rate risk (stemming from fluctuations in a portfolio’s market value due to changes in market interest rates) is controlled by the short-duration portfolio, managed to a zero- to- three-year benchmark index for Tranche 1 and a zero- to- five-year benchmark index for Tranche 2. It is expected that this level of interest rate exposure along with some diversification, tranching, and phasing will provide an efficient tradeoff between risk and return, resulting in returns that exceed the three-month SDR interest rate under most market conditions. Going forward, cautious diversification is intended to strengthen the resilience of the portfolio across varying market conditions and minimize the risk of permanent impairment of capital.
There is some, albeit very limited, residual foreign exchange risk because investments are not made in SDRs but in securities denominated in the currencies comprising the SDR basket. Additionally, the strategy allows for investments in sovereign bonds denominated in a currency outside the SDR basket—these must be hedged back to a currency in the SDR basket. The residual exchange rate risk is very limited as the portfolio is regularly rebalanced to reflect the SDR currency basket and investments in non-SDR-basket currencies are fully hedged.
Liquidity risk is small, because of the high credit quality and liquid nature of the investments, as well as the low likelihood of a call on the Fixed-income Subaccount assets.
Finally, credit risk is tightly monitored, notably through stringent rating requirements and concentration limits.
Endowment Subaccount
Although the assets in the Endowment Subaccount are exposed to a wide variety of market risks, these are controlled by the diversification across geography and asset classes.
The Endowment Subaccount is predominantly exposed to equity and interest rate risks. These risks are mitigated by the diversified, long-term nature of the investment strategy, which aims to diversify sources of risks across different markets and macroeconomic cycles.
Credit risk is mitigated by a minimum rating threshold of BBB– on corporate bonds and BBB+ on sovereign bonds, along with diversification requirements and a strict divestment rule in case of a downgrade.
The Endowment Subaccount is also exposed to residual foreign exchange risk. The impact of foreign exchange volatility in the larger passively managed portion is controlled through mandatory hedging back to the base currency, the US dollar, of all fixed-income instruments denominated in developed market currencies. Developed market equities, real estate investment trusts, and emerging market currencies are left unhedged because currency volatility is more limited as a percentage of total return in equity markets and hedging costs may be excessive in the case of some emerging market currencies.
Liquidity risk is small because all assets are invested in publicly traded securities and liquidity requirements on the Endowment Subaccount are limited and predictable.
To control asset class exposure in the larger, passively managed portion, the portfolio must be rebalanced to the strategic asset allocation benchmark at least annually or when the weights of any of the asset classes move beyond a certain threshold away from the benchmark. In the smaller, actively managed portion, the portfolio may deviate from its 65/35 global fixed-income/equity split only within specified parameters.
Operational Risk in the Investment Account
Operational risk is controlled by in-depth due diligence reviews of external investment managers and custodians, the checks and balances inherent in the reconciliation of portfolio valuation by managers and the custodian, stringent performance and risk measurement, and reporting requirements, notably under International Financial Reporting Standards (IFRS) standards.
Investments are carried out by external managers (except for BIS investments, which are managed by staff) and assets are held in safekeeping by custodian banks.
5.3.2 The Use of Investment Income
The Executive Board normally decides every financial year how the Investment Account income will be used, including whether it may be invested, retained in the Investment Account, or transferred to the General Resources Account to meet the expenses involved in conducting the business of the IMF.
The earnings of the Investment Account and its potential contribution to the IMF’s operating expenses depend on the size of the portfolio and the performance of its investments. Figure 5.6 summarizes the earnings of the Investment Account over the past decade.
Earnings of the Investment Account
(Millions of SDRs as of April 30 each year unless indicated otherwise)
Source: Finance Department, International Monetary Fund.Note: IA = Investment Account.5.4 Reimbursements to the General Resources Account
The General Resources Account is reimbursed annually for the expenses incurred in conducting the business of the SDR Department and administering Special Disbursement Account resources in the Catastrophe Containment and Relief (CCR) Trust. Reimbursement to the GRA from the CCR Trust is for expenses not already attributable to other accounts or trusts administered by the IMF or to the GRA. The framework for the Poverty Reduction and Growth Trust (PRGT) also provides for the reimbursement of the GRA for the expenses of conducting the business of the PRGT, although there have been suspensions in the past. In FY 2013, the practice of reimbursing the GRA for the expenses of conducting the business of the PRGT resumed (see Chapter 3). This reimbursement is an important element of the IMF’s new income model, and its resumption was part of the financing strategy for the PRGT that was approved in September 2012, which was directed toward putting concessional lending on a self-sustaining basis over the long term.
Setting the Margin for the Basic Rate of Charge
The basic rate of charge on lending is a key element of the IMF’s financial operations. It is composed of the Special Drawing Right (SDR) interest rate, which is also the remuneration paid to creditors, and a margin, to cover the cost of IMF financing to members as well as to help accumulate reserves. In addition, the rate of charge plays an important role, together with surcharges on lending, in creating incentives for timely repayment—thus helping to preserve the revolving nature of IMF resources—and moderating large and prolonged use of IMF resources.
Until FY 2007, decisions on the margin were driven primarily by the need to cover the IMF’s administrative expenses and accumulate reserves. The margin was set based on the level of income needed to cover projected expenses and meet a net income target (specified as 5 percent of IMF reserves at the beginning of the financial year from FY 1985 to FY 2006).1 However, due to the sharp decline in credit outstanding by the mid-2000s, this approach would have implied a margin of more than 350 basis points for FY 2007—a level that would have made the cost of borrowing from the IMF undesirably expensive. In response, an exceptional circumstances clause was added to Rule I-6(4) in April 2006 to allow the margin for the rate of charge to be set on a basis other than estimated income and expenses.2 In addition, the Executive Board began to take steps to broaden the IMF’s income sources with the establishment of the Investment Account in April 2006.3
In April 2008, the Executive Board adopted decisions to reform the IMF’s income model and endorsed several principles for setting the margin for the rate of charge under the “new” income model:
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The margin on the rate of charge should be set in a stable and predictable manner.
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The margin on the rate of charge should no longer cover the full range of the IMF’s activities but should instead be set as a margin over the SDR interest rate to cover the IMF’s intermediation costs and allow for a buildup of reserves.
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A mechanism should be developed for checking that the margin is in reasonable alignment with long-term credit market conditions, including ensuring that the cost of borrowing from the IMF does not become too expensive or too low relative to the cost of borrowing from the market.
In line with these principles, in December 2011 the Executive Board adopted a new framework for setting the basic rate of charge.4 It became effective on May 1, 2012, and includes the following elements:
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1) The rate of charge shall be determined as the SDR interest rate plus a margin expressed in basis points. The margin shall be set at a level that is adequate (a) to cover the estimated intermediation expense of the IMF for the period under (3) below, taking into account income from service charges, and (b) to generate an amount of net income for placement to reserves. The appropriate amount for reserve contribution is assessed by taking into account, in particular, the current level of precautionary balances, any floor or target for precautionary balances, and the expected contribution from surcharges and commitment fees to precautionary balances, provided, however, that the margin shall not be set at a level at which the basic rate of charge would result in the cost of IMF credit becoming too high or too low in relation to long-term credit market conditions as measured by appropriate benchmarks.
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2) Notwithstanding the above, in exceptional circumstances, the margin may be set at a level other than that which is adequate to cover estimated intermediation expenses incurred by the IMF and to generate an amount of net income for placement to reserves. This exceptional circumstances clause provides a safeguard that allows the Executive Board to set the margin on a basis other than that required to cover intermediation costs and allows for a buildup of reserves, should income from other sources be insufficient to cover the administrative expenses for the nonlending activities of the IMF.
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3) The margin shall be set for a period of two financial years. A comprehensive review of the income position shall be held before the end of the first year of each two-year period and the margin may be adjusted in the context of such a review, but only if this is warranted in view of fundamental changes in the underlying factors relevant for the establishment of the margin at the start of the two-year period.
Evolution of Surcharges
Surcharges were introduced in 1997 with the establishment of the Supplemental Reserve Facility (SRF).1,2 Applying only to the SRF, a time-based structure of surcharges was designed to complement short-term maturities and to incentivize early repayment by members with exceptional access that were experiencing capital account crises. In 2000, level-based surcharges were introduced on purchases in the credit tranches and under extended arrangements starting at 200 percent of quota to discourage unduly high access. Considerations were given to thresholds of 300 percent, consistent with the upper limit of “normal” access, and 100 percent to capture more prolonged users of IMF resources and allow for a more graduated charge. In the end, the Executive Board adopted a threshold in between, starting at 200 percent of quota and a higher rate after 300 percent of quota. A schedule of time-based repurchase expectations was introduced at the same time, from which a member could request an extension to the maximum allowed under the repurchase obligation schedule. This resulted in a complicated system of surcharges and maturities, as illustrated in the figure and table.
In 2009, surcharges were streamlined and aligned across facilities to simplify the structure of charges and to eliminate sources of misalignment of terms across facilities.3 The new single level-based threshold was set at the previous upper step of 300 percent of quota and the surcharge rate was set at 200 basis points. At the same time, the time-based repurchase expectation policy was eliminated and replaced by applying time-based surcharges of an additional 100 basis points on credit outstanding above 300 percent of quota for more than 36 months under all General Resources Account facilities, which was deemed more effective and transparent. The reform also eliminated the Supplemental Reserve Facility.
In the February 2016 review of surcharge policies, when the Fourteenth General Review of Quotas became effective and quotas doubled on average, the threshold for the 200 basis point level–based surcharge was revised to 187.5 percent of quota. The review also extended the trigger for the time-based surcharge to 51 months in the case of credit outstanding under the Extended Fund Facility (EFF), while keeping it unchanged at 36 months under the credit tranches. The different time-based surcharge trigger for credit outstanding under the EFF aims to achieve alignment of the surcharges with the scheduled start of repurchases (54 months under extended arrangements) and the longer-term nature of the balance of payments needs specific to the EFF.4
Surcharge Structure before 2009
(Basis points)
Source: Finance Department, International Monetary Fund.Note: EFF = Extended Fund Facility; SBA = Stand-By Arrangement; SLF = Short-Term Liquidity Facility; SRF = Supplemental Reserve Facility.Repurchase Expectations Policy before 2009
For the credit tranches and the EFF, a member whose external position has not improved sufficiently to meet the expectations schedule without undue hardship or risk could request an extension.
For the SRF, extensions provided if: (1) the member is unable to meet the repurchase expectation without undue hardship; and (2) the member is taking actions to strengthen its balanceof payments.
Repurchase Expectations Policy before 2009
Repayment period (in years) | ||
---|---|---|
Facility | Expectations basis | Obligation basis1,2 |
Credit tranches | 2¼–4 | 3¼–5 |
EFF | 4½-7 | 4½–10 |
SRF | 2-2½ | 2½–3 |
SLF | n.a. | 3, 6, or 9 months |
For the credit tranches and the EFF, a member whose external position has not improved sufficiently to meet the expectations schedule without undue hardship or risk could request an extension.
For the SRF, extensions provided if: (1) the member is unable to meet the repurchase expectation without undue hardship; and (2) the member is taking actions to strengthen its balanceof payments.
Repurchase Expectations Policy before 2009
Repayment period (in years) | ||
---|---|---|
Facility | Expectations basis | Obligation basis1,2 |
Credit tranches | 2¼–4 | 3¼–5 |
EFF | 4½-7 | 4½–10 |
SRF | 2-2½ | 2½–3 |
SLF | n.a. | 3, 6, or 9 months |
For the credit tranches and the EFF, a member whose external position has not improved sufficiently to meet the expectations schedule without undue hardship or risk could request an extension.
For the SRF, extensions provided if: (1) the member is unable to meet the repurchase expectation without undue hardship; and (2) the member is taking actions to strengthen its balanceof payments.
Current Surcharge Schedule
(Basis points)
Source: Finance Department, International Monetary Fund.Note: GRA = General Resources Account.Commitment Fees
Commitment fees were originally put in place to help manage incentives and compensate the IMF for cases in which commitments were not drawn. They were first introduced in conjunction with the establishment of the Stand-By Arrangement (SBA) in 1952.
Directors emphasized that while the charge should not discourage countries with need, it would serve as a deterrent to those that had no real reason to request IMF assistance. It was decided that a commitment charge of 25 basis points a year would be levied and that, if a member draws under the SBA, this charge would be credited against the service charge on a pro rata basis. In the context of the review of IMF facilities in 2000, a two-tier commitment fee schedule was adopted under which the fee remained at 25 basis points a year for commitments up to 100 percent of quota; a lower 10 basis point fee was levied on amounts in excess of 100 percent of quota that could be purchased over the same period.1 The lower 10 basis point fee for access above 100 percent of quota was adopted mainly to encourage the use of the Contingent Credit Line (CCL) (since discontinued), and the declining schedule was motivated by the lower probability of drawing under the CCL which made refunds less likely. The argument is consistent with the prevailing view at the time that the basic rationale for charging commitment fees for contingent credits was to cover the cost to the IMF for establishing and monitoring such arrangements.
The current commitment fee schedule stems from the 2009 General Resources Account (GRA) lending toolkit reform— and the applicable thresholds that were revisited in February 2016—and reflects an expanded focus on managing liquidity risks.2 Reforms to the GRA lending toolkit included improvements in the design and availability of precautionary SBAs, including High Access Precautionary Arrangements (HAPA). The reforms also included establishment of the Flexible Credit Line and the Precautionary Credit Line (which was replaced in 2011 by the Precautionary and Liquidity Line), allowing the IMF to provide up-front contingent financing for countries that had very strong or sound fundamentals and policies but could nevertheless potentially be affected by a crisis originating elsewhere. Recognizing that large commitments have costs associated with the finite availability of IMF resources and that such costs are likely to increase at the margin as resources available for other lending decline, the schedule introduced in 2009 increased fees progressively with access. The structure is designed to generally increase incentives against unnecessarily high precautionary access and to provide income to the IMF to help offset the cost of setting aside substantial financial resources. At the same time, commitment fees would not be set so high as to discourage members from seeking precautionary arrangements.
The current commitment fee structure was adopted in February 2016, shortly after the Fourteenth General Review of Quotas became effective. Commitment fees are levied at 15 basis points a year on amounts up to 115 percent of quota; 30 basis points a year on amounts in excess of 115 percent and up to 575 percent of quota; and 60 basis points a year on amounts in excess of 575 percent of quota.3
1 Review of Fund Facilities—Proposed Decisions and Implementation Guidelines, (11/02/2000). 2 GRA Lending Toolkit and Conditionality— Reform Proposals, (03/13/09. 3 See Review of Access Limits and Surcharge Policies, (01/20/16).Committee of Eminent Persons’ Proposal for Increasing IMF Income
Conceptually, the Committee of Eminent Persons organized its proposals for ensuring the IMF’s income over the long term by linking the sources and uses of the funds.1 To this end, the committee identified three broad categories of IMF activities: credit intermediation, the provision of public goods, and bilateral services.
Credit intermediation: As a general principle, the committee believed that the margin for the basic rate of charge on IMF lending should be stable and should not be linked to credit outstanding or to the IMF’s income needs (that is, the rate of charge should not increase as lending activities decline and vice versa). The committee also took the view that lending should yield enough to cover intermediation costs and build up reserves but should not have the objective of funding the full range of IMF activities.
Provision of public goods: The committee saw a need for the IMF’s income sources to be diversified to reduce the reliance on lending. The committee considered several measures, some of which required amendments to the Articles of Agreement:
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Levies on members: Despite their use by other public international institutions and their various benefits, levies on member countries were considered inconsistent with independent surveillance and were not favored by the committee.
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Investment operations: The committee recommended that the IMF liberalize its investment policies to enhance the benefits of creating additional sources of funds for investment. In particular, it recommended a broadening of the investment mandate for the IMF’s existing reserves. This would include more duration risk, given the absence of refinancing risks on its reserves, and an expansion of the instruments in which the IMF may invest in line with the policy followed by AAA-rated multilateral development banks. To generate income over time, the committee also proposed that the IMF use a part of the quota resources subscribed by members to invest in higher-yielding market securities. These securities would be highly liquid to reflect the potential need to use these resources for lending.
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Creation of an endowment: The committee favored creating an endowment and managing it to preserve its long-term real value while generating a sustainable income flow. One of the options proposed for funding such an endowment was through a limited sale of the IMF’s gold holdings. The committee proposed to conduct any such sale in a way that would ensure the continued strength of gold in the IMF’s balance sheet and would avoid disturbance to the functioning of the gold market. The committee cautioned that spending from a gold-financed endowment should not materially weaken the IMF’s financial position, and so the endowment should have a prescribed payout ratio that preserves its real value over time.
Bilateral services: The committee recommended charging member countries for some of the bilateral services provided by the IMF, including most notably technical assistance. It recognized that some of these services incorporate a measure of public good but felt that charging users would help ensure a disciplined approach to the costs and benefits associated with the services and enhance the IMF’s transparency and accountability. The committee raised the possibility of subsidizing such fees for low-income countries. The committee also recommended that the General Resources Account no longer absorb the administrative costs of providing concessional assistance to low-income countries and should end the recent practice of waiving reimbursement of these costs.
1 The Report to the Managing Director by the Committee of Eminent Persons on the Sustainable Long-Term Financing of the Fund (January 2007). The committee was chaired by Andrew Crockett.Additional Reading
Annex I of Review of Charges and Maturities—Policies Supporting the Revolving Nature of Fund Resources, IMF Policy Paper, May 23, 2005: www.imf.org/external/np/pp/eng/2005/052305.pdf
Charges and Maturities—Proposals for Reform, IMF Policy Paper, December 12, 2008: www.imf.org/external/np/pp/eng/2008/121208a.pdf
GRA Lending Toolkit and Conditionality—Reform Proposals, IMF Policy Paper, March 13, 2009: http://www.imf.org/external/np/pp/eng/2009/031309a.pdf
IMF Articles of Agreement—Article XII, Section 6(f) (ii): www.imf.org/external/pubs/ft/aa/#a12s6
IMF’s Broader Investment Mandate Takes Effect, Press Release No. 11/52, February 18, 2011: www.imf.org/external/np/sec/pr/2011/pr1152.htm
IMF Executive Board Reviews Access Limits, Surcharge Policies, and Other Quota-Related Policies, Press Release No. 16/166, April 11, 2016: www.imf.org/external/np/sec/pr/2016/pr16166.htm
IMF Executive Board Reviews Fund’s Income Position, Sets Rate of Charge for FY 2007 and Approves Establishment of an Investment Account, Press Release No. 06/90, May 4, 2006: www.imf.org/external/np/sec/pr/2006/pr0690.htm
IMF Executive Board Reviews the Fund’s Income Position for Financial Years 2016 and 2017–2018, Press Release No. 16/219, May 13, 2016: www.imf.org/external/np/sec/pr/2016/pr16219.htm
IMF Executive Board Reviews the Fund’s Income Position for Financial Years 2017–2018, Press Release No. 17/197, May 30, 2017: www.imf.org/en/News/Articles/2017/05/30/pr17197funds-income-position-for-fy2017-and-2018
The Report to the Managing Director by the Committee of Eminent Persons on the Sustainable Long-Term Financing of the Fund, January 2007: www.imf.org/external/np/oth/2007/013107.pdf
Review of Access Limits and Surcharges Policies, IMF Policy Paper, January 20, 2016: www.imf.org/external/np/pp/eng/2016/012016.pdf
Review of Fund Facilities—Proposed Decisions and Implementation Guidelines, IMF Policy Paper, November 2, 2000: www.imf.org/external/np/pdr/fac/2000/02/
Review of the Fund’s Income Position for FY 2016 and FY 2017– 2018, IMF Policy Paper, May 13, 2016: www.imf.org/external/np/pp/eng/2016/040816.pdf
Review of the Fund’s Income Position for FY 2017 and FY 2018, IMF Policy Paper, May 30, 2017: www.imf.org/en/publications/policy-papers/issues/2017/05/30/pp040417review-of-the-funds-income-position-for-fy-2017-and-fy-2018
Rules and Regulations for the Investment Account, IMF Policy Paper, August 30, 2016: www.imf.org/external/np/pp/eng/2016/072916.pdf
SDR Interest Rate, Rate of Remuneration, Rate of Charge and Burden Sharing Adjustments, 2017: www.imf.org/cgi-shl/create_x.pl?bur
In June 2006, the Investment Account was activated with a transfer from the General Resources Account of about SDR 5.9 billion.
“The Report to the Managing Director by the Committee of Eminent Persons on the Sustainable Long-Term Financing of the Fund” is available at www.imf.org/external/np/oth/2007/013107.pdf
The General Resources Account is reimbursed annually for expenses incurred in conducting the business of the SDR Department, administering the Poverty Reduction and Growth Trust (PRGT), (unless waived), and administering Special Disbursement Account (SDA) resources in the Catastrophe Containment and Relief (CCR) Trust. Reimbursements for the CCR Trust cover only expenses not attributable to other accounts or trusts administered by the IMF.
In December 2010, the IMF concluded the gold sales after total sales of 403.3 metric tons of gold (12.97 million ounces), as authorized by the Executive Board. The gold sales realized profits of SDR 6.85 billion, of which SDR 4.4 billion was used to establish an endowment as stipulated under the new income model. SDR 2.45 billion constituted the “windfall profit.” (See Chapter 2 for additional details.)
See Rules and Regulations for the Investment Account (2016): www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Rules-and-Regulations-for-the-Investment-Account-PP4734
The Articles of Agreement provide little guidance on setting charges except to indicate that rates of charge must be uniform for all members and should normally increase the longer credit is outstanding (Article V, Section 8).
Burden-sharing adjustments are applied to the basic rate of charge (as well as the rate of remuneration) to compensate the IMF for lost income resulting from unpaid charges of members in arrears.
The IMF’s New Income and Expenditure Framework—Frequently Asked Questions: www.imf.org/external/np/exr/faq/incfaqs.htm.
IMF’s Broader Investment Mandate Takes Effect: www.imf.org/external/np/sec/pr/2011/pr1152.htm
The Rules and Regulations for the Investment Account—adopted January 2013, and subsequently amended: www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Rules-and-Regulations-for-the-Investment-Account-PP4734
Under the Articles of Agreement, the Investment Account may be funded with transfers of a part of proceeds from the sale of the IMF’s gold and of currencies held in the General Resources Account, provided that the amount of these transfers may not exceed the total amount of the IMF’s General and Special Reserves at the time of the transfer decision.
Prior to the effectiveness of the Fifth Amendment in 2011, the Articles of Agreement were the main reference for the investment framework by specifying a list of eligible instruments and issuers into which the IMF could invest its own resources (Section 6(f) (iii) of the former Article XII.) The report prepared by the Committee on Eminent Persons noted that the list was more restrictive than those practices found within other international financial institutions.
In 2011, SDR 6.85 billion from the profit of sale of IMF gold was transferred to the Investment Account. Of that, SDR 4.4 billion was used to fund the Endowment Subaccount and the remainder was placed in the Temporary Windfall Profits Subaccount (see Box 2.6).
Prior to the amendment, eligible assets in the Fixed-Income Subaccount were limited to marketable obligations of members, their official agencies, and international financial organizations. The latter includes deposits and Medium-Term Instruments with the Bank for International Settlements (BIS). The investment strategy was anchored to a customized one- to three-year government bond benchmark index comprising bonds denominated in US dollars, euros, pounds sterling, and Japanese yen, weighted to reflect the composition of the SDR basket.