Review of the Fund's Strategy on Overdue Financial Obligations

This paper reviews progress under the Fund’s strengthened cooperative strategy on overdue financial obligations since the last review and proposes to extend the availability of the rights approach by another year, to end-August 2007. Section II reviews recent developments regarding overdue financial obligations to the Fund through end-June 2006. Progress under the Fund’s strategy on arrears and developments in the protracted arrears cases are discussed in Section III. A draft decision to extend the availability of the rights approach until end-August 2007 is provided in Section IV.

Abstract

This paper reviews progress under the Fund’s strengthened cooperative strategy on overdue financial obligations since the last review and proposes to extend the availability of the rights approach by another year, to end-August 2007. Section II reviews recent developments regarding overdue financial obligations to the Fund through end-June 2006. Progress under the Fund’s strategy on arrears and developments in the protracted arrears cases are discussed in Section III. A draft decision to extend the availability of the rights approach until end-August 2007 is provided in Section IV.

I. Introduction

1. This paper reviews progress under the Fund's strengthened cooperative strategy on overdue financial obligations since the last review and proposes to extend the availability of the rights approach by another year, to end-August 2007.1 Section II reviews recent developments regarding overdue financial obligations to the Fund through end-June 2006. Progress under the Fund's strategy on arrears and developments in the protracted arrears cases are discussed in Section III. A draft decision to extend the availability of the rights approach until end-August 2007 is provided in Section IV.

II. Recent Developments

2. Four members remained in protracted arrears to the Fund during the period under review.2 The three members with arrears dating back to the mid-1980s—Liberia, Somalia, and Sudan—account for 96 percent of total arrears to the Fund, with Sudan alone accounting for 56 percent (Figure 1). Zimbabwe, which became a protracted arrears case on August 14, 2001, accounts for most of the remainder.3

Figure 1.
Figure 1.

Overdue Financial Obligations by Member

(In millions of SDRs; as of end-June 2006)

Citation: Policy Papers 2006, 046; 10.5089/9781498332330.007.A001

Source: Finance Department.

3. Total arrears to the Fund declined by SDR 109 million to SDR 1,888 million since the last review, reflecting mainly the clearance of Zimbabwe's arrears to the GRA in February 2006 (Figure 2 and Table 1). Eighty-seven percent of total arrears to the Fund are to the GRA, with the remainder to the Trust Fund (6 percent), the PRGF-ESF Trust (4V percent),4 the SDR Department (2 percent), and the Structural Adjustment Facility (SAF) (V percent).

Figure 2.
Figure 2.

Overdue Financial Obligations to the Fund

(In millions of SDRs)

Citation: Policy Papers 2006, 046; 10.5089/9781498332330.007.A001

Source: Finance Department.
Table 1.

Overdue Financial Obligations to the Fund, 2005-2006

(In millions of SDRs)

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Source: Finance Department.

Includes overdue Trust Fund and SAF principal.

Includes overdue net SDR charges, SDR member assessments, and Trust Fund and SAF interest obligations.

4. Overdue financial obligations to the Fund continue to impose a significant financial cost on the Fund and its membership. The ongoing cost of deferred charges to the GRA is borne by the membership through the burden-sharing mechanism, which relies on an adjustment to the rate of charge and the rate of remuneration to make up for the income loss associated with the nonpayment of charges. As of end-June 2006, total burden-shared deferred charges amounted to SDR 864 million, a net increase of SDR 12 million from a year ago.5 Arrears to the Trust Fund, amounting to SDR 118 million, reduced the amount of resources that would have accrued to the Reserve Account of the PRGF-ESF Trust for the benefit of the Fund's low-income members. Zimbabwe's arrears to the Trust also have reduced the balances available in the Reserve Account, as SDR 75.7 million from the Account since 2001 needed to be drawn to meet payment obligations to Trust lenders.

5. Thirteen members (22 instances) incurred short-term arrears (less than six months) during the period under review. Most of these arrears were settled before remedial measures were applied, except in two instances, where the Executive Board was notified of the occurrence of arrears.

6. The members with protracted overdue financial obligations to the Fund have also accumulated arrears to other international financial institutions (Table 2). As of end-June 2006, their arrears amounted to SDR 0.9 billion to the World Bank Group and SDR 0.5 billion to the African Development Bank Group.

Table 2.

Arrears to the Fund and Other International Financial Institutions

(In millions of SDRs; as of end-June 2006)

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Sources: African Development Bank, World Bank, and IMF Finance Department.

Countries in non-accrual status with disbursements suspended.

At the exchange rate of US$/SDR on June 30, 2006.

7. Overdue currency valuation adjustments of 10 members amounted to SDR 1.9 billion at end-June 2006. Of this amount, the protracted arrears cases accounted for SDR 1.4 billion (73 percent). In order to maintain the value of the Fund's holdings of a member's currency in terms of the SDR, the Fund, at a minimum, adjusts its holdings of the member's currency at the end of each financial year. Such adjustments may result in an obligation by the member to pay additional currency to the Fund or vice-versa, depending on exchange rate movements. While overdue currency valuation adjustments do not generally affect the Fund's financing capacity, they, nevertheless, represent an essential element of members' financial obligations to the Fund, and staff actively pursues their settlement.

III. Progress Under the Strengthened Cooperative Strategy

A. Progress under the Strategy and Extension of the Rights Approach

8. The Fund's strategy on arrears has been broadly effective in dealing with cases that have arisen to date, and no changes are proposed. The strategy is comprised of three elements: prevention, intensified collaboration (including the rights approach), and remedial measures. The preventive element of the strategy has generally worked well in avoiding new arrears or in bringing about the quick clearance of such arrears should they occur, thereby preventing new cases of protracted arrears.

9. The rights approach remains potentially important for arrears clearance for Liberia, Somalia, and Sudan.6 7 Use of the rights approach is not required for these eligible members, but it provides a tested approach that has worked effectively for large protracted arrears cases in the past. It is, therefore, proposed that the availability of the rights approach be extended for another year, to end-August 2007.

B. Developments in Protracted Arrears Cases

10. During the period under the review, the record of cooperation with the Fund by the four protracted arrears cases varied widely. Key developments were as follows:

  • Liberia's cooperation with the Fund has improved significantly, as demonstrated by its commitment to policy adjustment and reform, as well as its performance through end-June under a staff-monitored program (SMP) for the period February-September 2006. The authorities increased the monthly payments to the Fund from US$50,000 to US$60,000 in November 2005. At its meeting on April 26, 2006,8 the Executive Board commended the Liberian authorities' resolve to work closely with international partners in addressing the daunting challenges of rebuilding Liberia's economy and reducing pervasive poverty. Directors stressed that prompt and sufficient indications of support from donors and strong performance under the SMP would be important steps toward the clearance of arrears to the Fund and a formal Fund arrangement following arrears clearance. They noted that satisfactory performance under such an arrangement would help pave the way toward Liberia's timely participation in the HIPC Initiative and MDRI debt relief and lead to a resolution of Liberia's debt overhang. The Board decided that the Fund would take into account the authorities' track record of performance on policies and payments under the SMP when deciding on the initiation of the de-escalation of remedial measures now in place for Liberia. Despite severe capacity limitations, the government has made considerable progress in recent months in implementing key policies under the SMP9.

  • Sudan's cooperation with the Fund in terms of policies and payments remained broadly satisfactory. At its meeting in May 2006,10 the Executive Board commended the Sudanese authorities for pursuing prudent macroeconomic policies in recent years and carrying out structural reforms in a very difficult environment, which had contributed to a favorable economic performance. Directors broadly endorsed the policy package under the 2006 SMP but urged the authorities to minimize nonconcessional borrowing in view of Sudan's already unsustainable external debt and in order to avoid complications in future debt relief operations. Directors also pointed out that all creditors should participate fully and on equal terms in any debt restructuring and the HIPC Initiative for Sudan, and the authorities should treat all creditors equally. Directors welcomed the increase in Sudan's payments to the Fund in 2006 despite severe financial constraints.11 However, some Directors called for a further increase in line with Sudan's increased repayment capacity.

  • Zimbabwe's cooperation with the Fund was mixed. Zimbabwe fully settled its arrears to the GRA in February 2006, but its arrears to the PRGF-ESF Trust remained outstanding. Following its clearance of arrears to the GRA, the Managing Director withdrew his complaint with respect to Zimbabwe's compulsory withdrawal from the Fund. The Executive Board last reviewed Zimbabwe's cooperation with the Fund on policies and payments on March 8, 2006.12 At that meeting, the Executive Board did not lift the suspension of Zimbabwe's voting and related rights in the Fund. Furthermore, because of the sequential nature of the sanctions imposed under Article XXVI, Section 2, the fact that the suspension of voting and related rights was not lifted by the Board precluded the Board from adopting a decision to terminate Zimbabwe's ineligibility to use the Fund's general resources. In addition, the remedial measures against Zimbabwe with respect to its arrears to the PRGF-ESF Trust remain in place, including the removal from the list of PRGF-ESF-eligible countries, the declaration of non-cooperation, and the suspension of the provision of technical assistance. The Board noted that Zimbabwe's economic crisis called for urgent implementation of a comprehensive policy package comprising several mutually reinforcing actions in the area of macroeconomic stabilization and structural reforms. The Board also urged Zimbabwe to continue its efforts to resolve the remaining overdue financial obligations to the PRGF-ESF Trust.

  • The Board has postponed its review of Somalia's overdue financial obligations since October 1990 owing to the unsettled political and security situation and the absence of information on economic and financial developments. Fund staff continues to monitor developments in Somalia and work with its counterparts in the World Bank and other multilateral institutions, but direct contact with the Transitional Federal Government has been sporadic, and largely centered on membership issues.

IV. Extension of Availability of the Rights Approach

11. It is proposed that the availability of the rights approach be extended for another year, to end-August 2007, based on the considerations elaborated in Section III.

Accordingly, the following draft decision, which may be adopted by a majority of the votes cast, is proposed for adoption by the Executive Board:

"The Fund has reviewed progress under the strengthened cooperative strategy with respect to overdue financial obligations to the Fund as described in EBS/06/111. The Fund reaffirms its support for the strengthened cooperative strategy and agrees to extend the availability of the rights approach until end-August 2007."

Appendix: Table 3.

Remedial Measures Applied to Countries in Protracted Arrears to the Fund 1/

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Source: Finance Department.

Under the Articles of Agreement and the Fund's Procedures for dealing with members with overdue financial obligations to the General Department and the SDR Department, a complaint is issued by the Managing Director when a member falls into arrears to the Fund for two months or more. The complaint may lead to different sanctions under Article XXVI of the Fund's Articles of Agreement: declaration of ineligibility to use Fund resources, suspension of voting rights in the Fund, and compulsory withdrawal depending upon the member's persistence in its failure to fulfill its obligations. A complaint can be withdrawn only after the arrears have been cleared. Overdue obligations to the PRGF-ESF Trust are separate from those to the General and SDR Departments, and are not breaches of obligations under the Articles of Agreement. A member in arrears to the General Department, SDR Department or the PRGF-ESF Trust has no access to Fund resources. The Fund also levies additional charges on late payments to the PRGF-ESF Trust. Remedial measures for dealing with arrears to the PRGF-ESF Trust include removal from the list of PRGF-ESF eligible countries, declaration of noncooperation and suspension of technical assistance.

On April 8, 2002, the Managing Director issued a complaint with respect to the suspension of Liberia's voting and related rights in the Fund.

In light of the lifting of the suspension of Sudan's voting rights on 8/1/2000, the complaint for the compulsory withdrawal of Sudan has been reformulated as a complaint for the suspension of Sudan's voting rights.

Complaint withdrawn on February 12,1997, following clearance of arrears in the SDR Department.

On October 17, 2002, the Managing Director issued a complaint with respect to the suspension of Zimbabwe's voting and related rights in the Fund.

Zimbabwe was also removed from the list of PRGF-ESF eligible countries on September 24, 2001.

As a result of Zimbabwe's full settlement of its arrears to the GRA on February 15, 2006, the Managing Director withdrew his complaint, dated February 6, 2004, with respect to compulsory withdrawal.

Appendix: Table 4.

Overdue Financial Obligations to the Fund by Duration, 1981-2006

(In millions of SDRs; end of period)

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Source: Finance Department.

Includes adjustments of SDR 9.1 million resulting from SCA-2 refunds for members in protracted arrears that were applied to reduce outstanding charges.

Appendix: Table 5.

Overdue Financial Obligations to the Fund by Type, 1981-2006

(In millions of SDRs; end of period)

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Source: Finance Department.

Includes quarterly charges, semiannual charges, stand-by charges on arrangements, and special charges on overdue GRA obligations (equivalent to SDR 126.8 million as of June 30, 2006).

Includes special charges on overdue Trust Fund obligations (equivalent to SDR 19.7 million as of June 30, 2006) and additional interest on overdue SAF/PRGF obligations (equivalent to SDR 7.4 million as of June 30, 2006).

Includes SDR member assessments.

Includes adjustments of SDR 9.1 million resulting from SCA-2 refunds for members in protracted arrears that were applied to reduce outstanding charges.

Appendix: Table 6.

Number of Countries Incurring Late Payments to the Fund, 1991-2006

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Source: Finance Department.

Twelve months to June 30, 2006.

Includes all types of financial obligations falling due to the Fund during the period. Members with multiple obligations falling due during the period are counted only once.

Members paying late during the period and with obligations overdue at the end of the period are counted only once.

Members with arrears outstanding for six months or more at end of period.

Appendix: Table 7.

Countries with Protracted Overdue Financial Obligations to the Fund 1/

(As of June 30, 2006)

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Source: Finance Department.

Countries with arrears outstanding for six months or more.

Includes outstanding repurchases, SAF and PRGF loans, Trust Fund loans, and overdue charges and interest (including special charges, net SDR charges, and assessments).

Appendix: Table 8.

Obligations Falling Due and Payments to the Fund by Current Protracted Arrears Cases, 1995-2006

(In millions of SDRs)

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Source: Finance Department.

Excludes adjustments resulting from settlements of deferred charges, retroactive reductions in rates of charge and SCA-2 refunds for members in protracted arrears that are applied to reduce outstanding charges and repurchases.

Appendix: Table 9.

Deferred GRA Charges of Countries with Protracted Arrears, FY 2002-2007 1/

(In millions of SDRs, as of June 30, 2006)

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Source: Finance Department.

Deferred charges only include periodic charges and special charges to the GRA.

Appendix: Table 10.

Countries with Overdue Currency Valuation Adjustments 1/

(In millions of SDRs; as of June 30, 2006)

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Source: Finance Department.

The Fund revalues members' currencies at least annually, at the end of the Fund's financial year (April 30). Members are notified of the adjustments arising from the revaluation, which are required to be settled promptly (within thirty days from date of notifications). Adjustments are payable in local currency and are not included among overdue obligations.

Adjustments have been outstanding since the end of FY 1991.

Adjustments have been outstanding since the end of FY 1996.

Adjustments have been outstanding since the end of FY 1999.

ANNEX I:

Overdue Financial Obligations to the General Department and the SDR Department—Timetable of Remedial Measures 1/

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Based on the procedures for dealing with members with overdue financial obligations to the Fund adopted by the Executive Board on August 17, 1989, as amended by Decision No. 12546-(01/84), adopted on August 22, 2001.

Annex II:

Overdue Financial Obligations to the Poverty Reduction and Growth Facility (PRGF) and Exogenous Shocks Facility (ESF) Trust-Timetable of Remedial Measures 1/

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Based on Decision No. 12545-(01/84) PRGF, adopted on August 22, 2001, as amended by Decision No. 13590-(05/99) ESF, November 23, 2005, effective January 5, 2006.

1

The Executive Board last reviewed the Fund's strengthened cooperative strategy on overdue financial obligations in August 2005 (Review of the Fund's Strategy on Overdue Financial Obligations, 8/24/05).

2

Protracted arrears are those outstanding for six months or more.

3

Arrears outstanding for less than six months account for the remaining 0.01 percent.

4

Zimbabwe is the first and only case of protracted arrears to the PRGF-ESF Trust, with outstanding arrears of SDR 85 million at end-June 2006.

5

The net increase reflects further buildup of overdue GRA charges by Liberia, Somalia, and Sudan, which was partially offset by Zimbabwe's settlement of its GRA overdue charges.

6

The rights approach was initiated in 1990 and was used in clearing the arrears to the Fund of three members— Peru, Sierra Leone, and Zambia. Eligibility was restricted to the eleven members that had protracted arrears to the Fund at end-1989. Under this approach, an eligible member must establish a track record of cooperation on policies with the Fund by undertaking an economic program with conditionality equivalent to that of upper credit tranche Fund arrangements. The member is also expected to make payments to the Fund that, at a minimum, are sufficient to meet new obligations falling due. By establishing such a track record, the member accumulates "rights" to future drawings of Fund resources following the clearance of its arrears. At the end of the rights accumulation program, bilateral creditors would provide a bridge loan to clear the member's arrears to the Fund, which would be repaid with a front-loaded disbursement under a successor financial arrangement from the Fund.

7

In the context of the Multilateral Debt Relief Initiative, the G-8 committed that donors would provide extra resources necessary for full debt relief for the three protracted arrears cases at completion point under the enhanced HIPC Initiative.

8

IMF Executive Board Concludes 2006 Article IV Consultation with Liberia (Public Information Notice (PIN) No. 06/47, 05/02/ 2006).

9

Statement by IMF Mission on Liberia's Progress Under the Staff Monitored Program (Press Release No. 06/166, 07/28/2006).

10

IMF Executive Board Concludes 2006 Article IV Consultation with Sudan (Public Information Notice (PIN) No. 06/57, 5/24/2006).

11

Sudan made payments to the Fund totaling US$30.2 million in 2005 and committed to increase the level of payments to US$45 million in 2006.

12

IMF Executive Board Upholds Sanctions Against Zimbabwe (Press Release No. 06/45, 3/8/2006).

Review of the Fund's Strategy on Overdue Financial Obligations
Author: International Monetary Fund
  • View in gallery

    Overdue Financial Obligations by Member

    (In millions of SDRs; as of end-June 2006)

  • View in gallery

    Overdue Financial Obligations to the Fund

    (In millions of SDRs)