Brau: Treasurer’s is the financial arm of the IMF. We mobilize, manage, and safeguard the IMF’s financial resources.
Mobilizing resources involves three areas: First, the work related to quotas, our main source of financial resources, and in particular to quota reviews and quota increases. Second, the department deals with all aspects of raising the resources for our concessional lending through the Poverty Reduction and Growth Facility (PRGF) and for the Heavily Indebted Poor Countries (HIPC) Initiative. This mobilization effort has kept us very busy over the past year. And third, the department is responsible for the operation of the SDR system, including the special equity allocation of SDRs, which is still pending, and the recent decisions to change the valuation and interest rate on the SDR.
Managing resources covers activities that range from general policies on the use of IMF resources all the way to the nitty-gritty of accounting and financial reporting. Let me give you a few examples. On the policy side, and together with other departments, we advise management and the Board on policies on the use of IMF resources, such as the interest rate charged on IMF lending and on net income to be applied to the IMF’s precautionary balances. We invest the $11 billion in PRGF and HIPC grant and deposit resources. We make all the disbursements when countries borrow from the IMF and also manage all SDR transactions between SDR holders. And internally, the department effects and controls all administrative expenditures, including the payroll.
The third important function is safeguarding resources. It is the role of the Treasurer’s Department to assess and monitor financial risks to the IMF and to help protect the IMF against arrears from member countries and to safeguard resources more generally. The department takes the lead in formulating policies to deal with existing arrears and the complex work of finding financial solutions to clear the arrears of specific members.
Brau: I was impressed by the breadth of activities in the department, and much of the core work that I just described to you will continue. But I have set new priorities in the past year. First, in April 2000 we began a new investment policy for about $11 billion in resources in the PRGF and HIPC Trusts. The income from these resources will be used to subsidize PRGF lending and help finance the IMF’s share of HIPC debt reduction. Until recently, the IMF invested only in short-term deposits with the Bank for International Settlements (BIS). We have now diversified under a conservative strategy and are investing the bulk of these resources in short-term, fixed-income securities with the BIS and external investment managers, including the World Bank and private managers. Our aim is to realize, over a longer term, something like 50 basis points in additional revenue. On a portfolio of $11 billion, this means over $50 million in additional income annually—a very significant sum in additional support for our poorest member countries. We are on track toward our goal in the first six months of operation of the new strategy.
Our second priority is to become much more open and transparent concerning all of our financial operations and our financial structure. This also means, more generally, that we have to communicate better with the public.
A third priority has been the new safeguards assessments under a policy adopted by the Board last spring.
Finally, we have taken a close look at our internal priorities. One priority is to improve our personnel and managerial practices and to enhance staff mobility both within and outside the department. The other is to achieve two major systems renewals: first, to put in place a first-class financial information, operating, accounting, and reporting system for the benefit of all users, including member countries; and second, to put in place a new administrative processing and accounting, and budget execution and reporting system that will allow further significant streamlining of administrative procedures. To lay a basis for this, we reorganized the department last summer on clear functional lines.
Brau: The IMF is a public institution that attracts a lot of interest. I believe we should welcome and respond to this interest with disclosure and full accessibility of information. This is what we’ve tried to do on the financial website. The response has been very positive, with, I’m told, 20,000 visits to our website every month.
You can now find on our website all significant financial information on the IMF. This includes quarterly data on the financing of our lending operations. It includes a comprehensive record of all our loans on a country-specific basis with monthly updates. We update all of the key financial numbers weekly, including liquidity, interest rates, SDR rates, HIPC disbursements, approvals of financial arrangements, and disbursements and repayments under arrangements—they are all there.
We also posted the IMF’s new financial statements. For the first time, these statements have been prepared in full compliance with international accounting standards and now reflect international best practice as far as disclosure, format, and intelligibility are concerned. The IMF should certainly lead in this area and fully practice what we advise others to do.
The quota and voting shares of member countries should reflect their relative economic position in the world economy.
Brau: This is clearly a very important issue, because it is basic to the acceptance of the IMF as a global institution. The quota and voting shares of member countries should reflect their relative economic position in the world economy. Many countries consider that the existing distribution of quotas does not live up to this requirement. A year and a half ago, management appointed a group of independent experts, chaired by Professor Richard Cooper of Harvard University, to make proposals on a new quota formula. This group made a number of useful suggestions—in particular, to update the formulas to take account of the fact that capital account transactions are much more important now. But in the end, their work did not produce satisfactory quota formulas that would command wide support. The Board’s work program foresees that the staff will propose alternative quota formulas, building on the work of the Cooper group, in the hope that something more widely acceptable will emerge. That’s a priority for us and also a difficult task; we hope inspiration will strike us.
Realism in this area is important. The next general quota review must be completed by January 2003. At present, the IMF’s liquidity is at a historic high and, if the projections in the latest World Economic Outlook are correct, our liquidity will remain ample in the immediate future. Of course, very large financing needs could strike, but even if financial needs arise like those experienced during the Asian crisis, we could handle that with the existing level of liquidity. And we also have the capacity to borrow under the New Arrangements to Borrow if the stability of the international monetary system is under threat. So there may not be a need to increase aggregate quotas.
A large-scale reallocation of quota shares according to a new quota formula could be done only in the context of a general quota increase. If there is none, one should look for selective quota adjustments for the few countries whose quota shares—according to a new formula—are most out of line. This would increase the absolute quotas of a handful of countries and reduce the shares of all the rest by small amounts, which should be doable. Separately, the Board is also now working on a selective quota increase for China to reflect the return of Hong Kong to Chinese sovereignty in 1997.
Brau: These have been very major reforms—the first comprehensive reform of the IMF’s financing facilities in many years. The purpose has been to adapt the IMF’s facilities to the changing global environment. So one thrust of the reforms was to adapt IMF facilities to the reality that most members have increasing access to private capital markets, which has changed the nature of the balance of payments difficulties they face. A second aim was to adapt the facilities—in particular, the Contingent Credit Lines [CCL]—to make them more useful in crisis prevention.
The review also abolished some little-used facilities—the Buffer Stock Financing Facility, the Contingency Financing Facility, and IMF support for policies on Currency Stabilization Funds and for Debt and Debt-Service Reduction—while retaining the emergency and postconflict assistance provision as a special policy. So the IMF really now has a set of streamlined core financing facilities ready for use.
For the CCL, one aim was to make it a more attractive instrument for crisis prevention by reducing the CCL’s surcharge over the regular rate of charge to 150 basis points. If it’s drawn upon, it will be 150 basis points cheaper than the Supplemental Reserve Facility [SRF]. We reduced the commitment fee for large commitments under all financial facilities.
In the case of Stand-By Arrangements, the Extended Fund Facility, and the Compensatory Financing Facility [CFF], there are two important changes. One is the introduction of expectations regarding early repayments of IMF loans, which are intended to discourage overly long use of IMF resources. Staff analysis has shown that in slightly more than the majority of past cases, the balance of payments improvement was much faster than projected, enabling the member to repay its loans earlier. If the balance of payments situation of the country does not improve quickly enough to repay early, the burden is on the member to request an extension from the Board, and the Board can grant this; in this case, the member has to repay on the original schedule.
The second major change is intended to discourage overly large use of IMF resources, through a surcharge of 100 basis points on IMF credit outstanding (other than under the CFF) in excess of 200 percent of quota. For IMF credit outstanding in excess of 300 percent of quota, there is a surcharge of 200 basis points. This surcharge should also encourage members to repay earlier.
These changes are important from two perspectives. First, the higher likelihood of capital account crises—and thus use of the CCL and the SRF—with larger access but much shorter repayment periods means that in the future we can expect to see greater swings in the amounts of IMF credit outstanding. Second, we will see shorter use of IMF resources and lower amounts, because members have a sharper incentive to repay when IMF credit is no longer needed. Our resources will revolve faster, enabling us to deal with more financing needs with the existing pool of resources.
We will bend over backwards, if necessary, to have member countries give us grant resources for our poorest member countries.
Brau: The condition for an SDR allocation is that there should be a long-term global need to supplement existing reserve assets. For more than two decades now, that need has not been identified by the required 85 percent majority of the Board. The world economy is in rather good shape, and I just don’t see the conditions that could lead to consideration of a general SDR allocation. But we do have the fourth amendment of the Articles, which provides for a onetime “equity” allocation of some SDR 21 billion. This would double the amount of SDRs outstanding. The amendment was agreed by the Board of Governors in 1997 specifically to permit those countries that have never received an SDR allocation to receive one. Ratification of this is still in progress. As of December 2000, 98 members, with 65 percent of the voting power, have accepted, and we need 110 with 85 percent. Those who have still to accept include Argentina, Australia, Brazil, Indonesia, Kuwait, Malaysia, Russia, Ukraine, the United States, and Venezuela.
Brau: The accounting arrangements and financing of the HIPC Initiative and the PRGF are indeed complex, for the very simple reason that we will bend over backwards, if necessary, to have member countries give us grant resources for our poorest member countries. Donor countries have their own budget problems and often go to great lengths to get us these moneys, so we need to be receptive to complex procedures. We need not apologize, but rather we must express our gratitude for the financing.
Is the General Resources Account—the basic financing mechanism of the IMF—complex? In reality, it is not. But it is unique and it employs a special terminology. This puts a special obligation on us to be as transparent and as lucid as possible. We obtain reserve assets from countries in strong external positions in proportion to their quota share. On the reserve assets we use, we pay interest at the SDR interest rate, which is based on three-month market rates. We turn around and lend these assets out under the financing facilities we discussed earlier at a rate of charge that is higher than the interest rate we pay our creditor members. The margin is sufficient to finance our administrative expenditures and provide some additions to precautionary balances. That is it. It’s quite simple.
Our financial mechanisms become complex in two areas. First, we make adjustments to the rate of remuneration—what we pay our creditor members—and to the rate of charge because we have to deal with the financial consequences of arrears by a few member countries. This complexity will disappear when arrears disappear.
The second complexity comes from onetime operations, such as off-market gold transactions to help finance HIPC. They are complex because there was opposition from members to our implementing a straightforward on-market way of mobilizing a part of our gold holdings.
It’s also important to recognize that decisions of the Board on anything affecting the rate of charge and net income require a 70 percent majority of the votes, which may require compromises nobody is entirely happy with. Sometimes, when a compromise is struck, the staff is asked at the same time to come up with “simplifications.”
Transparency is an asset here. I have asked my staff to review all the proposals for simplification of the IMF’s finances made over the past decade. Most of them were impractical and of interest only to a narrow group of members, but a few were realistic in principle. We will set out the reasons why they were not adopted and what can or cannot be done in terms of reducing complexity.
Brau: The genesis of this new policy was the widely reported instances of misreporting by some members under IMF-supported programs—which is a very real problem—and widespread allegations of misuse of IMF resources, for which no evidence has ever been adduced. Certainly misreporting is a serious matter, because it goes to the heart of the integrity of our operations. The Board reviewed our entire panoply of measures to ensure that resources were being used for the purposes intended. It concluded that ex post policies, which deal with misreporting once it has occurred, needed to be strengthened. This has now been done. But the Board also concluded that the IMF should employ certain ex ante policies, which hitherto we have not done. This would involve safeguards assessments to determine whether the accounting, financial reporting, audit, and internal financial control mechanisms of a member’s central bank are adequate for proper management of its resources, including IMF resources provided to it. If vulnerabilities are identified, staff would propose remedies, including measures that would be implemented prior to further disbursements of IMF resources. The Board adopted this policy, effective July 1, 2000, and the Safeguards Assessment Unit carries it out.
This work is ongoing and sensitive, and extra care is needed to do it correctly. We believe that if this safeguards framework had been applied in recent high-profile cases of misreporting, there would have been a fair chance that we would have detected what later gave rise to the problems of misreporting.