Review of the Fund's Income Position for FY 2013 and FY 2014
Author: International Monetary Fund
Publication Date:
30 Apr 2013
eISBN:
9781498341875
Language:
English
Keywords:
PP; income; financial year; net income; interest rate
Download PDF (1.1 MB)

This paper reviews the Fund’s income position for FY 2013 and FY 2014. The paper updates projections provided at the FY 2013 midyear review and proposes decisions for the current and next financial year. The paper includes a comprehensive review of the Fund’s income position as required under the new Rule I-6(4) adopted in December 2011 (see Box 1). Based on this review, no change in the margin for the rate of charge is proposed. The paper is structured as follows: The first section reviews the FY 2013 income position and the main changes from the midyear projections; the second section makes proposals on the disposition of FY 2013 net income, and placement to reserves; the third section discusses the margin on the rate of charge for FY 2014, updates the income projections, and reviews the projected burden sharing adjustments; and the last section reviews special charges.

Abstract

This paper reviews the Fund’s income position for FY 2013 and FY 2014. The paper updates projections provided at the FY 2013 midyear review and proposes decisions for the current and next financial year. The paper includes a comprehensive review of the Fund’s income position as required under the new Rule I-6(4) adopted in December 2011 (see Box 1). Based on this review, no change in the margin for the rate of charge is proposed. The paper is structured as follows: The first section reviews the FY 2013 income position and the main changes from the midyear projections; the second section makes proposals on the disposition of FY 2013 net income, and placement to reserves; the third section discusses the margin on the rate of charge for FY 2014, updates the income projections, and reviews the projected burden sharing adjustments; and the last section reviews special charges.

Introduction

1. This paper reviews the Fund’s income position for FY 2013 and FY 2014 .1 The paper updates projections provided at the FY 2013 midyear review and proposes decisions for the current and next financial year. The paper includes a comprehensive review of the Fund’s income position as required under the new Rule I-6(4) adopted in December 2011 (see Box 1). Based on this review, no change in the margin for the rate of charge is proposed.

The Rule for Setting the Margin for the Basic Rate of Charge

Effective May 1, 2012, Rule I-6(4) reads as follows:

“(4) The rate of charge on holdings (i) acquired as a result of a purchase under a policy that has been the subject of an exclusion under Article XXX(c), or (ii) that exceed the amount of the member's quota after excluding any balances referred to in (i), shall be determined in accordance with (a) and (b) below.

(a) The rate of charge shall be determined as the SDR interest rate under Rule T-1 plus a margin expressed in basis points. The margin shall be set at a level that is adequate (i) to cover the estimated intermediation expense of the Fund for the period under (b) below, taking into account income from service charges, and (ii) to generate an amount of net income for placement to reserves. The appropriate amount for reserve contribution shall be assessed taking into account, in particular, the current level of precautionary balances, any floor or target for precautionary balances, and the expected contribution from surcharges and commitment fees to precautionary balances; provided, however, that the margin shall not be set at a level at which the basic rate of charge would result in the cost of Fund credit becoming too high or too low in relation to long-term credit market conditions as measured by appropriate benchmarks. Notwithstanding the above, in exceptional circumstances, the margin may be set at a level other than that which is adequate to cover estimated intermediation expenses of the Fund and to generate an amount of net income for placement to reserves.

(b) The margin shall be set for a period of two financial years. A comprehensive review of the Fund's income position shall be held before the end of the first year of each such two-year period and the margin may be adjusted in the context of such a review, but only if this is warranted in view of fundamental changes in the underlying factors relevant for the establishment of the margin at the start of the two-year period.”

2. The paper is structured as follows : The first section reviews the FY 2013 income position and the main changes from the midyear projections; the second section makes proposals on the disposition of FY 2013 net income, and placement to reserves; the third section discusses the margin on the rate of charge for FY 2014, updates the income projections, and reviews the projected burden sharing adjustments; and the last section reviews special charges.

Review of the FY 2013 Income Position

3. FY 2013 net income is now projected at SDR 2.0 billion, compared with SDR 2.1 billion at the midyear update (see Table 1) .2 Key factors affecting the latest projections are as follows:

  • Lending income: Operational lending income (margin, service charges, and commitment fees) is estimated at about SDR 1.5 billion, consistent with the earlier estimate. The slightly higher income of SDR 5 million reflects higher commitment fees earned on the cancellation of some arrangements, partially offset by reduced margin income and service charges following the rephasing of scheduled disbursements under existing arrangements. Surcharge income is estimated at SDR 1.2 billion, in line with earlier estimates.

  • Investment income: Investment income for FY 2013 is estimated at SDR 58 million for the fixed-income subaccount (reserves portfolio), SDR 6 million for the endowment subaccount (gold profits portfolio) and SDR 0.036 million for the temporary windfall profits subaccount. Total IA income of SDR 64 million is expected to be about SDR 9 million lower than the midyear estimate due to lower-than-projected returns on government bonds.

  • Reimbursements to the General Resources Account (GRA): The GRA is reimbursed annually for the expenses of conducting the business of the SDR Department, of administering the PRGT Trust, and of administering SDA resources in the MDRI-I and the PCDR Trusts.3 The GRA will be reimbursed for the expenses of conducting the business of the SDR Department in FY 2013 through an assessment on participants in the SDR Department (proposed Decision 1).4 These expenses are estimated at SDR 1.149 million. Expenses of conducting the business of the MDRI-I and PCDR Trusts are estimated at SDR 0.019 million and SDR 0.039 million, respectively (proposed Decisions 2 and 3). Starting in FY 2013, the practice of reimbursing the GRA for the expenses of conducting the business of the PRG Trust will be resumed (see Box 2). The reimbursement is an important element of the Fund’s income model endorsed in 2008 and the resumption of the reimbursement was part of the financing strategy approved in September 2012 for the PRGT aimed at placing concessional lending on a self-sustaining basis over the longer term. Reimbursement had been included in the earlier projections. The estimated PRGT expenses for FY 2013 to be reimbursed to the GRA are SDR 52.21 million (proposed Decision 4).

  • Expenses: Net expenses are expected to be lower than projected by about SDR 22 million. The decrease reflects lower-than-projected expenses on capital projects (IT and facilities) of about SDR 4 million. The FY 2013 net administrative expenditures are also projected to be about SDR 31 million lower than budgeted. The lower expenses are partially offset by movements in the U.S. dollar/SDR exchange rate of about SDR 13 million.5

  • IAS 19 timing difference: The Fund’s pension and employee benefit expense is determined by the provisions of IAS 19, under International Financial Reporting Standards (IFRS). A timing difference results between the actuarially determined IAS 19 expense related to benefits earned by employees during the financial year and the amount actually funded from the budget. The IAS 19 expense for FY 2013 of SDR 249 million is higher than funding projected at SDR 102 million, which gives rise to a timing difference of SDR 147 million that decreases net income.

Table 1.

Projected Income and Expenditures—FY 2013

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Source: Finance Department and Office of Budget and Planning

Review of the Fund's Income Position for FY 2012 and FY 2013-14 (4/12/12).

The Fund's Income Position for FY 2013—Midyear Update (12/21/12).

Consistent with the recently endorsed rules and regulations for the IA, the earnings from the endowment subaccount will be retained in the IA and therefore they are excluded from operational income.

Interest free resources reduce the Fund's costs and therefore provide implicit returns. Since the Fund invests its reserves in the IA to earn a higher return, the interest free resources retained in the GRA are mainly attributable to the SCA-1, unremunerated reserve tranche positions not represented by gold holdings, and GRA income for the year not transferred to the IA. These resources reduce members' reserve tranche positions and the Fund's remuneration expense resulting in implicit income for the Fund.

IAS 19 is the accounting standard that prescribes the accounting treatment of pensions and employee benefit expenses, and involves actuarial valuations. The IAS 19 expense was determined in the actuarial valuation completed in June 2012.

Net income on the basis presented in the Fund's IFRS annual financial statements.

Reimbursement to the GRA from the PRG Trust

In 1987, the Executive Board adopted a decision providing for the annual reimbursement of the GRA for the expenses of conducting the business of the then-ESAF Trust (now PRGT). While this reimbursement was frequently suspended by the Executive Board (see paragraph 2 below), a key element of the new income model endorsed by the Fund in 2008 was the resumption of the reimbursement of the GRA for PRGT administrative expenses. However, an exception was provided pursuant to which the Fund should temporarily suspend annual reimbursements of the GRA in respect of the expenses of conducting the business of the PRGT if a determination is made that the resources of the Trust are likely to be insufficient to support anticipated demand for PRGT assistance and the Fund has been unable to obtain additional subsidy resources.

Since the inception of the Trust Fund in 1976, all administrative expenses associated with the cost of administering the Fund’s concessional lending have been accounted for, and normally the costs have been reimbursed to the GRA. Exceptions to the general rule have been agreed by the Executive Board in the context of funding initiatives since 1998 to increase concessional lending capacity or provide debt relief. During fiscal years 1998-2004, the Board agreed to suspend reimbursement and redirect SDR 366.2 million of such payments from the GRA to the PRGF-HIPC Trust, to help finance both subsidy needs and debt relief. Similarly, during fiscal years 2005-2009 SDR 237.3 million was redirected to benefit the PRGF-ESF Trust.

As part of the 2009 LIC financing package, the Executive Board decided that for a period of three years (FY 2010–12), an amount equivalent to the expenses of operating the PRGT would be transferred from the PRGT Reserve Account to the General Subsidy Account of the PRGT instead of to the GRA. Suspending PRGT reimbursement to the GRA during these three years generated additional PRGT subsidy resources of SDR 147.9 million.

In September 2012, the Executive Board approved a financing strategy for the PRGT aimed at placing concessional lending on a self-sustaining basis over the longer term. This strategy involves establishing a base lending envelope of SDR 1¼ billion annually by using already available resources and contributions from members linked to the remaining windfall profits from recent gold sales and also assumes the reimbursement of the GRA for PRGT administrative expenses to resume in FY 2013. If, however, demand for PRGT borrowing exceeds the base envelope by a substantial margin for an extended period, the strategy for the self sustained PRGT allows for the possibility that a further temporary suspension of reimbursement could be considered by the Executive Board (see Proposal to Distribute Remaining Windfall Gold Sales Profits and Strategy to Make the Poverty Reduction and Growth Trust Sustainable, 9/17/2012).

Disposition Decisions

4. Projected net income includes net operational income of about SDR 912 million and surcharge income of SDR 1.2 billion (Table 1) . The Executive Board needs to consider the disposition of net income and the use of IA investment income, which may impact the determination of GRA net operational income. Each of these elements is discussed below, and presented in Figure 1, beginning with the disposition of IA investment income.

Figure 1.
Figure 1.

Summary of Disposition Decisions

Citation: Policy Papers 2013, 037; 10.5089/9781498341875.007.A001

5. The IA has three subaccounts .6 Under the recent Board-approved Rules and Regulations for the IA, the IA has three separate subaccounts holding three portfolios of assets: (i) a fixed-income subaccount funded by transfers of currencies from the GRA in amounts equivalent to the Fund’s total reserves in June 2006, plus subsequent transfers of GRA net income not associated with gold profits; (ii) the endowment subaccount funded with gold profits (other than windfall profits) as part of the new income model aimed at diversifying the Fund’s sources of income; and (iii) the temporary windfall profits subaccount funded GRA currency transfers attributed to windfall gold profits, which is to be used to fund a partial distribution of the general reserve to the membership for the benefit of the Poverty Reduction and Growth Trust.7

6. The use of IA income is guided by the Fund’s Articles . Under the Articles, investment income from the IA may be invested, held in the IA, or used for meeting the expenses of conducting the business of the Fund.8 Further, Article XII, Section 6(f)(ii), permits the transfer of GRA currencies to the IA when the Fund’s reserves are above the cumulative amount of previous transfers of currencies from the GRA to the IA. Accordingly, in prior years a two-step approach has been taken with respect to the fixed-income subaccount; first, a transfer of IA income from this subaccount to the GRA is made to meet administrative expenses, which increases net income, and in turn increases available resources for placement to the GRA reserves. Second, the increase in reserves provides scope for further transfers of GRA currencies to the IA, thereby expanding the corpus of the IA which has generally provided higher returns.

7. Staff proposes that income in the subaccounts of the IA be used as follows :

  • Fixed-Income Subaccount (reserves portfolio): Consistent with past practice, staff proposes that the estimated FY 2013 income of SDR 58 million be transferred to the GRA to be used towards meeting the expenses of the Fund (proposed Decision 5). By so doing the IA income will contribute to the GRA net operational income, which will be placed in the Fund’s reserves.

  • Endowment Subaccount: Staff proposes that the projected income of SDR 6 million be retained in the IA. According to the Rules and Regulations for the Investment Account, no income from the endowment subaccount may be used for meeting the expenses of the Fund pending the completion of the phasing period, which is expected to start in mid-FY 2014.9 This approach is also consistent with the practice over the last two years. No Board decision is required for reinvestment of earnings.

  • Temporary Windfall Profits Subaccount: The income from this portfolio of about SDR 0.036 million will be retained in the IA until the partial distribution of the general reserve is executed in accordance with already approved Board decisions.

8. Assuming the above dispositions of the IA income, staff proposes that the GRA net operational income estimated at SDR 765 million be placed in the special reserve .10 Article XII, Section 6(a) permits the Fund’s net income to be distributed to members or placed to the general or special reserve. Since the 1970s, the Fund’s practice has been to place GRA annual net income to the special reserve, which is also the first line of defense for any income shortfalls, while surcharge income in the period FY 1998-2006, and in FY 2011–2012 (see below), was placed to the general reserve. Thus, placing the FY 2013 GRA net operational income to the special reserve would be consistent with the Fund’s long-standing practice (proposed Decision 6).

9. Staff proposes that net income equivalent to the FY 2013 surcharges estimated at SDR 1.2 billion be placed to the general reserve (proposed Decision 6) . This approach is consistent with the past practice since FY 1998, except for the period FY 2007–10 where net income equivalent to surcharge income was not placed to the General Reserve and instead was used towards meeting the expenses of conducting the business of the Fund.11 Following the transfer of the FY 2013 net income to reserves, the total precautionary balances at the end of FY 2013 are projected at SDR 11.5 billion.12 The balances would comprise SDR 4.2 billion in the special reserve, SDR 6.1 billion in the general reserve, and the SCA-1 balance of SDR 1.2 billion. Thus the special reserve, which unlike the general reserve is not available for potential distribution to the membership, remains well below the SDR 10 billion floor that the Board has established for precautionary balances.

10. Consistent with past practice, staff proposes to transfer currencies equivalent to the increase in the general and special reserves of SDR 2.0 billion from the GRA to the IA for investment in the Fixed-Income Subaccount, the maximum amount permitted under the Articles . The objective of this IA subaccount is to achieve investment returns that exceed the SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over a 12 month investment horizon.13 While risks of under-performance have increased in the current low interest rate environment (see Annex III), staff proposes to transfer the maximum amount permitted under the Articles, currently estimated at SDR 2.0 billion to the IA for investment (proposed Decision 7).14 Transferring GRA currencies to the IA is consistent with the assumption of the new income model that the IA will over time achieve a higher return than the SDR interest rate.

FY 2014 Income Outlook

11. The income outlook for FY 2014 continues to be positive . Demand for Fund financing is expected to remain strong, although the full extent of the demand is difficult to predict and projections are sensitive to the timing of purchases and repurchases.15 Other factors that affect the Fund’s income position include the level of global interest rates, the U.S. dollar/SDR exchange rate, and decisions on whether and how to adjust the thresholds for the application of surcharges when the 14th General Quota Review comes into effect (see discussion below).16

12. In December 2011, the Executive Board adopted a new rule for setting the basic rate of charge . The new Rule I-6(4) requires that the margin for the basic rate of charge be set for two financial years. In April 2012, the Executive Board set the margin at 100 basis points for the period FY 2013–2014. Under the new rule, a comprehensive review of the Fund’s income position must be held before the end of the first year of each two-year period (for this period the end of FY 2013). The margin may be adjusted by the Board in the context of such a review, but only if this is warranted in view of fundamental changes in the underlying factors relevant for the establishment of the margin at the start of the two-year period.17 The margin was adopted under the exceptional circumstances clause of Rule I-6(4) as a result of the current constrained non-lending income, which results in lending income financing a portion of the Fund’s non-lending activities (see Annex II).18

13. There have been no fundamental changes in the factors relevant for establishing the current margin . Under the new rule the margin should be set to cover the Fund’s intermediation costs and help build up reserves. The new rule also includes a cross-check to ensure that the resulting margin maintains a reasonable alignment with long-term credit market conditions. These factors, discussed below and in more detail in Annex II, have not fundamentally changed since April 2012 when the margin was established, and therefore no change in margin for the rate of charge for FY 2014 is warranted (Decision 8).

  • Intermediation costs for FY 2014 are now projected at US$96 million, broadly in line with the estimated level in FY 2013 and slightly lower than projected in April 2012 (US$111 million).19 Income associated with the current high lending levels is expected to remain well in excess of intermediation costs. Income from the margin is projected at about US$1.3 billion, compared with the earlier estimate of US$1.5 billion and the projected outcome for FY 2013 of about US$1.4 billion.

  • Commitment fee income is projected at about US$29 million substantially lower than in FY 2013 and broadly in line with the earlier estimate.

  • Surcharge income is projected at US$1.9–2.2 billion compared with the earlier estimate of US$2.0 billion and a projected outcome in FY 2013 of US$1.9 billion. Surcharge income is sensitive to the timing of the effectiveness of the 14th General Quota Review and future Board decisions on whether and how to adjust the thresholds for the application of surcharges following the quota increase. For purely illustrative purposes, two scenarios are presented. The first assumes that the current surcharge thresholds remain unchanged as a percent of quota implying that surcharge income would decline for a given level of credit outstanding. The second assumes that the surcharge thresholds are adjusted in percent of quota to maintain their SDR value on average when the quota increases under the 14th General Quota Review come into effect, thereby offsetting the effect of the quota increase.20 This adjustment to the thresholds would require a Board decision. The projected income for FY 2014 is shown in Tables 2 and 5 while the projected reserve accumulation path in the medium-term is illustrated in Figure 2. A specific proposal concerning surcharge thresholds will be presented for Executive Board consideration in due course.

  • Actual reserve accumulation in FY 2014 is projected at US$2.4–2.7 billion, compared with the earlier estimate (and projected outcome for FY 2013) of US$3.1 billion.

  • For the market cross-check, EMBI spreads, adjusted for the risk and term premiums, are used as the main basis for comparison with long term market conditions. While market spreads have declined in the past year, the average spread over the past 5 years is broadly unchanged, and the adjusted market comparator suggests that the alignment of the current margin of 100 basis points with long-term credit market conditions is broadly in line with that applying in recent years (Figure 3).

Figure 2.
Figure 2.

Projected Reserve Accumulationn

(in billions of SDRs)

Citation: Policy Papers 2013, 037; 10.5089/9781498341875.007.A001

Figure 3.
Figure 3.

EMBIG Spreads: Total Composite and Bottom Quartile

(in basis points)

Citation: Policy Papers 2013, 037; 10.5089/9781498341875.007.A001

Sources: Bloomberg and staff calculations.
Table 2.

Projected Income Sources and Uses—FY 2014

(in millions of SDRs)

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Source: Finance Department and Office of Budget and Planning

Surcharges are excluded from operational income.

Annual payouts from the endowment are expected to commence in FY 2018.

Interest free resources reduce the Fund’s costs and therefore provide implicit returns. Since the Fund invests its reserves in the IA to earn a higher return, the interest free resources retained in the GRA are mainly attributable to the SCA-1, unremunerated reserve tranche positions not represented by gold holdings, and GRA income for the year not transferred to the IA. These resources reduce members’ reserve tranche positions and the Fund’s remuneration expense resulting in implicit income for the Fund.

The initial projections for surcharges assumed for illustrative purposes that the 14th General Quota Review would be in place by the start of FY 2014 and showed the impact if surcharge thresholds were not adjusted. The updated projections assume the quota increase will be effective in the second half of FY 2014, and illustrate the sensitivity of the projections to adjustments in the surcharge thresholds.

The initial estimate for retained gold endowment income assumed that the gold endowment would be fully operational in FY 2014 with an initial payout to the GRA. The updated projections reflect the phase in of investments to the endowment with the gold profits being invested in short-term deposits during the interim period.

Net income on the basis presented in the Fund's IFRS annual financial statements.

Table 5.

Income from the Margin and Reserve Accumulation1

(in millions of U.S. Dollars, unless otherwise indicated)

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Source: Finance Department and Office of Budget and Planning

For analytical purposes, surcharges and commitments fees are considered for reserve accumulation only.

Costs related to the Fund's “generally available facilities.”

Derived by applying the margin against average Fund credit outstanding at the average US$/SDR rate.

Includes commitment fees for expired or cancelled arrangements in FY 2009-12.

Potential reserve accumulation assumes other sources of income sufficient to cover non-intermediation costs.

Potential reserve accumulation as a percent of precautionary balances at the beginning of the financial year.

Additions to reserves based on net income for the year (excluding gold profits). See Tables 1 and 2 for FY 2013-14 estimates.

Precautionary balances include the Fund's reserves and SCA-1 balance less gold sale profits in FY 2010-11.

Excludes FCL arrangements.

14. Based on the current margin, updated projections for FY 2014 indicate a net income of about SDR 1.6–1.8 billion compared with the earlier estimate of SDR 2.1 billion (Table 2) . An update of the FY 2014 income projections is discussed below highlighting the key factors that affect the outlook. Table 3 provides a sensitivity analysis on the income effects of changes in some assumptions.

  • Lending income . Average credit is now projected to be about SDR 88.2 billion in FY 2014 (see Table 2) or some SDR 9 billion lower than projected last April, due to the rephasing of drawings under existing arrangements and the expiration of arrangements with undrawn balances. The decline has resulted in lower income from the margin of about SDR 90 million, partially offset by increases in service charge and commitment fees of SDR 12 million and SDR 10 million, respectively. Surcharge income is expected to generate about SDR 1.3–1.5 billion towards FY 2014 income.

  • IA investment income . FY 2014 IA investment income is expected to be about SDR 264 million lower than estimated in April reflecting low global interest rates and the recent agreement not to initiate pay-outs from the endowment until the phased investment of the passively-managed gold portion of the endowment has been completed. Projected earnings from the fixed income subaccount (reserves portfolio) have also been updated to reflect lower expected returns due to the historically low interest rates. The FY 2014 projections now reflect an expected return over the SDR interest rate of 7 basis points over the SDR rate (the previous estimates assumed 50 basis points). The projections further assume a gradual build up of the premium to 100 basis points by FY 17 following a phased approach for the investment mandate. As highlighted in Annex III, the performance of the fixed income subaccount is subject to considerable uncertainty in the short term based on the current low interest rate environment in the SDR markets and the risk of rising interest rates.21 The Executive Board is expected to review the investment mandate of this subaccount in FY 2014.

  • Interest-free resources and reimbursements . The implicit returns on interest-free resources are about SDR 15 million lower as a result of the low global interest rates and the projected reimbursements to the GRA have also decreased by about SDR 12 million based on updated expenditure projections.

  • Expenditures . Net administrative and capital expenditures are consistent with those set in the medium-term budget paper.22

Table 3.

Sensitivity Analysis-Effect of Changes in Selected Assumptions in FY 2014

(in millions of SDRs)

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Implicit returns on GRA interest-free resources.

Assumes May 1 transaction with full drawing of SDR 10 billion and access of 1,000 percent of quota. Includes service charges, margin on the basic rate of charge and surcharges (commitment fees are excluded).

15. Burden sharing adjustments are expected to remain low in FY 2014 (see Table 4 below) . Given current levels of overdue obligations, sharply higher lending and the prevailing low interest rate environment, burden sharing adjustments remain at very low levels. The Board amended the decision on burden sharing in FY 2010 to take account of the low burden sharing adjustments and allow for a “carry-forward” of excess amounts generated from a minimum adjustment of 1 basis point to the rate of charge and the rate of remuneration.23 If the amounts brought forward are sufficient to offset deferred charges in subsequent quarter(s), no adjustments are necessary for such quarters. This was the case for the third quarter of FY 2013. Going forward, burden sharing adjustments are expected to remain low, with adjustments projected for the third quarter of FY 2014.

Table 4.

Recent Burden Sharing Adjustment Rates and FY 2014 Quarterly Rates

(in basis points, unless otherwise stated)

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The average rates have been calculated using the quarterly burden sharing rates and SDR interest rates.

The SDR interest rates are projected to average 0.1 percent in FY 2014.

Less than 0.5 basis points.

Review of Special Charges

16. The decision on special charges on overdue financial obligations in the GRA and the Trust Fund calls for an annual review . Under the current system, special charges are to be levied on repurchases and charges that are in arrears for more than 10 days. However, special charges on GRA obligations that are overdue for six months or more were eliminated effective May 1, 1992.24 No special charges have arisen during FY 2013 and no new considerations have arisen during the financial year. No changes are proposed to the current system (proposed Decision 9).

Proposed Decisions

Decisions pertaining to FY 2013

  • Decision 1 provides for the assessment on SDR Department participants for the reimbursement of the General Department for the expenses of conducting the business of the SDR Department in FY 2013.

  • Decision 2 provides for the reimbursement to the General Resources Account for the cost of administering SDA resources in the MDRI-I Trust in FY 2013.

  • Decision 3 provides for the reimbursement to the General Resources Account for the cost of administering SDA resources in the PCDR Trust in FY 2013.

  • Decision 4 provides for the reimbursement to the General Resources Account for the cost of administering the PRGT in FY 2013.

  • Decision 5 provides for the transfer of income from the Investment Account to the General Resources Account for use in meeting FY 2013 administrative expenses.

  • Decision 6 provides for the placement of FY 2013 net income to the Fund’s Special Reserve and General Reserve.

  • Decision 7 provides for the transfer of currencies from the GRA to the Investment Account equivalent to the increase of the special and general reserve as a result of the placement of FY 2013 net income.

Decision pertaining to FY 2014

  • Decision 8 maintains the rate of charge on the use of Fund resources for FY 2014 at 100 basis points over the SDR interest rate.

  • Decision 9 reviews the system of special charges.

  • Decisions 1, 2, 3, 4, 5, 6, 8, and 9 may be adopted by a majority of the votes cast. Decision 7 may be adopted by a 70 percent majority of the total voting power.

1. Assessment under Article XX, Section 4 for FY 2013

Pursuant to Article XVI, Section 2 and Article XX, Section 4 of the Articles of Agreement and Rule T-2 of the Fund's Rules and Regulations, it is decided that:

  • The General Department shall be reimbursed for the expenses of conducting the business of the SDR Department for the period of May 1, 2012 through April 30, 2013; and

  • An assessment shall be levied on all participants in the SDR Department. The special drawing right holdings accounts of participants shall be debited on April 30, 2013 with an amount equal to 0.00056283 percent of their net cumulative allocations of special drawing rights. The total assessment shall be paid into the General Department.

2. MDRI-I Trust Reimbursement for FY 2013

In accordance with paragraph 6 of Decision No. 13588-(05/99) MDRI, adopted November 23, 2005, effective January 5, 2006, the General Resources Account shall be reimbursed the equivalent of SDR 0.019 million by the MDRI-I Trust in respect of the expenses of administering SDA resources in the MDRI-I Trust during FY 2013.

3. PCDR Trust Reimbursement for FY 2013

In accordance with paragraph 3 of Decision No. 14649-(10/64) PCDR, adopted June 25, 2010, the General Resources Account shall be reimbursed the equivalent of SDR 0.039 million by the PCDR Trust in respect of the expenses of administering SDA resources in the PCDR Trust during FY 2013.

4. PRG Trust Reimbursement for FY 2013

In accordance with paragraph 3 of Decision No. 8760-(87/176), adopted on December 18, 1987, an amount equivalent to SDR 52.21 million, representing the cost of administering the Poverty Reduction and Growth Trust (PRGT) for FY 2013, shall be transferred from the Reserve Account of the PRGT (through the Special Disbursement Account) to the General Resources Account.

5. Transfer of Investment Income for FY 2013 to General Resources Account

The income of the Fixed Income Subaccount of the Investment Account for FY 2013 shall be transferred to the General Resources Account for use in meeting the expenses of conducting the business of the Fund during FY 2013.

6. Placement of FY 2013 net income of the General Resources Account to the Special Reserve and the General Reserve

The net income of the General Resources Account for FY 2013 shall be placed to the Fund’s Special Reserve and General Reserve as follows: Net income not attributable to surcharge income shall be placed to the Fund’s Special Reserve, and net income attributable to surcharge income shall be placed to the General Reserve.

7. Transfer of Currencies to the Investment Account for FY 2013

Pursuant to Article XII, Section 6(f)(ii) of the Articles of Agreement, the Fund shall transfer from the General Resources Account to the Investment Account currencies in an amount equivalent to the difference between the Fund’s general and special reserves as of April 30, 2013 and the cumulative amount of previous transfers of currencies from the General Resources Account to the Investment Account. This transfer of currencies to the Investment Account shall be effected in the context of the Financial Transactions Plan covering the period July-September 2013. The currencies transferred to the Investment Account pursuant to this decision shall be used for immediate investment in the Fixed Income Subaccount in accordance with the Rules and Regulations for the Investment Account.

8. Review of Fund’s Income Position

Pursuant to Rule I-6(4)(b) of the Fund’s Rules and Regulations, the Fund has conducted a comprehensive review of the Fund’s income position and decides to leave unchanged for FY 2014 the rate of charge established by Decision No. 15148–(12/39) adopted April 26, 2012.

9. Review of the System of Special Charges

The Fund has reviewed Decision No. 8165-(85/189) G/TR, adopted December 30, 1985, effective February 1, 1986, as amended, on Special Charges on Overdue Financial Obligations to the Fund.

Annexe I. Decisions in Effect Related to the FY 2013 Income Position1

Decisions in Effect

The Executive Board has taken the following decisions affecting the Fund’s income position for FY 2013:

Rate of Charge

The margin for calculating the basic rate of charge in FY 2013 was set at 100 basis points for a period of two years (FY2013-14). This decision was adopted under the exceptional circumstances clause of Rule I-6(4), which, in exceptional circumstances, allows the margin for calculating the basic rate of charge to be set at a level other than that which is adequate to cover the estimated intermediation expenses of the Fund and to generate an amount of net income for placement to reserves.

Burden Sharing for Deferred Charges

Income losses resulting from unpaid charges are shared equally between debtor and creditor members under the burden sharing mechanism largely pursuant to a decision taken in 2000. Unless amended by the Board, this mechanism will continue for as long as overdue obligations to the Fund persist.

1/ See Review of the Fund’s Income Position for FY 2012 and FY 2013-14 (4/12/12).

Annex II. Framework on the Margin for the Rate of Charge

In December 2011, the Executive Board adopted a new rule for setting the basic rate of charge .25 Based on the new Rule I-6(4), which came into effect on May 1, 2012, the Executive Board set the margin for the two financial years FY 2013-2014 at 100 basis points. Under the rule a comprehensive review of the Fund’s income position is required before the end of the first year of each two-year period (in this case FY 2013) and the margin may be adjusted in the context of such a review, but only if there are fundamental changes in the underlying factors for setting the margin. This annex provides an update for FY 2014 to determine if there are any fundamental changes that would warrant an adjustment to the margin.

In April 2012, the margin was adopted under the exceptional circumstances clause of the new rule . Under the new rule, the margin should be set to cover only the Fund’s intermediation costs and help build up reserves. The rule also allows for a cross-check of the alignment of the margin to long-term credit conditions. The rule was designed to move away from a reliance on lending income financing the Fund’s non-lending activities. However, investment income, the main source of the Fund’s non-lending income, is currently constrained resulting in lending income financing a portion of the Fund’s non-lending activities. While the gold endowment is expected to make a significant contribution to Fund income over the long-term, assuming interest rates rise back to more normal levels, non-lending income is unlikely to be sufficient to cover non-lending expenses over the near-and medium-term. As a result, the margin for FY 2013–14 was adopted on the exceptional circumstances clause of the new rule, which in exceptional circumstances, allows the margin for calculating the basic rate of charge to be set at a level other than that which is adequate to cover the estimated intermediation expenses of the Fund and to generate an amount of net income for placement to reserves. A review of the principles for setting the margin for FY 2014 is discussed below and is summarized in Table 5.

The FY 2014 intermediation costs are estimated at US$96 million compared with an estimate of US$111 million in April 2012 (Table 5) . Fund-wide intermediation costs related to generally available facilities (GAF) are derived in consultation with departments using the Fund’s Analytic Costing and Estimation System (ACES). They cover direct personnel, travel and other administrative expenses, as well as indirect support and governance costs. In addition, capital and depreciation expenses (which are not part of the ACES methodology) are allocated separately to derive total intermediation costs.

Income associated with the current high lending levels is expected to remain well in excess of intermediation costs in FY 2014 .26 The income from service charges at US$101 million (SDR 67 million) (Table 5, row B) is projected to cover 100 percent of the intermediation costs in FY 2014 while the income from the margin is projected to provide further income of about US$1.3 billion (SDR 882 million assuming an unchanged margin of 100 basis points).

Reserve accumulation: In addition to the margin and service charges on disbursements, commitment fees for non-drawing arrangements and surcharges contribute to the Fund’s income.

  • In FY 2014, the expected commitment fees are about US$29 million (SDR 19 million) . Commitment fee income is only recognized at the expiration or cancellation of arrangements and is therefore volatile. The decrease in income from FY 2013 reflects the two-year fees earned on the Flexible Credit Line arrangements.

  • Surcharge income is projected to be about US$1.9–2.2 billion (SDR 1.3–1.5 billion) . For purely illustrative purposes, two scenarios are presented for the surcharge income following the doubling of quotas under the 14th General Quota Review. The first assumes that the current surcharge thresholds remain unchanged as a percent of quota implying that surcharge income would decline for a given level of credit outstanding. The second assumes that the surcharge thresholds are adjusted in percent of quota to maintain their SDR value on average when the quota increases under the 14th General Quota Review come into effect, thereby offsetting the effect of the quota increase. This adjustment to the thresholds would require a Board decision. Again, for purely illustrative purposes, it is assumed that the quota increase takes effect on November 1, 2013.

  • Estimated potential reserve accumulation for FY 2014 with a margin of 100 bps would be about US$3.3–3.6 billion . This potential reserve accumulation (Table 5, row G) assumes that non-lending income would cover the remainder of the Fund’s administrative expenses. However, because the lending income continues to cover a portion of the non-lending costs, actual reserve accumulation is projected to be lower at about US$2.4–2.7 billion or SDR 1.6–1.8 billion (see Table 5, row I).

Alignment of Fund borrowing costs with market conditions: The new rule includes a mechanism to cross-check the alignment of the margin to long-term credit market conditions. This mechanism aims to ensure that the costs of borrowing from the Fund are not too high or low compared with the costs members face in private credit markets. As in the past, staff has used EMBI spreads as the main basis for the comparison with market borrowing rates.27 The market cross check provides a useful guide but is not mechanistic, requiring judgment, particularly on the global financial context and future developments. As in the past, two adjustments are made to the metric measuring long-term market conditions:

  • Risk premium adjustment—an adjustment to take account of the lower credit risks the Fund faces as a cooperative public policy institution. The Fund’s preferred creditor status and its lending policies are key factors in reducing these risks. To reflect this, the measure compares the margin to market borrowing spreads applying for the most creditworthy Fund members, approximated by the lowest quartile of EMBI spreads; and

  • Term premium adjustment—an adjustment is made to account for the difference between the SDR interest rate (based on a floating rate composed of three-month instruments) and the comparator EMBI measure (based on five year fixed instruments).

The lowest quartile of the EMBI adjusted for the term premium for the most recent five year period ending in February 2013 has remained basically unchanged, up 3 basis points since last year (from 154 to 157 basis points). Hence, while recent EMBI spreads have declined, the alignment of the current margin with long term credit market conditions is broadly unchanged (see Table 6 below).

Table 6.

Long-term Credit Market and Comparator Spreads

(in basis points)

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Source: Bloomberg, JP Morgan and Fund staff calculations.

SDR-equivalent rates are calculated using the currency weights in the SDR basket.

Table reports linear combination of spreads in EMBIG-U.S. dollar and EMBIG-Euro composites. Series were combined using the weights of the U.S. dollar and Euro in the SDR basket (normalized to 100). During the sample period, the combined EMBIG indices contained spreads for a total of 40 cou ntries.

Difference in yields between a five-year fixed-rate SDR bond and the five-year average 3-month SDR interest rate as implied in futures market contracts, adjusted for the higher risk premium of instruments in future markets.

Median level of the SDR weighted U.S. dollar and euro EMBIG spreads for the members with Fund arrangements between 1996 and 2011, excluding advanced countries.

Margin reduced to 100 bps from 108 bps in May 2008. Between 1989 and 2005, the rate of charge was determined by a coefficient to the SDR interest rate that was adjusted with the Fund's total administrative expenses and the volume of Fund credit outstanding. Since May 2005, the margin has been defined in absolute basis points over the SDR interest rate.

Annex III. Investment Account (IA) Performance Scenarios 28,29

Fixed income subaccount

  • Government bond yields in the markets of the SDR basket remain close to their historical lows, and those within the 1–3 year index range are near the zero bound. With growth and inflation expectations increasing only slowly, or being revised down in some cases, policy makers in SDR markets remain committed to keeping low rates for an extended period. As a result, investors are only anticipating a minor increase in bond yields: one-year forward yields in SDR terms for bonds in the 1–3 year segment of the curve are about 19 basis points higher than current levels (Figure 5). This magnitude of rate increase is lower than what was expected a year ago (increase of 26 bps).30

  • With yields very close to zero, and therefore limited income protection, there is a short-term risk of very low return, or of capital loss or underperformance against the three-month SDR rate if yields rise even moderately. The IA follows a long term investment strategy and periods of short-term underperformance should be expected. However, over time, higher average yields will benefit the IA’s performance both in absolute terms and relative to the SDR rate.

  • In line with past reviews of the Fund’s income position, the analysis below outlines possible future return scenarios for the IA relative to the three-month SDR rate, which the IA seeks to exceed over time. Table 7 presents the un-annualized IA returns in the ten-month period to end- February 2013 and assesses the impact on IA income of a number of possible scenarios through end-FY 2013 and in FY 2014:31

    • Yields remain unchanged from early March 2013 levels;

    • Yields follow market forward rates (as in Figure 4);

    • Yields increase by 25 basis points above market forward rates;

    • Yields increase by 50 basis points above market forward rates;

    • Yields increase by 100 basis points above market forward rates;

    • Bond yields increase by 100 basis points above market forward rates and swap spreads on MTIs widen by an additional 50 basis points (i.e., MTI yields increase by 150 basis points above forwards).

Table 7.

Investment Account Performance Scenarios

(unannualized returns in percent)

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Sources: State Street data, Bloomberg, and staff calculations.

From March 6, 2013.

Note: Actual returns are based on audited performance data provided by State Street. Projections are based on current market levels for SDR weighted 3-month bills, and 2-year government notes, and 2-year MTIs, and on government bond forward rates.
Figure 4.
Figure 4.

Current Levels of SDR-Weighted Yields and Market-Implied Forward Rates

(in percent)

Citation: Policy Papers 2013, 037; 10.5089/9781498341875.007.A001

The results of the above scenarios suggest that positive returns could be achieved if rates stay unchanged. They would be modest, however (0.17 percent). Against the SDR interest rate, the IA could break even if bond yields rise by 10 basis points less than implied by market forwards (i.e., bond yields increase by 7 basis points over the next fiscal year). A rise in yields in line with or above current market expectations could result in capital losses.

Income of gold sales proceeds in the endowment subaccount

With the approval by the Executive Board of the Rules and Regulations for the IA, work is under way to begin investing gold sales proceeds in the endowment subaccount in line with the endowment’s strategic asset allocation (SAA). This is expected to take place gradually, starting in the course of the third quarter of FY 2013, and spanning a three-year period. The share of gold sales profits to be placed in the IA’s endowment subaccount is currently invested in fixed-term deposits with the BIS as an interim measure. This specific arrangement is intended to ensure the funds are liquid and do not face any risk of capital loss. Setting an income projection in FY 2014 for the endowment subaccount is subject to considerable market uncertainty, in part due to the higher volatility of the markets in which funds will be invested, compared with the current IA’s fixed income subaccount.

Annex IV. Assumptions Underlying the Income Projections

Table 1.
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The figures are based on a general assumption that investment income is transferred annually to the GRA shortly after the year-end based on the final audited figures.

This balance represents the IA portion funded from the gold endowment and the temporary windfall gold profits subaccount. The projections assume that the windfall profits will be distributed in the second half of FY 2014.

End-February figure is unannualized.

The FY 2014 projected returns for the gold endowment reflect the phase in of investments under the strategic asset allocation and the earnings from the short-term deposits held in the interim.

Annex V. Projected Income and Expenses—FY 2013–14

Table 2.
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Includes commitment fees, which are refundable (when disbursements take place) so income arises only if planned disbursements are not made.

Administrative expenses include net administrative expenditures, capital budget items expensed, and depreciation.

IAS 19 is the accounting standard that prescribes the accounting treatment of pensions and employee benefit expenses, and involves actuarial valuations. The IAS 19 expense was determined in the actuarial valuation completed in June 2012.

Net income on the basis presented in the Fund's annual IFRS financial statements.

Annex VI. Cumulative Burden Sharing Adjustments at end–January 20131

Table 3.
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Adjustments to charges and remuneration are billed quarterly.

Note: Values of 0.0 represent amounts of less than SDR 0.1 million; “-” denotes no adjustments