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The Consolidated Medium-Term Income and Expenditure Framework

Author(s):
International Monetary Fund
Published Date:
August 2016
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Introduction

1. This paper updates the consolidated income and expenditure outlook from April 2015 and the recent review of the adequacy of precautionary balances.1,2 The paper incorporates and extends the income and budget projections in the companion papers.3

2. The paper is organized as follows. The first part of the paper presents the updated outlook for the Fund’s consolidated income and expenditure through FY 2022. It begins with a review of the outlook for the Fund’s medium-term income from lending and non-lending income sources, highlighting key changes since the last update in April 2015.4 The paper then describes the medium-term expenditure outlook. The discussion of consolidated income and expenditures concludes with an update of the long-run income-expenditure position which, as in the past, provides an illustration of the steady state income position when lending income has returned to low levels as envisaged at the time the Fund’s New Income Model was developed. The second part of the paper provides an update on the projected pace of accumulation of precautionary balances over the medium term including changes since the February review of the adequacy of precautionary balances.5

Consolidated Income and Expenses

A. Medium-Term Income

3. The medium-term income outlook remains positive despite a decline in projected income from surcharges and expectations for a more gradual rise in investment returns. Net operational income before surcharges is now expected to provide only a modest buffer over expenditures through FY 2021, while net income including surcharges remains positive through FY 2022.

4. Operational lending income is projected to be marginally higher over the medium term than projected in April 2015. One additional Stand-By Arrangement (SBA) and one outright purchase (under the RFI) with total access amounting to SDR 1 billion, have been approved by the Executive Board since April 2015.6 The revised projections also reflect some rephasing of purchases and lower than expected early repurchases. In aggregate, these changes have increased the projected credit path by an average of SDR 0.9 billion a year, or about 2 percent, over the period FY 2016-21, thus increasing projected annual average income from the margin and service charges by about SDR 10 million over the medium term.7,8

5. Non-lending income which is comprised of investment income, the implicit returns on the Fund’s interest-free resources, and reimbursements to the General Resources Account (GRA) is expected to rise more gradually over the medium term than projected earlier.

  • Income from the Fixed-Income Subaccount is expected to be significantly lower over the medium term than projected in April 2015.9 The rise in yields as implied by forward markets is now more gradual; the forward curve of the SDR interest rate, which takes into account the impact of the inclusion of the Chinese renminbi (RMB) in the SDR basket implies a rate of only 1.2 percent in FY 2021, compared with 1.5 percent estimated in April 2015; more recently, an SDR interest rate of close to 2 percent in FY 2021 was implied by market forwards at the time of the reviews of the SDR basket and the adequacy of precautionary balances.10 In addition the projections now embody more conservative assumptions on the gains to be made from a broadened investment mandate for this portfolio.11 While this downward revision in projected investment income from the subaccount of SDR 400 million over the next five years compared with the April 2015 projection mainly reflects lower expected returns, a slower build up in reserves over the medium term, due mainly to the decline in projected surcharge income (see below), also contributes to lower investment income.
  • The Endowment Subaccount is expected to incur a loss in FY 2016 but the medium term outlook is broadly unchanged. The current negative returns stem largely from volatility in the equity markets during the year including the large fall in equity prices in January 2016. However, the medium term outlook is relatively unchanged and remains positive. The three-year funding period of the passively-managed portion of the gold endowment began in March 2014; the projections continue to reflect the expectation that the endowment will be phased-in quarterly and thus be fully operational during FY 2018 with the illustrative assumption of 3 percent payouts commencing in that year.12,13 During the funding period, investment income earned from the subaccount is assumed to be retained in the endowment in accordance with the Rules and Regulations of the Investment Account (IA) and is therefore not included in the Fund’s operating income.
  • Projected income from interest-free resources has been lowered in line with expected interest rate developments.14 The implicit returns on interest-free resources follow the downward shift in the projected path for the SDR interest rates thereby lowering projected interest-free income through FY 2021 by some SDR 70 million compared with the estimates made in April 2015, or by more than SDR 90 million from the estimates at the time of precautionary balances review.

6. The more gradual increase in investment income described above combined with a rise in expenses in SDR terms has lowered projected net operational income over the medium term. In FY 2016, estimated expenses are expected to marginally exceed income (before surcharges) and result in a small operational loss for the period. Commitment fees from two precautionary arrangements approved in FY 2015 will contribute significantly to operational income in FY 2017. Thereafter a steady, albeit slower, increase in investment income is expected to broadly offset a decline in income from the margin as the stock of credit outstanding declines, to yield a small positive net operational income on average through FY 2021 (Figure 1).

Figure 1.Actual and Projected Income and Expenses – FY 2010-2026

(in millions of U.S. dollars)

7. Surcharge income is projected to be significantly lower than the April 2015 estimates. Following the quota increases under the 14th General Review of Quotas, the Executive Board approved the adjustment of surcharge thresholds to 187.5 percent of quota and a shift of the time-based surcharge trigger for EFF arrangements to 51 months for all members with GRA credit outstanding.15 As a result of these adjustments and the rephasing of purchases and the other assumptions noted above, annual surcharge income is projected to be lower by an average of about SDR 0.1 billion over the medium term compared with April 2015. Cumulative surcharge income over the period FY 2016-21 is now projected at SDR 3.3 billion.

8. The above projections include the expected impact of the inclusion of the Chinese renminbi (RMB) in the SDR basket. The Fund’s lending income will not be affected by the increase in the SDR interest rate following the inclusion of the RMB in the SDR basket. The modestly higher rate of charge on Fund borrowings reflecting the increase in the SDR interest rate would be offset by the higher remuneration paid to Fund creditors on their reserve tranche positions or borrowed resources. However, the Fund’s income position is expected to benefit marginally from a higher SDR interest rate as it translates into higher returns on the Fixed-Income Subaccount and to a lesser degree higher implicit returns on interest free resources. On this basis, a 17-20 basis point increase in the SDR interest rate would initially increase the Fund’s income (through the investment account and implicit returns on interest free resources) by about SDR 35-40 million in FY 2018, the first full year following the inclusion of the RMB in the SDR basket.16

9. The income projections outlined above remain highly uncertain and are sensitive to a number of key assumptions. Lending income is particularly susceptible to the timing of purchases and repurchases under existing arrangements, early repurchases, and possible new arrangements. Other key factors affecting the Fund’s income position include fluctuations in global interest rates and the U.S. dollar/SDR exchange rate (Box 1 provides further details), and changes in actuarial assumptions that impact the annual pension expense under the amended International Accounting Standard 19 (IAS 19).17

B. Medium-Term Expenditures

10. The medium-term expense projections reflect a small increase in the net administrative budget in real terms, starting in FY 2017, to accommodate rising security costs. An additional $6 million is built into the FY 2017 administrative budget baseline to meet mounting costs for physical and IT security, which previously were met through reallocation and temporary financing. However, because the structural increase in the net administrative budget is mostly offset by a lower price deflator, the nominal expense path projections for the medium- and longer-term—assuming no further changes in spending volumes—are virtually unchanged from last year.18

11. The budget outlook, however, is subject to upward pressures. Additional resources will be required to implement the Global Policy Agenda, focused on strategically important initiatives in the areas of surveillance and capacity development. Also, in light of growing economic vulnerabilities in many member countries, the demand for Fund financing could continue to rise. Finally, future needs for physical and IT security and prospective revenue losses could also exert pressures on existing resources. As savings that can potentially be achieved through further reprioritization might not be sufficient to offset the higher spending, Figure 1 also shows an alternative scenario incorporating an additional permanent 1.5 percent increase in the net administrative budget, phased in over FY 2018-19. As illustrated, the impact of such an increase on the net income position would be marginal.

12. Capital expenditures remain elevated due to the HQ1 renovation. The expense path is slightly higher than assumed last year, as a result of the supplemental funding that was approved in January. However, the increase in capital expenses reflected in the Fund’s income statement is projected to be moderate, as the major building renovations are depreciated over the remaining useful life of the building.

C. The Long-Run Income-Expenditure Position

13. The steady state outlook continues to point to a balanced position in a future low credit environment. In 2008, when the Board endorsed the New Income Model (NIM), a long-term goal was to broaden income sources to provide sustainable financing for the institution. In the current environment of very low interest rates, the Fund remains reliant on income from lending to cover the bulk of its activities. Against this background, the updated illustrative steady state outlook is intended as a cross-check on the consistency of the projected budgetary envelope with Fund income when lending income is assumed to be again at low levels. As such, the scenarios take into account the progress that has been made in implementing the NIM and the recent review of the adequacy of the Fund’s precautionary balances. While all elements of the NIM are now in place or in progress, the global economic and market environment remains very different from that assumed when the NIM was agreed, indicating some risks if returns remained at low levels for a prolonged period.

14. The illustrative steady state is assumed to be reached in FY 2026 when drawings under current arrangements have been largely repurchased. The conservative assumptions underlying the steady state are intended to illustrate a possible floor level of income providing an indication of the Fund’s ability to generate a net positive income position even when credit is low. Following the discussion of the adequacy of the Fund’s precautionary balances in February 2016, a higher but still conservative credit level of SDR 20 billion is assumed in this illustrative low-lending environment (see Table 1).19 Commitments under contingent lending facilities are also assumed to decline from current levels to SDR 10 billion (see Box 1). Assuming a margin of 100 basis points, lending income would, depending on the buoyancy of investment income, contribute in the range of 22 to 26 percent of total income.

Table 1.Consolidated Income and Expenses, FY2016–26(in millions of U.S. dollars, unless otherwise stated)
FY 16FY 17FY 18FY 19FY 20FY 21FY 22FY 26FY 26FY 26
Scenario
A (3%)B (2.5%)C (2%)
Based on updated thresholds following effectiveness of the 14th General Review of Quotas 1/
I. Operational income1,0661,4181,1871,2131,2361,2311,1561,5701,4341,300
Lending income8931,260700638554441308347347347
Non-lending income1731584875756827908481,2231,087953
II. Expenses 2/1,1061,1651,1851,2211,2151,2291,2501,3141,3141,314
Of which: Net administrative budget 3/1,0401,0721,0961,1271,1381,1551,1781,2451,2451,245
III. Net operational income (I - II)-402532-8212-94256120-14
IV. Surcharges1,095895814752690430242000
V. Net income plus Surcharges (III + IV)1,0551,148816744711432148256120-14
Memorandum items:
Fund credit (average stock, SDR billions)51.549.447.444.939.631.522.020.020.020.0
US$/SDR exchange rate1.391.401.401.401.401.401.401.401.401.40
Precautionary balances (end of period, SDR billions) 4/15.216.116.717.217.718.018.115.015.015.0

Following the Board discussion of the Review of Access Limits and Surcharge Policies (01/20/2016) paper on February 17, 2016, the trigger for time-based surcharges was moved to 51 months for EFF arrangements and the surcharges threshold for level-based surcharges was set at 187.5 percent of quota. Commitment fee thresholds are set at 115 percent, 116-575 percent, and greater than 575 percent of quota for charges of 15 basis points, 30 basis points, and 60 basis points, respectively.

Includes: (i) net expenditures made from the administrative budget; (ii) expenditures made from the capital budget for items that are not depreciated; and (iii) depreciation charges for expenditures made from the current or previous capital budgets.

FY 2016 net administrative budget is updated for the estimated outturn.

Annual net operational income and surcharges add to the level of precautionary balances each year.

Following the Board discussion of the Review of Access Limits and Surcharge Policies (01/20/2016) paper on February 17, 2016, the trigger for time-based surcharges was moved to 51 months for EFF arrangements and the surcharges threshold for level-based surcharges was set at 187.5 percent of quota. Commitment fee thresholds are set at 115 percent, 116-575 percent, and greater than 575 percent of quota for charges of 15 basis points, 30 basis points, and 60 basis points, respectively.

Includes: (i) net expenditures made from the administrative budget; (ii) expenditures made from the capital budget for items that are not depreciated; and (iii) depreciation charges for expenditures made from the current or previous capital budgets.

FY 2016 net administrative budget is updated for the estimated outturn.

Annual net operational income and surcharges add to the level of precautionary balances each year.

15. Investment income would under most scenarios cover the bulk of expenses (Table 1). Investment income would be in the form of payouts from the Endowment Subaccount, currently assumed at 3 percent, and returns from the Fixed-Income Subaccount. The scenarios also assume precautionary balances at the new higher floor of SDR 15 billion that was broadly endorsed in the recent review, implying that the resources available to invest in the Fixed-Income Subaccount and thus investment income would both be higher at given rates of return.20 On this basis, assuming a SDR interest rate of 3 percent and investment returns on the Fund’s Fixed-Income Subaccount of an additional 50 basis points, the steady state projection yields a positive income-expenditure position with a relatively comfortable buffer of over SDR 180 million (over US$250 million) or about 20 percent of expenditures and, as also envisaged under the NIM, the Fund would not be relying on lending income to finance its non-lending activities (Scenario A). Assuming an SDR interest rate of 2.5 percent in keeping with the current low interest rate environment and the more gradual rise in interest rate projections, the steady state projection maintains a positive income-expenditure position but with a reduced margin of under SDR 90 million or about US$120 million (Scenario B). At an SDR interest rate of 2 percent, which would imply a near zero real interest rate (Scenario C) the steady state projection yields a slightly negative income-expenditure position. Under the alternative scenario, incorporating an additional permanent 1.5 percent increase in the net administrative budget, the impact on the steady state net income position is expected to be marginal (Figure 1 above).

16. The steady state remains sensitive to other key assumptions, including the margin. While expenditures are assumed to be constant in real terms, the outlook remains sensitive to movements in the U.S. dollar/SDR exchange rate. The scenarios also assume that none of the credit outstanding in a low lending environment would be subject to surcharges. As such, a change in the margin could have a significant impact on the net income position particularly if interest rates were to remain low. Lowering the margin by 20 basis points to 80 basis points would reduce steady state income by SDR 40 million or US$56 million.

Precautionary Balances Outlook

17. The projected contribution of total lending income to the Fund’s medium-term finances has been lowered from earlier estimates reflecting a steady decline in Fund credit outstanding. However, lending income including surcharges continues to contribute significantly to the accumulation of precautionary balances and net income (excluding projected losses of the gold endowment) is projected at about SDR 1.1 billion in FY 2016 (see Table 2). When placed to reserves, this would increase precautionary balances to reach about SDR 15.2 billion by end-FY 2016.

Table 2.Consolidated Income and Expenses, FY2016–26Updated thresholds following 14th General Review of Quotas 1
Scenario AScenario BScenario C
SDRi 3%SDRi 2.5%SDRi 2%
FY16FY17FY18FY19FY20FY21FY22FY26FY26FY26
(in SDR millions)
A. Operational income 2/7671,0148488668848798261,1211,025929
Lending income643901500456396315220248248248
Margin for the rate of charge515494474449396315220200200200
Service charge321997000242424
Commitment fees96388170000242424
Investment income5941260310376441473651582513
Fixed-Income Subaccount 3/5941117165228290319484415346
Gold endowment pay-out00143145148151154167167167
Interest free resources 4/8173343546473157130103
SCA-1 and other8173343546473157130103
Reimbursements57555557585960656565
CCR Trust and SDR Department7544444666
PRG Trust50505153545556595959
B. Expenses795833846872869877893938938938
Net administrative budget 5/748766783805813825841889889889
Capital budget items expensed203023251277666
Depreciation27374042444545434343
C. Net operational income (A-B)-281812-6152-6718387-9
Surcharges788639581537493307173000
IAS 19 timing adjustment296000000000
Endowment (Gold Profits) Subaccount 6/-58198959799101103112112112
Net income9981,018678628607410209295199104
(in US$ millions)
D. Operational income 2/1,0661,4181,1871,2131,2361,2311,1561,5701,4341,300
Lending income8931,260700638554441308347347347
Investment income8257363435527619663912815718
Interest free resources122346617589102220181144
Reimbursements79787879808283919191
E. Expenses1,1061,1651,1851,2211,2151,2291,2501,3141,3141,314
Net administrative budget1,0401,0721,0961,1271,1381,1551,1781,2451,2451,245
Capital budget items expensed2841333516109999
Depreciation38525659616463606060
F. Net operational income (D-E)-402532-8212-94256120-14
Memorandum Items:
Fund credit (average stock, SDR billions)51.549.447.444.939.631.522.020.020.020.0
SDR interest rate (in percent)0.10.30.60.81.01.21.43.02.52.0
US$/SDR exchange rate1.391.401.401.401.401.401.401.401.401.40
Surcharges (US$ millions)1,095895814752690430242000
New income measures (US$ millions) 7/7382307334362391405478478478
Precautionary balances (end of period, SDR billions)15.216.116.717.217.718.018.115.015.015.0

Following the Board discussion of the Review of Access Limits and Surcharge Policies (01/20/2016) paper in February 2016, the trigger for time-based surcharges was moved to 51 months for EFF arrangements and the surcharges threshold for level-based surcharges was set at 187.5 percent of quota. Commitment fee thresholds are set at 115 percent, 116-575 percent, and greater than 575 percent of quota for charges of 15 basis points, 30 basis points, and 60 basis points, respectively.

Excludes surcharges. The payout from the endowment funded by gold profits is assumed to begin in FY 2018, when the endowment is fully funded under the agreed investment mandate.

The current projections assume that a premium of 50 basis points over the SDR rate is attained by FY 2021 and that the premium remains at this level thereafter.

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.

For FY 2016, the figure represents estimated net administrative expenditures, which are slightly lower than the budget.

From FY 2018 when the endowment is fully in place, it is assumed that the endowment is to make an annual payout to the GRA and that a portion of the income is to be retained to preserve the real value of the gold endowment.

The effect on operational income of broadening investments, creating an endowment funded by profits from gold sales, the reduction in remuneration from proceeds equal to the book value of gold, and reimbursement of PRGT expenses.

Following the Board discussion of the Review of Access Limits and Surcharge Policies (01/20/2016) paper in February 2016, the trigger for time-based surcharges was moved to 51 months for EFF arrangements and the surcharges threshold for level-based surcharges was set at 187.5 percent of quota. Commitment fee thresholds are set at 115 percent, 116-575 percent, and greater than 575 percent of quota for charges of 15 basis points, 30 basis points, and 60 basis points, respectively.

Excludes surcharges. The payout from the endowment funded by gold profits is assumed to begin in FY 2018, when the endowment is fully funded under the agreed investment mandate.

The current projections assume that a premium of 50 basis points over the SDR rate is attained by FY 2021 and that the premium remains at this level thereafter.

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.

For FY 2016, the figure represents estimated net administrative expenditures, which are slightly lower than the budget.

From FY 2018 when the endowment is fully in place, it is assumed that the endowment is to make an annual payout to the GRA and that a portion of the income is to be retained to preserve the real value of the gold endowment.

The effect on operational income of broadening investments, creating an endowment funded by profits from gold sales, the reduction in remuneration from proceeds equal to the book value of gold, and reimbursement of PRGT expenses.

18. The slower projected pace of reserve accumulation over the medium term largely reflects reduced income from surcharges and a more gradual rise in investment income. The April 2015 baseline projections, which assumed a margin on the rate of charge of 100 basis points (the current level), and no change in quotas or surcharge thresholds had indicated that precautionary balances would reach about SDR 19 billion in FY 2022, slightly below the SDR 20 billion indicative target (Figure 2, Panel A). An updated medium-term path for precautionary balances was discussed in February 2016 in the context of the review of the adequacy of precautionary balances.21 Although projections at the time of that review factored in a reduction of surcharge income on the assumption that thresholds were not set to fully offset the impact of the quota increase, (Figure 2, Panel A), the projected accumulation of precautionary balances remained broadly in line with the April 2015 projections. Expected losses from lower surcharge income were largely offset by slightly higher investment income reflecting a more rapid rise in the SDR rate implied by market futures at the time.

Figure 2.Precautionary Balances Accumulation

(in billions of SDRs)

19. The April 2016 income projections have been further lowered compared with prior projections. This reflects a downward adjustment in the SDR interest rate path since the February precautionary balances review lowering investment income returns over the medium term, and the higher expenses in SDR terms following the medium-term U.S. dollar/SDR exchange rate projection being revised from US$1.48 per SDR to US$1.40 per SDR. Against this backdrop, the pace of reserve accumulation has slowed down further.22 At the reduced pace of reserve accumulation currently projected, precautionary balances are expected to reach SDR 18.1 billion in FY 2022 (Figure 2, Panel A), remaining below the indicative medium-term target of SDR 20 billion. Under a scenario where the margin is increased to 120 basis points precautionary balances would rise to about SDR 18.6 billion, but still remain at least SDR 1 billion below the target over the medium term (see Figure 2, Panel B). Conversely, if the margin were reduced to 80 basis points, projected accumulation of precautionary balances would be lowered by about SDR 500 million to SDR 17.6 billion. The IAS 19 timing adjustment is also expected to remain volatile and affect the pace of reserve accumulation over the medium term.23

Box 1.Income Projections

Key ParametersKey ParametersKey Parameters
US$/SDR exchange rate1.40Assumed unchanged from recent levels. A 10 percent rise (fall) in the US$/SDR exchange rate would raise (lower) annual income in FY 2022 by US$120 million.
SDR interest rateRising to 3.0 percent by FY 2026 from 0.1 percent in FY 16A 10 basis point higher (lower) average SDR interest rate would raise (reduce) annual income in FY 2022 by US$34 million. In the steady state a 10 basis point higher/lower SDR interest rate would raise/reduce income by SDR 27 million.
Margin for rate of charge (basis points)100Assumed unchanged from current level. A 20 basis point higher (lower) margin would increase (reduce) income in FY 2017 and FY 2018 by US$138 million and US$134 million, respectively. A 20 basis point higher (lower) margin effective from FY 2017 would increase (lower) precautionary balances in the period to end-FY 2022 by some SDR 0.5 billion.

Operational lending income (US$347 million or SDR 248 million by FY 2026)

Fund credit is assumed to decline to an average steady state level of about SDR 20 billion by FY 2026, upon which a margin of 100 basis points would generate income of about SDR 200 million. Commitments under contingent lending facilities are assumed to also decline to an average of SDR 10 billion in the steady state, yielding some SDR 24 million in annual commitment fees. Average annual disbursements of about SDR 5 billion from FY 2023 generate about SDR 24 million in annual service charges (at 50 basis points).

Investment income (US$912 million or SDR 651 million by FY 2026)

Currency amounts equivalent to net operational income plus surcharges are assumed to be transferred annually to the Fixed-Income Subaccount for investment in the subsequent year. Phased investments under the broadened investment mandate for the Fixed-Income Subaccount is assumed to be begin in FY 2017, allowing average investment returns in this portfolio to exceed the SDR interest rate by 50 basis points from FY 2021 onwards. This would yield annual income of about SDR 484 million in the steady state (FY 2026) assuming an SDR interest rate of 3 percent (Scenario A) and precautionary balances floor of SDR 15 billion endorsed in the recent review of the adequacy of precautionary balances.

The updated projections assume that implementation of the proposed investment strategy for the endowment (SDR 4.4 billion, equivalent to an average gold price of US$850 per ounce, plus earnings during the interim period) will continue to be phased-in gradually with assumed annual payouts of 3 percent beginning in FY 2018.1/

Interest free resources (US$220 million or SDR 157 million by FY 2026)

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 net income not transferred to the Investment Account. These resources reduce members’ reserve tranche positions and the Fund’s remuneration expense resulting in implicit income for the Fund.

Reimbursements (US$79 million or SDR 57 million in FY 2016)

Reimbursements from the SDR Department and CCR (formerly PCDR) Trust, are projected at about SDR 7 million in FY 2016 and reimbursement of the GRA for the expenses of administering the PRGT is assumed to be SDR 50 million in FY 2016. Administrative costs and the associated reimbursements are assumed to be stable in real terms in the medium term.

1/ Staff plans to return to the issue of an appropriate payout policy before the end of the phase-in period of the passively-managed portfolio.
1

See The Consolidated Medium-Term Income and Expenditure Framework (04/10/15).

2

In February 2016 the IMF’s Executive Board discussed the adequacy of the Fund’s precautionary balances. See The Review of the Adequacy of the Fund’s Precautionary Balances (1/26/16).

3

See Review of the Fund’s Income Position for FY 2016 and FY 2017-2018 (04/08/16) and FY 2017-2019 Medium-Term Budget (03/24/16).

4

Lending income comprises i) operational lending income earned from the basic rate of charge, service charges, and commitment fees; and ii) income from surcharges which is not included in operational income.

5

See The Review of the Adequacy of the Fund’s Precautionary Balances (1/26/16). Precautionary balances comprise the general and special reserves (except for amounts in the special reserve attributed to profits from the 2009-2010 gold sales of SDR 4.4 billion), and the Special Contingent Account (SCA-1). An adequate level of precautionary balances is an essential element in the strategy to mitigate credit risk and thereby protect the value of reserve assets that members place with the Fund.

6

Excludes arrangements treated as precautionary by the authorities upon approval of the program.

7

See Review of Access Limits and Surcharge Policies (01/27/16).

8

Commitment fee income is only recognized at the expiration or cancellation of an arrangement. The fees for the two-year FCL and Precautionary and Liquidity Line (PLL) arrangements are included in income at the end of the two-year period.

9

The Fixed-Income Subaccount has investments equivalent to the Fund’s general and special reserves except for (i) amounts attributed to gold sales profits in the special reserve and (ii) amounts of the general and special reserve attributed to net income for which no currency transfer have been made from the GRA to the IA in FY 2014 and FY 2015, totaling SDR 2.6 billion. These amounts were retained in the GRA as an interim measure providing the Fund with time to review the strategic asset allocation for the Fixed-Income Subaccount. The review was completed in August 2015 and staff now proposes to transfer currencies equivalent to net income for FY 2016 and the prior two years, from the GRA to this subaccount.

10

On November 30, 2015, the Executive Board completed the quinquennial review of the method of valuation of the SDR, and determined that the RMB will be added to the SDR basket effective from October 1, 2016. The RMB will be represented in the SDR interest rate basket by the three-month benchmark yield for China Treasury bonds.

11

The April 2015 projections assumed that the fixed-income subaccount would attain a premium of 100 basis points over the SDR rate, as originally expected when the Fund’s New Income Model was developed, by FY 2021. In August 2015 the Executive Board modified the investment strategy of the fixed income subaccount that had been in place since 2006. The objective for the subaccount return is to exceed the SDR interest rate over time while minimizing the frequency and extent of negative returns. The updated projections assume that a premium of 50 basis points is attained by FY 2021.

12

It is expected that the Executive Board will consider the payout policy for the endowment toward the end of the phase-in period.

13

The SDR rate is subject to a floor of 5 basis points (see Recent fall in the SDR Interest Rate – Implications and Proposed Amendments to Rule T-1 (10/16/2014)), and as the low interest rate environment continues to prevail, actual returns on short-term deposits could fall short of the SDR rate in the near-term.

14

GRA interest-free resources comprise primarily the SCA-1, unremunerated reserve tranche positions not represented by gold holdings, and GRA net income not transferred to the IA. These resources generate implicit income for the Fund by reducing members’ reserve tranche positions and the remuneration expense thereon.

15

See Review of Access Limits and Surcharge Policies (01/27/16).

16

For a fuller discussion of the impact on the Fund’s income of the inclusion of the RMB in SDR basket see Review of the Fund’s Income Position for FY 2016 and FY 2017-2018 (04/08/16).

17

IAS 19 (amended) is the International Financial Reporting Standard that deals with accounting for pension and other employee benefits, including the timing adjustment. The actuarially determined timing adjustment in FY 2016 results in a projected gain of about SDR 296 million, and stems mainly from a decline in the obligations of the staff retirement plan that reflect the outcome of a comprehensive review of actuarial assumptions. As discussed in the Review of the Fund’s Income Position for FY 2016 and FY 2017-2018 (04/08/16), the new standard was expected to introduce an additional source of volatility in the Fund’s income over the medium-term; following the elimination of the corridor method, gains or losses arising from changes in actuarial assumptions are to be recognized in the year incurred.

18

For FY 2017-19, the applied Global External Deflator is 1.9 percent, 2.2 percent, and 2.3 percent, respectively (For specific details, see FY2017-2019 Medium-Term Budget (March 24, 2016)). A five-year backward-looking average of the GED is used for the nominal long-term expense path.

19

See Review of the Adequacy of the Fund’s Precautionary Balances (1/26/16).

20

Since the floor is below the projected level of precautionary balances over the medium term, the longer term steady state projection implicitly assumes a prior distribution of reserves that lowers precautionary balances to the level of the floor.

21

At the review the Board agreed to maintain the indicative medium-term target of SDR 20 billion. See Review of the Adequacy of the Fund’s Precautionary Balances (1/26/16) and The Acting Chair’s Summing Up Review of the Adequacy of the Fund’s Precautionary Balances Executive Board Meeting 16/15 February 19, 2016 (02/25/16).

22

The pace of reserve accumulation has been impacted by the changes in the Fund’s structure and thresholds of surcharges and commitment fees following the effectiveness of the 14th General Review of Quotas. See Review of Access Limits and Surcharge Policies (01/27/16).

23

Since the IAS 19 timing adjustment is sensitive to changes in the discount rate and the fair value of pension assets, the effects of which are highly unpredictable over the medium term, no projections are made beyond the current financial year-end (FY 2016).

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