Selected Decisions and Selected Documents of the International Monetary Fund
Chapter

Article XXVI Compulsory Withdrawal

Author(s):
International Monetary Fund
Published Date:
July 2002
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Compulsory Withdrawal

In response to the request of the Government of [a member], and after having considered the arguments put forward by that Government, the Executive Directors, acting pursuant to Article XVIII(a)1 of the Fund Agreement, interpret Article XV, Section 22 as follows:

Action may be taken by the Fund to require a member to withdraw when the following conditions have been met:

1. The member has been declared ineligible to use the resources of the Fund pursuant to Article XV, Section 2(a);3

2. A reasonable time has passed since the member was declared ineligible to use the resources of the Fund pursuant to Article XV, Section 2(a),4 whether or not a fixed period of time had been prescribed in connection with such action, and the member persists in failing to fulfill its obligations;

3. The member has been informed in reasonable time of the complaint against it and given an adequate opportunity to state, both orally and in writing, any fact or legal argument relevant to the issue before the Fund.

Decision No. 343-(54/47)

August 11, 1954

The Board of Governors confirmed the foregoing decision on September 28, 1954.

Overdue Payments to the Fund—Purchases From Fund

1. …1

2. …

3. Other stand-by or extended arrangements granted by the Fund after the date of this decision shall include also the provision in 1 or 2 above.

4. The provision in 1 and 2 above shall be included also in an existing stand-by or an extended arrangement when the Fund and the member reach understandings regarding the circumstances in which further purchases may be made under the arrangement.

5. Decision No. 7678-(84/62), April 20, 1984, shall cease to apply in respect of a stand-by or an extended arrangement that includes the provision in 1 or 2 above.

Decision No. 7908-(85/26)

February 20, 1985

Overdue Payments to the Fund—Discussions on Use of Fund Resources Executive Board Meeting 84/54, April 5, 1984

The Executive Board unanimously reaffirmed the existing practices…that management will not submit to the Board any requests for the use of Fund resources under a stand-by or extended arrangement as long as the member concerned has overdue payments to the Fund.

There was more debate whether the Fund should engage in discussions or resume discussions on the use of Fund resources with a member that is in arrears to the Fund. On the whole, the practice of not entering into discussion in those circumstances was confirmed.

This does not mean that we are not going to continue discussions… with members with overdue payments; but… discussions [are] confined quite precisely to assisting the members to organize their affairs in order to permit the payment of the overdue obligations… Far from cutting our lines of communication, we should do what we can to keep them open. But we should direct the discussions toward enabling the country to make repayments.

The Chairman’s Summing Up at the Conclusion of the Discussion on Overdue Financial Obligations to the Fund Executive Board Meeting 85/170, November 25, 1985

…[M]ember countries in arrears should be induced to give priority to actions that are designed specifically to enable them to repay the Fund. In addition, they should introduce corrective measures at an early stage to improve their economic policies and to avoid the emergence and further accumulation of arrears to the Fund.

…[T]he Fund should keep open its channels of communication with countries in arrears in order to help them formulate adjustment policies and to catalyze external assistance so that these concerted efforts can ultimately be supported by Fund assistance and lead prior to the Fund’s formal commitment to providing such assistance to settlement of the arrears.

…[I]ntervals between Board reviews should be put to good use; they should never be seen as grace periods or as periods in which a member is excused from making every effort to settle its arrears to the Fund…

A majority of Directors favor reducing the period between the emergence of arrears and the first substantive consideration of a complaint. These Directors felt that the present five-month period was too long, as it has tended to coincide with a buildup of arrears that has made it more difficult to tackle the matter; earlier involvement by the Board would have been helpful. Although some Directors favor taking a flexible approach to this period, a majority clearly supports limiting the period to three months. Issuing the complaint two months after arrears have arisen instead of three months would certainly be consistent with today’s discussion. The review period following the first substantive consideration would remain three months, but the three months would be considered an outer limit: the decision on the actual timing in each case should take into account the particular circumstances and the performance of the member…

A majority of Directors felt that once a member has been declared ineligible to use the Fund’s resources the Board should not wait as long as the next Article IV consultation to discuss the member’s arrears situation. The majority of Directors would like to review the member’s situation every six months.

The Acting Chairman’s Concluding Remarks at the Discussion on Additions to the Special Contingent Account Executive Board Meeting 88/12, January 29, 1988

Some Directors made reference to the Enhanced Structural Adjustment Facility in the context of the arrears problem. The Managing Director has stated several times that members in arrears to the Fund would not have access to the Enhanced Structural Adjustment Facility, just as they do not currently have access to the Structural Adjustment Facility (Buff/87/260, 12/17/87), or the facilities in its General Resources Account. Thus, the existing arrears policy is not changed or modified in the context of the Enhanced Structural Adjustment Facility. At the heart of dealing with those cases in which arrears exist are the elements of a strong adjustment program which will assist in attracting external resources to help the country clear its arrears. The Fund could then grant access to its facilities as appropriate, including, of course, the Enhanced Structural Adjustment Facility when it becomes operational.

The Acting Chairman’s Summing Up at the Conclusion of the Discussion on Overdue Financial Obligations—Six-Monthly Report Executive Board Meeting 88/19, February 10, 1988

Second, Directors also agreed that the present practice, whereby the general policies and procedures relating to overdue financial obligations to the Fund are not applied to overdue maintenance of value adjustments, should be continued. Again, it was emphasized that prompt settlement of these adjustments constitutes an essential element of members’ financial obligations to the Fund, and the staff was encouraged to follow up actively in cases of overdue valuation adjustments in order to achieve a more speedy settlement and to report periodically to the Board in the context of staff papers on individual members.

Procedures for Dealing with Members with Overdue Financial Obligations to the General Department and the SDR Department

The Fund, as a cooperative institution, relies on the mutually supportive actions of its membership in all areas of its endeavors. Overdue financial obligations are a breach of obligations to the Fund and are demonstrably a noncooperative action, which imposes financial cost on the Fund’s membership, impairs its capacity to assist members, and more generally weakens the Fund’s ability to perform its broader responsibilities in the international financial system.

As the experience with arrears demonstrates, countries which accumulate arrears to the Fund also damage themselves, in part through the deterioration which inevitably follows in their financial relations with other creditors. When arrears exist the Fund is not able to provide its own assistance and its effectiveness is diminished as a catalyst for helping the country restore regular financial relations with other creditors.

This statement outlines procedures aimed at preventing the emergence of overdue financial obligations to the Fund and the elimination of existing overdues, including protracted arrears. The need for flexibility in the implementation of the Fund’s policies dealing with overdues has been stressed in the past; flexibility must continue to be exercised in order to take account of the specific circumstances of the member. Nonetheless, a balance must be struck between the need for appropriate flexibility and the need for clear and credible procedures that act as a deterrent to members against incurring arrears and to encourage members with overdues to become current.

Arrears prevention

The importance of preventing new cases of arrears has been stressed by the Executive Board. As noted in the past, our best safeguard is the quality of Fund arrangements and we will continue to direct our efforts to ensure that arrangements of the highest quality are placed before the Board. These efforts would include assisting members to design strong and comprehensive economic programs, careful attention to access levels and phasing, explicit assessment of a member’s capacity and willingness to repay the Fund, and adequate assurances regarding external financing during the period of the Fund arrangement. Special understandings with creditors and donors may also need to be sought in certain cases to help assure progress toward external viability. In some cases, specific financial or administrative arrangements designed to ensure that forthcoming obligations to the Fund are settled on time will be used to increase the assurance that the Fund’s resources will be repaid on time. Moreover, the importance of members remaining current on obligations falling due and observing the Fund’s preferred creditor status will continue to be stressed.

The Fund’s response to overdue obligations

The Fund has developed a set of procedures for dealing with members with overdue financial obligations which are designed to bring about a reduction and the eventual elimination of these overdue obligations. In addition to the procedures set out below, the Fund makes an effort to assist members willing to cooperate to eliminate their arrears through the design and implementation of appropriate policies as well as to help members adopting these policies to secure the necessary financial support.

The procedures initiated immediately after a member falls into arrears provide for a sequence of actions by management, the staff, and the Executive Board.

—Whenever a member fails to settle an obligation on time, the staff immediately sends a cable urging the member to make the payment promptly; this communication is followed up through the office of the Executive Director concerned.

—When an obligation has been outstanding for two weeks, management sends a communication to the Governor for that member stressing the seriousness of the failure to meet obligations to the Fund and urging full and prompt settlement. The Executive Board understands that the Governor will bring this communication and the circumstances that gave rise to it to the attention of his authorities at the highest level. The communication to the Governor would also note that unless payment is received in due course, the Managing Director would intend to raise with the Executive Board the possibility of communicating with Governors of the Fund concerning the situation. The Managing Director has on occasion raised the matter of overdue financial obligations to the Fund directly with the head of government of the member concerned, and he would intend to continue to do so in those cases where he believes it would be a useful procedure.

—The Managing Director notifies the Executive Board normally one month after an obligation has become overdue.

—When the longest overdue obligation has been outstanding for six weeks, the Managing Director informs the member concerned that unless the overdue obligations are settled a complaint will be issued to the Executive Board in two weeks’ time.

The Managing Director would in each case recommend to the Executive Board whether a communication should be sent to a selected set of Fund Governors, or to all Fund Governors. If it were considered that it should be sent to a selected set of Fund Governors, an informal meeting of Executive Directors would be held, some six weeks after the emergence of overdues, to consider the thrust of the communication. Alternatively, if it were considered that the communication should be sent to all Fund Governors, a formal Board meeting would be held to consider a draft text and the preferred timing. A sample text for a communication to all Fund Governors is set out in Attachment I.

—A complaint by the Managing Director is issued two months after an obligation has become overdue, and is given substantive consideration by the Executive Board one month later. At that stage, the Executive Board has usually decided to limit the member’s use of the general resources, and if the member has overdue obligations in the SDR Department, to suspend its right to use SDRs, and has provided for a subsequent review of the decision. This and subsequent review periods would normally not exceed three months. It would be understood that the Managing Director may recommend advancing the Executive Board’s consideration of the complaint regarding the member’s overdues.

When a member has overdue financial obligations outstanding for more than three months, a brief factual statement noting the existence and the amount of such arrears will be posted on the member’s country-specific page on the Fund’s external website. The statement will be updated as necessary. It will also indicate that the member’s access to the Fund, including PRGF and HIPC resources, has been and will remain suspended for as long as arrears remain outstanding.

A press release will be issued following the Executive Board’s decision to limit the member’s use of the general resources or, if the member has overdue obligations in the SDR Department, to suspend its right to use SDRs. A similar press release will be issued following a decision to lift such limitation or suspension.

—The Annual Report and the financial statements identify those members with overdue obligations outstanding for more than six months.

Beyond these procedures, the Executive Board has expressed its intention to provide that a member must first discharge its overdue financial obligations to the General Resources Account before it would be permitted to pay for an increase in its quota under the Ninth General Review, and that, in the event the quota payment were not made within a prescribed period, the proposal for an increase in the member’s quota would lapse.

Another measure being considered by the staff relates to the possibility of withholding SDR allocations for members with arrears in the General Department. This measure would require an amendment of the Articles and will be examined further in the next Six-Monthly Report on Overdue Financial Obligations.

Declaration of ineligibility

—If a member persists in its failure to settle its overdue obligations to the Fund, the Executive Board declares the member ineligible to use the general resources of the Fund. The timing of the declaration of ineligibility would vary according to the Board’s assessment of the specific circumstances and of the efforts being made by the member to fulfill its financial obligations to the Fund. The procedures for dealing with members with protracted arrears that have been declared ineligible include further reviews at intervals of not more than six months.

—For members with protracted arrears willing to cooperate with the Fund in settling those overdues, the Fund has adopted an intensified collaborative approach, which incorporates exceptional efforts by the international financial community.

—For members that are judged not to be cooperating actively with the Fund, remedial measures would be applied.

—Members not showing a clear willingness to cooperate with the Fund have been informed that in these circumstances the provision of technical assistance would be inappropriate, but the Fund would reconsider providing technical assistance once the member has resumed active cooperation. The Managing Director may also limit technical assistance provided to a member, if in his judgment that assistance was not contributing adequately to the resolution of the problems associated with overdues to the Fund.

—A further remedial measure in cases of protracted arrears would be communications with all Governors of the Fund and with heads of certain international financial institutions. Use of such communications would normally be raised for the Executive Board’s consideration at the time of the first post-ineligibility review of the member’s arrears. At that time the staff would prepare a draft text of a communication along the lines set out in Attachment II to this statement. It should be noted that the Fund’s communication to certain other international financial institutions, such as the three main regional development banks (Asian Development Bank, African Development Bank, Inter-American Development Bank), like its communication to the Governors, would not request the addressee to take specific actions and would leave any action to the institution’s discretion. This does not preclude informal contacts with other international financial institutions. The staff would intend to propose to send this latter type of communication on the occasion of the next post-ineligibility review for members that at present have arrears that have been outstanding for a protracted period, in the event the Executive Board judges that the member concerned is not cooperating actively with the Fund in efforts to resolve the problem of its overdue financial obligations to the Fund.

Censure or declaration of noncooperation

—A declaration of censure or noncooperation would come as an intermediate step between a declaration of ineligibility and a resolution on compulsory withdrawal. The decision as to whether to issue such a declaration would be based on an assessment of the member’s performance in the settlement of its arrears to the Fund and of its efforts, in consultation with the Fund, to follow appropriate policies for the settlement of its arrears. Three related tests would be germane to this decision regarding (i) the member’s performance in meeting its financial obligations to the Fund taking account of exogenous factors that may have affected the member’s performance; (ii) whether the member had made payments to other creditors while continuing to be in arrears to the Fund; and (iii) the preparedness of the member to adopt comprehensive adjustment policies. The declaration would follow any communication to Governors after ineligibility and would be considered at a subsequent post-ineligibility review. The period between such communications and the declaration could be about six months, but this time period would be determined on a case-by-case basis.

Upon a declaration of noncooperation, technical assistance to the member will be suspended unless the Executive Board decides otherwise. (EBS/01/122, 7/13/01)

A draft of the declaration is set out in Attachment III. The actual declaration would be based on this draft text taking account of the circumstances of the individual case. The declaration would be adopted by the Executive Board and published.

Other remedial measures

—On suspension of membership, Directors noted the necessity of amending the Fund’s Articles of Agreement to provide for suspension of membership. Some Directors showed an interest in introducing a provision into the Articles of Agreement under which the voting rights of a member that has been declared ineligible to use the Fund’s general resources could be suspended. However, most Directors felt that it would not be advisable to propose an amendment of the Fund’s Articles of Agreement at this time, but that this matter could be reconsidered in the future.

—Finally, Directors noted the availability to the Fund of procedures under Section 22 of the By-Laws on compulsory withdrawal. These procedures would only be pursued once the Fund has exhausted all other possible avenues to redress the problem of overdue financial obligations and, despite a declaration of noncooperation, the member has not exhibited a willingness to cooperate with the Fund. The Articles of Agreement and the By-Laws provide for procedures for settling claims by the Fund on a member in the event that it withdraws from the Fund. If the procedures were initiated, the staff would prepare an analysis of the effect of the member’s withdrawal on the Fund’s financial position.

Attachment I: Draft First Letter to All Governors

Dear:

The Executive Board has considered the complaint which was recently issued regarding [member]’s overdue financial obligations to the Fund. In considering this complaint the Executive Board has agreed that I write to all Governors of the Fund to draw their attention to this development. Prompt and effective actions now by [member] and the international community would avoid a further deterioration of this situation including the possibility of declaring [member] ineligible to use the general resources of the Fund, would permit these overdues to be cleared before their magnitude makes the problem more intractable, and before they place a financial burden on other members.

[Paragraph on background circumstances of member leading to the emergence of arrears, the views of the member regarding its overdue obligations, and the member’s intended approach for addressing the problem of its overdue obligations. This paragraph would be tailored to the specific circumstances of the member concerned.]

The Executive Board is very concerned about these developments which have serious potential implications both for the [member] and for the Fund as a whole, if the problem is not resolved early. The existence of these overdue financial obligations to the Fund precludes the Fund from extending financial assistance to the member. In addition, experience to date indicates that when a country incurs arrears to the Fund its financial relations with other creditors are also likely to deteriorate. These arrears also have an adverse impact on the Fund as an international financial cooperative, which is the central monetary institution in the international monetary system. As you are aware, overdue obligations, if they are not settled, place a financial burden on other members: on the Fund’s debtor members in the form of higher charges and the Fund’s creditors in the form of reduced remuneration.

The Fund would greatly appreciate any assistance in urging the member to effect the full and prompt settlement of its overdue obligations to the Fund.

Sincerely yours,

Michel Camdessus

Managing Director and

Chairman of the Executive Board

Attachment II Draft Second Letter to All Governors and Certain International Financial Institutions

Dear:

The Executive Board has reviewed the overdue financial obligations of [member] and its circumstances. In this context it agreed that I write to all Governors of the Fund to seek their assistance in resolving the problem of [member]’s overdue financial obligations to the Fund [and that I inform at the same time the heads of [names of certain international financial institutions]].

As you know, [member] was declared ineligible to use the general resources of the Fund on [date], as it had failed to meet its financial obligations to the Fund. As of [date], [member]’s overdue financial obligations to the Fund amounted to SDR[ ] million and the longest overdue obligation had been outstanding for [ ] months. As you are aware, these overdue obligations reduce Fund resources available to help other members and place a financial burden on debtor members in the form of higher charges and on creditor members in the form of reduced remuneration.

[Paragraph on background circumstances of member leading to the emergence of arrears, the views of the member regarding its overdue obligations, and the member’s intended approach for addressing the problem of its overdue obligations. This paragraph would be tailored to the specific circumstances of the member concerned.]

The Fund has developed a set of procedures, including the intensified collaborative approach, for dealing, as appropriate, with members that have overdue financial obligations outstanding for a protracted period. The application of the procedures for members in arrears up to now has not resulted in [member] taking steps that could be expected to resolve promptly the problem of its arrears to the Fund. If, in the period prior to the next review of [member]’s arrears, [member] does not take action to demonstrate its willingness to resume active cooperation with the Fund toward the resolution of the problem of its arrears, [member] may be subject to a declaration of noncooperation. This would be a most serious step that would involve the publication of this declaration, which would refer, inter alia, to the availability to the Fund of procedures under Section 22 of the By-Laws on compulsory withdrawal of [member] from the Fund. The Fund’s Executive Board has emphasized the critical stage that has been reached with respect to [member]’s arrears and has stressed its sincere hope that the consideration of further steps will be unnecessary. The Fund would appreciate your [Government/ institution] taking whatever actions it considers appropriate to help bring about an early resolution of this situation.

The Executive Board will review again the position of [member] with regard to its arrears to the Fund not later than [date].

Sincerely yours,

Michel Camdessus

Managing Director and

Chairman of the Executive Board

Attachment III Draft Declaration on Censure or Noncooperation

The Fund notes that, since the declaration of ineligibility of [date], the member has remained in arrears in its financial obligations to the Fund, thus persisting in its failure to fulfill its obligations under the Articles, and that the level of its arrears has not decreased (or has increased);

[notes that the member has made payments to other creditors while not discharging its financial obligations to the Fund (or not to the same extent), thus ignoring the preferred creditor status that members are expected to give to the Fund;]

finds that the member is not cooperating with the Fund toward the discharge of its financial obligations to the Fund;

urges the member to discharge its financial obligations to the Fund promptly and to cooperate with the Fund;

reminds the member that arrears to the Fund, which is a cooperative institution, are detrimental to the whole membership of the Fund in that they hamper the proper performance by the Fund of its function of assisting members facing balance of payments difficulties;

reminds the member that members in breach of their obligations to the Fund may be subject to the procedures under Section 22 of the By-Laws leading to compulsory withdrawal.

EBM 89/100 and 89/101, July 27, 1989

as amended by Decision No. 12546-(01/84),

August 22, 2001

Statement by the Managing Director on the Strengthened Cooperative Strategy on Overdue Financial Obligations to the Fund Executive Board Meeting 90/38, March 16, 1990

2. Measures of deterrence

Measures of deterrence are a second key element of the cooperative strategy that need to be strengthened further. The Fund recently adopted important new procedures in this area and communications to all Fund Governors and selected heads of multilateral financial institutions have been sent in three cases and have borne some fruit.

Executive Directors have agreed that it would be appropriate to widen the scope and strengthen the application of deterrent measures to underscore the Fund’s firm resolve to deal with the arrears problem. There is general support for the proposition that a clear timetable and sequence for the implementation of such measures, from the emergence of arrears to the final step of initiation of procedures for compulsory withdrawal, would help remove any misperceptions about the actions to be taken by the Fund when a member falls into arrears or about the consequences of noncooperation. The presumption would be that this timetable would be followed in all cases unless in the Board’s judgment a different approach were justified in an individual case.

As compared with the procedures contained in my statement at (EBM/89/101, 7/27/89), the main changes suggested relate to the (i) periodic reviews by the Executive Board of decisions limiting the use of the general resources by the member in arrears which, if the overdue obligations are not settled, leads to a declaration of ineligibility; and (ii) timing and content of measures taken after a declaration of ineligibility. Previously, the Executive Board has held as many as five reviews of its decision to limit a member’s use of the general resources before a declaration of ineligibility was adopted; the total length of time between these two actions has been as long as thirteen months, and the period between the emergence of arrears and a declaration of ineligibility has been as long as two years. Many Directors have expressed the view that the number of reviews before a declaration of ineligibility should in general be limited. As regards the post-ineligibility period, in the event a member continues in its failure to fulfill its financial obligations, present procedures call for communications to be sent to all Governors within six months. It is proposed to shorten that period, and also to make explicit the timing of a declaration of noncooperation and of the initiation of the procedure for compulsory withdrawal.

I believe that there is wide support for new procedures under which a member in arrears to the Fund would be declared ineligible to use the general resources no later than twelve months after the emergence of arrears, with the exact timing depending on the Executive Board’s assessment of the specific circumstances and of the efforts being made by the member to fulfill its obligations to the Fund. The sending of communications to all Fund Governors and the heads of selected international financial institutions regarding the member’s continued failure to fulfill its financial obligations to the Fund would be considered within three months after the declaration of ineligibility. At present, these communications may be followed by a public declaration of noncooperation if the member continues to fail to cooperate. The Executive Board would be asked to consider such a declaration not later than four months after the dispatch of these communications (i.e., within nineteen months of the emergence of arrears), unless the Executive Board were to conclude that there had been a decisive improvement in the member’s cooperation with the Fund.

A declaration of noncooperation is an intermediate step before compulsory withdrawal. At present, such a declaration of noncooperation would note the availability to the Fund of procedures on compulsory withdrawal. This procedure should be strengthened by the initiation by the Executive Board of procedures for compulsory withdrawal within five months of the declaration of noncooperation (i.e., within two years of the emergence of arrears), if the member continues to fail to comply with its obligations and to cooperate actively with the Fund toward clearance of its arrears. A recommendation of compulsory withdrawal can be made by the Executive Board by a simple majority, although withdrawal can be required only by a majority of Governors having 85 percent of the total voting power.

In our discussion of financing in relation to the arrears strategy we have had a preliminary review of financial and legal aspects of compulsory withdrawal, and I believe that the general provisions on the basis of which we would need to proceed are understood. In such circumstances, the Executive Board might need to consider the appropriate means to rebuild the Fund’s precautionary balances, which would normally imply increasing the Fund’s operating income or supplementing it by other exceptional means. In this connection, it has been noted that as a last resort, the sale of part of the Fund’s gold could help restore the Fund’s financial position.

The timetable proposed would help to make clear to members the need to prevent arrears and to act expeditiously to deal with them if they arose, as well as the consequences of not doing so. It would also provide sufficient time for such members to adopt the adjustment measures needed to move toward restoring domestic and external economic balance. Such a timetable is not to be understood as a period of grace, and the Executive Board would need to be prepared to accelerate action when appropriate, particularly in the early stages prior to a declaration of ineligibility. For the eleven members with protracted arrears, some Executive Directors have stressed that it would be appropriate to apply the new schedule with a degree of flexibility. This is reasonable, but we will need also to keep in mind that these members have already been given a great deal of time to demonstrate their cooperation with the Fund.

In all cases, there is a need for tangible and continuous support for the Fund from the international financial community. In cases of members that were not cooperating, the Fund would expect bilateral creditors and other multilateral agencies to initiate an intensive dialogue with the member in arrears to persuade it to respect the preferred creditor status of the Fund, and to consider reducing and, if necessary, suspending assistance to members that are not cooperating with the Fund. There is a need to convince creditors and donors that persistent financing of a member’s inadequate policies is detrimental to the interests of creditors, donors, and debtors alike. The Fund will also ask other official creditors to follow the practice of Paris Club creditors and not engage in rescheduling in the absence of a Fund arrangement or a Fund-monitored program. Furthermore, I believe Executive Directors have supported the proposition that creditors receiving payments from members in arrears to the Fund should be requested, at the least, to urge such members to direct payments to the Fund.

The Board has agreed that a member must first discharge its overdue obligations to the General Resources Account before it can be permitted to consent or to pay for an increase in its quota in connection with the Ninth General Review; and if a member had not increased its quota within the prescribed period, the proposal for an increase in quota should lapse. The Board’s consideration of an extension of the period for consent or payment would take into account the situation of members with overdue obligations that are cooperating with the Fund to resolve their arrears problem in the context of a Fund-monitored program.

The measures of prevention and deterrence described above, if applied firmly in the day-to-day operations of the Fund, can provide a powerful mechanism to prevent the emergency of new arrears cases, lead to their rapid elimination if problems do develop, and, jointly with the measures of support suggested in the next section, offer to noncooperating members a last opportunity to move with no further delay onto a more collaborative path. I believe that we should adopt these measures immediately.

At the same time we should pursue expeditiously the necessary work on an amendment of the Articles to introduce into the Fund’s Articles a provision similar in some respects to those already existing in other multilateral financial institutions, notably the World Bank i.e., a provision to suspend voting and related rights for cases of continuing breach of obligations to the Fund. Such an amendment would provide an additional instrument of deterrence. The staff will prepare a paper for Executive Board consideration in April which will focus on the substantive issues related to an amendment of the Articles of Agreement. In particular, the following matters would need to be discussed: the scope of suspension; the conditions for suspension; the relationship of suspension to other deterrent measures; the decision-making procedures; and the majority required. I continue to believe that the qualified majority for suspension should be set at 70 percent of the total voting power. The staff paper would elaborate on these matters, examining the consequences of different approaches and exploring the modalities of an amendment.

Attachment Measures for Prevention/Deterrence of Overdue Financial Obligations to the Fund—Strengthened Timetable of Procedures

Time after

Emergence of

Arrears
Action
ImmediatelyStaff sends a cable urging the member to make the payment promptly; this communication is followed up through the office of the concerned Executive Director.
The member is not permitted any use of the Fund’s resources nor is any request for the use of Fund resources placed before the Executive Board until the arrears are cleared.
2 weeksManagement sends a communication to the Governor for the member stressing the seriousness of the failure to meet obligations and urging full and prompt settlement.
1 monthThe Managing Director notifies the Executive Board that an obligation is overdue.
6 weeksThe Managing Director notifies the member that unless the overdue obligations are settled promptly a complaint will be issued to the Executive Board. The Managing Director would also consult with and recommend to the Executive Board that a communication concerning the member’s situation should be sent to selected Fund Governors or to all Fund Governors in the event that the member has not improved its cooperation with the Fund.
2 monthsA complaint regarding the member’s overdue obligations is issued by the Managing Director to the Executive Board.
3 monthsThe complaint is given substantive consideration by the Executive Board. The Board has usually decided to limit the member’s use of the general resources and, if overdue SDR obligations are involved, suspend its right to use SDRs.
6-12 monthsThe Executive Board will review its decision on limitation within three months, with the possibility of a second review if warranted. It is proposed that, depending on the Executive Board’s assessment of the specific circumstances and of the efforts being made by the member to fulfill its obligations to the Fund, a declaration of ineligibility be considered to take effect not more than twelve months after the emergence of arrears. It is proposed that the sending of communications to all Fund Governors and the heads of selected international financial institutions regarding the member’s continued failure to fulfill its financial obligations to the Fund be considered at the same time as the declaration of ineligibility.
Up to 15 monthsIt is proposed that a declaration of noncooperation be considered within three months after the dispatch of the communications.
Up to 18 monthsIn case an amendment of the Articles would be adopted, is proposed that a decision on suspension of voting and representation rights be considered within three months after the declaration of noncooperation.
Up to 24 monthsIt is proposed that the procedures on compulsory withdrawal be initiated within six months after the decision on suspension (in case an amendment of the Articles would be adopted) or nine months after the declaration of noncooperation.

Corresponds to Article XXIX(a) of the Articles of Agreement after the Second Amendment.

Corresponds to Article XXVI, Section 2(a) of the Articles of Agreement after the Second Amendment.

See footnote 2.

See footnote 2.

For paragraphs 1 and 2, see paragraph 4 of Attachments A and B to Decision No. 10464-(93/130) on pages 202 and 206-7.

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