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. Total arrears to the Fund declined by SDR 552 million since the last review, owing largely to the clearance of arrears by Liberia in March 2008. While Sudan’s payments in excess of its new obligations falling due to the Fund also contributed to the decline, arrears by Somalia and Zimbabwe increased further. The majority of the arrears to the Fund (85 percent) were to the General Resources Account (GRA).

Abstract

This paper reviews progress under the Fund’s strengthened cooperative strategy on overdue financial obligations. Total arrears to the Fund declined by SDR 552 million since the last review, owing largely to the clearance of arrears by Liberia in March 2008. While Sudan’s payments in excess of its new obligations falling due to the Fund also contributed to the decline, arrears by Somalia and Zimbabwe increased further. The majority of the arrears to the Fund (85 percent) were to the General Resources Account (GRA).

Executive Summary

  • This paper reviews progress under the Fund’s strengthened cooperative strategy on overdue financial obligations. Total arrears to the Fund declined by SDR 552 million since the last review, owing largely to the clearance of arrears by Liberia in March 2008. While Sudan’s payments in excess of its new obligations falling due to the Fund also contributed to the decline, arrears by Somalia and Zimbabwe increased further. The majority of the arrears to the Fund (85 percent) were to the General Resources Account (GRA).

  • Liberia was in protracted arrears to the Fund until March 14, 2008. The clearance of its arrears (SDR 543 million) was facilitated by an intra-day bridge loan provided by the United States. In addition, 102 members contributed to the financing of the Fund’s debt relief to Liberia. On March 18, Liberia reached the decision point and received interim assistance under the enhanced HIPC Initiative.

  • Three members remain in protracted arrears to the Fund—Somalia, Sudan, and Zimbabwe—and remedial measures are in place for all three cases. All overdue financial obligations to the Fund as of end-June 2008 were protracted arrears, with Sudan accounting for 75 percent of the total. The record of cooperation with the Fund on policies and payments by the current protracted cases varied widely during the period under review:

    • Somalia’s Transitional Federal Government—which lacks international recognition—has so far not been able to restore order. The absence of an internationally-recognized central government and official information on economic and financial developments precludes a full assessment of Somalia’s cooperation with the Fund.

    • Sudan’s cooperation with the Fund on policies and payments has been mixed since the last review. While Sudan’s payments to the Fund have continued to exceed new obligations falling due, its policy performance under the 2007–08 staff-monitored program (SMP) has been uneven. Corrective actions were taken recently, allowing staff to complete the first assessment of the SMP.

    • Zimbabwe’s cooperation with the Fund has remained poor. Zimbabwe’s arrears to the PRGF-ESF Trust have increased since the last review. The economic and social crisis has intensified further, making it critical to implement a comprehensive program of macroeconomic stabilization and structural reform.

    • No changes are proposed to the Fund’s strategy on arrears, which remains broadly effective in dealing with both short-term and protracted arrears.

    • It is proposed that the availability of the rights approach be extended by another year, to end-August 2009. The rights approach remains an important option for arrears clearance for the remaining two eligible members (Somalia and Sudan). A draft decision is provided to extend the availability of the rights approach.

I. Introduction

1. This paper provides an update on 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 2009.1 Section II reviews recent developments on overdue financial obligations to the Fund through end-June 2008, including developments in the protracted arrears cases. Section III discusses progress under the Fund’s strategy on arrears, and issues relating to payment attribution and de-escalation of remedial measures. A draft decision is provided at the end of the paper to extend the availability of the rights approach to end-August 2009.

II. Recent Developments

A. Overview

2. Three members remained in protracted arrears to the Fund at end-June 2008.2 Two members with arrears dating back to the mid-—Somalia and Sudan—account for 93 percent of total arrears to the Fund, with Sudan accounting for 75 percent (Figure 1). Zimbabwe, which has been in arrears to the PRGF-ESF Trust since February 2001, accounts for the remaining 7 percent.

Figure 1.
Figure 1.

Overdue Financial Obligations by Member

(In millions of SDRs; as of end-June 2008)

Citation: Policy Papers 2008, 049; 10.5089/9781498334334.007.A001

Source: Finance Department.

3. Total arrears to the Fund declined by SDR 552 million to SDR 1,338 million since the last review, reflecting the arrears clearance by Liberia and payments by Sudan (Figure 2 and Table 1). About 85 percent of total arrears to the Fund are to the GRA, with the remainder to the Trust Fund (6.6 percent), the PRGF-ESF Trust (6.6 percent),3 the SDR Department (1 percent), and the Structural Adjustment Facility (SAF) (less than 1 percent).

Figure 2.
Figure 2.

Overdue Financial Obligations to the Fund

(In millions of SDRs; 1980–end-June 2008)

Citation: Policy Papers 2008, 049; 10.5089/9781498334334.007.A001

Source: Finance Department.
Table 1.

Overdue Financial Obligations to the Fund, 2007–2008

(In millions of SDRs)

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Source: Finance Department.

Comprises Trust Fund and SAF overdue principal obligations.

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

4. On March 14, 2008, Liberia cleared all of its arrears (SDR 543 million) to the Fund, which had been accumulated since 1984. Following the arrears clearance, the Executive Board restored Liberia’s voting and related rights and its eligibility to use the general resources of the Fund, and lifted the suspension of its rights to use SDRs.4 On this basis, and in light of the existence of satisfactory assurances as to the availability of resources to finance arrangements under the Poverty Reduction and Growth Facility (PRGF) and Extended Fund Facility (EFF), totaling SDR 582 million. On March 18, Liberia reached the decision point under the enhanced HIPC Initiative and its request for interim assistance was approved.

5. 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 debtor and creditor members 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 GRA charges. As of end-June 2008, total burden-shared deferred charges amounted to SDR 685 million, a decrease of SDR 210 million from a year ago.5 Arrears to the Trust Fund, amounting to SDR 88 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 PRGF-ESF Trust have also reduced the balances available in the Reserve Account, as SDR 74.6 million has been drawn from the Reserve Account to repay PRGF-ESF Trust lenders.

6. Three members (three instances) incurred short-term arrears (less than six months) during the period under review, as compared to four members (eight instances) reported in the previous review. These arrears were settled before remedial measures were applied.

7. The members with protracted overdue financial obligations to the Fund have also accumulated arrears to other international financial institutions (Table 2). As of 5 end-June 2008, their arrears amounted to SDR 789 million to the World Bank and SDR 436 million to the African Development Bank Group (AfDB).

Table 2.

Arrears to the Fund and Other International Financial Institutions

(In millions of SDRs; as of end-June 2008)

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

Countries in non-accrual status with disbursements suspended.

Converted at the US$/SDR exchange rate of June 30, 2008.

8. Overdue currency valuation adjustments of 14 members amounted to SDR 1.2 billion at end-June 2008, compared to SDR 2.4 billion at end-June 2007 (Table 10). 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. Of the above amount, the protracted arrears cases accounted for SDR 663 million, or 57 percent of the total amount.

Table 10.

Countries with Overdue Currency Valuation Adjustments 1/

(In millions of SDRs; as of end-June 2008)

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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. Settlement of adjustments shall be made promptly after the end of the financial year and at other times requested by the Fund or the member. Adjustments are payable in local currency and are not included among overdue obligations. This table lists members whose currency valuation adjustments payable were outstanding on April 30, 2007, and have not been settled before end-June 2008.

Somalia: Adjustments have been outstanding since the end of FY 1991.

Sudan: Adjustments have been outstanding since the end of FY 1996.

Suriname: Adjustments have been outstanding since the end of FY 1999.

B. Developments in Protracted Arrears Cases

9. During the period under the review, the record of cooperation with the Fund by the protracted arrears cases varied widely, and remedial measures remained in place in all three cases.

Sudan

10. Sudan’s record of cooperation on policies and payments with the Fund was mixed. As discussed in the Country Report No. 08/174, performance under the 2007–08 SMP has thus far been uneven.6 While actions were taken to rein in tax exemptions, widen the tax base, and implement the Government Finance Statistics Manual (GFSM) 2001 framework to improve transparency and the timely monitoring of domestic arrears, structural measures related to public financial management reforms were delayed or not fully implemented, contributing to a sizeable accumulation of domestic arrears. Corrective measures were recently implemented that have contributed to a notable reduction in domestic arrears. On payments, in 2007 Sudan paid the Fund US$50.6 million (equivalent to SDR 32.8 million) compared to new obligations falling due of SDR 16.9 million and its commitment of a minimum of US$50 million. Under the 18-month SMP, the authorities have committed to pay the Fund at least US$50 million in 2008. So far in 2008, Sudan has made four payments to the Fund totaling US$24.6 million (equivalent to SDR 15.2 million).7

11. The Executive Board last reviewed Sudan’s overdue financial obligations to the Fund and the Managing Director’s complaint with respect to the suspension of Sudan’s voting and related rights in May 2008. Executive Directors urged the authorities to take prompt actions to sustain macroeconomic stability and high economic growth and minimize nonconcessional borrowing in view of the already unsustainable external debt burden. Directors noted that Sudan’s payments to the Fund in 2007 were in line with its commitments and exceeded new obligations falling due. However, Directors urged the authorities to step up efforts to make payments on a monthly basis, and to consider a further increase in payments to the Fund in 2008, in light of the expected improvement in Sudan’s payment capacity. No further remedial action was taken, and Directors agreed to again review Sudan’s arrears to the Fund and the Managing Director’s complaint with respect to the suspension of Sudan’s voting and related rights in the Fund within six months.

Zimbabwe

12. Zimbabwe’s cooperation on policies and payments with the Fund remained poor. The country’s economic and social crisis deepened, with shrinking economic activity, spiraling hyperinflation, a virtual free fall in the exchange rate, and rapid depletion of international reserves. Currency reform consisting of the removal of ten zeros from the existing denomination was recently introduced. This, and other minor policy changes, are not likely to have any meaningful effect without strong supporting policies to address the underlying cause of hyperinflation. Zimbabwe’s payments toward the settlement of its PRGF-ESF arrears since the last review of the Fund’s arrears strategy have been minimal. These comprised of four payments totaling SDR 0.3 million and Zimbabwe’s share of SDR 1 million from the partial distribution of the SCA-1 balance and burden-shared deferred charges adjustments related to Liberia’s clearance of its arrears to the Fund in March 2008.

13. The Executive Board reviewed Zimbabwe’s cooperation with the Fund on policies and payments with respect to its arrears to the PRGF-ESF Trust in July 2008. In its decision, the Board regretted that Zimbabwe had not made a meaningful reduction in its arrears since the last review, and urged the authorities to take action to discharge the arrears as soon as possible. The Board also noted that Zimbabwe’s economic and social crisis had deepened and could worsen further without a drastic change in policies. Directors underscored that, in order to stabilize the economy and improve living conditions, it was critical to implement a comprehensive program of macroeconomic stabilization and structural reforms with a number of mutually reinforcing policy actions: exchange rate unification and removal of all restrictions on making payments and transfers for current international transactions; substantial fiscal tightening, including termination of all quasi-fiscal activities by the Reserve Bank of Zimbabwe and transferring such activities transparently to the budget; prioritizing spending to ensure adequate social safety nets; liberalization of price controls and imposition of hard budget constraints on public enterprises; and establishing a strong nominal anchor. Achieving a sustainable economic recovery would also require a significant improvement in the investment climate, including through fundamental reforms in the areas of public enterprises, civil service, public expenditure management, property rights, and governance. In light of Zimbabwe’s deteriorating policy performance and payments to the Fund, the remedial measures that were imposed with respect to Zimbabwe’s arrears to the PRGF-ESF Trust were kept in place. Directors agreed to again consider Zimbabwe’s overdue financial obligations to the PRGF-ESF Trust within six months.

Somalia

14. The Executive Board has postponed its review of Somalia’s overdue financial obligations since October 1990. There has been no basis for assessing Somalia’s cooperation with the Fund due to its unsettled political and security situation and the absence of information on economic and financial developments. The Transitional Federal Government that was formed in 2005 has so far been unable to restore order, and lacks international recognition. Staff continues to closely monitor the developments in Somalia, together with staff in the World Bank and other multilateral institutions, and stands ready to work on re-engagement should conditions permit.

III. Progress Under the Fund’s Arrears Strategy and Policy Issues

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

15. 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. The timetables for remedial measures for overdue financial obligations to the Fund’s General and SDR Departments and the PRGF-ESF Trust are provided in Annexes I and II.

16. The rights approach remains an important option for arrears clearance for the two members that remain eligible (Somalia and Sudan).8 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—in the 1990s. Eligibility for the rights approach was restricted to the eleven members that had protracted arrears to the Fund at end-1989. Of these countries, only two—Somalia and Sudan—remain eligible for the rights approach. Use of the rights approach is not required for these members, but it could provide a useful approach for arrears clearance in light of country-specific circumstances. It is, therefore, proposed that the availability of the rights approach be extended for another year, to end-August 2009.

B. Payment Attribution and De-escalation of Remedial Measures

17. Executive Directors recently called for a modification of the de-escalation policy to reduce the financial cost of burden-sharing for deferred charges. In reviewing the burden-sharing mechanism in the context of the review of charges and maturities, Directors noted that the burden-sharing mechanism has recently come under strain with the sharp decline in Fund credit. To help reduce the pressures on the mechanism in the current low-credit environment, Directors supported consideration of a modification to the Fund’s de-escalation policy for members with overdue financial obligations—to make remaining current on new obligations falling due a firm test of cooperation with the Fund. In line with the Managing Director’s work program, a separate paper on this issue will be prepared for the Board’s consideration after the 2008 Annual Meetings.

Proposed Decision

Accordingly, the following 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/08/96. The Fund reaffirms its support for the strengthened cooperative strategy and agrees to extend the availability of the rights approach until end-August 2009.”

Table 3.

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

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Source: Finance Department.

Remedial measures are applied to overdue financial obligations to the General Resources Account (GRA), the SDR Department, and to the PRGF-ESF Trust. With respect to the GRA and the SDR Departments, a complaint is issued by the Managing Director when a member falls into arrears to the Fund for two months or more. In the GRA, depending on the persistence in failure of a member to fulfill its obligations, the complaint may lead to a number of different sanctions under Article XXVI, Section 2: declaration of ineligibility to use Fund resources, suspension of voting rights in the Fund, and compulsory withdrawal from the Fund. With regard to SDR Department, Article XXVI, Section 2(f) provides that Article XXVI, Section 2 sanctions shall not apply to failure to fulfill any obligations with respect to SDRs. Rather, the right of a participant to use SDRs may be suspended as provided for under Article XXIII, Sections 2(a) and (b). Arrears to the PRGF-ESF Trust are not breaches of obligations under the Articles and are thus not subject to Article XXVI sanctions. Remedial measures for dealing with PRGF-ESF arrears include removal from the list of PRGF-eligible countries, declaration of noncooperation and suspension of technical assistance. The Fund also levies the SDR interest rate on any amounts of any overdue interest on, or overdue repayments of, Trust loans.

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-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.

Table 4.

Overdue Financial Obligations to the Fund by Duration, 1981–2008

(In millions of SDRs; end of period)

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Source: Finance Department.
Table 5.

Overdue Financial Obligations to the Fund by Type, 1981–2008

(In millions of SDRs; end of period)

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Source: Finance Department.

Includes periodic charges and special charges on overdue GRA obligations.

Includes Trust Fund/SAF/PRGF overdue interests, special charges and additional interest.

Table 6.

Number of Countries Incurring Late Payments to the Fund, 1998–2008

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Source: Finance Department.

Twelve months to June 30, 2008.

Includes all types of financial obligations falling due to the Fund. 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.

Liberia cleared its arrears to the Fund on March 14, 2008.

Table 7.

Countries with Protracted Overdue Financial Obligations to the Fund 1/

(As of end-June 2008)

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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).

Table 8.

Financial Obligations Falling Due and Payments to the Fund by Current Protracted Arrears Cases, 1998–2008

(In millions of SDRs)

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Source: Finance Department.

Since February 2006, Zimbabwe has been in arrears only to the PRGF-ESF Trust.

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

Table 9.

Deferred GRA Charges of Countries with Protracted Arrears, FY 2004–2009 1/

(In millions of SDRs, as of June 30, 2008)

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Source: Finance Department.

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

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 last review was concluded in August 2007 (Review of the Fund’s Strategy on Overdue Financial Obligations, 8/22/07).

2

Protracted arrears are those outstanding for six months or more.

3

Zimbabwe is the first and only case of protracted arrears to the PRGF-ESF Trust, with outstanding arrears of SDR 88 million at end-June 2008.

4

IMF Executive Board Fully Restores Liberia's IMF Status, Approves Financial Support Amounting to US$952 Million and HIPC Decision Point Designation (Press Release No. 08/52, 3/14/08).

5

The decrease reflects Liberia’s settlement of its overdue GRA charges and the refund to contributing members of their prorated share of the related burden-shared adjustment.

6

Sudan—First Review of Performance Under the 2007–2008 Staff-Monitored Program (Country Report No. 08/174, 6/03/08).

7

In addition, following Liberia’s arrears clearance on March 14, 2008, Sudan’s share of the partial distribution of the SCA-1 and deferred charges adjustments, amounting to SDR 5.6 million, was applied to its overdue GRA repurchase obligations.

8

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 (and the World Bank) 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 followed by the member’s access to new Fund financin.

Review of the Fund's Strategy on Overdue Financial Obligations
Author: International Monetary Fund
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    Overdue Financial Obligations by Member

    (In millions of SDRs; as of end-June 2008)

  • View in gallery

    Overdue Financial Obligations to the Fund

    (In millions of SDRs; 1980–end-June 2008)