Chapter

CHAPTER 8 Financial Operations and Policies in FY2003

Author(s):
International Monetary Fund
Published Date:
September 2003
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The IMF is a cooperative institution that lends to member countries experiencing balance of payments problems. The IMF extends financing to members through three channels:

Regular Operations. The IMF provides loans to countries from a revolving pool of funds consisting of members’ capital subscriptions (quotas) on the condition that the borrower undertake economic adjustment and reform policies to address its external financing difficulties (see Box 8.1). These loans are extended under a variety of policies and facilities designed to address specific balance of payments problems (see Table 8.1). Interest is charged on the loans at market-related rates, and repayment periods vary depending on the lending facility.

Table 8.1IMF Financial Facilities
Credit FacilityPurposeConditionsPhasing and Monitoring1
Credit Tranches and Extended Fund Facility4
Stand By Arrangements (1952)Medium-term assistance for countries with balance of payments difficulties 6f a short-term characterAdopt policies that provide confidence that the member’s balance of payments difficulties will be resolved within a reasonable periodQuarterly purchases (disbursements) contingent on observance of performance criteria and other conditions
Extended Fund Facility (1974) (Extended Arrangements)Longer-term assistance to support members’ structural reforms to address balance of payments difficulties of a long-term characterAdopt 3-year program, with structural agenda, with annual detailed statement of policies for the nest 12 monthsQuarterly or semiannual purchases (disbursements) contingent on observance of performance criteria and other conditions
Special Facilities

Supplemental Reserve Facility (1997)
Short-term assistance for balance of payments difficulties related to crises of market confidenceAvailable only in context of Stand-By or Extended Arrangements with associated program and with strengthened policies to address loss of market confidenceFacility available for one year; frontloaded access with two or more purchases (disbursements)
Contingent Credit Line (1999)Precautionary line of defense that would be made readily available against balance of payments difficulties arising from contagionEligibility Criteria: (1) absence of balance of payments need from the outset, (2) positive assessment of policies by the IMF, (3) constructive relations with private creditors and satisfactory progress in limiting external vulnerability, (4) satisfactory economic programResources approved for up to one year. Small amount (5-25 percent of quota) available on approval but not expected to be drawn. Presumption that one-third of resources arc released on activation, with the phasing of the remainder determined by a postactivation review
Compensatory Financing Facility’ (1963)Medium-term assistance for temporary export shortfalls or cereal import excesses.Available only when the shortfall/excess is largely beyond the control of the authorities and a member has an arrangement with upper credit tranchc conditionality, or when its balance of payments position excluding the shortfall/excess is satisfactoryTypically disbursed over a minimum of six months in accordance with the phasing provisions of the arrangement
Emergency AssistanceQuick, medium-term assistance for balance of payments difficulties related to:None, although post-conflict assistance can be segmented into two or more purchases
(1) Natural Disasters (1962)(1) Natural disasters(1) Reasonable efforts to overcome balance of payments difficulties
(2) Post-Conflict (1995)(2) The aftermath of civil unrest, political turmoil, or international armed conflict(2) Focus on institutional and administrative capacity building to pave the way toward an upper credit tranchc arrangement or PRGF
Facility for Low-Income Members
Poverty Reduction and Growth Facility (1999)Longer-term assistance for deep-seated balance of payments difficulties of structural nature; aims at sustained poverty-reducing growthAdopt 3-year PRGF-supported program. PRGF-supported programs are based on a Poverty Reduction Strategy Paper (PRSP) prepared by the country in a participatory process, and integrating macroeconomic, structural, and poverty reduction policiesSemiannual (or occasionally quarterly) disbursements contingent on observance of performance criteria and reviews
Note: Replaced the Enhanced Structural Adjustment Facility
Repurchase (Repayment) Terms3
ObligationExpectation
scheduleschedule
Access Limits1Charges2(Tears)(Tears)Installments
Annual: 100% of quota; cumulative: 300% of quotaBasic rate plus surcharge (LOO basis points on amounts above 200% of quota; 200 basis points on amounts above 300%)53¼-52¼-4Quarterly
Annual: 100% of quota; cumulative: 300% of quotaBasic rate plus surcharge (100 basis points on amounts above 200% of quota; 200 basis points on amounts above 300%)54½-104½-7Semiannual
No access limits; access under the facility only when access under associated regular arrangement would otherwise exceed either annual or cumulative limitBasic rate plus surcharge (300 basis points rising by 50 basis points a year after first disbursement and every 6 months thereafter to a maximum of 500 basis points;2½-32-2½Semiannual
No access limits, but commitments are expected to be in the range of 300-500% of quotaBasic rate plus surcharge (150 basis points rising by 50 basis points at the end of the first year and every 6 months thereafter to a maximum of 350 basis points;2-2½1-½Semiannual
45% of quota each for export and cereal components. Combined limit of 55% of quota for both componentsBasic rate3½-52½-4Quarterly
Generally limited to 25% of quota, though larger amounts can be made available in exceptional casesBasic rate3½-5Not applicableQuarterly
140% of quota; 185% of quota in exceptional circumstances0.5%5½-10Not applicableSemiannual

The IMF’s lending is financed from the capital subscribed by member countries; each country is assigned a quota that represents its financial commitment. A member provides a portion of its quota in foreign currencies acceptable to the IMF—or SDRs—and the remainder in its own currency. An IMF loan is disbursed or drawn by the borrower purchasing foreign currency assets from the IMF with its own currency. Repayment of the loan is achieved by the borrower repurchasing its currency from the IMF with foreign currency. See Box 8.1 on the IMF’s Financing Mechanism.

The basic rate of charge on funds disbursed from the General Resources Account (GRA) is set as a proportion of the weekly interest rate on SDRs and is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter. In addition to the basic rate plus surcharge, an up-front commitment fee (25 basis points on committed amounts up to 100 percent of quota, 10 basis points thereafter) is charged on the amount that may be drawn during each (annual) period under a Stand-By or Extended Arrangement. The fee is, however, refunded on a proportionate basis as subsequent drawings are made under the arrangement. A one-time service charge of 0.5 percent is levied on each drawing of IMF resources in the General Resources Account, other than reserve tranchc drawings, at the time of the transaction.

For purchases made after November 28, 2000, members are expected to make repurchases (repayments) in accordance with the schedule of expectations; the IMF may upon request by a member amend the schedule of repurchase expectations if the Executive Board agrees that the member’s external position has not improved sufficiently for repurchases to be made.

Credit tranches refer to the size of purchases (disbursements) in terms of proportions of the member’s quota in the IMF; for example, disbursements up to 25 percent of a member’s quota are disbursements under the first credit tranche and require members to demonstrate reasonable efforts to overcome their balance of payments problems. Requests for disbursements above 25 percent are referred to as upper credit tranche drawings; they are made in installments as the borrower meets certain established performance targets. Such disbursements are normally associated with a Stand-By or Extended Arrangement. Access to IMF resources outside of an arrangement is rare and expected to remain so.

Surcharges are applied to the combined amount of outstanding credit resulting from purchases made after November 2000 in the credit tranches and under the EFF.

The IMF’s lending is financed from the capital subscribed by member countries; each country is assigned a quota that represents its financial commitment. A member provides a portion of its quota in foreign currencies acceptable to the IMF—or SDRs—and the remainder in its own currency. An IMF loan is disbursed or drawn by the borrower purchasing foreign currency assets from the IMF with its own currency. Repayment of the loan is achieved by the borrower repurchasing its currency from the IMF with foreign currency. See Box 8.1 on the IMF’s Financing Mechanism.

The basic rate of charge on funds disbursed from the General Resources Account (GRA) is set as a proportion of the weekly interest rate on SDRs and is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter. In addition to the basic rate plus surcharge, an up-front commitment fee (25 basis points on committed amounts up to 100 percent of quota, 10 basis points thereafter) is charged on the amount that may be drawn during each (annual) period under a Stand-By or Extended Arrangement. The fee is, however, refunded on a proportionate basis as subsequent drawings are made under the arrangement. A one-time service charge of 0.5 percent is levied on each drawing of IMF resources in the General Resources Account, other than reserve tranchc drawings, at the time of the transaction.

For purchases made after November 28, 2000, members are expected to make repurchases (repayments) in accordance with the schedule of expectations; the IMF may upon request by a member amend the schedule of repurchase expectations if the Executive Board agrees that the member’s external position has not improved sufficiently for repurchases to be made.

Credit tranches refer to the size of purchases (disbursements) in terms of proportions of the member’s quota in the IMF; for example, disbursements up to 25 percent of a member’s quota are disbursements under the first credit tranche and require members to demonstrate reasonable efforts to overcome their balance of payments problems. Requests for disbursements above 25 percent are referred to as upper credit tranche drawings; they are made in installments as the borrower meets certain established performance targets. Such disbursements are normally associated with a Stand-By or Extended Arrangement. Access to IMF resources outside of an arrangement is rare and expected to remain so.

Surcharges are applied to the combined amount of outstanding credit resulting from purchases made after November 2000 in the credit tranches and under the EFF.

Concessional Financing. Financing. The IMF lends at a very low interest rate to poor countries to help them restructure their economies to promote growth and reduce poverty. The IMF also provides grants to eligible poor countries to help them achieve sustainable external debt positions. The principal for concessional loans is funded by bilateral lenders to the IMF at market-based rates, with the IMF acting as a trustee. Resources to subsidize the rate charged to borrowers, and grants for debt relief, are financed through contributions by member countries and income from the IMF’s own resources.

Special Drawing Rights. The IMF can also create international reserve assets by allocating special drawing rights (SDRs) to members, which can be used to obtain foreign exchange from other members and to make payments to the IMF. The SDR also serves as the

Box 8.1The IMF’s Financing Mechanism

The IMF’s regular lending is financed from the capital subscribed by member countries. Each country is assigned a quota that determines its maximum financial commitment to the IMF. A portion of the quota is provided in the form of reserve assets (foreign currencies acceptable to the IMF or SDRs) and the remainder in its own currency. The IMF extends financing by providing reserve assets to the borrower from the reserve asset subscriptions of members or by calling on countries that are considered financially strong to exchange their currency subscriptions for reserve assets (see Box 8.3).

A loan is disbursed or drawn by the borrower “purchasing” the reserve assets from the IMF with its own currency. Repayment of the loan is achieved by the borrower “repurchasing” its currency from the IMF with reserve assets. The IMF levies a basic rate of interest (charges) on loans based on the SDR interest rate (see Box 8.6) and imposes surcharges depending on the amount and maturity of the loan and the level of credit outstanding.

A country that provides reserve assets to the IMF as part of its quota subscription or through the use of its currency receives a liquid claim on the IMF (reserve position) that can be encashed on demand to obtain reserve assets to meet a balance of payments financing need. These claims earn interest (remuneration) based on the SDR interest rate and are considered by members as part of their international reserve assets. As IMF loans are repaid (repurchased) by the borrower with reserve assets, these funds are transferred to the creditor countries in exchange for their currencies and the creditor’s claim on the IMF is extinguished.

The “purchase/repurchase” approach to IMF lending affects the composition of the Fund’s resources but not the overall size. An increase in loans outstanding will reduce the IMF’s holdings of reserve assets and the currencies of members that are financially strong and increase the IMF’s holdings of the currencies of countries that are borrowing from the Fund. The amounts of the IMF’s holdings of reserve assets and the currencies of financially strong countries determine the Fund’s lending capacity (liquidity) (see Box 8.4).

Detailed information on various aspects of the IMF’s financial structure and regular updates of its financial activities are available on the IMF’s website athttp://www.imf.org/ external/fin.htm.

IMF’s unit of account, and its value is based on a basket of four major international currencies. The SDR interest rate is based on market interest rates for the currencies in the valuation basket and serves as the basis for other IMF interest rates.

Among the key financial developments in FY2003 were the following

  • The IMF completed a review of members’ capital subscriptions (quotas) and concluded that no general increase in its capital base was necessary for the time being.
  • Outstanding IMF credit to members increased as capital flows to emerging market countries continued to decline and several members with very large external financing needs faced reduced access to international capital markets.
  • The IMF continued its efforts to assist its poorest members to reduce their debt burdens and to focus the Fund’s concessional lending activities more explicitly on poverty reduction.

Regular Financing Activities

The IMF’s regular lending activity is conducted through the General Resources Account (GRA), which holds the quota subscriptions of members. The bulk of the financing is provided under Stand-By Arrangements, which address members’ short-term, cyclical balance of payments difficulties, and under the Extended Fund Facility (EFF), which focuses on external payments difficulties arising from longer-term structural problems. Loans under Stand-By and Extended Arrangements can be supplemented with short-term resources from the Supplemental Reserve Facility (SRF) to assist members experiencing a sudden and disruptive loss of capital market access. All loans incur interest charges and can be subject to surcharges based on the type and duration of the loan and the amount of IMF credit outstanding. Repayment periods also vary by facility (see http://www.imf.org/external/np/tre/lend/terms.htm).

Lending

New IMF commitments in FY2003 were dominated by a large Stand-By Arrangement for Brazil. In addition, new large arrangements for Colombia and Argentina, as well as augmentations of the existing arrangement for Uruguay, kept the level of total commitments in FY2003 relatively high, with new commitments amounting to SDR 29.4 billion compared with SDR 39.4 billion in FY2002.1

The IMF approved ten new Stand-By Arrangements involving commitments totaling SDR 27.1 billion, and the commitment to Uruguay under the Stand-By Arrangement already in place was augmented by SDR 1.5 billion. In addition, two EFF arrangements were approved in FY2003: SDR 0.7 billion for Serbia and Montenegro and SDR 0.1 billion for Sri Lanka (see Table 8.2). Burundi, Grenada, and Malawi made small purchases under the IMF’s policy of emergency assistance. No commitments were made under the IMF’s Compensatory Financing Facility (CFF) or Contingent Credit Line (CCL) during the year.

Table 8.2IMF Financial Assistance Approved in FY2003
Type ofAmount Approved1
MemberArrangementDate of Approval(In millions of SDKs)
Albania3-year PRGFJune 21, 200228.0
Argentina7-month Stand-ByJanuary 24, 20032,174.5
Bolivia1-year Stand-ByApril 2, 200385.8
Bosnia and Herzegovina15-month Stand-ByAugust 2, 200267.6
Brazil16-month Stand-BySeptember 6, 200222,821.1
BurundiEmergency AssistanceOctober 9, 20029.6
(Post-Conflict)
Colombia2-year Stand-ByJanuary 15, 20031,548.0
Congo, Democratic Republic of3-ycar PRGFJune 12,2002580.0
Croatia, Republic of14-month Stand-ByFebruary 3, 2003105.9
Dominica1-year Stand-ByAugust 28, 20023.3
Ecuador13-month Stand-ByMarch 21, 2003151.0
Gambia, The3-year PRGFJuly 18, 200220.2
GrenadaEmergency AssistanceJanuary 27, 20032.9
(Natural Disaster)
Guyana3-ycar PRGFSeptember 20, 200254.6
Jordan2-year Stand-ByJuly 3, 200285.3
Macedonia, Former Yugoslav Republic of14-month Stand-ByApril 30, 200320.0
MalawiEmergency AssistanceSeptember 3, 200217.4
(Natural Disaster)
Nicaragua3-ycar PRGFDecember 13,200297.5
Rwanda3-year PRGFAugust 12,20024.0
Senegal3-ycar PRGFApril 28, 200324.3
Serbia and Montenegro3-ycar EPFMay 14, 2002650.0
Sri Lanka3-year EFFApril 18, 2003144.4
Sri Lanka3 year PRGFApril 18, 2003269.0
Tajikistan3-ycar PRGFDecember 11,200265.0
Uganda3-year PRGFSeptember 13,200213.5
Uruguay 2Augmentations of Stand-ByJune 25 and August 8, 20021,534.2
ZambiaAugmentation of PRGFMay 29, 200224.5

For augmentations, only the amount of the increase is shown.

Augmentation amount is net of cancellation of remaining balance (SDR 257.4 million) under the SRF.

For augmentations, only the amount of the increase is shown.

Augmentation amount is net of cancellation of remaining balance (SDR 257.4 million) under the SRF.

Box 8.2Expectations Versus Obligations

The IMF’s Articles of Agreement (Article V, Section 7 (b)) specify that members are expected to make “repurchases” (repayments of loans), in connection with “purchases” (loan disbursements) made previously, as their balance of payments and reserve position improves. To encourage early repayment, the Review of Fund Facilities carried out in FY2001 introduced time-based repurchase expectations on purchases made after November 28, 2000, in the credit tranches, under the Extended Fund Facility, and under the Compensatory Financing Facility. Purchases under the Supplemental Reserve Facility have been subject to repurchase expectations since that facility’s inception; in March 2003, the maturities of SRF expectations and obligations were extended by one year and six months, respectively. The expectations schedule entails earlier repayments than the original obligations schedule, as shown in the table.

At the request of the member, the IMF Executive Board can approve repayment on the obligations date if the country’s external position is not strong enough to meet repurchase expectations without undue hardship or risk.

If the member’s request is granted, all extended repurchase expectations in the credit tranches and under the CFF become due on the date of the corresponding repurchase obligations. That is, due dates for each individual repayment are extended by one year. Under the SRF, repayment periods may be extended for six months. A new schedule for repayments under the EFF would be decided on a case-by-case basis, taking into account the overall profile of repayments.

Obligations ScheduleExpectations Schedule
Credit Facility(Tears)(Tears)
Stand-By Arrangements3¼-52¼-4
Compensatory Financing Facility’ (CFF)3¼-52¼-4
Extended Fund Facility (KFF)4½-104½-7
Supplemental Reserve Facility (SRFJ2½-32-2½

The arrangement for Brazil, the largest in the IMF’s history, was approved in September 2002. This arrangement supports the government’s economic program through December 2003. The total commitment of SDR 22.8 billion included SDR 7.6 billion under the SRF. In January 2003, the IMF approved a seven-month, SDR 2.2 billion Stand-By Arrangement for Argentina, which replaced the previous arrangement approved in March 2000. Another large arrangement was also approved in January 2003, a two-year, SDR 1.5 billion Stand-By Arrangement for Colombia.

Of the current 15 Stand-By Arrangements, three are being treated as precautionary, with borrowers having indicated that they do not intend to draw on the funds committed to them by the IMF. Use of precautionary Stand-By Arrangements, as well as other factors such as uncompleted reviews and interrupted programs, resulted in drawings being made under only 18 of the 29 Stand- By and Extended Arrangements in place during the year (see Appendix II, Table II.3). At the end of April 2003, undrawn balances under the 18 Stand-By and Extended Arrangements still in effect amounted to SDR 23.6 billion, about half of the total amount committed under those arrangements (SDR 47.2 billion).

During the financial year, the IMF disbursed SDR 21.8 billion in loans from its GRA. The amount of new credit exceeded the repayment of loans extended in earlier years. Total repayments were SDR 7.8 billion, including advance repayments by Croatia (SDR 0.1 billion, which eliminated its outstanding IMF credit), Thailand (SDR 0.1 billion), and Estonia and Lithuania.2 Consequently, IMF credit outstanding at the end of the financial year amounted to a record high SDR 66.0 billion, SDR 13.9 billion higher than a year earlier.

In February 2003, the repurchase (repayment) expectations introduced at the time of a review of IMF facilities completed in FY2001 (see Box 8.2) began to take effect. In FY2003, repurchase expectations arose for four members: Argentina, Bosnia and Herzegovina, Pakistan, and Turkey. In February-March 2003, Bosnia and Herzegovina, Pakistan, and Turkey repurchased SDR 0.1 billion on the expectations schedule. For Argentina, repurchase expectations arising in FY2003 (SDR 0.3 billion) and in FY2004 (SDR 0.4 billion) have been extended by one year in the context of the program approved in January 2003. Repurchase expectations arising in FY2004 have also been extended for Ecuador, Sri Lanka, and Uruguay. As of April 30, 2003, IMF financing amounting to SDR 32.9 billion was subject to early repurchase expectations under the policies adopted in November 2000; in addition, SDR 28.7 billion was subject to the new surcharges on high levels of IMF credit also introduced at that time.

Resources and Liquidity

The IMF’s lending is financed primarily from the fully paid-in capital (quotas) subscribed by member countries in the form of reserve assets and currencies.3 General reviews of IMF quotas are conducted at five-year intervals, during which adjustments may be proposed in the overall size and distribution of quotas to reflect developments in the world economy. A member’s quota can also be adjusted separately from a general review to take account of major developments. The IMF can also borrow to supplement its quota resources.

Only a portion of the paid-in capital is readily available to finance new lending, however, because of earlier commitments and IMF policies that limit use of the currencies to those of members that are financially strong (see Box 8.3). The base of usable resources increased during the financial year because four additional members (India, Malaysia, Mauritius, and Mexico) were considered sufficiently strong for their currencies to be included in the IMF’s financial transactions plan.

The IMF’s liquidity position remained adequate throughout the year to meet the needs of its members. The one-year forward commitment capacity (FCC), a new measure of liquidity introduced during FY2003, amounted to SDR 61 billion on April 30, 2003, compared with SDR 59 billion a year earlier (see Box 8.4 and Figure 8.1). During the first half of the financial year, the FCC weakened significantly following the approval of the large arrangement for Brazil, but recovered thereafter following the expiry and cancellation of two arrangements with substantial undrawn balances (Colombia and Argentina) and an increase in repayments projected over the 12-month forecast period.

Figure 8.1IMF One-Year Forward Commitment Capacity (FCC), 1990-April 2003

(In billions of SDRs)

Source: IMF Finance Department

Note: The IMF started publishing data for the FCC in December 2002. For earlier periods the chart shows estimates of the FCC. The FCC increases when quota payments are made. It also increases when purchases are made and decreases when the IMF makes new financial commitments. The references to member countries and the Asian crises note selected large financial commitments by the IMF to members and groups of members.

Box 8.4FCC—A New Measure of Lending Capacity

In December 2002, the IMF introduced a new measure of its liquidity called the forward commitment capacity (FCC), which is designed to be a clearer measure of its capacity to make new loans. The one-year FCC, which indicates the amount of quota-based resources available for new lending over the next 12 months, has replaced the traditional liquidity ratio as the primary measure of the IMF’s liquidity.

The one-year FCC is defined as the IMF’s stock of usable resources less undrawn balances under existing arrangements, plus projected repayments during the coming 12 months, less a prudential balance intended to safeguard the liquidity of creditors’ claims and to take account of any potential erosion of the IMF’s resource base. The IMF’s usable resources consist of its holdings of the currencies of financially strong members included in the financial transactions plan (see Box 8.3) and its holdings of SDRs. The prudential balance is calculated as 20 percent of the quotas of members included in the financial transactions plan and of any amounts activated under borrowing arrangements. Information on the one-year FCC is published weekly (Financial Activities: Week-at-a-Glance) and monthly (Financial Resources and Liquidity) on the IMF’s website at http://www.imf.org/external/fin.htm.

Quota Developments

A number of quota-related developments took place during the financial year.

Directors continued their exchange of views on the implications for the size of the IMF of globalization, the integration of financial markets, and the IMF’s efforts to strengthen its capacity to prevent and resolve financial crises (see Box 8.5). There was broad recognition that greater reliance on private market financing by many countries had contributed to increased vulnerability to capital account shocks, and that such shocks could be quite large in absolute amounts and relative to the size of an economy. There was also recognition that global economic and financial integration might entail the risk of financial contagion. Directors generally agreed that the IMF’s crisis prevention efforts will contribute to a reduction in the frequency and severity of financial crises, through improved surveillance that promotes sound economic policies and strengthens the functioning of domestic international capital markets. At the same time, Directors accepted that future crises would occur, and that the IMF would need to continue to play a central role in crisis resolution and therefore should have adequate resources at hand. However, views differed on the extent to which the IMF’s response to these developments would or should result in large financing that could require additional IMF resources.

The Board also held further discussions on various issues involved in revising and updating the quota formulas to reflect changes in the world economy and measure countries’ relative positions more adequately. Progress was made in discussing the development of alternative formulas that, based on an updating of the traditional variables, are intended to be simpler and more transparent than the current formulas. The discussions clarified that the selection of weights for the variables and the distribution of quotas are inextricably linked, and that decisions on possible changes in quota shares will need to take account of other quota-related issues, including the financial size of the IMF and access to Fund resources by borrowers. This approach would help address concerns about overloading the quota formulas with too many objectives, including the determination of members’ contributions to the IMF, access to Fund resources, and relative voting power.

Box 8.3Financial Transactions Plan

The IMF extends loans by providing reserve assets from its own holdings and by calling on financially strong countries to exchange the Fund’s holdings of their currencies for reserve assets. The members that participate in the financing of IMF transactions in foreign exchange are selected by the Executive Board based on an assessment of each country’s financial capacity. These assessments are ultimately a matter of judgment and take into account recent and prospective developments in the balance of payments and reserves, trends in exchange rates, and the size and duration of external debt obligations.

The amounts transferred and received by these members are managed to ensure that their creditor positions in the IMF remain broadly the same in relation to their quota, the key measure of each member’s rights and obligations in the IMF. This is achieved in the framework of an indicative quarterly plan for financial transactions. The IMF publishes on its website the outcome of the financial transactions plan for the quarter ending three months prior to publication. As of April 30, 2003, the 44 members listed below were participating in financing IMF transactions.

AustraliaFinlandKuwaitQatar
AustriaFranceLuxembourgSaudi Arabia
BelgiumGermanyMalaysiaSingapore
BotswanaGreeceMauritiusSlovenia
Brunei DarussalamHungaryMexicoSpain
CanadaIndiaNetherlandsSweden
ChileIrelandNew ZealandSwitzerland
ChinaIsraelNorwayTrinidad and Tobago
CyprusItalyOmanUnited Arab Emirates
Czech RepublicJapanPolandUnited Kingdom
DenmarkKoreaPortugalUnited States

Box 8.5Twelfth and Thirteenth General Reviews of Quotas

The IMF normally conducts general reviews of members quotas every five years to assess the adequacy of its resource base and to provide for adjustments of the quotas of individual members to reflect changes in their relative positions in the world economy. The Twelfth General Review of Quotas was completed on January 30, 2003, without proposing an increase in IMF quotas, which leaves the maximum size of the quotas unchanged at SDR 21 3.7 billion.

During the period of the Thirteenth General Review, which commenced with the completion of (he Twelfth Review, the IMF’s Executive Board will closely monitor and assess the adequacy of IMF resources, consider measures to achieve a distribution of quotas that reflects developments in the world economy, and consider measures to strengthen the governance of the IMF. The Board intends to provide a status report on its discussions regarding these issues to the International Monetary and Financial Committee (IMFC) by the 2003 Annual Meetings and establish, as the discussions may warrant, a Committee of the Whole to make specific recommendations.

As of April 30, 2003, 177 member countries accounting for more than 99 percent of total quotas proposed in 1998 under the Eleventh General Review of Quotas had consented to, and paid for, their then-proposed quota increases. Two member countries eligible to consent had not done so by the end of the financial year, and four countries were ineligible to consent to their proposed increases because they were in arrears to the IMF. On January 23, 2003, the Board approved an extension of the period for consent to, and payment of, quota increases under the Eleventh Review until July 31, 2003. At the close of the financial year, total subscribed quotas amounted to about SDR 212.7 billion.

Borrowing Arrangements

The IMF can borrow to supplement its quota-based resources. It maintains two standing borrowing arrangements with official lenders and can borrow from private markets, although it has not done so to date. Borrowing has played an important role in providing temporary supplemental resources to the IMF at critical junctures in the past. At April 30, 2003, there was no outstanding borrowing. The last outstanding borrowing was repaid in March 1999, upon receipt by the IMF of the bulk of quota payments under the Eleventh General Review.

General Arrangements to Borrow (GAB)

The GAB, which have been in place since 1962, are a set of credit arrangements under which 11 participants (industrial countries or their central banks) have agreed to provide resources to the IMF to forestall or cope with an impairment of the international monetary system. The potential amount of credit available to the IMF under the GAB totals SDR 17 billion, with an additional SDR 1.5 billion available under an associated agreement with Saudi Arabia (see Table 8.3). The GAB have been activated ten times, most recently in July 1998 for an amount of SDR 6.3 billion (SDR 1.4 billion of which was drawn) in connection with the financing of an Extended Arrangement for Russia. The activation was canceled and the borrowing was repaid in March 1999. The GAB decision has been renewed nine times, most recently in November 2002, when the IMF Executive Board approved its renewal for a further period of five years from December 2003.

Table 8.3GAB Participants and Credit Amount(in millions of SDRs)
ParticipantAmount
Belgium595.0
Canada892.5
Deutsche Bundesbank2,380.0
France1,700.0
Italy1,105.0
Japan2,125.0
Netherlands850.0
Sveriges Riksbank382.5
Swiss National Bank1,020.0
United Kingdom1,700.0
United States4,250.0
Total17,000.0
Credit arrangement with Saudi Arabia
in association with the GAB1,500.0

New Arrangements to Borrow (NAB)

The NAB, which took effect in November 1998, are a set of credit arrangements under which 26 participants (member countries and official institutions) have agreed to provide resources to the IMF to forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system. The potential amount of credit available to the IMF under the NAB totals SDR 34 billion (see Table 8.4).

Table 8.4NAB Participants and Credit Amounts(In millions of SDRs)
ParticipantAmount
Australia801
Austria408
Banco Central dc Chile340
Belgium957
Canada1,381
Denmark367
Deutsche Bundesbank3,519
Finland340
France2,549
Hong Kong Monetary Authority340
Italy1,753
Japan3,519
Korea340
Kuwait341
Luxembourg340
Malaysia340
Netherlands1,302
Norway379
Saudi Arabia1,761
Singapore340
Spain665
Sverigcs Riksbank850
Swiss National Bank1,540
Thailand340
United Kingdom2,549
United States6,640
Total134,000

Total may not equal sum of components owing to rounding

Total may not equal sum of components owing to rounding

This is also the total amount of credit potentially available under the GAB and NAB combined. The NAB is the first and principal recourse in the event of a need to provide supplementary resources to the IMF, except that: (1) in the event of a request for a drawing on the IMF by a participating member, or a member whose institution is a participant, in both the GAB and NAB (all GAB participants are also participants in the NAB), a proposal for calls may be made under either of the facilities; and (2) in the event that a proposal for calls under the NAB is not accepted, a proposal for calls may be made under the GAB. The NAB has been activated once—to finance a Stand-By Arrangement for Brazil in December 1998, when the IMF called on funding of SDR 9.1 billion (SDR 2.9 billion of which was drawn). The activation was canceled and borrowing was repaid in March 1999. In November 2002, the NAB decision was renewed for a further period of five years from November 2003. The Banco Central de Chile (as an official institution of Chile) became the twenty-sixth NAB participant, effective February 2003.

Concessional Financing

The IMF provides concessional assistance to help its poorest members boost economic growth and reduce poverty under the Poverty Reduction and Growth Facility (PRGF) and the Initiative for Heavily Indebted Poor Countries (HIPC). As of April 30, 2003, a total of 36 member countries received PRGF financing, and 27 countries had received financial commitments under the HIPC Initiative by the end of the financial year.

Poverty Reduction and Growth Facility

In 1999, the objectives of the IMF’s concessional lending were modified to include an explicit focus on poverty reduction in the context of a growth-oriented economic strategy. The IMF, along with the World Bank, supports strategies elaborated by the borrowing country in a Poverty Reduction Strategy Paper (PRSP) prepared with the participation of civil society and other development partners. Reflecting the new objectives and procedures, the IMF established the PRGF, which replaced the Enhanced Structural Adjustment Facility (ESAF), to provide financing under arrangements developed in the context of PRSPs.

During FY2003, the Executive Board approved 10 new PRGF arrangements (for Albania, the Democratic Republic of the Congo, The Gambia, Guyana, Nicaragua, Rwanda, Senegal, Sri Lanka, Tajikistan, and Uganda) with commitments totaling SDR 1.2 billion; in addition, the amount committed under the existing loan to Zambia was increased by SDR 24 million (see Appendix II, Table II.4). Total PRGF disbursements amounted to SDR 1.2 billion during FY2003. As of April 30, 2003, 36 member countries’ reform programs were supported by PRGF arrangements, with commitments totaling SDR 4.5 billion and undrawn balances of SDR 2.5 billion.

Financing for the PRGF is provided through trust funds administered by the IMF—the PRGF Trust and PRGF-HIPC Trust—that are separate from the IMF’s quota-based resources and that are financed from contributions from a broad spectrum of the IMF’s membership and the IMF itself.4 The PRGF Trust borrows resources at market or below-market interest rates from loan providers—central banks, governments, and government institutions—and lends these funds to PRGF-eligible member countries at an annual interest rate of 0.5 percent. The PRGF Trust receives contributions to subsidize the rate of interest on PRGF loans and maintains a Reserve Account as security for loans to the Trust. The PRGF - HIPC Trust was established to subsidize PRGF operations during 2002- 2005 and also provides resources for HIPC Initiative assistance.

As of April 30, 2003, the total loan resources that had been made available for PRGF operations amounted to SDR 15.8 billion, of which SDR 12.6 billion had been committed and SDR 10.1 billion had been disbursed. It is estimated that the remaining uncommitted PRGF loan resources of SDR 3.2 billion will cover annual commitments of about SDR 1.1 billion under new PRGF arrangements through 2005, in line with the average annual historical commitments. The continuation of concessional lending after 2005 will need to be reassessed closer to that time, but a substantial proportion of such lending is expected to be provided by the IMF’s own resources accumulating in the Reserve Account of the PRGF Trust. These resources will become available as lenders to the PRGF Trust are repaid and the need for security provided by the Reserve Account declines.

Enhanced HIPC Initiative

Originally launched by the IMF and World Bank in 1996, the HIPC Initiative was considerably strengthened in 1999 to provide deeper, faster, and broader debt relief for the world’s heavily indebted poor countries. By April 30, 2003, the IMF and the World Bank had brought 26 HIPC-eligible members to their decision points under the enhanced Initiative and one (Côte d’Ivoire) under the original Initiative. Of these countries, eight had reached their completion points under the enhanced Initiative. (See also Chapter 5).

The IMF provides HIPC Initiative assistance in the form of grants or interest-free loans that are used to service part of member countries’ debt to the IMF. As of April 30, 2003, the IMF had committed SDR 1.6 billion in grants to the following eligible countries: Benin, Bolivia, Burkina Faso, Cameroon, Chad, Côte d’Ivoire, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Tanzania, Uganda, and Zambia. Three members (Benin, Mali, and Mauritania) reached their completion points under the enhanced HIPC Initiative during FY2003. Under the enhanced Initiative, a portion of the assistance committed at the decision point can be disbursed prior to the country reaching its completion point. Such interim assistance from the IMF may amount to up to 20 percent annually and a maximum of 60 percent of the total committed amount of HIPC assistance. In exceptional circumstances, the annual and maximum amounts of interim assistance can be raised to 25 percent and 75 percent, respectively. As of April 30, 2003, total disbursements of HIPC Initiative assistance by the IMF amounted to SDR 1.0 billion (Table 8.5).

Table 8.5Commitments and Disbursements of HIPC Initiative Assistance(In millions of SDKs, as of April 30, 2003)
AmountAmount
MemberCommittedDisbursed1MemberCommittedDisbursed1
Benin18.420.1Malawi23.12.3
Bolivia262.465.5Mali245.549.3
Burkina Faso244.034.4Mauritania34.838.4
Cameroon28.52.5Mozambique2106.9108.0
Chad14.34.3Nicaragua63.01.9
Cote divoire316.7Niger21.63.3
Ethiopia26.98.2Rwanda33.810.0
Gambia, The1.80.1São Tomé and
Ghana90.19.9Príncipe4
Guinea24.25.2Senegal33.88.2
Guinea-Bissau9.20.5Sierra Leone98,547.3
Guyana256.235.8Tanzania89.096.4
Honduras22.74.5Uganda2119.6121.7
Madagascar16.65,0Zambia468.8351.6
Twenty-seven members, of which 26 are under the

enhanced HIPC framework
1,570.31,034.3

Amounts may include interest on assistance committed but not disbursed during the interim period.

Under the original and enhanced HIPC framework.

Côte d’Ivoire reached its decision point under the original HIPC Initiative.

At the time of the decision point, there was no debt to the IMF eligible for HIPC Initiative assistance.

Amounts may include interest on assistance committed but not disbursed during the interim period.

Under the original and enhanced HIPC framework.

Côte d’Ivoire reached its decision point under the original HIPC Initiative.

At the time of the decision point, there was no debt to the IMF eligible for HIPC Initiative assistance.

Financing of the HIPC Initiative and PRGF Subsidies

The financing of the IMF’s participation in the enhanced HIPC Initiative and the subsidy requirements of the PRGF are administered through the PRGF Trust and the PRGF - HIPC Trust. The total resources required for these purposes are estimated at SDR 72 billion, on a cash basis, of which HIPC Initiative assistance is estimated at about SDR 2.2 billion and the cost of subsidies for PRGF lending is estimated at SDR 5.0 billion.5 These resource requirements are expected to be fully met by bilateral contributions from member countries and by the IMF itself.

Bilateral pledges for the PRGF Trust and the PRGFHIPC Trust from member countries have come from a wide cross-section of the IMF’s membership, demonstrating the broad support for the HIPC and PRGF initiatives. Altogether, 94 countries have pledged support: 27 advanced countries, 58 developing countries, and 9 countries in transition.6

The IMF’s own contributions amount to SDR 2.6 billion, of which the contributions to the PRGF-HIPC Trust are SDR 2.2 billion. The bulk of the IMF’s contribution—SDR 1.8 billion—comes from investment income on the net proceeds generated from off-market transactions in gold of 12.9 million troy ounces. The off-market transactions were completed in April 2000, generating net proceeds of SDR 2.2 billion (see Annual Report 2000, page 71). These funds have been placed in the Special Disbursement Account (SDA) and invested for the benefit of the HIPC Initiative.

The IMF also contributes about SDR 0.4 billion by making a one-time transfer from the SDA (which took place in early 1994) and by forgoing compensation from the PRGF Reserve Account for the administrative expenses related to PRGF operations for the financial years 1998 through 2004, with the equivalent amount being instead transferred to the PRGF-HIPC Trust. In addition, part of the interest surcharges on financing provided in 1998 and 1999 under the Supplemental Reserve Facility related to activation of the New Arrangements to Borrow were also transferred to the PRGF-HIPC Trust. The contributions by the IMF’s membership and the IMF itself are supplemented by investment income earned on such contributions.

Investment of PRGF, PRGF-HIPC, and SDA Resources

In March 2000, the IMF initiated a new investment strategy for the resources supporting the PRGF subsidies and HIPC Initiative with the objective of supplementing returns over time while maintaining prudent limits on risk. Supplemental income will be used to help meet the financial requirements of the PRGF subsidies and HIPC Initiative.

Under the new strategy, the maturity of investments was lengthened by shifting the bulk of assets previously invested in short-term, SDR-denominated deposits with the Bank for International Settlements (BIS) into portfolios of bonds and other medium-term instruments structured to reflect the currency composition of the SDR basket. Sufficient short-term deposits were to be held to meet liquidity requirements and to conform with the administrative arrangements agreed with certain contributors.

The performance benchmark for the portfolio of bonds and medium-term instruments was initially a customized index comprising 1- to 3-year government bond indices for Germany, Japan, the United Kingdom, and the United States, with each market weighted to reflect the currency composition of the SDR basket. Regular portfolio rebalancing ensures that the currency composition of the investment portfolio matches as closely as practicable the currency composition of the SDR basket. Following a shortening of the average maturity of the portfolio in mid-January 2002, the benchmark was changed to a customized index based on three-month deposit rates and 0- to 1-year government bonds. The investment strategy is implemented on the IMF’s behalf by the BIS, the World Bank, and three private investment managers.

In the first three years since its inception, the new investment strategy added about 135 basis points (on an annualized basis, net of fees) to returns over the previous approach of investing in SDR-denominated deposits—generating supplemental income of about SDR 276 million in support of PRGF and PRGFHIPC operations.

Post-Conflict Emergency Assistance

The IMF provides emergency assistance to countries that are emerging from conflict through loans subject to the IMF’s basic rate of charge. An administered account was established on May 4, 2001, to accept contributions by bilateral donors that would enable the IMF to provide such assistance by subsidizing the rate of charge to a level of 0.5 percent a year for countries that were PRGF-eligible members.7 As of April 30, 2003, total pledged grant contributions from seven countries amounted to SDR 11.5 million, including SDR 6.8 million that had been paid in (Table 8.6). Thus far, disbursements have totaled SDR 1.4 million to subsidize the rate of charge on post-conflict emergency assistance for seven countries (Albania, Burundi, the Republic of Congo, Guinea-Bissau, Rwanda, Sierra Leone, and Tajikistan).

Table 8.6Contributes to Subsidize Post-Confilict Emergency Assistance(In millions of SDRs, as of April 30,2003)
ContributionContributionSubsidy
ContributorPledgedReceivedDisbursed
Belgium1.00.6
Canada1.60.4
Netherlands1.51.5
Norway3.01.0
Sweden0.80.80.8
Switzerland0.80.8
United Kingdom2.81.70.6
Total11.66.81.4

Income, Charges, Remuneration, and Burden Sharing

The IMF, like other financial institutions, earns income from interest charges and fees levied on its loans and uses the income to meet funding costs and pay for administrative expenses. The IMF’s reliance on capital subscriptions and internally generated resources provides some flexibility in setting the basic rate of charge. However, the IMF also needs to ensure that it provides creditors with a competitive rate of interest on their IMF claims. As an additional safeguard, the IMF’s Articles of Agreement set limits on the interest rate paid to creditors in relation to the SDR interest rate.

The basic rate of charge on regular lending is determined at the beginning of the financial year as a proportion of the SDR interest rate to achieve an agreed-upon net income target for the year. This rate is set to cover the cost of funds and administrative expenses as well as add to the IMF’s reserves. The specific proportion is based on projections for income and expenses for the year and can be adjusted at midyear in light of actual net income and if income for the year as a whole is expected to deviate significantly from the projections. At the end of the year, any income in excess of the target is refunded to the members that paid interest charges during the year and shortfalls are made up in the following year.

The IMF imposes level-based surcharges on credit extended after November 28, 2000, to discourage unduly large use of credit in the credit tranches and under Extended Fund Facility Arrangements. The IMF also imposes surcharges on shorter-term loans under the SRF and CCL that vary according to the length of time credit is outstanding. Income derived from surcharges is placed in the IMF’s reserves and is not taken into account in determining the income target for the year.

The IMF also receives income from borrowers in the form of service charges, commitment fees, and special charges. A one-time service charge of 0.5 percent is levied on each loan disbursement from the General Resources Account. A refundable commitment fee is charged on Stand-By and Extended Fund Facility credits, payable at the beginning of each 12-month period, on the amounts that may be drawn during that period, including amounts available under the SRF or CCL. The fee is 0.25 percent on amounts committed up to 100 percent of quota and 0.10 percent for amounts exceeding 100 percent of quota. The commitment fee is refunded when credit is used in proportion to the drawings made. The IMF also levies special charges on overdue principal payments and charges that are overdue by less than six months.

The IMF pays interest (remuneration) to creditors on their IMF claims (reserve positions) based on the SDR interest rate. The basic rate of remuneration is currently set at 100 percent of the SDR interest rate (the maximum permitted under the Articles of Agreement), but it may be set as low as 80 percent of the SDR interest rate (the lower limit).

Since 1986, the rates of charge and remuneration have been adjusted under a burden-sharing mechanism that distributes the cost of overdue financial obligations between creditor and debtor members. Loss of income from unpaid interest charges overdue for six months or more is recovered by increasing the rate of charge and reducing the rate of remuneration. The amounts thus collected are refunded when the overdue charges are settled. Additional adjustments to the basic rates of charge and remuneration are made to generate resources for a Special Contingent Account (SCA-1), which was established specifically to protect the IMF against the risk of loss resulting from arrears. In FY2003, the combined adjustment for unpaid interest charges and the allocation to the SCA - 1 resulted in an increase to the basic rate of charge of 9 basis points and a reduction in the rate of remuneration of 10 basis points. The adjusted rates of charge and remuneration averaged 2.74 percent and 1.96 percent, respectively, for the financial year.

In April 2002, the basic rate of charge for FY2003 was set at 128.0 percent of the SDR interest rate to achieve the agreed income target. The IMP s net income, after refunds of income in excess of the target amount, in FY2003 totaled SDR 646 million. This included the net income target of SDR 69 million and surcharge income of SDR 656 million, less the cost of postretirement employee benefits of SDR 79 million. As initially agreed in 1999, the IMF was not reimbursed for the expenses of administering the PRGF Trust in FY2003; instead, an equivalent amount (SDR 64 million) was transferred from the PRGF Trust, through the Special Disbursement Account, to the PRGF-HIPC Trust. As agreed at the beginning of the financial year, SDR 57 million of net income in excess of the income target was returned to members that paid interest charges at the end of FY2003, retroactively reducing the basic rate of charge for FY2003 to 123.5 percent of the SDR interest rate. In addition, SDR 94 million generated through the burden- sharing mechanism described above was placed in the SCA-1.

Following the retroactive reduction in the rate of charge, the net income target of SDR 69 million was placed to, and the postretirement employee benefits of SDR 79 million were charged against, the Special Reserve. In addition, surcharge income of SDR 656 million was placed to the General Reserve.

In April 2003, the Board decided to continue the financial mechanism in place and set the basic rate of charge for FY2004 at 132.0 percent of the SDR interest rate.

Precautionary Financial Balances

To safeguard its financial position, the IMF has a policy of accumulating precautionary financial balances in the General Resources Account. These precautionary balances consist of reserves and the SCA-1. Reserves provide the IMF with protection against financial risks, including income losses and losses of a capital nature. The SCA-1 was established as an additional layer of protection against the adverse financial consequences of protracted arrears.

Existing precautionary financial balances have been financed through the retention of income and the burden-sharing mechanism. Additions to reserves are made by placing the net income, including income from surcharges, to the General and Special Reserves. Under the Articles of Agreement, the resources in the General Reserve may be distributed by the IMF to members on the basis of quota shares. The IMF may use the Special Reserve for any purpose for which it may use the General Reserve except for distribution. Total reserves increased to SDR 4.3 billion as of April 30, 2003, from SDR 3.6 billion a year earlier. The balance in the SCA-1 amounted to SDR 1.4 billion, compared with overdue principal of SDR 0.7 billion. SCA-1 resources are to be refunded after all arrears have been cleared, but can be refunded earlier by a decision by the IMF.

In November 2002, the Board reviewed the adequacy of the precautionary financial balances and decided to continue to build up these balances with the aim of doubling them. The Board also concluded that the present system of accumulating precautionary balances is appropriate and will keep the pace of accumulation under close review.

Special Drawing Rights (SDR) Developments

The SDR is a reserve asset created by the IMF in 1969 to meet a long-term global need to supplement existing reserve assets and allocated to members in proportion to their IMF quotas. A member may use SDRs to obtain foreign exchange reserves from other members and to make payments to the IMF. Such use does not constitute a loan; members are allocated SDRs unconditionally and may use them to meet a balance of payments financing need without undertaking economic policy measures or repayment obligations. However, a member that makes net use of its allocated SDRs pays the SDR interest rate, while a member that acquires SDRs in excess of its allocation receives interest at the SDR rate. A total of SDR 21.4 billion has been allocated to members—SDR 9.3 billion in 1970-72 and SDR 12.1 billion in 1978-81. The value of the SDR is based on the weighted average of the values of a basket of major international currencies, and the SDR interest rate is a weighted average of interest rates on short-term instruments in the markets for the currencies in the valuation basket (see Box 8.6). The SDR interest rate provides the basis for calculating the interest charges on regular IMF financing and the interest rate paid to members that are creditors to the IMF. In addition, the SDR serves as the unit of account for the IMF, and a number of other international organizations. 8

  • General allocations of SDRs. Decisions on general allocations are made in the context of five-year basic periods and require a finding that an allocation would meet a long-term global need to supplement existing reserve assets. A decision to allocate SDRs requires an 85 percent majority of the total voting power.
  • Special one-time allocation. In September 1997, the IMF Board of Governors proposed an amendment to the Articles of Agreement to allow a special one-time allocation of SDRs to correct for the fact that more than one-fifth of the IMF membership, having joined the IMF after the last general allocation, has never received an SDR allocation. The special allocation of SDRs would enable all members of the IMF to participate in the SDR system on an equitable basis and would double cumulative SDR allocations to SDR 42.9 billion. The proposal will become effective when three-fifths of the IMF membership (111 members) having 85 percent of the total voting power have accepted the proposal. As of April 30, 2003, 125 members having 74.98 percent of the total voting power had agreed and only acceptance by the United States was required to implement the proposal.

Box 8.6SDR Valuation and Interest Rate

Valuation. The value of the SDR is based on the weighted average of the values of a basket of major international currencies. The method of valuation is reviewed at five-year intervals. Following completion of the latest review in FY2001, the Executive Board decided on a number of European countries and the growing role of international financial markets. Currencies included in the valuation basket are among the most widely used in international transations and widely traded in the principal foreign exchange markets. Currencies selected for inclusion in the SDR basket for the period 2001-2005 are the U.S. dollar, the euro, the Japanese yen, and the pound sterling (see the Table). Interest rate. The SDR interest rate is set weekly on the basis of a weighted average of interest rates on short-term instruments in the markets for the currencies included in. the SDR valuation basket. As part of the review conducted in FY2001, the financial instruments used to determine the representative interest rate for the euro and the Japanese yen were modified to reflect financial market developments. During FY2003, the SDR interest rate evolved in line with developments in the major money markets, declining gradually during the year to the level of 1.75 percent in April 2003, while averaging 2.06 percent over the course of FY2003 (see Figure 8.2).

SDR Valuation, as of April 30, 2003
Amount ofExchangeU.S. Dollar
CurrencyCurrency UnitsRate1Equivalent
Euro0.42601.112900.474095
Japanese yen21.0000119.480000.175762
Pound sterling0.09841.596100.157056
U.S. dollar0.57701.000000.577000
1.383913
Memorandum:
SDR 1 = US$1.383913
US$1 -SDR 0.722589

Exchange rates in terms of U>S. dollars per currency unit except for the Japanese ye, which is in exchange markets. Currency units per US dollar.

Exchange rates in terms of U>S. dollars per currency unit except for the Japanese ye, which is in exchange markets. Currency units per US dollar.

Figure 8.2SDR Interest Rate, 1993-2003

(In percent)

SDR Operations and Transactions

All SDR transactions are conducted through the SDR Department (which is a financial entity, not an organizational unit). SDRs are held largely by member countries and by official entities prescribed by the IMF to hold SDRs. The balance of allocated SDRs is held in the IMF’s GRA. Prescribed holders do not receive SDR allocations but can acquire and use SDRs in operations and transactions with IMF members and with other prescribed holders under the same terms and conditions as IMF members.9 Transactions in SDRs are facilitated by 13 voluntary arrangements under which the parties stand ready to buy or sell SDRs for currencies that are readily usable in international transactions, provided that their own SDR holdings remain within certain limits.10 These arrangements have helped ensure the liquidity of the SDR system.11

The total level of transfers of SDRs increased in FY2003 to SDR 15.6 billion, compared with SDR 14.0 billion in the previous year, but was still well below the peak of SDR 49.1 billion in FY1999, when the volume of SDR transactions increased significantly because of payments for members’ quota increases (see Table 8.7). By April 30, 2003, the IMF’s own holdings of SDRs, which had risen sharply as a result of payments for quota subscriptions in 1999, had fallen to SDR 1.0 billion from SDR 1.5 billion a year earlier, at the low end of the targeted range of SDR 1.0-1.5 billion within which the IMF seeks to maintain its SDR holdings. SDRs held by prescribed holders amounted to SDR 0.6 billion. SDR holdings by participants increased to SDR 19.9 billion from SDR 19.6 billion in FY2002. SDR holdings of the industrial and net creditor countries relative to their net cumulative allocations decreased from a year earlier. SDR holdings of nonindustrial members amounted to 72 percent of their net cumulative allocations compared with 56.9 percent a year earlier.

Table 8.7Transfers of SDRs(In millions of SDRs)
Financial Years Ended April 30
199519961997199819992000200120022003
Transfers among participants and
prescribed holders
Transactions by agreement18,9878,9317,4118,56713,8176,6395,0463,6692,858
Prescribed operations21241,95188864,5772935442901,186
IMF- related operations33017046069017566849228661,794
Net interest on SDRs174319268284289214302228162
Total9,58611,9058,3729,83919,4397,8316,8145,0546,000
Transfers from participants to
General Resources Account
Repurchases1,1815,5724,3642,9184,7613,8263,1991,6311,955
Charges1,3861,9851,6161,8772,8062,6002,4172,3042,505
Quota payments24708,6445286562
Interest received on General Resources
Account holdings262535144351381185631
Assessments444433222
Total2,8577,6836,0354,34416,2497,0945,8003,9934,555
Transfers from General Resources Account
to participants and prescribed holders
Purchases5,9706,4604,0604,2439,5223,5923,1662,3612,215
Repayments of IMF borrowings8621,429
Interest on IMF borrowings974618
In exchange for other members’ currencies
Acquisitions to pay charges994922-1205451,5771,1071,2301,598
Remuneration8151,0921,0551,2201,8261,7471,7831,3611,175
Other—refunds and adjustments512592790741,008319489
Total7,8947,8595,3665,57413,4427,9426,0874,9455,077
Total transfers20,33627,44819,77320,25649,13022,86718,70213,99115,632
General Resources Account holdings
at end of period1,0018251,4947643,5722,7242,4371,485963

Transactions by agreement are transactions in which participants in the SDR Department (currently including all members) and/or prescribed holders voluntarily exchange SDRs for currency at the official rate as determined by the IMF. These transactions are usually arranged by the IMF

Operations involving prescribed SDR holders. A prescribed SDR holder is a nonparticipant in the SDR Department that has been prescribed by the IMF as a holder of SDRs.

Operations in SDRs between members and the IMF that are conducted through the intermediary of a prescribed holder are referred to as “IMF related operations.” The IMF has adopted a number of decisions to prescribe SDR operations under the Trust Fund, the SFF Subsidy, the SAF, the ESAF, the PRGF, and the HIPC Initiative.

Transactions by agreement are transactions in which participants in the SDR Department (currently including all members) and/or prescribed holders voluntarily exchange SDRs for currency at the official rate as determined by the IMF. These transactions are usually arranged by the IMF

Operations involving prescribed SDR holders. A prescribed SDR holder is a nonparticipant in the SDR Department that has been prescribed by the IMF as a holder of SDRs.

Operations in SDRs between members and the IMF that are conducted through the intermediary of a prescribed holder are referred to as “IMF related operations.” The IMF has adopted a number of decisions to prescribe SDR operations under the Trust Fund, the SFF Subsidy, the SAF, the ESAF, the PRGF, and the HIPC Initiative.

Safeguards Assessments

In FY2003, the IMF continued its efforts to safeguard GRA, PRGF, and HIPC resources through the conduct of safeguards assessments of the central banks of borrowing member countries, since central banks are typically the recipients of IMF disbursements as the members’ fiscal agents. Safeguards assessments aim at providing reasonable assurance to the IMF that a central bank’s framework of reporting, audit, and controls is adequate to manage resources, including IMF disbursements (see Box 8.7).

Box 8.7Safeguards Assessments Policy: A Summary

Objective of Safeguards Assessments

  • To provide reasonable assurance to the IMF that a central bank’s control, accounting, reporting, and auditing systems in place to manage resources, including IMF disbursements, are adequate to ensure the integrity of operations.

Applicability of Safeguards Assessments

  • Central banks with arrangements for use of IMF resources approved after June 30, 2000;
  • Abbreviated assessments of only the external audit mechanism for member countries with arrangements in effect prior to June 30, 2000;
  • Not applicable to emergency assistance, first-credit-tranche purchases, and standalone CFFs; and
  • Voluntary for members with staff-monitored programs.

Scope of Policy—ELBIC

  • The External audit mechanism;
  • The Legal structure and independence;
  • The financial Reporting framework;
  • The Internal audit mechanism; and
  • The internal Controls system.

Publication References

The staffs papers and other background information concerning the safeguards policy, including a paper by a panel of eminent external experts, are available on the IMF website (www.imf.org).

Safeguards assessments were adopted as a permanent IMF policy by the Executive Board in March 2002, after an initial two-year experimental period. The safeguards policy, initiated against the background of several instances of misreporting to the IMF and allegations of misuse of IMF resources, aims at supplementing conditionality, technical assistance, and other means that have traditionally ensured the proper use of IMF loans. In adopting the permanent policy, the Board noted that central banks had widely embraced the findings of safeguards assessments and that the policy had enhanced the IMF’s reputation and credibility as a prudent lender while helping to improve the operations and accounting procedures of central banks.

Safeguards assessments apply to all countries with arrangements for use of IMF resources approved after June 30, 2000, and are conducted in respect of any new arrangement presented to the Board for approval. Although safeguards assessments do not formally apply to countries with staff-monitored programs (SMPs), countries under an SMP are encouraged to undergo an assessment on a voluntary basis, as in many cases these programs are followed by formal arrangements with the IMF. In FY2003, 24 safeguards assessments were conducted bringing the cumulative assessments completed as of April 30, 2003, to 75. This cumulative total includes 27 abbreviated assessments, which were conducted for arrangements in effect prior to June 30, 2000, and which examined only one key element of the safeguards framework—namely, that central banks publish annual financial statements that are independently audited by external auditors in accordance with internationally accepted auditing standards.

Safeguards assessments follow an established set of procedures to ensure consistency in application. All central banks subject to an assessment provide a standard set of documents to IMF staff, who review the information and communicate as needed with central bank officials and the external auditors. The review may be supplemented by an on-site visit to the central bank to obtain or clarify information necessary to draw conclusions and make recommendations. Such visits are conducted by IMF staff with possible participation of technical experts drawn from the IMF’s membership. The review also takes into account the findings and timing of a previous safeguards assessment, including the results of any follow-up monitoring.

The outcome of a safeguards assessment is a confidential report, not made available to the Executive Board or the general public, that identifies vulnerabilities, assigns risk ratings, and makes recommendations to mitigate the identified risk. Country authorities, who have the opportunity to comment on all safeguards assessment reports, are expected to implement the safeguards recommendations, possibly under program conditionality. The conclusions and agreed-upon remedial measures are reported in summary form to the Board at the time of arrangement approval or, at the latest, by the first review under the arrangement.

The implementation of safeguards recommendations is monitored periodically by IMF staff. Safeguards monitoring begins once the final assessment report is issued to the authorities and continues as long as credit is outstanding. The monitoring process primarily entails following up on the recommendations arising from previous safeguards assessments to ensure that (1) commitments made by the authorities have been fulfilled, and (2) the recommendations have been satisfactorily implemented. In general, commitments made by the authorities are monitored in conjunction with overall program conditionality, and the main focus of safeguards monitoring is therefore on the efficacy of implementation. To this end, IMF staff request periodic updates of the status of implementation and may conduct an on-site monitoring review. Under monitoring, country authorities must annually provide to the IMF their audited financial statements and any recommendations or special reports prepared by the external auditors of the central bank.

The findings of safeguards assessments to date have indicated that significant but avoidable risks to IMF resources may have existed in certain cases. Assessment recommendations are designed to safeguard IMF resources by addressing these vulnerabilities and permanently improving controls and operations in a central bank. Monitoring to date has shown that central banks are progressively implementing the measures recommended by IMF staff to mitigate the identified vulnerabilities. In FY2003, central banks continued to implement assessment recommendations at a high rate (over 85 percent for the most important measures). The main areas of improvement in central bank operations and controls resulting from the implementation of safeguards measures have included (1) establishing an independent external audit policy in accordance with international standards; (2) reconciling the economic data reported to the IMF for programmonitoring purposes with the underlying accounting records of the central bank; (3) improving the transparency and consistency of financial reporting, including publication of the audited financial statements; (4) improving controls over reserve management; and (5) implementing independent, high-quality internal audit functions.

In FY2003, IMF staff continued to enhance communication and dissemination of information on the safeguards policy. The IMF Institute developed a course on safeguards assessments, which was delivered at the Singapore Training Institute in January 2003 and the Joint Vienna Institute in March 2003. IMF staff also prepared two semiannual summary reports covering the activities and results of the policy for the Executive Board. These reports are available on the IMF website athttp://www.imf.org/external/fin.htm.

Arrears to the IMF

The strengthened cooperative strategy on overdue financial obligations to the IMF consists of three essential elements: prevention, intensified collaboration, and remedial measures.12

Total overdue financial obligations to the IMF decreased to SDR 2.01 billion during FY2003, from SDR 2.36 billion at the beginning of the financial year (Table 8.8). This reflected mainly the clearance of arrears by the Democratic Republic of the Congo in June 2002 and by the Islamic State of Afghanistan (henceforth Afghanistan) in February 2003. However, the arrears of other countries (with the exception of Sudan) continued to rise—most notably those of Zimbabwe, which is the first new case of significant arrears to the GRA since 1993 and the first case of arrears to the PRGF Trust. As of April 30, 2003, almost all arrears to the IMF were protracted (outstanding for more than six months), about evenly divided between overdue principal and overdue charges and interest. More than four-fifths of arrears were to the GRA and the remainder to the SDR Department and the PRGF Trust.

Table 8.8Arrears to the IMF of Countries with Obligations Overdue by Six Months or More, by Type and Duration(In millions of SDRs, as of April 30, 2003)
By Type
GeneralBy Duration
DepartmentSDKTrustLess thanMore than
Total(incl. SAF)DepartmentFundPRGF6 months6 months
Iraq52.30.152.21.351.0
Liberia499.6446.023.530.13.3496.3
Somalia217.4199.69.97.91.7215.7
Sudan1,081.71,003.00.178.65.21,076.5
Zimbabwe158.790.768.032.7126.0
Total2,009.71,739.485.7116.668.044.21,965.5

The two countries with the largest protracted arrears to the IMF—Sudan and Liberia—account for more than 79 percent of the overdue financial obligations to the IMF—with Somalia and Zimbabwe accounting for most of the remainder.13 Under the IMF’s strengthened cooperative strategy on arrears, remedial measures have been applied against the countries with protracted arrears to the IMF.14 No changes were made in the IMF’s strengthened cooperative strategy on arrears during FY2003.

During FY2003, two countries cleared their arrears to the IMF—the Democratic Republic of the Congo and Afghanistan:

  • The Democratic Republic of the Congo cleared its arrears to the IMF of SDR 404 million ($522 million) on June 12, 2002. Arrears clearance was facilitated by bridge loans provided by four countries—Belgium, France, South Africa, and Sweden. Immediately following the clearance of the arrears, the Executive Board approved a PRGF arrangement for the Democratic Republic of the Congo in the amount of SDR 580 million (109 percent of its quota). Part of the proceeds of the first PRGF disbursement of SDR 420 million was used to repay in full the bridge lenders. The Democratic Republic of the Congo subsequently cleared its arrears of SDR 254 million ($338 million) to the World Bank Group. Arrears of SDR 669 million ($860 million) to the African Development Bank Group were handled in the context of a partial clearance/partial consolidation mechanism.
  • On February 26, 2003, Afghanistan settled its overdue financial obligations to the IMF totaling SDR 8.1 million (about $11.1 million). The settlement of arrears to the IMF was part of a coordinated plan under which Afghanistan also cleared arrears to the Asian Development Bank and the International Development Association. The coordinated arrears-clearance operation was supported by grant contributions from Italy, Japan, Norway, Sweden, the United Kingdom, and the Afghanistan Reconstruction Trust Fund.

The Executive Board conducted several reviews of member countries’ overdue financial obligations to the IMF during FY2003:

  • The Board considered on two occasions the complaint by the Managing Director with respect to the suspension of Liberia’s voting and related rights in the IMF. At its October 9, 2002, meeting, the Board expressed regret at the further accumulation of arrears to the IMF by Liberia and the limited actions taken by the authorities to improve economic policy implementation. Nevertheless, the Board decided to defer the decision on the suspension of voting and related rights by another six months and to review the matter at the same time it considered the 2002 Article IV consultation with Liberia. At this second review, on March 5, 2003, the Board found that Liberia had not adequately strengthened its cooperation with the IMF and decided to suspend Liberia’s voting and related rights in the IMF.
  • The Board reviewed Sudan’s overdue financial obligations twice during FY2003—on June 19, 2002, and on December 18, 2002. In June, the Board expressed regret that Sudan did not make committed payments to the IMF during the last three months of 2001 but welcomed the corrective action taken in the latter half of 2001. It noted Sudan’s constrained capacity for debt service and its intention to maintain a monthly level of payments to the IMF of $2 million. At the December review, the Board welcomed the policy performance achieved by the Sudanese authorities under the staff-monitored program for 2002 and noted that Sudan had made payments to the IMF in 2002 in line with its intentions.
  • Against the background of mounting arrears and little improvement in economic policy, the Board imposed further remedial measures on Zimbabwe during FY2003. On June 13, 2002, it adopted a declaration of noncooperation regarding Zimbabwe and suspended all technical assistance. At the next review of Zimbabwe’s arrears on September 11, 2002, the Board decided to initiate promptly the procedure on the suspension of Zimbabwe’s voting and related rights in the IMF. On October 25, 2002, the Board noted the Managing Director’s complaint, dated October 17, 2002, regarding Zimbabwe’s failure to fulfill its obligations to the IMF. This complaint will be taken up on the occasion of the next review of Zimbabwe’s arrears to the IMF, at which time the Board will consider whether to suspend Zimbabwe’s voting and related rights in the IMF.

At the end of April 2003, Liberia, Somalia, Sudan, and Zimbabwe were ineligible under Article XXVI, Section 2 (a) to use the general resources of the IMF. In addition, Zimbabwe had been removed from the list of PRGF-eligible countries. Declarations of noncooperation—a further step under the strengthened cooperative arrears strategy—were in effect for Liberia and Zimbabwe, and the voting and related rights of Liberia in the IMF were suspended.

1As of April 30, 2003, SDR 1 = US$1.383913.
2The advance repayments by Estonia and Lithuania were less than SDR 50 million.
3Quotas also determine a country’s voting power in the IMF, its access to IMF financing, and its share in SDR allocations.
4For a fuller account of the sources of funds for IMF concessional lending operations, see Financial Organization and Operations of the IMF, Pamphlet No. 45, 6th ed. (Washington: International Monetary Fund, 2001), available online athttp://www.imf.org/external/pubs/ft/pam/pam45/contents.htm.
5Loan disbursements from the PRGF Trust could continue until 2009, and the last repayments of principal would take place in 2019.
6Bilateral contributions to the PRGF and PRGF-HIPC Trusts are summarized in Appendix II, Table II.9, on an “as needed,” rather than a cash, basis.
7If, in any quarter, the assets of the account are insufficient to subsidize the charge of all subsidy beneficiaries to 0.5 percent on an annual basis, the subsidy to each beneficiary will be prorated to bring the effective rate of charge paid after subsidization to the closest common percentage to 0.5 percent.
8In March 2003, the Bank for International Settlements (BIS) adopted the SDR as its unit of account.
9There are 16 prescribed holders of SDRs: the African Development Bank, African Development Fund, Arab Monetary Fund, Asian Development Bank, Bank of Central African States, Bank for International Settlements, Central Bank of West African States, East African Development Bank, Eastern Caribbean Central Bank, European Central Bank, International Bank for Reconstruction and Development (World Bank), International Development Association, International Fund for Agricultural Development, Islamic Development Bank, Latin American Reserve Fund, and Nordic Investment Bank.
10These include 12 IMF members and one prescribed holder. In addition, one member has established a one-way (selling only) arrangement with the IMF.
11Under the designation mechanism, participants whose balance of payments and reserve positions are deemed sufficiently strong may be obliged, when designated by the IMF, to provide freely usable currencies in exchange for SDRs up to specified amounts. Owing to the existence of voluntary arrangements, the designation mechanism has not been used since 1987.
12See Annual Report 2001, pages 72 and 73, for background on the IMF’s strengthened cooperative strategy for dealing with arrears.
13Iraq’s overdue net SDR charges and assessments account for the remaining 2.6 percent
14In two cases (Iraq and Somalia) the application of remedial measures has been delayed or suspended because of civil conflicts, the absence of a functioning government, and/or international sanctions.

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