The IMF is a cooperative institution that lends to member countries experiencing balance of payments problems. The IMF extends financing to members through three channels:

The IMF is a cooperative institution that lends to member countries experiencing balance of payments problems. The IMF extends financing to members through three channels:

Regular Financing Activities. The IMF provides loans to countries from a revolving pool of funds consisting of members’ capital subscriptions (quotas) on the condition that the borrower undertake economic adjustment and reform policies to address its external financing difficulties. These loans are extended under a variety of policies and facilities designed to address specific balance of payments problems (see Table 3.1). Interest is charged on the loans at market-related rates, and repayment periods vary depending on the lending facility.

Concessional Financing Activities. The IMF provides loans at a very low interest rate to low-income member countries to support programs to strengthen their balance of payments positions and to foster durable growth, which will lead to higher living standards and a reduction in poverty. The IMF also makes grants available to eligible heavily indebted poor countries (HIPCs) to help them achieve sustainable external debt positions. The principal of concessional loans is funded by bilateral lenders that make resources available to the IMF at market-based rates, with the IMF acting as a trustee. The rate charged to borrowers and grants for HIPC debt relief are subsidized by separate contributions from some member countries and the IMF’s own resources.

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

Among the key financial developments in FY2004 were the following:

  • Outstanding IMF credit reached an all-time high in late 2003 but, by the end of FY2004, it had dropped below the level at the end of FY2003. This was because the demand for new lending was restrained in the second half of the financial year, owing partly to the improving world economic environment, and repayments exceeded disbursements.

  • Credit outstanding continued to be concentrated in a small number of large, middle-income member countries, raising concerns about financial risks facing the IMF. The Executive Board reviewed the IMF’s risk-management mechanisms and level of precautionary balances.

  • The IMF continued its efforts to assist its poorest members in reducing their debt burdens, and initial steps were taken to ensure the continued ability of the IMF to provide adequate financial resources to low-income countries over the medium term.

Regular Financing Activities

The IMF’s regular lending activity is conducted through the General Resources Account (GRA), in which the members’ quota subscriptions are held (see Box 7.1). The bulk of IMF financing is provided under Stand-By Arrangements, which address members’ short-term balance of payments difficulties, and under the Extended Fund Facility (EFF), which focuses on external payments difficulties arising from longer-term structural problems. Loans under Stand-By and Extended Arrangements can be supplemented with short-term resources from the Supplemental Reserve Facility (SRF) to assist members experiencing a sudden and disruptive loss of capital market access. All loans incur interest charges and can be subject to surcharges depending on the type and duration of the loan and the amount of IMF credit outstanding. Repayment periods also vary by type of loan (see Table 3.1).

The IMF’s Financing Mechanism

The IMF’s regular lending is financed from the capital (quotas) subscribed by member countries. Each country is assigned a quotataking into account the country’s economic size and external trade-which determines its maximum financial commitment to the IMF. A portion of the quota is provided in the form of reserve assets (foreign currencies acceptable to the IMF or SDRs) and the remainder in the country’s own currency. The IMF extends financing by providing reserve assets to borrowers from the reserve asset subscriptions of members or by calling on countries that are considered financially strong to exchange their own currency subscriptions for reserve assets (see Box 7.4).

A loan is disbursed by the IMF when a borrower “purchases” the reserve assets from the IMF with its own currency. The loan is considered repaid when the borrower “repurchases” its currency from the IMF in exchange for reserve assets. The IMF levies a basic rate of interest (charge) on loans based on the SDR interest rate (see Box 7.8) and imposes surcharges depending on the amount and maturity of the loan and the level of credit outstanding.

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

The “purchase/repurchase” approach to IMF lending affects the composition of the IMF’s resources but not the overall size. An increase in loans outstanding will reduce the IMF’s holdings of reserve assets and the currencies of members that are financially strong and increase the IMF’s holdings of the currencies of countries that are borrowing from the IMF. The amounts of the IMF’s holdings of reserve assets and the currencies of financially strong countries determine the IMF’s lending capacity (liquidity) (see Box 7.5).

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


Improving global economic and financial conditions, combined with an accumulation of foreign exchange reserves by many emerging market economies, contributed to a decline in new IMF commitments, from SDR 29.4 billion in FY2003 to SDR 14.5 billion in FY2004.1

The IMF approved five new Stand-By Arrangements and one augmentation of an existing Stand-By Arrangement involving commitments totaling SDR 14.5 billion (Table 7.1). In addition, Burundi made a small purchase (SDR 9.6 million) under the IMF’s policy of emergency assistance. No Extended Arrangements were approved and no commitments were made under the IMF’s Compensatory Financing Facility (CFF) during the year.2

Table 7.1

Regular Loans Approved in FY2004

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

Two new large IMF commitments were made during the financial year. In September 2003, a three-year Stand-By Arrangement of SDR 9.0 billion was approved for Argentina in support of the government’s economic program, succeeding the arrangement that expired in August 2003.3 In December 2003, the IMF approved a 15-month extension and SDR 4.6 billion augmentation of Brazil’s existing Stand-By Arrangement, which was originally approved in September 2002.4 Together, these two cases accounted for more than 90 percent of the total new commitments in FY2004.

Thirteen Stand-By and Extended Arrangements were in effect as of end-FY2004, of which five are being treated as precautionary, with borrowers having indicated that they do not intend to draw on the funds committed to them by the IMF. These include Brazil’s arrangement, on which the authorities have not drawn since September 2003 in light of improvements in the country’s balance of payments position. Drawings were made under 15 of the 23 Stand-By and Extended Arrangements in place during the year, reflecting use of precautionary Stand-By Arrangements as well as reviews that were not completed (see Appendix II, Table II.3). At the end of April 2004, undrawn balances under the arrangements still in effect amounted to SDR 19.8 billion.

IMF credit outstanding reached an all-time high of SDR 70 billion in September 2003, with disbursements in the first months of the financial year to Argentina, Brazil, Indonesia, Turkey, and Uruguay, but declined rapidly in the second half of FY2004. During FY2004, total repayments reached SDR 21.6 billion—including large repayments by Argentina, Brazil, Russia, and Turkey and advance repayments by Thailand (SDR 0.1 billion), which eliminated its outstanding IMF credit—exceeding the SDR 17.8 billion disbursed by the IMF in loans from the GRA. As a result, IMF credit outstanding amounted to SDR 62.2 billion at the end of the financial year, SDR 3.5 billion less than a year earlier.

During the year, five members—Bosnia and Herzegovina, Brazil, Pakistan, Romania, and Turkey—made repayments on the expectations schedule (see Box 7.2) in the amount of SDR 10.8 billion, of which SDR 8.4 billion constituted SRF repayments by Brazil.5 Six members requested and were granted extensions of repurchase expectations (Table 7.2).6 As of April 30, 2004, IMF outstanding credit amounting to SDR 30.6 billion was subject to time-based repurchase expectations under the policies adopted in November 2000.

Table 7.2

IMF Extension of Repurchase Expectations in FY2004

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The period in which extended repurchases were originally due.

Resources and Liquidity

The IMF’s lending is financed primarily from the fully paid-in capital (quotas) subscribed by member countries in the form of reserve assets and currencies.7 General reviews of IMF quotas, during which adjustments may be proposed in the overall size and distribution of quotas to reflect developments in the world economy, are conducted at five-year intervals. A member’s quota can also be adjusted separately from a general review to take account of major developments. The IMF can borrow to supplement its quota resources and has in place two formal borrowing arrangements (Box 7.3).

Only a portion of the paid-in capital is readily available to finance new lending because of previous commitments made by the IMF and the IMF policy of lending only in the currencies of members that are financially strong. The IMF’s base of usable resources increased during FY2004 because Thailand was considered sufficiently strong for its currency to be included in the IMF’s financial transactions plan. (See Box 7.4.)

The IMF’s liquidity position remained adequate to meet the needs of its members throughout the year. Following a strengthening in the first part of FY2004, the one-year forward commitment capacity of the IMF declined, primarily because of the IMF’s large new commitments to Argentina and Brazil. (See Box 7.5.) It regained some ground toward the end of the financial year. (See Figure 7.1.) Overall, the one-year forward commitment capacity fell slightly in FY2004, to SDR 58 billion on April 30, 2004, compared with SDR 61 billion a year earlier.

Figure 7.1
Figure 7.1

One-Year Forward Commitment Capacity, 1994-April 2004

(In billions of SDRs)

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

Expectations Versus Obligations

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

The time-based repurchase expectations can be extended upon request by members.

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IMF Borrowing Arrangements

The IMF can borrow to supplement its quota-based resources. It maintains two standing borrowing arrangements with official lenders: the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB). The IMF can also borrow from private markets, although it has never done so. The GAB was established in 1962 to forestall or cope with an impairment of the international monetary system. The potential amount of credit available to the IMF under the GAB is SDR 17 billion to be provided by 11 industrial countries (or their central banks). An additional SDR 1.5 billion is available under an associated agreement with Saudi Arabia. The latest activation of the GAB took place in July 1998. The NAB, which took effect in November 1998, was established for a similar purpose. Under the NAB, 26 participants (member countries and official institutions) have agreed to provide up to SDR 34 billion to the IMF The NAB has been activated once, in December 1998.

The NAB is the first and principal recourse in the event the IMF needs supplementary resources, but the GAB is also available if needed. The maximum amount of credit available to the IMF under the NAB and GAB combined is SDR 34 billion. In November 2002, both the NAB and the GAB were renewed for five years beginning November and December 2003, respectively. As of April 30, 2004, the IMF had no outstanding debt.

A more detailed description of the GAB and the NAB is available in Annual Report 2003, pages 70 and 71.

Concessional Financing Activities

The IMF provides concessional assistance—that is, financing with below-market interest rates and long maturities—under the Poverty Reduction and Growth Facility (PRGF) to help its poorest members boost economic growth and reduce poverty. It also makes grants to eligible members under the Initiative for Heavily Indebted Poor Countries (HIPC) to help alleviate excessive debt burdens. A total of 36 member countries received disbursements under the PRGF during FY2004, and, by end-April 2004, 27 countries had received financial commitments under the enhanced HIPC Initiative.

Financial Transactions Plan

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

The amounts transferred and received by these members are managed to ensure that their creditor positions in the IMF are broadly equal in relation to their quotas, the key measure of members’ rights and obligations in the IMF. This is achieved in the framework of an indicative quarterly plan for financial transactions. The IMF publishes on its website the outcome of the financial transactions plan for each quarter three months after the quarter has ended. As of April 30, 2004, the 45 members listed below were participating in financing IMF transactions.





Brunei Darussalam





Czech Republic



















New Zealand






Saudi Arabia







Trinidad and Tobago

United Arab Emirates

United Kingdom

United States

Poverty Reduction and Growth Facility

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

During FY2004, the Executive Board approved 10 new PRGF arrangements for Bangladesh, Burkina Faso, Burundi, Dominica, Ghana, Honduras, Kenya, Mauritania, Nepal, and Tanzania, with commitments totaling SDR 955 million (Table 7.3). In addition, the Board approved an augmentation of the existing arrangements for Madagascar in the amount of SDR 12.2 million to help the country recover from the economic impact of a cyclone. Total PRGF disbursements to these countries and other countries with existing arrangements amounted to SDR 865 million during FY2004. As of April 30, 2004, 36 member countries’ reform programs were supported by PRGF arrangements, with total commitments of SDR 4.4 billion.

Table 7.3

PRGF Loans Approved in FY2004

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Financing for the PRGF is provided through trust funds administered by the IMF—the PRGF Trust and PRGF-HIPC Trust—that are separate from the IMF’s quota-based resources and financed by contributions from a broad spectrum of the IMF’s membership and the IMF itself.8 The PRGF Trust borrows funds at market or below-market interest rates from central banks, governments, and government institutions and lends these funds to PRGF-eligible member countries at an annual interest rate of 0.5 percent. The PRGF Trust receives contributions that subsidize the rate of interest on PRGF loans and maintains a Reserve Account as security for loans to the Trust. The PRGF-HIPC Trust was established to subsidize PRGF operations during 2002-05 and also provides resources for HIPC Initiative assistance.

Forward Commitment Capacity–A Measure of Lending Capacity

The main measure of the IMF’s liquidity is its forward commitment capacity-a measure of its capacity to make new loans. The one-year forward commitment capacity, which indicates the amount of quota-based resources available for new lending over the following 12 months, has replaced the traditional liquidity ratio as the primary measure of the IMF’s liquidity.

The one-year forward commitment capacity is defined as the IMF’s stock of usable resources less undrawn balances under existing arrangements, plus projected repayments during the coming 12 months, less a prudential balance intended to safeguard the liquidity of creditors’ claims and to take account of any potential erosion of the IMF’s resource base. The IMF’s usable resources consist of its holdings of SDRs and of the currencies of financially strong members included in the financial transactions plan. The prudential balance is calculated as 20 percent of the quotas of members included in the financial transactions plan and of any amounts activated under borrowing arrangements.

Information on the one-year forward commitment capacity is published weekly (Financial Activities: Week-at-a-Glance) and monthly (Financial Resources and Liquidity) on the IMF’s website at www.imf.org/external/fin.htm.

As of April 30, 2004, SDR 15.8 billion had been made available for PRGF operations; of this amount, SDR 13 billion had been committed and SDR 11 billion had been disbursed. It is estimated that the remaining uncommitted SDR 2.7 billion should cover the projected annual commitments of about SDR 1.3 billion under new PRGF arrangements through 2005, slightly above the average annual historical commitments. During FY2004, the IMF’s Executive Board held discussions on the IMF’s future role in low-income member countries and explored various financing options to continue the IMF’s concessional lending after 2005. Most Executive Directors supported an option that would allow a self-sustained PRGF to begin in 2006, supplementing its lending capacity with new bilateral loans (see Box 7.6).

Enhanced HIPC Initiative

Originally launched by the IMF and World Bank in 1996, the HIPC Initiative was considerably strengthened in 1999 to provide deeper, faster, and broader debt relief for the world’s heavily indebted poor countries. By April 30, 2004, 27 HIPC-eligible members had reached their decision points under the enhanced Initiative and one (Cote d’Ivoire) under the original Initiative only. Of these countries, 13 had reached their completion points under the enhanced Initiative (see also Section 4).

The IMF provides HIPC Initiative assistance in the form of grants that are used to service part of member countries’ debt to the institution. As of April 30, 2004, the IMF had committed SDR 1.8 billion in grants to the following countries: Benin, Bolivia, Burkina Faso, Cameroon, Chad, Cote d’Ivoire, the Democratic Republic of Congo, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Tanzania, Uganda, and Zambia. Five members (Ethiopia, Guyana, Nicaragua, Niger, and Senegal) reached their completion points under the enhanced HIPC Initiative during FY2004. As of April 30, 2004, total disbursements of HIPC Initiative assistance by the IMF amounted to SDR 1.2 billion (Table 7.4).

Table 7.4

Status of Commitments of IMF HIPC Assistance

(In millions of SDRs; as of April 30, 2004)

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Includes interest on amounts committed under the Enhanced HIPC Initiative.

Equivalent to the committed amount of US$22.5 million at decision point exchange rates (March 17, 1998).

Excludes commitment of additional enhanced HIPC assistance of SDR 10.93 million subject to receipt of satisfactory financing assurances from other creditors.

Amount committed is equivalent to the remaining balance of the total IMF HIPC assistance of SDR 337.9 million, after deducting SDR 109.6 million representing the concessional element associated with the disbursement of a PRGF loan following the DRC’s clearance of arrears to the IMF on June 12, 2002.

Excludes commitment of additional enhanced HIPC assistance of SDR 18.19 million subject to receipt of satisfactory financing assurances from other creditors.

Excludes commitment of additional enhanced HIPC assistance of SDR 9.664 million subject to receipt of satisfactory financing assurances from other creditors.

During FY2004, the IMF also approved additional HIPC assistance (“topping up”) to Ethiopia and Niger at their completion points on account of exogenous factors deemed to have fundamentally changed these members’ economic circumstances and adversely affected their debt sustainability. With topping-up assistance for Burkina Faso (approved in FY2002) included, total additional HIPC assistance for the three members amounted to SDR 38.8 million, to be disbursed once satisfactory financing assurances from other creditors are in place.

Under the enhanced HIPC Initiative, a portion of the assistance committed at the decision point can be disbursed before the country reaches its completion point. Such assistance from the IMF may amount to up to 20 percent annually, with a cumulative maximum of 60 percent of the total committed amount of HIPC assistance. In exceptional circumstances, the annual and maximum amounts of assistance can be raised to 25 percent and 75 percent, respectively. During FY2004, SDR 63.8 million of interim assistance was disbursed to 13 countries.

Financing of PRGF Subsidies and the HIPC Initiative

The financing of the subsidy requirements of the PRGF and the IMF’s participation in the enhanced HIPC Initiative is administered through the PRGF Trust and the PRGF-HIPC Trust. The total cost is estimated at SDR 7.1 billion on a cash basis through 2019: PRGF subsidies are estimated at SDR 4.9 billion, and the IMF’s cost of HIPC assistance is estimated at SDR 2.2 billion. These costs are expected to be fully met by contributions from member countries and from the IMF itself.

Bilateral pledges for the PRGF Trust and the PRGF-HIPC Trust from member countries have come from a cross section of the IMF’s membership (94 countries have pledged support), demonstrating broad support for the PRGF and the HIPC Initiative. Bilateral contributions are estimated at SDR 3.7 billion on a cash basis through 2019.

As of the end of April 2004, all pledged bilateral contributions to the PRGF Trust, as well as 98 percent of total contributions to the PRGF-HIPC Trust, had been made available. Pledged contributions by 10 countries, amounting to about SDR 32 million, remain pending.

The IMF’s own contributions amount to SDR 2.6 billion, of which SDR 2.2 billion is for the PRGF-HIPC Trust. The bulk of the contributions comes from the investment income on the net proceeds of SDR 2.2 billion generated from off-market gold transactions in 1999-2000 (see Annual Report 2000, page 71). The investment income on the gold proceeds held in the Special Disbursement Account (SDA) may be used up to a maximum limit of SDR 1.76 billion to meet the IMF’s share of HIPC Initiative assistance.

The IMF’s other contributions include a one-time transfer of SDR 0.4 billion from the SDA to the PRGF Trust in 1994 and forgone reimbursement to the GRA from the PRGF Reserve Account for the administrative expenses related to PRGF operations during financial years 1998-2004, with the equivalent amount being transferred to the PRGF-HIPC Trust. In addition, part of the interest surcharges on financing provided in 1998 and 1999 under the Supplemental Reserve Facility, related to activation of the New Arrangements to Borrow, were transferred to the PRGF-HIPC Trust. Investment income on the balances in the two trusts is also applied toward financing PRGF loan subsidies and HIPC Initiative assistance.

Investment of PRGF, PRGF-HIPC, and SDA Resources

The IMF invests assets supporting the PRGF subsidies and the HIPC Initiative in a diversified portfolio of fixed-income securities issued by governments and international financial institutions. As of April 30, 2004, the value of these assets totaled SDR 9.7 billion.

In March 2000, the IMF’s Executive Board endorsed investment objectives and risk-tolerance parameters designed to supplement returns over time while maintaining prudent limits on risk.9 Under this revised investment strategy, about half the assets were invested in bond portfolios, for which a duration benchmark of 1-3 years was established. The remaining assets were invested in short-term deposits to serve as a liquidity tranche and to conform with the administrative arrangements agreed with certain contributors. Currency risk is minimized by limiting purchases to securities denominated in the four currencies of the SDR basket (euros, Japanese yen, pound sterling, and U.S. dollars), with regular rebalancing of the basket weights to reflect currency movements. The World Bank and two private external managers are currently charged with investing the bond portfolio assets, consistent with the investment mandate and benchmark indices, while the remaining assets are held in SDR-denominated deposits and medium-term instruments with the Bank for International Settlements (BIS).

Financing PRGF Operations over the Medium Term

In March 2004, the IMF’s Executive Board concluded its discussions of the staff paper “The Fund’s Support of Low-Income Member Countries: Considerations on Instruments and Financing.”

The paper provided a preliminary assessment of the potential magnitude of the financial resources required to support the IMF’s continued involvement in low-income member countries. The staff’s analysis indicated that (1) for 2004-05, the remaining period of the interim PRGF, available PRGF resources are likely to be sufficient to cover projected requirements; (2) for 2006-10, the focus of the paper, the projected financing needs would require a PRGF lending capacity of SDR 0.8-1.2 billion (about $1.2-1.8 billion) a year, which is in line with lending levels of the recent past; and (3) beyond 2010, financing requirements for PRGF operations may decline, but it would remain important for the IMF to maintain the financing capacity to address low-income members’ balance of payments needs.

The paper considered the following options for continuing the IMF’s concessional financing over the medium term:

  • Three options–the self-sustained PRGF, sunsetting of the PRGF (allowing it to expire), and grants–that rely solely on the resources accumulating in the Reserve Account of the PRGF Trust were considered. These alternatives would not provide sufficient financing to meet the projected annual requirements of SDR 0.8-1.2 billion in 2006-10.

  • Options that involve using the Reserve Account resources to subsidize the rate of charge on General Resources Account credit under arrangements similar to those financed by the Extended Fund Facility could accommodate the projected level of financing requirements but would represent a break with the current funding structure of the IMF’s concessional operations through trust arrangements.

  • An option that allows a self-sustained PRGF to begin operations in 2006 while supplementing its lending capacity with new bilateral loan resources would provide sufficient flexibility to meet the projected financing requirements in 2006-10. This option would also provide for the continuation of self-sustained PRGF operations at a significant level beyond 2010.

Most Directors agreed that a financing capacity on the order of SDR 0.8-1.2 billion annually would provide a reasonable basis for PRGF lending operations during 2006-10. Nearly all Directors agreed that the three financing options that would rely solely on the resources in the Reserve Account of the PRGF Trust would be insufficient to meet the projected financing needs. Most instead supported the option that would allow a self-sustained PRGF to begin operations in 2006 while supplementing its lending capacity with new bilateral loans.

A tactical decision to shorten the bond portfolio duration was made in early 2002, in the face of historically low yields in the markets of the SDR basket currencies. For the year ended April 30, 2004, the annual return on the portfolio was 1.7 percent, down from 2.4 percent a year earlier. In the four years that the investment strategy has been in place, the annual portfolio return has averaged 3.7 percent.

Post-Conflict Emergency Assistance

The IMF provides emergency assistance to post-conflict countries, in the form of loans subject to the IMF’s basic rate of charge. An administered account was established on May 4, 2001, for contributions by bilateral donors that would enable the IMF to provide such assistance at a subsidized rate of charge of 0.5 percent a year for countries eligible for PRGF assistance. During FY2004, one country, Burundi, received SDR 9.6 million in emergency assistance. As of April 30, 2004, total pledged grant contributions from seven countries amounted to SDR 11.2 million, of which SDR 9.6 million had been received (Table 7.5). Thus far, disbursements have totaled SDR 1.9 million to subsidize the rate of charge on post-conflict emergency assistance for seven countries (Albania, Burundi, the Republic of Congo, Guinea-Bissau, Rwanda, Sierra Leone, and Tajikistan). Of these, only two countries—the Republic of Congo and Guinea-Bissau—still have outstanding balances on post-conflict emergency assistance.

Table 7.5

Contributions to Subsidize Post-Conflict Emergency Assistance

(In millions of SDRs, as of April 30, 2004)

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Note: Dashes denote zero.

In March 2004, the IMF’s Executive Board broadly endorsed a proposal to subsidize the rate of charge for emergency assistance offered to PRGF-eligible countries hit by natural disasters, as is currently done for post-conflict PRGF-eligible countries, provided that resources are available. This proposal is expected to be finalized during FY2005.

Income, Charges, Remuneration, and Burden Sharing

The IMF, like other financial institutions, earns income from interest charges and fees levied on its loans and uses the income to meet funding costs, pay for administrative expenses, and build up precautionary balances. The IMF’s reliance on quota subscriptions and internally generated resources provides some flexibility in setting the basic rate of charge. However, the IMF also needs to ensure that it provides creditors with a competitive rate of interest on their IMF claims.

The basic rate of charge on regular lending is determined at the beginning of the financial year as a proportion of the SDR interest rate (see the subsection on SDR developments below) to achieve an agreed net income target for the year. This rate is set to cover the cost of funds and administrative expenses as well as add to the IMF’s reserves. The specific proportion is based on income and expense projections for the year and can be adjusted at midyear if actual net income to that point indicates that income for the year as a whole is likely to deviate significantly from the projections. At the end of the financial year, any income in excess of the target is refunded to the members that paid charges during the year; shortfalls are made up in the following year, in accordance with Board decisions currently in effect.

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

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

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

Since 1986, the rates of charge and remuneration have been adjusted under a burden-sharing mechanism that distributes the cost of overdue financial obligations between creditor and debtor members. Loss of income from unpaid interest charges overdue for six months or more is recovered by increasing the rate of charge and reducing the rate of remuneration. The amounts thus collected are refunded when the overdue charges are settled. Additional adjustments to the basic rates of charge and remuneration are made to generate resources for a Special Contingent Account (SCA-1), which was established specifically to protect the IMF against the risk of loss resulting from arrears. In FY2004, the combined adjustment for unpaid interest charges and the allocation to the SCA-1 resulted in an increase to the basic rate of charge of 8 basis points and a reduction in the rate of remuneration of 9 basis points. The adjusted rates of charge and remuneration averaged 2.17 percent and 1.49 percent, respectively, for the financial year.

In April 2003, the basic rate of charge for FY2004 was set at 132.0 percent of the SDR interest rate to allow the IMF to achieve the agreed net income target of SDR 108 million (excluding income from surcharges). In the event, net income amounted to SDR 73 million, which fell short of the target by SDR 35 million, owing mainly to the decline in the SDR interest rate and lower-than-expected use of credit during the year, which were partly offset by lower administrative expenditures in SDR terms. In accordance with the decisions made by the Board at the beginning of FY2004, this shortfall is to be recovered by a corresponding increase in the net income target for FY2005, which is set at SDR 191 million. Income derived from SRF and level-based surcharges amounted to SDR 848 million in FY2004. Adjusted for expenses associated with administering the PRGF Trust (SDR 58 million)10 and the cost of pension and other postretirement provisions (SDR 39 million), total net income for the year amounted to SDR 824 million. This amount was added to the IMF’s reserves, of which SDR 790 million (equivalent to the surcharge income minus the cost of administering the PRGF Trust) went to the General Reserve and the remainder to the Special Reserve.

In April 2004, the Executive Board set the basic rate of charge for FY2005 at 154 percent of the SDR interest rate. The Executive Board has also decided to conduct a comprehensive review of the IMF’s finances and financing mechanism before the end of 2004.

Financial Risk Management and Precautionary Balances

During FY2004, in view of continued high concentration of credit and adverse developments in a large borrower’s economy, the Executive Board considered issues related to both the way the IMF manages financial risk and the level of the Fund’s precautionary balances. The IMF mitigates financial risk by rigorously implementing the policies governing the use of its resources and carefully managing its liquidity, while accumulating adequate precautionary balances.11

Financial Risk Management

The principal financial risks faced by the IMF stem from large arrangements with middle-income countries. As of end-April 2004, three countries (Argentina, Brazil, and Turkey) accounted for some 71 percent of all General Reserve Account credit outstanding, and these three plus Indonesia and the Russian Federation accounted for 86 percent. The IMF’s Articles of Agreement charge the IMF with assisting a cooperating member—including in very difficult circumstances. As a result, the size of the IMF’s loan portfolio can change dramatically in a short time, as can assessments of the riskiness of the IMF’s loan portfolio. Sound risk management requires the IMF to be prepared for the possibility of payments disruptions, which could arise from the increase in, and concentration of, its outstanding credit. However, in view of the cooperative nature of the Fund and its role in promoting global stability as a public good, diversification of lending is not, and cannot be, an objective of the Fund.

While the specific features of the IMF’s institutional framework and financing role suggest that high credit concentration is inevitable in an uncertain world, such concentration does not embody the same degree of risk for the IMF as for other financial institutions. Important for mitigating financial risk is the IMF’s preferred creditor status—that is, members giving priority to repayment of their obligations to the IMF over those to other creditors—which is fundamental to the IMF’s role in the international financial system and to the IMF’s financing mechanism. Its preferred creditor status has allowed the IMF to take the necessary risk to provide financial assistance to members in exceptionally difficult balance of payments situations, in support of their efforts to implement strong adjustment policies without resorting to measures destructive of national and international prosperity.

On a different level, the IMF’s policies on access to, and use of, IMF resources are, along with effective crisis prevention and conditionality in support of strong country-owned programs, the most important elements of the IMF’s risk-management framework. An IMF member’s commitment to adopt sound economic policies, the IMF’s conditionality, and the safeguards in place (including an assessment of the member’s ability to repay the IMF) reduce the risk to the IMF of lending and of credit concentration.

The profound changes in the IMF’s lending policies in recent years in response to the changing global environment and the growing financial interdependence of members led to the adoption of the framework for exceptional access in 2003 as a key pillar of the IMF’s enhanced risk-management framework. Firm application of the criteria governing exceptional access to IMF resources and rigorous assessments of the risks to the IMF arising from high access and of the member’s capacity to repay are crucial for effective risk management. In addition, it is the responsibility of IMF members benefiting from financial assistance to pay the IMF back as soon as temporary balance of payments problems are resolved. Incentives to do so include the IMF’s surcharges and the presumption that exceptional access will be on SRF terms.

Precautionary Balances

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

Twelfth and Thirteenth General Reviews of Quotas

The IMF normally conducts general reviews of members’ quotas every five years to assess the adequacy of its resource base and to adjust the quotas of individual members to reflect changes in their relative positions in the world economy. The Board completed the Twelfth General Review of Quotas on January 30, 2003, without proposing an increase (or adjustments), which leaves the maximum size of the quotas unchanged at SDR 213.7 billion.

During the Thirteenth General Review, which began with the completion of the Twelfth Review, the IMF’s Executive Board will monitor closely and assess the adequacy of IMF resources, consider measures to achieve a distribution of quotas that reflects developments in the world economy, and explore ways to strengthen the governance of the IMF. The International Monetary and Financial Committee (IMFC) in April 2004 called on the Executive Board to continue its work on IMF quotas, voice, and representation, and report on progress at the IMFC’s next meeting in the fall of 2004.

Existing precautionary balances have been financed through the retention of income and the burden-sharing mechanism (see previous subsection). The net income and the income from surcharges to the Special and General Reserves are added to reserves. Under the Articles of Agreement, the resources in the General Reserve may be distributed by the IMF to members on the basis of their quota shares. The IMF may use the Special Reserve for any purpose for which it may use the General Reserve except distribution. Total reserves increased to SDR 5.1 billion as of April 30, 2004, from SDR 4.3 billion a year earlier. The balance in the SCA-1 amounted to SDR 1.5 billion, compared with overdue principal of SDR 0.7 billion. SCA-1 resources are to be refunded after all arrears have been cleared but can be refunded earlier by a decision of the Executive Board.

In February 2004, the Executive Board reconfirmed as broadly appropriate the decision taken in 2002 for a target level of precautionary financial balances of some SDR 10 billion. It was agreed that the adequacy of the level of precautionary balances and the pace of accumulation, as well as the application of the burden-sharing mechanism, will need to be kept under close review.

Quota Developments

Since the IMF’s liquidity position was adequate during the year and the Thirteenth General Review of Quotas (see Box 7.7) is at an early stage, there were only a few noteworthy quota developments in FY2004.

In July 2003, Executive Directors discussed further a number of issues related to the distribution of quotas of IMF members.12 The discussion confirmed broad support for a quota formula that is simpler and more transparent than the traditional formula. Directors noted that the preliminary results of calculating quotas using variables broadly endorsed for inclusion in a new quota formula would not lead to a significant change in calculated quota shares across country groups, but a new quota formula would make it easier to measure how out-of-line the quotas of individual countries are relative to the size of their economies. As they discussed how best to move forward to achieve adjustments in quota shares, Directors observed that, historically, significant adjustments in quota shares tended to take place in the context of general quota increases. Therefore, most Directors saw merit in a package that would involve a general quota increase; ad hoc quota increases aimed at addressing the clearest cases of shares that are out of line; and an increase in basic votes specifically aimed at correcting the erosion of the voting power of the smallest members. Most Directors recognized that, in view of the IMF’s satisfactory liquidity position, there was no immediate need for a quota increase.

As of April 30, 2004, 179 member countries accounting for 99.46 percent of total quotas proposed in 1998 under the Eleventh General Review of Quotas had consented to, and paid for, their proposed quota increases. All member countries eligible to consent had done so by the end of the financial year, and four member countries were ineligible to consent to their proposed increases because they were in arrears to the IMF. On January 28, 2004, the Executive Board approved an extension of the period for consent to, and payment of, quota increases under the Eleventh Review to July 31, 2004. At the close of the financial year, total quotas amounted to SDR 212.8 billion.

SDR Developments

The SDR is a reserve asset created by the IMF in 1969 to meet a long-term global need to supplement existing reserve assets. SDRs are allocated to members in proportion to their IMF quotas. A member may use SDRs to obtain foreign exchange reserves from other members and to make payments to the IMF. Such use does not constitute a loan; members are allocated SDRs unconditionally and may use them to meet a balance of payments financing need without undertaking economic policy measures or repayment obligations. However, a member that uses its allocated SDRs pays the SDR interest rate on the portion used, while a member that acquires SDRs in excess of its allocation receives interest at the SDR rate. A total of SDR 21.4 billion has been allocated to members—SDR 9.3 billion in 1970-72 and SDR 12.1 billion in 1978-81. The value of the SDR is based on the weighted average of the values of a basket of major international currencies, and the SDR interest rate is a weighted average of interest rates on short-term instruments in the markets for the currencies in the valuation basket (see Box 7.8). The SDR interest rate provides the basis for calculating the interest charges on regular IMF financing and the interest rate paid to members that are creditors to the IMF. In addition, the SDR serves as the unit of account for the IMF and a number of other international organizations.

SDR Valuation and Interest Rate


The value of the SDR is based on the weighted average of the values of a basket of major international currencies. The method of valuation is reviewed at five-year intervals. Following completion of the latest review, in FY2001, the Executive Board decided on a number of changes to take account of the introduction of the euro as the common currency for a number of European countries and the growing role of international financial markets. Currencies included in the valuation basket are among the most widely used in international transactions and are widely traded in the principal foreign exchange markets. Currencies selected for inclusion in the SDR basket for 2001-2005 are the U.S. dollar, the euro, the Japanese yen, and the pound sterling (see table).

Interest rate

Since the method for determining the SDR interest rate was reviewed in FY2001, the weekly interest rate has been determined on the basis of a weighted average of interest rates (expressed as equivalent annual bond yields) on short-term instruments in the markets for the currencies included in the SDR valuation basket, namely the three-month Euribor (Euro Interbank Offered Rate), Japanese Government thirteen-week financing bills, three-month U.K. Treasury bills, and three-month U.S. Treasury bills. During FY2004, the SDR interest rate evolved in line with developments in the major money markets, declining to as low as 1.49 percent in July 2003, its lowest level on record, before gradually increasing to 1.62 percent at the end of April 2004. Over the course of FY2004, the SDR interest rate averaged 1.58 percent (see figure).

SDR Valuation, as of April 30, 2004

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Exchange rates in terms of U.S. dollars per currency unit except for the Japanese yen, which is in currency units per U.S. dollar.

Rounded to six digits.


SDR Interest Rate, 1994-April 2004

(In percent)

There are two types of SDR allocations:

  • General allocations. Decisions on general allocations of SDRs are made for successive basic periods of up to five years and require a finding that an allocation would meet a long-term global need to supplement existing reserve assets. A decision to allocate SDRs requires an 85 percent majority of members’ total voting power. Two general allocations have been approved. The first was distributed in 1970–72, the second in 1979–81.

  • Special one-time allocations. In September 1997, the IMF Board of Governors proposed an amendment to the Articles of Agreement to allow a special one-time allocation of SDRs to correct for the fact that more than one-fifth of the IMF’s membership, which joined after the last general allocation, has never received an SDR allocation. The special allocation of SDRs would enable all members of the IMF to participate in the SDR system on an equitable basis and would double cumulative SDR allocations to SDR 42.9 billion. The proposal will become effective when three-fifths of the IMF membership (111 members) representing 85 percent of the total voting power have accepted the proposal. As of April 30, 2004, 131 members having 77.57 percent of the total voting power had agreed, and only acceptance by the United States was required to implement the proposal.

SDR Operations and Transactions

All SDR transactions are conducted through the SDR Department (which is a financial entity, not an organizational unit). SDRs are held largely by member countries and by official entities prescribed by the IMF to hold SDRs. The balance of allocated SDRs is held in the IMF’s GRA. Prescribed holders do not receive SDR allocations but can acquire and use SDRs in operations and transactions with IMF members and with other prescribed holders under the same terms and conditions as IMF members. Transactions in SDRs are facilitated by 13 voluntary arrangements under which the parties stand ready to buy or sell SDRs for currencies that are readily usable in international transactions, provided that their own SDR holdings remain within certain limits.13 These arrangements have helped ensure the liquidity of the SDR system.14

Total transfers of SDRs decreased in FY2004 to SDR 13.8 billion, from SDR 15.6 billion in FY2003. The largest transfers of SDRs (SDR 49.1 billion) took place in FY1999, when the volume of SDR transactions increased significantly because of members’ payments for quota increases (see Table 7.6).

Table 7.6

Transfers of SDRs

(In millions of SDRs)

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Note:–denotes zero.

As of March 31, 2004, except GRA holdings, which are as of April 26, 2004.

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

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

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

By April 30, 2004, the IMF’s own holdings of SDRs, which had risen sharply as a result of payments for quota subscriptions in 1999, had fallen to SDR 0.5 billion from about SDR 1.0 billion a year earlier. SDRs held by prescribed holders amounted to SDR 0.4 billion. SDR holdings by participants increased to SDR 20.6 billion from SDR 19.9 billion in FY2003. SDR holdings of the industrial and net creditor countries relative to their net cumulative allocation increased from a year earlier. SDR holdings of nonindustrial members amounted to 76 percent of their net cumulative allocations, compared with 72 percent a year earlier.

Safeguards Assessments

In FY2004, the IMF continued its efforts to safeguard GRA, PRGF, and HIPC resources by conducting safeguards assessments of central banks of borrowing member countries. Safeguards assessments aim at providing reasonable assurance to the IMF that central banks have adequate frameworks of reporting, audit, and controls for managing their resources, including IMF disbursements (see Box 7.9). The IMF makes recommendations on how central banks can address the vulnerabilities identified in assessments, thereby permanently improving controls and operations. The safeguards policy focuses on central banks, since they are typically the recipients of IMF disbursements.

The safeguards assessment framework was adopted as a permanent IMF policy by the Executive Board in March 2002, after a two-year experimental period. The safeguards policy, initiated against the background of several instances of misreporting to the IMF and allegations of misuse of IMF resources, aims at supplementing conditionality, technical assistance, and other means that have traditionally ensured the proper use of IMF loans.

Safeguards Assessment Policy: A Summary

Objective of Safeguards Assessments

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

Applicability of Safeguards Assessments

  • Central banks with new arrangements for use of IMF resources approved after June 30, 2000; existing arrangements that are augmented; member countries following a Rights Accumulation Program (RAP) under which resources are being committed.

  • Abbreviated assessments of only the external audit mechanism for member countries with arrangements in effect before June 30, 2000.

  • Voluntary for members with staff-monitored programs.

  • Not applicable to emergency assistance, first-credit-tranche purchases, and stand-alone CFFs.

Scope of Policy—ELRIC

  • External Audit Mechanism;

  • Legal Structure and Independence;

  • Financial Reporting Framework;

  • Internal Audit Mechanism; and

  • Internal Controls System.

Publication References

The staff’s papers and other background information concerning the safeguards policy are available at www.imf.org/external/fin.htm.

Safeguards assessments apply to all countries with arrangements for use of IMF resources approved after June 30, 2000, and are conducted whenever a new arrangement is presented to the IMF Executive Board for approval. Although safeguards assessments do not formally apply to countries with staff-monitored programs (SMPs), these countries are encouraged to undergo an assessment on a voluntary basis, since, in many cases, SMPs are followed by formal arrangements with the IMF. In FY2004, the Fund conducted 20 safeguards assessments of member countries’ central banks, including one voluntary assessment, bringing the total number completed as of April 30, 2004, to 95. This total includes 27 abbreviated assessments that were conducted for arrangements in effect before June 30, 2000, and that examined only one key element of the safeguards framework, namely, that central banks publish annual financial statements that are independently audited by external auditors in accordance with internationally accepted standards.

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

The outcome of a safeguards assessment is a confidential report that identifies vulnerabilities, assigns risk ratings, and makes recommendations to the central bank authorities on the steps needed to mitigate the identified risk. The authorities, who have the opportunity to comment on all safeguards assessment reports, are expected to implement the safeguards assessment recommendations; in some cases, implementation may become a condition for program support. The conclusions and agreed remedial measures are reported in summary form to the IMF Executive Board at the time of arrangement approval or, at the latest, by the time of the first review of the country’s performance under the arrangement, but the safeguards report itself is not made available to the Board or the general public.

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

The findings of safeguards assessments to date have indicated that significant, but avoidable, risks to IMF resources may have existed in certain cases, although, over time, identified vulnerabilities have declined in importance and frequency. Experience has shown that central banks are progressively implementing the measures recommended by the Fund. In FY2004, central banks continued to implement assessment recommendations at a high rate (over 92 percent for the most important measures). The main areas of improvement in central bank operations and controls resulting from the implementation of safeguards measures have included (1) establishing independent external audit policies in accordance with international standards; (2) reconciling the economic data reported to the IMF for program-monitoring purposes with the underlying accounting records of the central bank; (3) improving the transparency and consistency of financial reporting, including publication of the audited financial statements; (4) improving controls over reserves management; and (5) implementing independent, high-quality internal audit functions. Central banks have generally embraced the findings of safeguards assessments, and this policy has enhanced the IMF’s reputation and credibility as a prudent lender while helping to improve the operations and accounting procedures of central banks.

On a semiannual basis, IMF staff prepare summary reports covering the activities and results of the safeguards policy for the Executive Board. These reports are available on the IMF website at www.imf.org/external/fin.htm. A comprehensive review of the safeguards policy, with the involvement of external experts, is scheduled to take place in early 2005.

As in the previous year, in FY2004 IMF staff continued to enhance communication and dissemination of information on the safeguards policy to central bank officials, holding courses on safeguards assessments at the Joint Africa Institute (Tunis) in June 2003 and at the IMF Institute (Washington) in November 2003. As of April 30, 2004, 112 officials from 87 countries had attended courses on safeguards assessments.

Arrears to the IMF

The strengthened cooperative strategy on overdue financial obligations to the IMF consists of three essential elements: prevention, intensified collaboration, and remedial measures.15

Total overdue financial obligations to the IMF were SDR 2.05 billion at the end of April 2004, up slightly from SDR 2.01 billion at the beginning of the financial year (Table 7.7). Although Sudan’s arrears to the IMF declined as a result of regular monthly payments in excess of obligations falling due, overdue financial obligations by the other four countries with protracted arrears—Iraq, Liberia, Somalia, and Zimbabwe—continued to increase. As of April 30, 2004, almost all arrears to the IMF were protracted (outstanding for more than six months), with 45 percent of them representing overdue principal and the remainder overdue charges and interest. More than four-fifths of arrears were to the GRA, with the remainder to the SDR Department and the PRGF Trust.

Table 7.7

Arrears to the IMF of Countries with Obligations Overdue by Six Months or More, by Type and Duration

(In millions of SDRs; as of April 30, 2004)

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The two countries with the largest protracted arrears—Sudan and Liberia—account for 77 percent of the overdue financial obligations to the IMF—with Somalia and Zimbabwe accounting for most of the remainder.16 Under the IMF’s strengthened cooperative strategy on arrears, remedial measures have been applied against the countries with protracted arrears to the IMF.17 No changes were made in the strengthened cooperative strategy on arrears during FY2004.

The IMF’s Executive Board reviewed the overall arrears strategy and extended the rights approach18 for one more year. The Board also conducted several reviews of individual member countries’ overdue financial obligations to the IMF during FY2004:

  • In September 2003, the Board postponed the scheduled review of Liberia’s overdue financial obligations to the IMF because of the highly unsettled political and security situation in the country and the lack of reliable data on economic developments, which precluded an assessment of the country’s economic policy and performance. Subsequently, on March 1, 2004, the Board held its first review following the suspension of Liberia’s voting and related rights in the IMF on March 5, 2003. At the March 2004 review, the Board welcomed the willingness of the National Transitional Government of Liberia to improve relations with the IMF and its initial steps in restoring a functioning economy and government. The Board also welcomed the transitional government’s resumption of monthly payments to the IMF of US$50,000. It discussed the modalities of future IMF engagement with Liberia, stressing that a continued track record of cooperation and strong policies would be needed to lay the basis for normalizing relations with the institution and other creditors over time. In light of these first steps in improving cooperation with the IMF on both policies and payments and Liberia’s limited technical capacity and overwhelming reconstruction needs, the Board approved the resumption of technical assistance to Liberia.

  • The Board twice reviewed Sudan’s overdue financial obligations to the IMF—on June 6, 2003, and on February 20, 2004. During the June review, the Board noted the favorable policy performance achieved by the Sudanese authorities under the 2002 staff-monitored program (SMP) and Sudan’s commitment to a modest increase in monthly payments to the IMF. It welcomed the agreement on a new SMP for 2003 and urged Sudan to fully implement the macroeconomic and structural policies specified in the program. At the February review, the Board noted the continued favorable policy performance achieved by the Sudanese authorities under the 2003 SMP.

  • The Board on two occasions reviewed Zimbabwe’s overdue obligations to the IMF. On June 6, 2003, the Board decided to suspend the voting and related rights of Zimbabwe against the background of the country’s increasing arrears and little improvement in economic policy. In its December 3, 2003, review, the Board noted its intention to initiate promptly the procedure on compulsory withdrawal with respect to Zimbabwe. On February 6, 2004, the Managing Director issued a complaint to the Executive Board with respect to the compulsory withdrawal of Zimbabwe from the IMF. This complaint was placed on the Executive Board’s agenda for substantive consideration on July 7, 2004.

As of end-April 2004, Liberia, Somalia, Sudan, and Zimbabwe were ineligible under Article XXVI, Section 2(a) to use the general resources of the IMF. In addition, Zimbabwe had been removed from the list of PRGF-eligible countries. Declarations of noncooperation—a further step under the strengthened cooperative arrears strategy—were in effect for Liberia and Zimbabwe, and the voting and related rights of Liberia and Zimbabwe in the IMF were suspended. In addition, a complaint with respect to the compulsory withdrawal of Zimbabwe from the IMF remained outstanding.


As of April 30, 2004, SDR 1 = US$1.45183.


Another facility, the Contingent Credit Lines facility, was allowed to expire on its scheduled sunset date of November 30, 2003.


At the same time, the IMF extended repurchase expectations arising in FY2004 and FY2005 in the amount of SDR 1.9 billion.


At the same time, the IMF extended repurchase expectations arising in FY2005, FY2006, and FY2007 in the amount of SDR 8.1 billion.


Repurchase expectations were introduced at the time of a review of IMF facilities completed in FY2001 (see Box 7.2).


In FY2003, repurchase expectations falling due in FY2004 were extended for Argentina, Ecuador, Sri Lanka, and Uruguay.


Quotas also determine a country’s voting power in the IMF, its access to IMF financing, and its share in SDR allocations.


For a fuller account of the sources of funds for IMF concessional lending operations, see Financial Organization and Operations of the IMF, Pamphlet No. 45, 6th ed. (Washington: International Monetary Fund, 2001), available online at www.imf.org/external/pubs/ft/pam/pam45/contents.htm.


Prior to this shift in investment strategy, these assets had been invested in short-term SDR-denominated deposits with the Bank for International Settlements.


As initially agreed in 1999, the IMF is not reimbursed for the expenses of administering the PRGF Trust; instead, an equivalent amount is transferred from the PRGF Trust, through the Special Disbursement Account, to the PRGF-HIPC Trust.


For more details, see the IMF’s website at www.imf.org/external/np/sec/pn/2004/pn0416.htm.


For more details, see the IMF’s website at www.imf.org/external/np/sec/pn/2003/pn03106.htm.


These include 12 IMF members and one prescribed holder. In addition, one member has established a one-way (selling only) arrangement with the IMF.


Under the designation mechanism, participants whose balance of payments and reserve positions are deemed sufficiently strong may be obliged, when designated by the IMF, to provide freely usable currencies in exchange for SDRs up to specified amounts. The designation mechanism has not been used since 1987, following the set up of the voluntary arrangements starting in 1986.


See Annual Report 2001, pages 72 and 73, for background on the IMF’s strengthened cooperative strategy for dealing with arrears.


Iraq’s overdue net SDR charges and assessments account for 3.1 percent.


In two cases (Iraq and Somalia), the application of remedial measures has been postponed because of civil conflicts, the absence of a functioning government, and/or international sanctions.


Established in 1990, the rights approach permits a member to establish a track record on policies and payments to the IMF under a rights accumulation program and to earn “rights” to obtain IMF resources under successor arrangements following the completion of the program and settlement of the arrears to the IMF.

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