The provisions of a bank’s loan agreement may condition effectiveness of the agreement on the Fund’s approval of a stand-by arrangement and may condition advances under the agreement on a country’s status in the Fund or on its access to the Fund’s resources under the arrangement. These and other provisions relating to the Fund fall into a number of categories.
First Category: Representations on Entry into Loan Agreement
The provisions of a bank’s loan agreement may condition effectiveness of the agreement on the Fund’s approval of a stand-by arrangement and may condition advances under the agreement on a country’s status in the Fund or on its access to the Fund’s resources under the arrangement. These and other provisions relating to the Fund fall into a number of categories.
Clauses calling for certain representations by the borrower on entry into a loan agreement constitute one category. A representation that is said to be normal in Eurodollar loan agreements for the benefit of developing states,47 but is probably in wider use, is one in which a government as borrower, or as guarantor if the central bank is the borrower, “represents,” or “represents and warrants,” that it is “a member in good standing of the International Monetary Fund … and is fully eligible to purchase dollars from the I.M.F.” Representations of this kind can be narrower or broader than this formulation. A narrower formulation calls for a representation that:
Patria is a member in good standing of the IMF.
A broader formulation provides for a representation that:
On the effective date of this Agreement, Patria shall be a member in good standing of the IMF and IBRD and no event shall have occurred which suspends or limits Patria’s ability to utilize the resources of the IMF or IBRD, including SDR facilities.
One author has referred to “the increasing tendency of lenders to require that a sovereign state should continue to maintain its membership of the IMF in good standing and should ensure that it continues to be eligible to use the resources of the IMF.” He explains the rationale of the representations as follows:
The reason for this covenant is no doubt that membership of the IMF is considered by many lenders to be essential to the basic financial good health of a state and possibly because some bankers see the IMF as a lender of last resort, as a sort of umbrella if the borrowing state should find itself in financial difficulties.48
“In Good Standing’”
The formulations quoted above are clear in their reference to membership but unclear in their use of the expression “in good standing.” It is unlikely that these words, at least in the first formulation, are intended to mean that the member is eligible to make purchases from the Fund, because eligibility is mentioned separately in the representation. Meaning might be given to the words by assuming that they refer to the term in paragraph 5 of a stand-by arrangement that suspends the right of a member to make purchases if the Executive Board has taken a decision “to consider a proposal, made by an Executive Director or the Managing Director, formally to suppress or to limit the eligibility” of the member.
The forms of stand-by and extended arrangements under the Fund’s current policy on enlarged access to its resources49 are shown in Appendices A and B.
The purpose of the term in paragraph 5 of an arrangement referred to above is to prevent a member from availing itself of resources in accordance with what would otherwise be its assured rights when it is on notice that the Fund has decided to consider whether to declare the member ineligible or to limit its use of the Fund’s resources. The decision to consider a proposed ineligibility or limited use is a preliminary action and is not equivalent to a decision decreeing ineligibility or a limitation on use. The effect of the decision is to impose a standstill and to give the Fund and the member an opportunity to consult, so that understandings can be reached on the circumstances in which purchases can be resumed under the stand-by arrangement.
There are other ambiguities in the phrase “in good standing.” The Fund has authority to take a number of actions, apart from decisions declaring members ineligible to use the Fund’s resources, that are censorious of members. These actions are sometimes called sanctions, but the word is unsuitable because the conduct in respect of which the actions can be taken are not necessarily violations of obligations.50 The Fund may call for consultation on whether a member is performing its exchange rate obligations,51 sell a member’s currency52 or impose penal charges53 because the member has failed to repurchase, authorize discriminatory restrictions against a member because its currency has become scarce,54 communicate its views informally to a member or publish a report made to a member regarding its monetary or economic conditions that directly tend to produce a serious disequilibrium in the balance of payments of members,55 designate a member to receive transfers of SDRs because of certain acts of omission or commission,56 suspend the right of a member to use its SDRs,57 or compel it to withdraw because of its failure to fulfill any obligations58 other than those relating to SDRs.59 If the Fund has taken one of these actions against a member, is the member “in good standing” under the terms of a loan agreement calling for a representation of good standing?
For lenders seeking protection, there may be greater dangers in the words “fully eligible” than in the phrase “in good standing.” The latter expression has no technical meaning in the Fund, but eligibility is a term of art. Even if “in good standing” is given a restrictive interpretation, it may not deprive lenders of the protection they think the expression gives them. The Fund’s technical meaning of eligibility, however, would almost certainly disappoint the expectations of lenders. The word “fully” suggests broad expectations, but there are many circumstances in which a member may be unable to use the Fund’s resources even though its eligibility in the sense of the Articles is unimpaired. There is much evidence that official as well as private lenders employ the word “eligibility” loosely when referring to the use of the Fund’s resources.
A further discussion of eligibility may have greater relevance to the representations that a member may have to make on the occasion of each advance under a loan agreement. For this reason, eligibility is discussed in detail in connection with the second category of provisions in loan agreements. The reference to “SDR facilities” also is examined later.
Resources of the Fund
The third of the representations that have been quoted earlier refers to “the resources of the IMF” but should refer to the “general resources.” The financial structure of the Fund consists of two Departments—the General Department and the Special Drawing Rights Department. The General Department consists of three Accounts: the General Resources Account, the Special Disbursement Account, and the Investment Account. Resources held in all three Accounts would be “resources” of the Fund, but it has been seen that the sales of currency and SDRs that are discussed in this pamphlet are sales of “general resources” held in the General Resources Account. Operations and transactions in SDRs are conducted through the Special Drawing Rights Department, but assets are rarely held in that Department and then only briefly.
Legal Impediments to Loans
It has been recommended by one author that a lender should require a representation that there are no legal impediments interposed by the Fund to the receipt of a loan by a member or to its guarantee of a loan.60 The author suggests the following formulation:
… There is no constitutional provision, treaty, convention, statute, law, regulation, decree or similar authority of or binding upon the Guarantor, and to the best of my knowledge no provision of any existing contract, agreement or instrument binding on the Guarantor and no provision of any contract, agreement or instrument with the IMF or of any other borrowing obligation or agreement of the Guarantor, which would be contravened by the execution and delivery of the Guaranty by the Guarantor or by the performance or observance by the Guarantor of any of the terms thereof.
The management of external debt is a feature of stabilization programs supported by stand-by arrangements, and the volume of debt is frequently made a performance criterion.61 The language of the proposed representation, however, may be inspired by the belief that a stand-by arrangement is an agreement between the Fund and a member. A stand-by arrangement is a decision of the Fund prescribing the terms on which a member may make purchases but not an agreement with the member in the legal sense. A loan agreement that was inconsistent with a performance criterion would not “contravene” a performance criterion, and the validity of the loan agreement would be unaffected. The word “instrument” in the representation might apply to a stand-by arrangement were it not for the fact that the word is followed by “any other borrowing obligation or agreement.”
Second Category: Individual Advances Under Loan Agreement
Provisions requiring representations as to the state of affairs at the time of entry into a loan agreement, including representations that relate to membership in the Fund, good standing, ability to use the Fund’s resources, and the absence of legal impediment to loan agreements or guarantees, constitute one category of provisions in loan agreements that are tied in some way to stand-by arrangements.
In a second category are provisions that establish conditions for each advance to the borrower under a loan agreement. It has been seen that a representation sometimes required when a member enters into a loan agreement is that it is eligible or fully eligible to make purchases from the Fund or that it is fully eligible to purchase U.S. dollars from the Fund. A representation of this kind may be required also on the occasion of each advance under a loan agreement.
Ineligibility in the sense of the Articles means that a member is not able to use the Fund’s general resources because the Fund has declared the member ineligible.62 The Fund can declare a member ineligible because it is using the general resources in a manner contrary to the purposes of the Fund,63 or because a member has failed to exercise appropriate controls after the Fund has requested it to apply them in order to prevent the use of the Fund’s resources to meet a large or sustained outflow of capital,64 or because a member persists in maintaining restrictions that are inconsistent with the purposes of the Fund,65 or because a member fails to fulfill obligations66 other than obligations with respect to SDRs,67 or because a member has terminated the par value for its currency despite the objection of the Fund, if the Fund has called into existence the par value system for which the Articles provide.68 The Fund is not compelled to restore the par value system and has not taken action for this purpose.
A declaration of ineligibility does not impede transactions financed directly with resources held in the Special Disbursement Account69 and not by means of the transfer of these resources to the General Resources Account. In the Special Disbursement Account of the General Department, the Fund can hold the proceeds of sales of gold in excess of the former official price and can make them available as balance of payments assistance to poorer developing members as one of the uses of these proceeds.
If the Fund declares a member ineligible, the member is unable to make any new use of the Fund’s resources until the Fund terminates the ineligibility. The member is not even entitled to make a request that the Fund is bound to consider. A declaration, however, does not require the member to accelerate the reversal of its use of the Fund’s resources that is outstanding at the date of the declaration.
Interruption Without Ineligibility: Performance Criteria
A lender that refers to ineligibility in its loan agreement should be aware that there are a number of situations in which a member may be unable to make purchases under a stand-by arrangement even though the member has not been declared ineligible. Some of the situations may imply that the member’s program is not succeeding but others may convey no such implication. An example of the former kind is the situation in which a member is not observing performance criteria.
A performance criterion is an element in a program that a member must observe to be able to engage in transactions under its stand-by arrangement. Performance criteria are among the terms in the Fund’s decision that govern transactions. Elements in a program can be made performance criteria only if they are stated with such precision that departures from them will be obvious without the exercise of judgment. For this reason, performance criteria are often called objective. They are set forth in paragraph 4 of the stand-by arrangement. Not all objective elements become performance criteria, because the Fund’s policy is to limit performance criteria to those that, if observed, will give evidence that the objective of the program is likely to be achieved. Furthermore, performance criteria are not applied to transactions in the first credit tranche.70
A lender concerned to withhold its resources in some circumstances is likely to want to withhold them from a member that is not observing performance criteria, but the member is not ineligible within the meaning of the Articles. One of the major purposes of performance criteria is to free the Fund from the necessity to invoke the procedure of ineligibility to protect its resources, even when the nonobservance of performance criteria could justify ineligibility, because the procedure appears punitive and because it can be protracted. Activation of the procedure can damage a member’s reputation severely and can provoke bad relations between it and the Fund for many years.
That the inability of a member to make purchases under a stand-by arrangement because it is not observing a performance criterion is not the result of ineligibility is demonstrated by the member’s continued right to request purchases without recourse to the stand-by arrangement. The member might qualify for a purchase under a policy of the Fund that involves slight conditionality, such as the buffer stock financing facility or the compensatory financing facility, under which the member’s nonob-servance of a performance criterion would not be a legal barrier. In principle, the member would not be disqualified from requesting a purchase, without relying on its stand-by arrangement, under the credit tranche policy, even though that is the policy under which stand-by arrangements are approved.71 Although there would be no a priori legal impediment to the request, the member might not succeed if the Fund found that the member’s policies, as evidenced by the nonobservance of a performance criterion, were not in conformity with the Fund’s policy on the use of its resources in the credit tranches.
To clarify that a member is not ineligible when it is unable to make purchases under a stand-by arrangement because it is not observing a performance criterion, paragraph 5 refers to “formal ineligibility” and action “formally to suppress or to limit the eligibility” of a member. The only concepts of the Articles are eligibility and ineligibility. There are no concepts of “informal” and “formal” ineligibility. The drafters of paragraph 5 have taken note of the possible confusion that may exist outside the Fund between ineligibility in the technical (formal) sense and a member’s inability to make purchases because it is not observing a performance criterion.72 The paragraph attempts to make it clear that it refers to ineligibility in the technical sense.
The parties to a loan agreement may attribute to ineligibility a meaning broader than it has under the Articles, so that a member would be ineligible according to the intent of the loan agreement if it was unable to make purchases under its stand-by arrangement as the result of not observing a performance criterion. A lender might wish to consider its attitude, however, to circumstances in which the Fund waives the objection of nonobservance of a performance criterion, or modifies a performance criterion that is not being observed, and permits purchases under the stand-by arrangement. A lender might assume that the Fund would not take either action unless the Fund was satisfied that there continued to be reasonable hope that the member’s program would succeed. The lender might conclude, therefore, that the protection it sought by conditioning advances under its loan agreement on the member’s ability to use the Fund’s resources would not be prejudiced by a waiver or modification of performance criteria.
Limitation of Use
Another situation in which a lender may be concerned about developments in a member’s situation, even though the Fund has not declared the member ineligible, is one in which the Fund has acted under Rule K-2 of its Rules and Regulations:
Whenever the Executive Board is authorized by the Articles to declare a member ineligible to use the general resources of the Fund it may refrain from making the declaration and indicate the circumstances under which, and the extent to which, the member may make use of the general resources.
Action under Rule K-2 is an alternative whenever the Fund is in a position to declare a member ineligible. The Fund can avoid the procedure of ineligibility altogether, although it would have to make a finding that it was in a position to declare a member ineligible. This necessity deprives Rule K-2 in most circumstances of the usefulness that was foreseen for it as a less disturbing safeguard of the Fund’s resources. Action under Rule K-2 is an alternative also to limitation of a member’s use of the Fund’s resources that the Fund may impose after the ineligibility procedure of Article V, Section 5 has been invoked or has run its full course:
Ineligibility to use the Fund’s general resources
Whenever the Fund is of the opinion that any member is using the general resources of the Fund in a manner contrary to the purposes of the Fund, it shall present to the member a report setting forth the views of the Fund and prescribing a suitable time for reply. After presenting such a report to a member, the Fund may limit the use of its general resources by the member. If no reply to the report is received from the member within the prescribed time, or if the reply received is unsatisfactory, the Fund may continue to limit the member’s use of the general resources of the Fund or may, after giving reasonable notice to the member, declare it ineligible to use the general resources of the Fund.
The limitation of use under Rule K-2 is another consequence of the Fund’s preference for avoiding the impression of punitive action that ineligibility is likely to convey even though proceedings under the Rule would probably be regarded in these days as subject to a similar disadvantage.
A lender would probably insist that a member was not “fully eligible” within the meaning of a loan agreement if the Fund has acted to limit the member’s use of the Fund’s resources under Article V, Section 5. This interpretation could be supported by citing some of the language of paragraph 5 of stand-by arrangements: “a proposal … formally to suppress or limit the eligibility … of the member” (emphasis added).
Legally, however, action by the Fund under Rule K-2 is an alternative to action under Article V, Section 5, and performance criteria are intended to avoid both actions. The few actions of the Fund under its powers apart from the power to establish performance criteria have been taken in circumstances in which no stand-by arrangement existed. The Fund has adopted one declaration of ineligibility and initiated the procedure in another case in which the procedure was terminated by the member’s decision to withdraw from membership. The Fund has taken action under Rule K-2 in only one instance. The Fund’s practice of avoiding the appearance of censure shows that, for a lender, the observance of performance criteria is a far more practical safeguard than references to ineligibility, unless ineligibility is defined extensively in the loan agreement.
Elements Not Made Performance Criteria
There is yet another problem to be noted. Performance criteria do not cover all important elements of a program. Some aspects may not lend themselves to the precise formulation that is necessary for selection as performance criteria. One of the purposes of paragraph 11 of the stand-by arrangement is to deal with the situation in which a member is observing performance criteria but there is prima facie evidence that the program is imperiled by departures from other elements of the program. In these circumstances, the Managing Director may call the member into consultation. He may take this step also because the member, although currently in conformity with performance criteria, was formerly not observing them. The earlier nonobservance may still signal danger, and the means by which observance has been achieved may deserve examination. If the Managing Director calls for consultation, for whatever reason, the member’s eligibility within the meaning of the Articles remains unimpaired.
First Installment of Resources
Lenders must be aware, in addition, that some performance criteria may not provide a safeguard during the first period in which resources become available under a stand-by arrangement. Resources are available in the installments prescribed by the phasing set forth in paragraph 2 of the stand-by arrangement. An installment will become available during a later period only if the data at the end of the preceding period show that the performance criteria in paragraph 4(a) of the stand-by arrangement were observed. For the first period, however, performance criteria of this kind cannot be made effective, because there is no preceding period, and therefore they are not applied.
Full Use of Phased Resources
A lender needs to be sure that the protection it negotiates is as broad as it intends, but the language of a loan agreement, in dealing with a borrower’s inability to make purchases under a stand-by arrangement, can go beyond the intention of the parties. A member may be unable to make purchases without any implication that something is amiss with its program. For example, the resources made available by a stand-by arrangement are phased: they are available in fixed proportions on or after specified dates. Phasing may prevent further purchases for the time being because all possible installments permitted by the phasing have been purchased. Similarly, the period of a stand-by arrangement may not yet have run its full course but the member may have made all the purchases for which the arrangement provides.
A lender may not want to withhold advances under its loan agreement because of the unavailability of the Fund’s resources in either of the situations that have been described. Indeed, a loan agreement may require a member to make all possible purchases as a condition of recourse to the agreement. A member’s representation of eligibility or full eligibility even though phasing prevented purchases would not be incorrect unless the loan agreement defined these words in a way that differed from the Fund’s use of them.
In some circumstances, a member may be unable to make purchases under a stand-by arrangement but not because it is prevented from making them by ineligibility procedures, phasing, or the nonobservance of performance criteria. The member’s inability may result from the fact that the Fund and the member have not yet reached understandings on the member’s policies, including performance criteria, on the basis of which the member is to be able to make purchases during part of the period of the stand-by arrangement.
The Fund’s decision of March 2, 1979 provides for two kinds of situation in which an arrangement is to include a term requiring a review by the Fund, in consultation with the member, from which understandings on the member’s policies, including performance criteria, are to emerge as the basis for subsequent purchases. In one situation, a member’s program extends beyond a year, and it is not possible for the member to establish in advance one or more necessary performance criteria for the whole period of the program. Similarly, the period of a stand-by arrangement may not extend beyond a year, but the period begins in the course of a budget or planning year, and the member cannot plan in advance for the new year. In the other situation, the problem is not a difficulty of timing but the substantial uncertainties at the beginning of a program year concerning major economic trends. These uncertainties prevent the formulation of one or more performance criteria and make it necessary to reach understandings on them at a later date.73 Paragraph 4(c) of the stand-by arrangement, suitably modified when necessary, provides for reviews of the kind discussed here.
Once again, it must be clear that a member is not ineligible in the sense of the Articles because understandings have not yet been reached in a review. The absence of understandings, however, is likely to be of concern to a lender interested in the safeguard implied in a member’s ability to use the Fund’s resources. The member’s circumstances resemble more closely those in which a member is not observing a performance criterion and are different from those in which phasing prevents purchases.
Ability to Purchase a Specified Currency
The mention of eligibility to purchase U.S. dollars in one of the representations under discussion creates a further problem. The U.S. dollar may be singled out in a loan agreement because the lender provides dollars or expects that dollars are to be used in repayment of its loan. The representation is probably based on the assumption that if a member is “fully eligible” to make purchases from the Fund, it will be entitled automatically to purchase U.S. dollars. The lender’s view of the Fund as an “umbrella” if a member is in difficulties in making repayment has been quoted earlier. An assumption that dollars will necessarily be available if a member can make purchases would be incorrect because normally the Fund selects the currencies that it will sell, as is stated in paragraph 6 of the stand-by arrangement. The Fund’s practice and the criteria it applies are prescribed by Article V, Section 3(d) of its Articles:
The Fund shall adopt policies and procedures on the selection of currencies to be sold that take into account, in consultation with members, the balance of payments and reserve position of members and developments in the exchange markets, as well as the desirability of promoting over time balanced positions in the Fund, …
In accordance with this provision, the Fund adopts, at quarterly intervals, an operational budget in which it sets out the currencies and the amounts of them that it will sell in the operations and transactions that are expected during the next quarter.74 The criteria in Article V, Section 3(d) may make it inappropriate to include the U.S. dollar in one or more operational budgets. From time to time the balance of payments and reserve position of the United States has been too weak to justify the sale of U.S. dollars by the Fund.
The only circumstances in which the choice of the currency is determined by the purchasing member and not by the Fund in accordance with the criteria of Article V, Section 3(d) are described in the rest of that provision:
…provided that if a member represents that it is proposing to purchase the currency of another member because the purchasing member wishes to obtain an equivalent amount of its own currency offered by the other member, it shall be entitled to purchase the currency of the other member unless the Fund has given notice under Article VII, Section 3 that its holdings of the currency have become scarce.75
The singling out of the U.S. dollar in a representation is based on another misunderstanding of the Fund’s law and practice. If a member in a position to make purchases from the Fund cannot purchase U.S. dollars, the member can purchase other currencies. The Second Amendment ensures that a member will always be able to obtain, directly or indirectly, a currency that will meet its needs. A member making a purchase from the Fund will receive either a currency deemed “freely usable” by the Fund or a currency not deemed “freely usable.” A freely usable currency is
a member’s currency that the Fund determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets.76
A freely usable currency, therefore, can be readily exchanged in the exchange markets for a currency that the member wishes to obtain, and the exchange can be made without adversely affecting exchange rates. The Fund has decided that until further notice the U.S. dollar, the pound sterling, the deutsche mark, the French franc, and the Japanese yen are freely usable currencies.77 It follows that if a purchasing member receives a freely usable currency other than the U.S. dollar from the Fund, the member will have no difficulty in obtaining U.S. dollars in the exchange market if it needs that currency to repay a loan or for any other purpose.78
If a purchasing member receives a currency that is not deemed freely usable by the Fund, the issuer of that currency must exchange it, on the request of the purchasing member, for a freely usable currency.79 The exchange must be made at an exchange rate that gives the purchasing member the same value it would have received had the Fund sold the freely usable currency to the purchasing member.80 The result of an exchange is that the purchasing member will receive U.S. dollars or another freely usable currency. If it receives one of the other freely usable currencies, it will be able to exchange it for U.S. dollars in the market without difficulty and without adverse effect on exchange rates.
The inclusion of “SDR facilities” in the third representation of the first category of provisions in loan agreements as among “the resources of the Fund” that the member must be able to use is based on a misunderstanding of the legal character of SDRs. SDRs held by members are their resources and not resources of the Fund. The Fund does hold some SDRs in the General Resources Account as a result of transfers of SDRs to the Fund by members in discharge of obligations. The Fund may sell these SDRs in the same way that it sells currencies to members needing to use the Fund’s resources,81 but the representation is not referring to transactions involving these SDRs because it mentions “SDR facilities.”
The probable purpose of the representation is to ensure that a member remains able to use its holdings of SDRs as a safeguard for the lender parallel to the assurance it seeks that a member remains “eligible” to use the Fund’s resources in transactions conducted through the General Resources Account. A member may become unable to use the SDRs that it owns as the result of the violation of certain of its obligations. The most serious consequence of this kind is attached to a member’s failure to accept a transfer of SDRs from another member and to provide a freely usable currency in return for them when designated by the Fund as a transferee of the SDRs.82 The designated member is automatically debarred from using any of its SDRs unless the Fund takes a decision to prevent this consequence.83 If the Fund finds that a member has violated any other obligation with respect to SDRs, the Fund may decide to suspend the member’s right to use SDRs obtained after the suspension.84 The member continues to be able to use SDRs obtained before the suspension. The right of a member to use its SDRs is not suspended because the Fund has declared the member ineligible to use the general resources of the Fund. A member cannot be made ineligible to use these resources, and cannot be compelled to withdraw from the Fund, because it has failed to fulfill any obligation with respect to SDRs.85
A member may be unable to use some, or even all, of its SDRs not because it has violated obligations but because it has entered into an operation that produces this result. A pledge of SDRs to secure the performance of a financial obligation owed to another member or another holder of SDRs is among the operations in SDRs that the Fund has authorized. While the pledge is in existence, the member continues to own the pledged SDRs but cannot use them, although if the member owns no other SDRs the pledged SDRs remain available to discharge the member’s obligations to the Fund that must be settled in SDRs.86
Other Provisions on Use Under Stand-By Arrangements
The following clause has been used in some loan agreements to combine the necessity for a stand-by arrangement with the member’s ability to make purchases under it:
… each Bank shall have received (i) a copy certified by the Governor of the Central Bank of Patria, of a letter substantially in the form of Schedule D hereto, dated a recent date, or other evidence satisfactory to it that the International Monetary Fund has approved a stabilization plan for Patria and has provided a drawing facility to Patria in the higher credit tranches (the “IMF Facility”) and that Patria is entitled to draw under the IMF Facility.87
The final words of the clause avoid the trap of reference to eligibility, although the language is not the same as the corresponding words of paragraph 1 of the stand-by arrangement: “… Patria will have the right to make purchases from the Fund,” etc. The formulation in paragraph 1 does not declare that a member is “entitled” to engage in the transactions for which a stand-by arrangement provides because the word “entitled” has a technical meaning under the Articles. The word appears in a provision that sets forth the conditions on which a member “shall be entitled” to use the Fund’s resources. One of the conditions is that transactions will not increase the Fund’s total holdings of a member’s currency beyond 200 per cent of quota.88 A stand-by arrangement frequently provides for transactions that will have this effect, for which reason a waiver of the condition relating to the total of the Fund’s holdings of the member’s currency is necessary.89 A member is not “entitled” to a waiver.
A more serious objection to the words “entitled to draw” is that they are ambiguous and subject to the same uncertainties as “eligible” or “fully eligible.” The contracting parties may intend the expression “entitled to draw” to mean that the member will not qualify for an advance under the loan agreement if it is unable for any reason to make purchases under its stand-by arrangement. According to this interpretation, the member will not qualify even though the Fund regards it as eligible to engage in transactions within the meaning of the Articles, the member is observing all performance criteria, and the Fund has not suspended the member’s right to make purchases under paragraph 5 of the stand-by arrangement. It would suffice to debar a member from enjoying the benefit of a loan agreement if, for example, the only reason why the member could not engage in a purchase from the Fund was that phasing under the stand-by arrangement imposed a delay.
The language of the provision can be understood, however, in a narrower sense. For example, the language appears in the following provision:
… Bank shall have received (i) copy certified by the Governor of the Central Bank of Patria, of a letter substantially in the form of Schedule F hereto, dated a recent date, or other evidence satisfactory to it that Patria is entitled to draw under the IMF Facility.
The letter set forth in Schedule F, which, it is assumed, the Fund would address to the Governor of the Central Bank, is as follows:
The International Monetary Fund hereby confirms that Patria continues in compliance with the terms and conditions of the drawing facility in the higher credit tranches made available to it on (date), and is entitled to draw thereunder.
The last clause could be controlled by the language that precedes it, and the words “in compliance with the terms and conditions” could be taken to refer to the member’s behavior and not to phasing.
A condition that accords more closely with the practice and the terminology of the Fund has been drafted as follows in some loan agreements:
Patria shall be entitled to draw the amounts available in accordance with this loan agreement provided that Patria is observing the performance criteria set forth in the stand-by arrangement approved by the International Monetary Fund on (date) and the letter of intent annexed thereto, and provided further that no action has been taken by the International Monetary Fund under Paragraph 5 of that stand-by arrangement.
Two other conditions that fall into the second category have been drafted in the following form:
As a condition to all borrowings, the Borrower will have to furnish to the Agent Bank two days prior to any advance a statement from the IMF that, as of the date of the statement, the borrower has made or could make all purchases of funds that could be made in accordance with the phasing prescribed by the extended arrangement approved by the IMF for the Borrower.
During the part of the ten-year repayment period remaining after the expiration of the extended arrangement approved by the IMF for the Borrower, the Borrower covenants to furnish to the Agent Bank, on each April 1, July 1, October 1, and January 1, a statement from the IMF that the IMF has not suppressed or limited, and has not decided to consider action to suppress or limit, the eligibility of the Borrower to use the Fund’s resources.
The first of these provisions establishes a condition on which advances can be made under the loan agreement during the life of the extended arrangement, but the second applies after that period has expired, provided that the full period during which the use of the Fund’s resources can be outstanding under the arrangement has not run its course. The condition refers to the period during which resources purchased from the Fund could remain outstanding and not the period during which they in fact remain outstanding. A member is expected to reduce or terminate its outstanding use of the Fund’s resources as its balance of payments and reserve position improves within the maximum period permissible for continuing use.90 The reason for the condition relating to the period after the expiration of the extended arrangement may be that advances are still possible under the loan agreement, or that a decision by the Fund of the kind referred to in the condition is to be treated as a default under the loan agreement that accelerates repayment.
Advances under a loan agreement may depend on a variety of conditions, among which the two shown below are examples:
The Central Bank of Patria shall not be entitled to borrow hereunder unless the Agent shall have received not less than five business days prior to the date upon which the Central Bank requests a borrrowing pursuant to Clause 6, in the English language or accompanied by a certified translation into English, with copies for each Bank: …
(viii) Evidence that Patria has drawn down in full its First Credit Tranche; …
(x) A statement from the Central Bank of the balance of payments position of Patria for the six months period ended (date), computed on both the current accounts and capital accounts bases, using the same format as that used in preparing such information for the IMF.
Condition (viii) is related to purchases from the Fund. The rationale of it is that if the member contemplates further purchases after it has exhausted the first credit tranche, whether under an existing or a future stand-by arrangement, it will have to observe performance criteria. This condition protects the lender if its advances are tied by another condition to the observance of performance criteria. Condition (x) is discussed later in connection with documents and information.
Third Category: Defaults
A third category of provisions involving the Fund deals with the circumstances or events that are deemed defaults under a loan agreement. Some of these provisions have been drafted along the following lines:
If any of the following events (“Events of Default”) shall occur and be continuing: …
(v) Patria shall cease to be a member in good standing of the IMF; or
(vi) Patria shall not draw down the Second Credit Tranche from the IMF in two phases to be completed by (date) and (date), respectively …
Patria shall cease to be a member of the International Monetary Fund, or shall cease to be entitled to draw under the IMF Facility for any reason other than that the availability thereunder has been fully drawn.
The second of these provisions takes account of the fact that the inability of a member to make purchases may be the result not of any weakness in its program or performance but of purchases that have exhausted the full amount made available by the stand-by arrangement. In some loan agreements the failure of a member to obtain the Fund’s approval of stand-by arrangements throughout the whole period in which advances can be made under a loan agreement is treated as an event of default. Sometimes, the event of default is expressed as a decision of the Fund refusing a request for a stand-by arrangement.
Other events of default in loan agreements have been the termination of a stand-by arrangement by the Fund, the reduction by the Fund of the aggregate amount made available by a stand-by arrangement, or any material alteration by the Fund in the terms of an arrangement to the disadvantage of the member. Provisions of this kind are not consistent with the law and practice of the Fund. Stand-by arrangements are not agreements between the Fund and a member, and therefore no right of the Fund to terminate a stand-by arrangement can be based on doctrines of the material breach of agreements. No other basis exists for a right of termination because the Fund gives a member the specific assurance that the Fund will have no such right, and members embark on their programs with this assurance.91 Only the member for which the Fund has approved a stand-by arrangement can exercise a right of cancellation. The same reasoning precludes any right of the Fund to reduce the amount that has been made available by a stand-by arrangement or to alter its terms to the member’s disadvantage after the stand-by arrangement has been approved.
In the foregoing discussion of defaults, it must be emphasized that the defaults are the circumstances or events that are defined as defaults for the purpose of a loan agreement. None of the circumstances or events is a default under a stand-by arrangement. Even the nonobservance of performance criteria cannot be described as a default under a stand-by arrangement, because an arrangement is not an agreement by which the member undertakes an obligation to follow its program or to observe performance criteria.
Fourth Category: Documents and Information
A fourth category of provisions is a troublesome one. Provisions have been included in loan agreements that require the borrower to supply the lender with copies of such documents as the stand-by arrangement or the Fund’s reports on consultations. These documents bear the legend “Document of International Monetary Fund and Not for Public Use.” The Fund does not grant waivers of the prohibition of public use. The knowledge that members sometimes supply copies of these documents to lenders has not induced the Fund to change its policy of restricting the distribution of its documents to official channels.92
A borrower may covenant to:
Cause, to the extent within its control, the International Monetary Fund to make available to the Banks its reports with respect to Patria.
The Fund would not depart from its practice because of the existence of such a covenant.
A covenant by which the borrower undertakes to provide to the lender information that the borrower provides to the Fund might be less troublesome, although problems of confidentiality could arise. An author referred to earlier has summarized his experience in these sentences:
Certain state borrowers have political objections to supplying information about state economic policy and financial conditions to outside private lenders where the information is not generally available to the people of the country concerned or must for reasons of state be kept secret. Hence, if there are any informational requirements at all, the obligation to supply information is limited to a general commitment to provide such information as the lender may reasonably require, a covenant which has very little strength where, in effect, the borrower can determine reasonableness. Where the borrower is experiencing economic difficulties, the lenders often expect to have an improved right to monitor the financial and economic progress of the borrower with a view to being forewarned of potential difficulties. In these cases the requirement can be more detailed; for example, there may be a commitment to supply information as to the budgets of the state and its economic and financial position and prospects and to furnish copies of economic information supplied to, say, the IBRD or the IMF (if not confidential, which it usually is). On the other hand, information about the financial position of most states in the western world is published by those states, is readily available and is periodically analysed by international and national economic agencies. The converse is true of communist countries and lenders to the communist states generally receive far inferior information to that provided by states in the free world. The problem in lesser developed countries is somewhat different since these countries may lack the official civil service, the machinery, the bureaucracy and the resources needed to monitor and report on the state of the public finances.93