Legal and institutional Aspects of the international Monetary System

12 Relations Between Banks’ Loan Agreements and Fund Stand-By Arrangements

International Monetary Fund
Published Date:
December 1984
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The drafters of agreements committing commercial banks to lend to the monetary or other official authorities of a country (member) that is a member of the International Monetary Fund (Fund) sometimes refer in the agreements to a stand-by or extended arrangement approved by the Fund for the benefit of the member. It is not known how widespread the practice has become, but it seems to be increasing and common enough to justify discussion of provisions in which these references occur. A loan agreement may require representations from the borrower about various aspects of the relationship between the member and the Fund. The representations may refer to the country’s membership in the Fund, the country’s standing in the organization, the existence of an approved arrangement, the ability of the country to draw resources under an arrangement, and the extent to which resources have been drawn. Provisions of loan agreements treat these and other aspects of a member’s relationship with the Fund in a variety of ways. Some provisions seem to be standardized. A purpose common to all the provisions requiring representations is to give the lender some assurance of safety in lending or in continuing to lend.1

The theme of this Chapter is that if provisions are not drafted with expert knowledge of the law and practice of the Fund, the assurance may be illusory or ambiguous. It will be useful to deal briefly with the financial structure and the financial activities of the Fund, the policies of the Fund on the use of its resources, and certain features of standby and extended arrangements as a preface to the discussion of some provisions that have appeared in the loan agreements of banks. The discussion reflects the current policies and practice of the Fund. The point may seem obvious but it is emphasized because a process of steady modification goes on as economic and financial conditions change in the world.

Financial Structure of the Fund

The transactions and operations authorized by the Fund’s Articles of Agreement (Articles) are conducted through one of two departments, or through both. Transactions are exchanges of monetary assets for other monetary assets; operations are other uses of monetary assets.2 Transactions and operations on the account of the Fund are conducted through the General Department. All transactions and operations involving SDRs are conducted through the Special Drawing Rights Department.3 The SDR is the monetary asset that the Fund can allocate to all members to supplement their other reserve assets if there is a long-term global need for a supplement.4 Transactions and operations in which the Fund obtains or disposes of SDRs in its capacity as a holder of SDRs are conducted through both departments.5

financial structure

The Special Drawing Rights Department will hold resources only rarely and fleetingly. All other resources, except those held in Administered Accounts, are held in the accounts of the General Department. The resources of one department cannot be reached to meet the obligations or losses of the other department, except that the expenses of conducting the business of the Special Drawing Rights Department are paid from the General Department against reimbursement in SDRs by assessments on members.6

Administered Accounts exist outside the two departments under authority in the Articles for the Fund to perform services, including the management of resources contributed by members (and, by implication, others), provided that the services are consistent with the Fund’s purposes.7 The Fund owns the resources held in Administered Accounts, but the transactions and operations conducted through them are not on the account of the Fund. The Trust Fund 8 and two Subsidy Accounts,9 all of which the Fund manages for the benefit of poorer developing countries, are the Administered Accounts that have been established so far. The resources in the Trust Fund were derived from the disposition that was made of some of the Fund’s gold in order that the proceeds beyond the former official price could be used to make loans on concessional terms; the resources in the two Subsidy Accounts have been contributed to help in the payment of charges exigible as a result of some transactions with the Fund.

The General Department consists of three Accounts for which there is express authority in the Articles, together with other accounts for which implied authority exists. Of the three accounts, the Investment Account and the Special Disbursement Account are not directly related to the subject matter of this article. The Fund is authorized to invest resources through the Investment Account in an amount not in excess of the Fund’s reserves.10 If the Fund were to make further sales of gold on the basis of market prices, the proceeds in excess of the former official price would be held in the Special Disbursement Account.11 From this account, the Fund could make transfers to the third of the accounts for immediate use in transactions and operations authorized by the Articles. Alternatively, resources held in the Special Disbursement Account could be used directly in transactions and operations that were not otherwise authorized by the Articles but were consistent with its purposes. Proceeds of the liquidation of the Trust Fund will be held in or transferred through the Special Disbursement Account.12

The third account is the General Resources Account, in which all other assets of the General Department are held, except those held in accounts established under implied authority.13 The assets held in the General Resources Account are called “general resources” and consist of the currencies of members, SDRs, and gold. The resources are derived from the subscriptions of members, borrowings by the Fund, transfers from the Special Disbursement Account if they should occur, and transactions and operations conducted through the General Resources Account. The composition of the general resources changes whenever transactions or operations are conducted through the General Resources Account.

The accounts of the General Department established so far under implied powers are Borrowed Resources Suspense Accounts.14 In them, the Fund holds balances of currency it receives under certain borrowing agreements before the balances can be used in transactions conducted through the General Resources Account, or assets that the Fund will use on the due dates for the repayment of these borrowings. Balances of currency are held in the Borrowed Resources Suspense Accounts to prevent the effects on members that would follow if the Fund held the balances in the General Resources Account, because the volume of a member’s currency held in that account affects a number of the member’s rights and obligations under the Articles.

The provisions of loan agreements that refer in some way to the Fund’s resources relate to the general resources the Fund makes available through the General Resources Account.


It follows that the policies of the Fund to be considered are those that govern the transactions by which members make use of the general resources. The transactions are properly so called because they take the form of the sale by the Fund to a member of the currencies of other members or SDRs held in the General Resources Account, in return for the purchasing member’s currency, under one or another of the Fund’s policies.15

One way in which these policies can be distinguished from each other is by reference to “conditionality.” 16 That word connotes the standards that a member’s economic and financial program must meet to satisfy the requirements of the particular policy involving conditionality to which the member wishes to resort.

The present Articles provide that only transactions in the reserve tranche shall be free from the requirement of conditionality, because that tranche is a reserve asset owned by the member.17 The reserve tranche has replaced the gold tranche that existed under the earlier versions of the Articles. The original character of the gold tranche as equivalent to a member’s true economic contribution to the Fund (the member’s gold subscription plus the net outstanding use of the currency subscription by other members minus its net outstanding use of the currency subscriptions of other members) does not explain the reserve tranche. That tranche is to some extent an artificial concept that has been developed in order to enable members to hold in the Fund the reserve positions of their choice as part of their reserves.18

The standards of conditionality are designed to promote a solution of the balance of payments problem to which the policy applies, and to give some assurance that the member will be able to terminate its use of the Fund’s resources within a period described as “temporary” by the Articles.19 The policies now in existence require conditionality that may be mild or strict. The character of the problem that a policy seeks to resolve and the volume of outstanding use of the Fund’s resources that a member is already making or wants to make are among the factors that influence the degree of conditionality that the Fund builds into a policy.

The policies with mild conditionality are the compensatory financing facility 20 and the buffer stock facility.21 Under the former policy, the Fund provides resources when a member’s problem is caused by a shortfall in the proceeds of its exports that is largely attributable to circumstances beyond the member’s control or is caused by an increase in the cost of cereal imports. The compensatory financing facility was established predominantly, but not exclusively, for the benefit of members that export primary products.22 The buffer stock facility is intended to assist members that have difficulty in financing their contributions to international buffer stocks of primary products under buffer stock agreements that meet specified standards. Transactions under these two policies are not carried out under stand-by or extended arrangements. References in loan agreements to these transactions would serve no useful purpose.

The first credit tranche policy is also a policy of mild conditionality, but the policy must be treated as relevant in this Chapter because it can apply to transactions under stand-by arrangements. Transactions are in the first credit tranche to the extent that they increase the Fund’s total holdings of the purchasing member’s currency in the General Resources Account, minus holdings obtained under other policies, to no more than the equivalent of 25 percent of the member’s quota. The Fund has described its attitude to requests by a member for transactions in the first credit tranche as a liberal one, provided that the member is making reasonable efforts to solve its problem.23 The policies expected of the member in accordance with the conditionality for this tranche are less severe than for the higher tranches, the whole of the tranche is available without division into installments, and performance criteria, which are discussed below, are not applied.

Beyond the first credit tranche are three higher credit tranches, each of which is measured by reference to the Fund’s total holdings of a purchasing member’s currency in the General Resources Account minus those obtained under other policies.24 Each of these tranches is equivalent to 25 percent of quota. It has been said at times that conditionality increases in severity as transactions progress through the higher tranches, but this statement is not supported by any decision of policy. The Fund’s declaration on conditionality within the higher tranches is that requests for transactions in these tranches require substantial justification.25 The effect of this criterion is that a membei must demonstrate to the satisfaction of the Fund that the program the member intends to follow will be adequate for the solution of its problem within the specified period.

The Fund’s extended facility is designed to give special balance of payments assistance to members when their balance of payments difficulties are associated with structural maladjustments.26 The assistance, which is given under extended arrangements,27 is intended to exceed the amount of the credit tranches and can be as much as the equivalent of 140 percent of quota. The conditionality is directed toward the correction of the maladjustments and is comparable in character to the conditionality of the higher tranches under the credit tranche policy.

The amounts of 100 percent under the credit tranche policy and 140 percent under the extended facility are the basic amounts under these policies, but they are not the maximum amounts under present conditions of increased difficulties for members. The Fund has responded to current difficulties with a policy on enlarged access 28 that enables a member to make maximum purchases under a stand-by or extended arrangement equivalent to 150 percent of quota a year or 450 percent of quota over a three-year period. To make these limits effective, the policy provides for specified supplements to each tranche and to the 140 percent of quota under extended arrangements, as well as for amounts in excess of these supplements. The supplementary or excess amounts are made available with resources borrowed by the Fund. Separate standards of conditionality are not applied because a transaction is financed, in whole or in part, with borrowed resources.

Stand-By and Extended Arrangements

A stand-by arrangement is a decision of the Fund, largely in standard form, that gives a member the assurance that it will be able to make purchases of the Fund’s general resources, in accordance with the terms of the decision, during a specified period and up to a specified amount.29 Attached to the stand-by arrangement is the member’s letter of intent setting forth the member’s program, but the two documents do not constitute an agreement in the legal sense between the Fund and the member.30 The terms of the decision, however, make the member’s ability to go on making purchases in the higher credit tranches dependent on the member’s observance of certain policies or practices that are elements in the program. These elements, called “performance criteria,” are selected by the Fund on the principle that the observance of them will be strong, although not necessarily conclusive, evidence that the program is on course. If a member fails to observe performance criteria, it is not committing breaches of an agreement between the Fund and the member, but it will be seen that some performance criteria require the observance of certain obligations under the Articles. The failure to observe these performance criteria would be violations of the Articles.

The stand-by arrangement was developed as an instrument that would satisfy a member’s need to have assured resources as backing for its program without sacrificing the Fund’s need to safeguard its resources against the possibility of future improper use. A balance between these different interests was reached by providing that performance criteria were to be objective in character and formulation. They should enable both the Fund and the member to be aware whether the criteria were or were not being observed without the need for the exercise of subjective judgment or discretion by the Fund. Obvious examples of performance criteria are quantitative limits of a financial or economic character that are not to be exceeded, such as the volume of credit expansion by the central bank, or quantitative targets of a financial or economic character that are to be reached, such as the reduction in international payments arrears. One class of performance criteria is confined normally to macroeconomic variables. The criteria do not purport to define by what detailed measures the limits are to be observed or the targets reached. In exceptional circumstances, performance criteria may relate to other variables if they are essential for the effectiveness of a member’s program because of their macroeconomic impact.

The Fund tries to limit performance criteria to those that are essential to enable it to evaluate the member’s progress. For this reason, and also because performance criteria must be objective and must relate only to macroeconomic variables, the criteria may cover only a small part of the program. Elements of a program that are not, or cannot be, made performance criteria may be as important as performance criteria for achieving the success of the program.

The macroeconomic policies that are the subject of performance criteria are not necessarily the same in all cases. A second category of performance criteria, however, is standardized. The standard performance criteria are intended to give effect to some specific provisions of the Articles or to some specific policies of the Fund and are included in all stand-by or extended arrangements. These performance criteria interrupt a member’s right to make further purchases if the member imposes or intensifies restrictions on payments and transfers for current international transactions, introduces or modifies multiple currency practices, concludes bilateral payments agreements that are inconsistent with the Articles, or imposes or intensifies import restrictions for balance of payments reasons. Transactions are interrupted because these measures suggest that a program is not succeeding.31

Extended arrangements are subject to the Fund’s policies governing stand-by arrangements to the extent that the Fund has not decided on variations. An important difference between the two kinds of arrangement is that the normal period for a stand-by arrangement is one year, while for an extended arrangement it is three years, but this difference is not rigidly observed, particularly for stand-by arrangements. The period for a number of stand-by arrangements, for example, has gone well beyond one year and sometimes as far as three years. Another important difference is that the maximum period within which a member must terminate the use of resources is five years under a stand-by arrangement but ten years under an extended arrangement, except that the period is seven years under both to the extent that transactions are financed with resources obtained by the Fund under some of its borrowing agreements. In the rest of this Chapter, only stand-by arrangements will be mentioned, because the distinction between stand-by and extended arrangements has no substantive effect on the further discussion. The drafters of loan agreements, however, must refer in those agreements to the appropriate form of arrangement.

The length of the period of a stand-by arrangement may make it impossible to establish all performance criteria in advance for the whole period. In those circumstances, stand-by arrangements provide for consultations as a result of which performance criteria will be established to cover successive subperiods as necessary. In addition, when there are substantial uncertainties about future economic trends, stand-by arrangements may include provision for reviews and the possible revision of some performance criteria that have been established, or for the addition of new performance criteria. Further transactions will not be possible if the reviews are not held or if understandings are not reached on the revisions or additions the Fund considers necessary.

Ties to Fund Arrangements: Membership

It is now possible to examine some provisions that have been incorporated in loan agreements for the purpose of relating the agreements to stand-by arrangements. The discussion will be in terms of representations that the borrower (or guarantor) is required to make under loan (or guarantee) agreements, but often the circumstance that is the subject matter of the representation is referred to again in the provision of the agreement that defines events of default. If the borrower is unable to represent that the circumstance exists or has occurred, the borrower’s inability falls within the definition of default. The language that is appropriate for representations will be appropriate in most instances for the definition of events of default also, with such adaptations as are required by the difference in contractual context. The discussion of the provisions of loan contracts can be taken to apply to agreements to reschedule debts also if the agreements contain similar provisions.

Ordinarily, a lender’s purpose is to obtain for itself as much protection as possible from the borrower’s relationship with the Fund. The lender’s first interest will be to ensure that the borrower is already, and will remain, a member of the Fund during the period in which advances can be called for under the loan agreement. The lender can require a representation by the borrower (Patria) before the loan agreement is concluded that Patria is a member of the Fund and, at specified dates during the life of the agreement, that Patria continues to be a member. Another possible technique would be to require a representation that Patria has not “withdrawn from membership in the Fund.” A few withdrawals have occurred, but not in recent years, and in one instance in the past the country re-entered the Fund.

It is possible for Patria to terminate its participation in the Special Drawing Rights Department without withdrawing from the Fund,32 although this event has never occurred and is hardly likely to occur. A lender may wish, however, to require a representation that “Patria is a member of the Fund and a participant in the Special Drawing Rights Department of the Fund.” The lender may be interested in the member’s participation in the Special Drawing Rights Department because participation may augment the member’s reserves.

A representation affirming membership, whether or not coupled with continued participation in the Special Drawing Rights Department, is not adequate protection because the Fund may have initiated the procedure to compel Patria to withdraw.33 The Fund is unlikely, for a variety of reasons, to initiate these proceedings. The dislike of compulsory withdrawal is illustrated by the fact that while the Fund has always had authority to compel a member to withdraw if it “persists in its failure to fulfill any of its obligations under this Agreement,” 34 since the date of the First Amendment, which created the SDR, the Articles contain the qualification that a member shall not be compelled to withdraw because it “has failed to fulfill any obligations with respect to” SDRs.35

A lender that seeks protection against the possibility of withdrawal by a country from the Fund should be aware of the step that the Fund must take as a prelude to compulsory withdrawal, although the Fund is not required to proceed from this first step to the second step of compelling withdrawal. Under Article XXVI, Section 2(a) of the Articles, the first step is a declaration of ineligibility by the Fund:

If a member fails to fulfill any of its obligations under this Agreement, the Fund may declare the member ineligible to use the general resources of the Fund. Nothing in this Section shall be deemed to limit the provisions of Article V, Section 5 or Article VI, Section 1.

The two provisions referred to also authorize declarations of ineligibility by the Fund, but in special circumstances. The implication of the reference to the two provisions may be that members can be declared ineligible because the special circumstances are undesirable even though they are not considered to be failures to fulfill obligations. Ineligibility is discussed later in this Chapter. It is sufficient to make the point here that a lender can obtain broad protection under another provision in its loan agreement, also discussed below, that disposes of the necessity to dwell separately on ineligibility as a step toward withdrawal. The provision to be discussed, however, does not cover an actual withdrawal, although it does so by implication. A representation that Patria remains a member of the Fund (or that it has not withdrawn from membership) would remove any doubt.

“Good Standing”

Lenders seem to realize that a representation confined to membership is inadequate, because they have often drafted a provision requiring a representation along these lines: “Patria is a member in good standing in the Fund.” The phrase “in good standing” creates a problem because it is not a term of art in the Fund, and because the language of the provision gives no clue that helps in elucidating the drafter’s intention.

The phrase could be interpreted to mean that Patria is not “in good standing” if one of the following actions has taken place:

— Patria has been informed that in the opinion of the Managing Director it has failed to perform an obligation;

— the Managing Director has informed the Executive Board that in his opinion Patria has failed to perform an obligation; 36

— the Fund has initiated proceedings to declare Patria ineligible to use the Fund’s resources because of a failure to perform an obligation;

— the Fund has suspended Patria’s right to use some or all of its holdings of SDRs; 37

— the Fund has taken some other censorious decision, such as a decision that Patria is not acting in accordance with the Fund’s principles for the guidance of members with respect to their exchange policies.38

The list of actions by the Fund or the Managing Director that the lender might consider an impaired standing could be lengthened substantially.

Some actions are responses to breaches of obligation, or to allegations of breaches, but others are not, although these other actions also are responses to undesirable behavior by Patria.39 The lender’s intention may be to refer, among other events, to Patria’s failure to observe performance criteria, even though, as already noted, nonobservance is not a breach of agreement, and is not necessarily a failure to fulfill obligations under the Articles.

It is hardly likely that a borrower will know what it is representing when it declares that it is “in good standing.” Many of the actions listed above, and more, would fall within the reach of provisions that are considered later in this Chapter and that avoid the ambiguities of the expression about good standing.

A representation that would be free of ambiguity and would not fall within the provisions discussed later in this Chapter would be a representation that “the Managing Director has not made a report to the Executive Board of the Fund under Rule K-l or Rule S-l of the Fund’s Rules and Regulations.” Under these Rules and Regulations, the Managing Director must report to the Executive Board any case in which it appears to him that a member is not fulfilling obligations under the Articles. Rule S-1 applies to obligations with respect to SDRs and Rule K-1 applies to all other obligations.

Stand-By Arrangement in Effect

A provision requiring a representation that Patria has obtained a stand-by arrangement should not refer to the arrangement in contractual language, because, as noted above, an arrangement is a decision and not an agreement of the Fund. For example, the provision should not call for a representation that the Fund has “agreed” with Patria on an arrangement, but that the Fund “has approved a stand-by arrangement for Patria.” More information can be added to this language, if the lender wishes, along the following lines: “for a period of … years from … for a total amount equivalent to SDR. …”

Whether these words are added or not, the lender should add a clause as a safeguard against two possibilities. An arrangement may become effective only when a condition precedent is satisfied, and an arrangement, whether or not it has become effective, can be canceled by Patria. Therefore, the lender should draft the provision somewhat as follows: Patria represents that the Fund “has approved a stand-by arrangement for Patria [for a period of … years from … for a total amount equivalent to SDR …] and that the stand-by arrangement is in effect.”


Lenders sometimes require a representation by Patria that it is “eligible” or “fully eligible” to make purchases (or to draw) under a stand-by arrangement. “Eligibility” is a term of art in the Articles of the Fund, and the danger is that references to eligibility in the provisions of loan agreements might be interpreted to mean what they mean in the Fund. In that event, the provisions would not be a realistic safeguard for lenders.

The Fund can declare a member ineligible to use the Fund’s resources if the member has failed to fulfill an obligation under the Articles other than an obligation with respect to SDRs, or in the special circumstances covered by Article V, Section 5 or Article VI, Section 1, both of which relate to improper uses of the Fund’s resources. The Fund’s policy has been to avoid declarations of ineligibility. Only one declaration has been made throughout the history of the Fund, and one other case of ineligibility occurred automatically under a provision that is no longer included in the Articles. The reluctance to apply the remedy of ineligibility is encouraged by the Articles, which give the Fund the alternative remedy under Article V, Section 5 of “limiting” further use of its resources if a member is misusing them. Furthermore, the Fund has adopted a Rule and Regulation (K-2) under which, in any case in which a member can be declared ineligible for whatever reason, the Fund may refrain and instead state the circumstances in which, and the extent to which, the member may make a new use of the Fund’s resources. The Fund has been equally reluctant to apply these other remedies. Declarations of ineligibility and the other remedies would be likely to provoke political controversy among members. Practices have been developed that make these remedies unnecessary for safeguarding the Fund’s resources against uses that are not consistent with the Articles.

The technique of performance criteria makes it possible to avoid disagreeable decisions on ineligibility or on the limitation of access to the Fund’s resources. Performance criteria, if not observed, automatically interrupt Patria’s right to make further purchases under its stand-by arrangement without the need for decisions by the Executive Board of the Fund and without publicity by the Fund. A more realistic safeguard for lenders, therefore, is to require a representation that refers to the observance of performance criteria.

Interruption of a member’s right to make purchases is automatic under the Articles if the Fund declares the member ineligible or if the Fund suspends transactions with all members because of an emergency or unforeseen circumstances that threaten the Fund’s activities.40 Paragraph 4 of a stand-by arrangement, or paragraph 5 if the stand-by arrangement provides for resources under the policy on enlarged access, broadens these interruptions to include certain preliminaries to a declaration of ineligibility. The idea is to prevent a member from rushing in to obtain resources because the procedure that might lead to ineligibility has been initiated but not yet completed. The one qualification that the Fund observes is that its defensive action will not prevent compliance with a request for a transaction under the standby arrangement if the request was received by the Fund before it acted. The qualification is observed so as to strike a fair balance between the assured use of the Fund’s resources that a stand-by arrangement is supposed to give, on the one hand, and safeguarding the resources, on the other hand.

Paragraph 4 (or 5) provides:

Patria’s right to engage in the transactions covered by this stand-by arrangement can be suspended only with respect to requests received by the Fund after (a) a formal ineligibility, or (b) a decision of the Executive Board to suspend transactions, either generally or in order to consider a proposal, made by an Executive Director or the Managing Director, formally to suppress or to limit the eligibility of Patria. When notice of a decision of formal ineligibility or of a decision to consider a proposal is given pursuant to this paragraph [4] [5], purchases under this arrangement will be resumed only after consultation has taken place between the Fund and Patria and understandings have been reached regarding the circumstances in which such purchases can be resumed.

A representation that covers both performance criteria and paragraph (4) or (5) could be drafted somewhat as follows:

Patria shall represent on [dates] that:

(i) all performance criteria that were to be established by the date of the representation in accordance with the stand-by arrangement referred to in paragraph [ ] above and the documents attached or annexed to the arrangement from time to time had been approved by the Fund;

(ii) Patria was observing all performance criteria that were to be observed on the date of the representation; and

(iii) on the date of the representation Patria’s right to make purchases under the stand-by arrangement was not suspended under paragraph [4] [5] of the arrangement.

The reference should be to the attached or annexed documents and not to the letter of intent because one or more technical memoranda may be “annexed” to the letter of intent that is “attached” to the stand-by arrangement. Moreover, letters subsequent to the original letter of intent are sometimes declared by the Fund to be “attached” and sometimes “annexed” to the stand-by arrangement when new or modified performance criteria are established.

The phrase “referred to in paragraph [ ] above” in clause (i) of the proposed draft is intended to refer to the representation discussed under the heading “Stand-By Arrangement in Effect,” page 794. The draft assumes that the latter representation precedes in the loan agreement the representation about performance criteria and purchases. The two representations, however, could be combined easily in a single provision.

A stand-by arrangement is likely to provide for new or modified performance criteria after the first year of the program supported by the stand-by arrangement or even earlier in some circumstances. This fact explains the references to required performance criteria and to documents attached or annexed from time to time. The stand-by arrangement provides that purchases cannot be made until the required performance criteria are established.

Patria may not be observing one or more of the established performance criteria on the date to which the representation relates. The Fund, however, may have granted a waiver that permits a transaction notwithstanding Patria’s nonobservance of a performance criterion. The waiver does not eliminate or modify the performance criterion for the purpose of future transactions. Patria will have to observe the performance criterion to qualify for transactions beyond the one for which the waiver is granted, unless the waiver is accompanied by the elimination or modification of the performance criterion for the purpose of future transactions. The Fund is unlikely to grant a waiver if new or modified performance criteria are desirable or if the future of the program as a whole needs to be considered. In view of this attitude of the Fund, a lender may conclude that its commitments under its loan agreement need not be qualified because a waiver has become necessary if it has been granted. The lender could regard the phrase “performance criteria that were to be observed on that date” as covering the case. But the lender might want to know that a waiver had become necessary. To provide for waivers, therefore, the provision as drafted above could be amended so that clause (ii) would read as follows:

(ii) Patria was observing all performance criteria that were to be observed on the date of the representation, or all such performance criteria except those, which Patria shall specify, in respect of which the Fund had granted a waiver that was in effect on that date; and. …

A provision of the kind that has been proposed does not refer to the “general resources” of the Fund. It is not necessary to distinguish the general resources from other resources of the Fund by express language because stand-by arrangements give an assurance of the use of general resources only.

“Entitled” to Make Purchases

Loan agreements sometimes require a representation that on the specified date “Patria was entitled to use the Fund’s resources.” This formulation has the appeal of simplicity but raises a number of difficulties. Under the Articles, a member is “entitled” to make purchases, subject to four conditions.41 One condition is that the Fund has not declared the member ineligible. It has been seen that a member may not be able to make purchases, even in the absence of a declaration of ineligibility, because the member is not observing performance criteria. The member would remain “eligible” and “entitled,” unless it was deprived of its entitlement under another condition. The case might be considered as one that was caught by the condition that “the member’s use of the general resources of the Fund would be in accordance with the provisions of this Agreement and the policies adopted under them.” Even on this interpretation, the representation would not be satisfactory because the member might be able, and therefore “entitled,” to use the resources of the Fund under other policies, even though it was not able to use them under a standby arrangement.

Should the representation, therefore, call for the statement that “Patria was entitled to use the Fund’s resources under the stand-by arrangement approved by the Fund on [date]”? The ambiguities of the word “entitled” would continue to exist but, in addition, the formulation would be subject to the objection discussed in the first paragraph of the next Section of this Chapter.

Purchases Made

The inability of Patria to represent that on a specified date it could make purchases under a stand-by arrangement can be misleading. For this reason, the representation called for should not be in the simple form that on the specified date “Patria was in a position to make purchases under the stand-by arrangement approved by the Fund on [date].” If Patria cannot make purchases on that date, the reason need not be its failure to observe performance criteria or a suspension under the stand-by arrangement. Resources are available in stated amounts during stated periods, and it may be that Patria has made all the purchases that it can make for the time being or that it has made the total purchases for which the stand-by arrangement provides.

A lender might be interested in the purchases that Patria has made even though for the time being Patria cannot make purchases, because the lender wants its own advances to be made in step with purchases under the stand-by arrangement. In that event, Patria might be required to represent that “it has made all the purchases set forth in the schedule of amounts established in or under paragraph 2 of the stand-by arrangement for the period up to [date].” The words “or under” apply to the cases in which the installments for a later period are established at a date after the stand-by arrangement is approved. This language would meet the lender’s need even though paragraph 2 recognizes the authority of the Fund to permit purchases in excess of the scheduled amounts. The Fund has exercised the authority to permit the schedule to be exceeded only rarely.

It would be inadvisable to require the simpler formulation that “Patria has made all the purchases for which the stand-by arrangement provides for the period up to [date].” It might be argued that this formulation permitted the representation to be made even though Patria was unable to make purchases because it was not observing performance criteria. The argument would be that the stand-by arrangement did not provide for further purchases for the time being.

Specified Currency of Purchase

Patria should not be required to represent that it is in a position to purchase a particular currency from the Fund even if the lender has some special interest in that currency, perhaps because the lender wants repayment in the currency. A stand-by arrangement provides that the Fund will select the currencies it will sell in accordance with its policies and procedures, and that it may agree to provide SDRs if the member asks for them when requesting a transaction. In selecting currencies, the Fund’s policies take account of the strength of the balance of payments and reserve position of members, developments in the exchange markets, and the promotion of balanced positions in the Fund for members over time.42

If Patria cannot purchase a currency in which the lender is interested, Patria will be able to purchase other currencies. The Fund distinguishes between the currencies that it has deemed to be “freely usable” for its purposes and the currencies of other members.43 The Fund now deems the currencies of France, the Federal Republic of Germany, Japan, the United Kingdom, and the United States to be freely usable.44 If the Fund sells any one of these five currencies, the issuer of the currency has no obligation to exchange it for another currency, but there will be no problem in making an exchange through the market. If the Fund sells any one of the other currencies, the issuer will be bound to exchange it at once, on Patria’s request, for one of the five currencies selected by the issuer of the currency sold by the Fund. If the selected freely usable currency is not the one that Patria wants, Patria will have no trouble in exchanging that currency in the market for the currency it wants.45

In only one case will Patria be able to choose the currency the Fund must provide. In this case, another member is holding a balance of Patria’s currency, the other member offers the balance in exchange for its own currency, and Patria is willing to make the exchange. If Patria is able to use the Fund’s resources, Patria can insist on purchasing the other member’s currency.46

Scope of Protection

A lender that relates its loan agreement to a stand-by arrangement seeks the protection that a program supported by the Fund is in existence and is being observed. Although the protection offered by properly drafted provisions is valuable, it is not complete. Phasing and performance criteria do not apply to transactions in the first credit tranche. Furthermore, the data that a member must supply to show that performance criteria are being observed are supplied at specified dates. Some purchases may be made before the first date. The Fund seeks to ensure that purchases in the first credit tranche, or before the first date at which the observance of performance criteria can be determined, will be consistent with the Fund’s purposes and policies. For this reason, the Fund may insist that it will approve a stand-by arrangement only if Patria has already put certain policies into effect or adopted certain measures. The protection given by a stand-by arrangement may be incomplete for another reason. The program may include policies that have not been made performance criteria because they cannot be formulated in objective terms, but the pursuit of these policies may be as essential for the success of the program as the observance of performance criteria. In these cases, reviews at specified dates may lead to new understandings that will be effective safeguards.


One kind of representation required by some loan agreements relates to the business of the Special Drawing Rights Department and not to transactions conducted through the General Resources Account. The representation deals with a member’s ability to use its SDRs.

The Fund can suspend a member’s use of the SDRs the member acquires after the suspension, and in one case all the member’s holdings of SDRs, if the Fund finds that the member has failed to fulfill an obligation with respect to SDRs.47 In addition, a member will be unable to use its SDRs pending disposition of a complaint of such a failure that has been communicated by the Fund to the member. A suspension or complaint does not produce ineligibility to use the resources of the Fund or impede transactions under a stand-by arrangement in any other way. Nor does the suspension or complaint imply that the program supported by the stand-by arrangement is not succeeding. A representation that Patria is able to use all its SDRs provides no assurance to a lender that the program is or is not on track.

A lender may be interested, however, in knowing whether a member can make full use of its monetary reserves. In those circumstances, the lender could consider a representation by Patria that “on [date] it was not unable to use SDRs because of a suspension of use or because a complaint had been communicated to it of a failure to fulfill an obligation with respect to SDRs.” A representation that “on [date] it was able to use its holdings of SDRs” is unsatisfactory because Patria may hold no SDRs on that date 48 but may be unable to use SDRs acquired later.

Supplemental Note to Chapter 12

1. After the Eighth General Review of Quotas became effective, the Fund decided in January 1984 to revise the maximum amounts available to members under various policies on the use of its resources. Under the policy on enlarged access, during the period ending December 31, 1984, annual limits of 102 or 125 percent of quota and triennial limits of 306 or 375 percent of quota are substituted for 150 percent for the former annual limit and 450 percent for the former triennial limit. The new limits, like the old, are not targets. Within the ranges now specified, the amounts are determined in each case according to the circumstances of the member and criteria established by the Fund. The new amounts are subject to review before the end of 1984.

2. The standardized performance criteria in stand-by and extended arrangements were augmented on April 20, 1984 to refer to overdue financial obligations to the Fund in addition to the measures and practices already listed. This change entails no change in the draft provisions discussed in this Chapter. The Managing Director does not submit to the Executive Board a request by a member for a stand-by or extended arrangement as long as the member has an overdue payment to the Fund. Nor, in such circumstances, are discussions held or resumed with a member on use of the Fund’s resources.

Note.—This essay was published originally in International Financial Law Review (September 1983), pp. 28–35.

Joseph Gold, Order in International Finance, the Promotion of IMF Stand-By Arrangements, and the Drafting of Private Loan Agreements, IMF Pamphlet Series, No. 39 (Washington, 1982).

Article XXX(h).

Introductory Article; Article XXI.

Article XV, Section 1; Article XVIII, Section 1.

Article XVI, Section 1; Article XVII, Section 2; Article XXI.

Article XVI, Section 2.

Article V, Section 2(b).

Selected Decisions, 10th (1983), pp. 302–20.

Ibid., pp. 321–33.

Article XII, Section 6(f).

Article V, Section 12(f).

Decision No. 6683-(80/185) G/TR, Selected Decisions, 10th (1983), p. 328.

Article V, Section 2(a).

Decisions Nos. 7188-(82/114), 6844-(81/75), and 6845-(81/75), Selected Decisions, 10th (1983), pp. 203 and 217–19.

Article V, Section 3(b); Article XVII, Section 2.

Joseph Gold, Conditionality, IMF Pamphlet Series, No. 31 (Washington, 1979); Manuel Guitián, Fund Conditionality: Evolution of Principles and Practices, IMF Pamphlet Series, No. 38 (Washington, 1981); Gold, Selected Essays, pp. 410–45.

Article V, Section 3(b)(iii) and (c).

Selected Decisions, 10th (1983), pp. 100–109.

Article I(v); Article V, Section 3(a).

Selected Decisions, 10th (1983), pp. 61–70.

Ibid., pp. 70–79.

Louis M. Goreux, Compensatory Financing Facility, IMF Pamphlet Series, No. 34 (Washington, 1980).

Selected Decisions, 10th (1983), p. 26.

On exclusions of holdings under Article XXX(c), see Selected Decisions, 10th (1983), pp. 38, 45, 68, 298, and 299.

See footnote 23.

Selected Decisions, 10th (1983), pp. 27–33.

Ibid., pp. 48–58.

Ibid., Decision No. 6783-(81/40), pp. 40–45.

Article XXX(b).

Joseph Gold, The Legal Character of the Fund’s Stand-By Arrangements and Why It Matters, IMF Pamphlet Series, No. 35 (Washington, 1980).

Ibid. See also footnote 16.

Article XXIV.

Article XXVI, Section 2.

Article XXVI, Section 2(a).

Article XXIII, Section 2(f).

Rule K-1, Rules and Regulations, By-Laws, Rules and Regulations, 40th (August 1, 1983).

Rules S-1 to S-8, Rules and Regulations, ibid.

Article IV, Section 3(b).

Gold, Selected Essays, pp. 148–81.

Article XXVII, Section 1.

Article V, Section 3(b).

Article V, Section 3(d).

Article XXX(f).

Decision No. 5719-(78/46), Selected Decisions, 10th (1983), p. 301.

Joseph Gold, Use, Conversion, and Exchange of Currency Under the Second Amendment of the Fund’s Articles, IMF Pamphlet Series, No. 23 (1978).

Article V, Section 3(d).

Article XXIII, Section 2.

See Section IX, paragraph 2 of the Supplemental Note to Chapter 1.

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