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Overdue payments: IMF strategy stresses prevention, cooperation

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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To maintain the cooperative nature and protect the monetary character of the IMF and to keep other sources of official and private credit open to them, members must meet their financial obligations to the IMF on time. Members that incur arrears are expected to settle them as quickly as possible.

Strategy

The IMF’s strengthened cooperative strategy, introduced in 1990, helps prevent new cases of arrears from emerging and existing arrears from becoming protracted (overdue by six months or more). The three elements of the strategy—prevention, intensified collaboration, and remedial measures—continued to be applied in 1998/99. The strategy entails close collaboration among the IMF, the World Bank, and other international financial organizations in encouraging member countries to resolve their arrears problems.

Prevention. To prevent new cases of arrears from emerging, the IMF applies conditionality on the use of its resources, assesses borrowers’ medium-term external viability and ability to repay, cooperates with donors and other official creditors to ensure that IMF-supported adjustment programs are adequately financed, and provides technical assistance to help members formulate and implement reforms.

Strengthened surveillance has reinforced the IMF’s ability to assess a member’s ability to repay, as have debt sustainability analyses prepared jointly by the IMF and World Bank staffs and the country authorities for the heavily indebted poor countries (HIPCs) in the context of the HIPC Initiative.

Intensified collaboration and the rights approach. Intensified collaboration helps members design and implement economic and structural policies to resolve their balance of payments and arrears problems. It also provides a framework for members in arrears to establish a track record of policy and payments performance, mobilize resources from international creditors and donors, and become current in their obligations to the IMF and other creditors. In some cases, a country’s economic policies are formulated in the context of a “rights-accumulation program.” A rights-accumulation program shares many of the features of a regular IMF-supported macroeconomic stabilization and structural reform program. It allows a country in protracted arrears to accumulate rights to future drawings of IMF resources through its adjustment and reform efforts. Future drawings are made only after satisfactory completion of the rights program and are conditional on clearance of the member’s arrears and IMF approval of a successor arrangement or arrangements.

The rights approach is limited to the 11 countries that were in protracted arrears to the IMF at the end of 1989. Five of the original 11 eligible countries—Cambodia, Guyana, Honduras, Panama, and Vietnam—cleared their arrears to the IMF without recourse to the rights approach. Peru, Sierra Leone, and Zambia adopted rights-accumulation programs and successfully completed those programs and cleared their arrears. Liberia, Somalia, and Sudan remain in arrears to the IMF.

Remedial measures. The arrears strategy includes a timetable of remedial measures of increasing intensity to be applied when members do not actively cooperate with the IMF in resolving their arrears problems. The steps can range from a temporary limit on the member’s use of IMF resources (on the basis of a complaint issued to the Executive Board) to compulsory withdrawal.

In view of Sudan’s progress since February 1997 in implementing macroeconomic and structural policies, on August 27, 1999, the Executive Board lifted the declaration of noncooperation that had been in place since September 14, 1990. The Board also decided that it could consider lifting the suspension of Sudan’s voting and related rights if the country’s policy performance and record of payments to the IMF were satisfactory for 12 months from the date of the Board decision. The Board decision is the first step in scaling back the remedial measures that the IMF had applied earlier to Sudan.

Developments

Total overdue financial obligations to the IMF increased slightly in 1998/99, to SDR 2.30 billion from SDR 2.26 billion in 1997/98, with the number of countries in protracted arrears remaining at seven. As of August 31, 1999, four countries were subject to declarations of ineligibility to use the IMF’s general resources; declarations of noncooperation remained in effect for two of them; two had their voting and related rights in the IMF suspended; and for one, there was an outstanding complaint with respect to compulsory withdrawal from the IMF. Following its annual review of the arrears strategy in March 1999, the Board decided to extend again the deadline for entry into a rights-accumulation program until the spring 2000 meeting of the Interim Committee.

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