Chapter

CHAPTER 6 Financial Operations and Support for Member Countries

Author(s):
International Monetary Fund
Published Date:
September 2000
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The IMF is a cooperative institution—in some ways like a credit union—in which member countries provide temporary financial assistance to other members experiencing difficulties in paying for imports of goods and services and/or servicing their foreign debt; in return, the recipient countries agree to undertake policy reforms to correct the problems that underlie their balance of payments difficulties. The temporary financial assistance from the IMF provides members the “opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.”1

The most common type of IMF financial assistance to members takes the form of Stand-By or Extended Arrangements (see Box 6.1). During FY2000, 11 new Stand-By Arrangements and 4 new Extended Arrangements were approved for member countries by the IMF. Including augmentations of several existing arrangements, total new commitments of IMF resources under Stand-By and Extended Arrangements amounted to SDR 22.3 billion.2 The IMF also approved 10 new Poverty Reduction and Growth Facility Arrangements for eligible low-income member countries with commitments totaling SDR 0.6 billion. An additional SDR 0.6 billion was committed under special facilities and policies. (Table 6.1 sets out financial assistance approved during FY2000 by member country.)

Table 6.1IMF Financial Assistance Approved in FY2000(In millions of SDRs)
MemberType of Financial AssistanceDate of

Approval
Amount Approved1
AlbaniaSecond annual PRGF and augmentationJune 14, 19999.7
AlgeriaCCFFMay 26, 1999223.5
ArgentinaThree year Stand-By ArrangementMarch 10,20005,398.6
BoliviaSecond annual PRGFFebruary 7, 200046.1
Bosnia and HerzegovinaAugmentation to Stand-By ArrangementJune 28, 199916.9
Augmentation to Stand-By ArrangementMarch 30, 200016.9
Burkina FasoThree year PRGFSeptember 10, 199939.1
CambodiaThree-year PRGFOctober 22, 199958.5
CameroonThird annual PRGFSeptember 7, 199954.0
Cape VerdeAugmentation to Stand By ArrangementMay 24, 19990.4
ChadThree-year PRGFJanuary 7, 200036.4
ColombiaThree year Extended ArrangementDecember 20, 19991,957.0
DjiboutiThree year PRGFOctober 18, 199919.1
EcuadorOne-year Stand-By ArrangementApril 19, 2000226.7
Estonia18-month Stand-By ArrangementMarch 1,200029.3
GambiaSecond annual PRGF’November 19, 19998.6
GeorgiaAugmentation and extension of PRGFJuly 23,19995.6
GhanaThree-year PRGFMay 3, 1999155.0
GuineaThird annual PRGFDecember 21, 199923.6
Guinea-BissauEmergency’ post conflict assistanceSeptember 14, 19992.1
Emergency post conflict assistance-January 7, 20001.4
IndonesiaThree-year Extended ArrangementFebruary 4, 20003,638.0
KazakhstanThree-year Extended ArrangementDecember 13, 1999329.1
Kyrgyz RepublicSecond annual PRGFFebruary 9, 200021.5
Latvia16-month Stand By ArrangementDecember 10, 199933.0
Lithuania15-month Stand-By ArrangementMarch 8, 200061.8
Macedonia, FYRCCFFAugust 4, 199913.8
MadagascarSecond annual PRGF and extensionJuly 23, 199927.2
MaliThree-year PRGFAugust 6, 199946.7
MauritaniaThree-year PRGFJuly 21, 199942.5
Mexico17-month Stand By ArrangementJuly 7, 19993,103.0
MongoliaSecond annual PRGFJune 16, 199914.8
MozambiqueThree-year PRGFJune 28, 199958.8
Augmentation to three year PRGFMarch 27, 200028.4
NicaraguaSecond annual PRGFSeptember 16, 199933.6
Papua New Guinea14-month Stand-By ArrangementMarch 29, 200085.5
PeruThree-year Extended ArrangementJune 24, 1999383.0
Romania10-month Stand-By ArrangementAugust 5, 1999400.0
Russia17-month Stand-By ArrangementJuly 28, 19993,300.0
RwandaSecond annual PRGFNovember 19, 199923.8
São Tomé and PríncipeThree year PRGFApril 28,20006.7
SenegalSecond annual PRGFJuly 12,199935.7
Sierra LeoneEmergency post conflict assistanceDecember 17, 199915.6
TajikistanSecond annual PRGFJuly 2,199930.0
TanzaniaThree year PRGFMarch 31, 2000135.0
TurkeyEmergency assistanceOctober 13,1999361.5
Three-year Stand-By ArrangementDecember 22, 19992,892.0
UgandaThird annual PRGFDecember 10, 199926.8
UkraineAugmentation to three-year ExtendedMay 27, 1999274.4
Arrangement
Zimbabwe14-month Stand-By ArrangementAugust 2, 1999141.4

For augmentations, only the amount of the increase is shown

For augmentations, only the amount of the increase is shown

Member countries’ drawings from the IMF’s General Resources Account amounted to SDR 6.4 billion in FY2000, and SDR 0.5 billion of Poverty Reduction and Growth Facility (PRGF) loans were disbursed. Net IMF credit outstanding decreased to SDR 50.4 billion as of the end of FY2000, reflecting the large volume of scheduled and advance repayments of credit extended under several very large financial arrangements approved for members in previous years.

As of the end of FY2000, the Executive Boards of the IMF and World Bank had made decisions to assist nine countries that had reached their decision points under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative); the IMF had committed SDR 467 million to these countries, five of which had received grants totaling SDR 213 million.

On a broader policy level, the Executive Board began a comprehensive review of the IMF’s lending facilities and policies during FY2000, to determine whether they were all still needed and appropriately designed; as a result of the review, four facilities were eliminated. The Board also, in response to reports of misreporting of data and misuse of IMF financing, acted to:

  • strengthen safeguards on members’ use of its financing;
  • deal with misreporting of information to the IMF by member countries; and
  • consider helping members achieve sound practices ii foreign exchange reserves management.

In addition, the Board considered program design issues, notably, the implications for IMF conditionality of the use of inflation targeting by member countries.

Quotas

Under the Eleventh General Review of Quotas, on January 30, 1998, the Board of Governors approved an increase in total IMF quotas to SDR 212 billion from SDR 146 billion. On January 22, 1999, the IMF determined that the participation requirement for the Eleventh Review quota increase (consents from member countries having 85 percent of the total quotas on December 23, 1997) had been fulfilled, and the quota increase took effect. The size of total IMF quotas relative to world trade during 1946–98 is shown in Figure 6.1.

Figure 6.1IMF Quotas Relative to World Trade1

(In percent)

1World trade is defined as the average of exports and imports. Data for 1946 refer to the IMF quotas set in 1945 and world trade data for 1946. The other data points refer to years in which resolutions for increases in quotas were adopted by the Board of Governors under general quota reviews. A resolution for a general increase in quotas for all members, along with special increases for some members, was first adopted in 1959.

As of April 30, 2000, 172 member countries, accounting for 99 percent of total quotas proposed under the Eleventh Review, had consented to and paid for their quota increases, and total quotas had reached SDR 210.25 billion.3 Four member countries eligible to consent to the proposed increases in their quotas had not yet done so, and six member countries were ineligible to consent to their proposed increases because of their arrears to the IMF’s General Resources Account. The Executive Board approved on July 13, 2000, an extension of the periods for consent to and payment of quota increases under the Eleventh Review until January 31, 2001. Individual members’ quotas in the IMF at the end of April 2000 are shown in Appendix II, Table 11.16.

In June 1999, the Executive Board authorized a panel of external experts to review the formulas used to guide the apportionment of quota increases resulting from general reviews and the setting of new member countries’ initial quotas.4 The terms of reference of the panel were to:

  • review the quota formulas and their working, and assess their adequacy to help determine members’ calculated quotas in the IMF in a manner that reasonably reflects members’ relative positions in the world economy and their relative needs for, and contributions to, the IMF’s financial resources; the review would take into account changes in the functioning of the world economy and the international financial system in light of the increasing globalization of markets;
  • propose, as appropriate, changes in the variables and their specification to be used in the formulas; and
  • examine other issues directly related to the quota formulas.

The report of the panel was submitted to management and the Executive Board on May 1, 2000. The Board is scheduled to discuss the report and an accompanying staff commentary in August 2000.

The IMF’s Liquidity

Following the expansion of IMF resources resulting from the increases in members’ quotas under the Eleventh General Review of Quotas, the IMF’s resource position continued to strengthen throughout FY2000. The improvement occurred against a background of improving global economic and financial conditions and returning investor confidence in many emerging market economies.

The demand for IMF resources declined from the exceptionally high levels experienced in FY1999, and, with the faster-than-anticipated recovery in the economies of a few member countries with large IMF arrangements, repayments rose considerably. Brazil, Mexico, Korea, and Russia, which had drawn large amounts during earlier financial crises, together repaid SDR 19.6 billion in FY2000. Taking advantage of a strong improvement in its balance of payments, Korea made advance repayments of SDR 4.7 billion and eliminated the balance of its credit outstanding under the Supplemental Reserve Facility (SRF) by mid-September 1999. Similarly, in early 2000, Brazil repaid SDR 3.3 billion in advance and eliminated the balance of its outstanding SRF credit.

The IMF’s liquid resources consist of usable currencies and SDRs held in the General Resources Account. Usable currencies, the largest component of liquid resources, are holdings of currencies of members whose balance of payments and reserve positions are considered sufficiently strong to allow the use of their currencies in the quarterly financial transactions plan (see Box 6.2).

The IMF’s usable resources rose steadily throughout FY2000, reflecting the margin of repayments over new drawings, the inclusion of additional members in the financial transactions plan during the course of the financial year, and the receipt of some payments for Eleventh Review quota increases during this period.

At the end of April 2000, the IMF’s usable resources reached SDR 108.2 billion, an increase of SDR 24.5 billion from a year earlier. The related increase in the stock of net uncommitted usable resources (usable resources less resources committed under current arrangements and considered likely to be drawn, and less working balances of usable currencies) was not as steep—SDR 74.8 billion at the end of April 2000, compared with SDR 56.7 billion a year earlier—as the number of arrangements in place and the associated undrawn balances of commitments rose over the course of FY2000.

The IMF’s liquid liabilities at the end of April 2000 totaled SDR 48.8 billion, compared with SDR 63.6 billion a year earlier. The ratio of the IMF’s net uncommitted usable resources to its liquid liabilities—the “liquidity ratio"–increased to 153.1 percent at the end of April 2000 from 89.2 percent at the end of April 1999, reaching levels that prevailed before the onset of the Asian crisis (Figure 6.2).

Figure 6.2IMF Liquidity Ratio and Net Uncommitted Usable Resources

(As of April 30)

The IMF’s Articles of Agreement authorize it to borrow to supplement the resources provided through members’ quota subscriptions. To date, the IMF has borrowed only from official sources (such as governments and central banks), but it may also borrow from private sources. The IMF has two sets of credit arrangements—the New Arrangements to Borrow (NAB) and the General Arrangements to Borrow (GAB)–whose purpose is to make supplementary resources available to the IMF when needed to forestall or cope with an impairment of the international monetary system. Total resources available to the IMF under the NAB and GAB combined are up to SDR 34 billion.

The NAB is a set of credit arrangements between the IMF and 25 member countries and institutions. It entered into force in 1998 and is the borrowing facility of first and principal recourse, unless a GAB participant (all GAB participants are also participants in the NAB) requests the use of IMF resources, in which case a proposal for drawings may be made under either the NAB or GAB. The NAB was activated for the first time in December 1998 to help finance a Stand-By Arrangement for Brazil. These drawings were repaid in March 1999, following the increase in IMF resources resulting from Eleventh Review quota payments. Table 6.2 shows the amounts of credit arrangements of participants in the NAB.

Table 6.2New Arrangements to Borrow (NAB)(In millions of SDRs)
ParticipantAmount
Australia810
Austria412
Belgium967
Canada1,396
Denmark371
Deutsche Bundesbank3,557
Finland340
France2,577
Hong Kong Monetary Authority340
Italy1,772
Japan3,557
Korea340
Kuwait345
Luxembourg340
Malaysia340
Netherlands1,316
Norway383
Saudi Arabia1,780
Singapore340
Spain672
Sveriges Riksbank859
Swiss National Bank1,557
Thailand340
United Kingdom2,577
United States6,712
Total34,000

Box 6.1IMF Financial Facilities and Policies

Financial assistance provided by the IMF is made available to member countries under a number of policies, or facilities, the terms of which reflect the nature of the balance of payments problem that the borrowing country is experiencing.

Regular Lending Facilities

IMF credit is subject to different conditions, depending on whether it is made available in the first credit “tranche” (or segment) of 25 percent of a member’s quota or in the upper credit tranches (any segment above 25 percent of quota). For drawings in the first credit tranche, members must demonstrate reasonable efforts to overcome their balance of payments difficulties. Upper credit tranche drawings are made in installments (“phased”) and are released when performance targets are met. Such drawings are normally associated with Stand-By or Extended Arrangements.

  • Stand-By Arrangements (SBAs) are designed to deal with short-term balance of payments problems of a temporary or cyclical nature, and must be repaid within 3¼–5 years. Drawings are normally made quarterly, with their release conditional upon borrowers’ meeting quantitative performance criteria—generally in such areas as bank credit, government or public sector borrowing, trade and payments restrictions, and international reserve levels—and not infrequently structural performance criteria. These criteria allow both the member and the IMF to assess progress under the member’s program. Stand-By Arrangements typically cover 12–18 month periods (although they can extend for up to three years).
  • Financial assistance provided through Extended Arrangements under the Extended Fund Facility (EFF) is intended for countries with balance of payments difficulties resulting primarily from structural problems and has a longer repayment period, 4 ½–10 years, to take account of the need to implement reforms that can take longer to put in place and have full effect. A member requesting an Extended Arrangement outlines its goals and policies for the period of the arrangement, which is typically three years but can be extended for a fourth year, and presents a detailed statement each year of the policies and measures to be pursued over the next 12 months. The phasing of drawings and performance criteria are like those under Stand-By Arrangements, although phasing on a semiannual basis is possible.
  • Precautionary arrangements are used to assist members interested in boosting confidence in their economic management. Under a Stand-By or an Extended Arrangement that is treated as precautionary, the member agrees to meet the conditions applied for such use of the IMF’s resources but expresses its intention not to draw on them. This expression of intent is not binding; consequently, as with an arrangement under which a member is expected to draw, approval of a precautionary arrangement signifies the IMF’s endorsement of the member’s policies according to the standards applicable to the particular form of arrangement.

Special Lending Facilities and Policies

  • The Supplemental Reserve Facility (SRF) was introduced in 1997 to supplement resources made available under Stand-By and Extended Arrangements in order to provide financial assistance for exceptional balance of payments difficulties owing to a large short-term financing need resulting from a sudden and disruptive loss of market confidence, such as occurred in the Mexican and Asian financial crises in the 1990s. Its use requires a reasonable expectation that strong adjustment policies and adequate financing will result in an early correction of the member’s balance of payments difficulties. Access under the SRF is not subject to the usual limits but is based on the financing needs of the member, its capacity to repay, the strength of its program, and its record of past use of IMF resources and cooperation with the IMF. Financing is committed for up to one year, and repayments are expected to be made within 1 to 1½ years, and must be made within 2 to 2½ years, from the date of each drawing. For the first year, the rate of charge on SRF financing is subject to a surcharge of 300 basis points above the usual rate of charge on other IMF loans; the surcharge then increases by 50 basis points every six months until it reaches 500 basis points.
  • Contingent Credit Lines (CCLs) were established in 1999. Like the Supplemental Reserve Facility, the CCL is designed to provide short term financing to help members overcome exceptional balance of payments problems arising from a sudden and disruptive loss of market confidence. A key difference is that the SRF is for use by members already in the midst of a crisis, whereas the CCL is a preventive measure solely for members concerned with their potential vulnerability to contagion but not facing a crisis at the time of the commitment. In addition, the eligibility criteria confine potential candidates for a CCL to those members implementing policies considered unlikely to give rise to a need to use IMF resources; whose economic performance–and progress in adhering to relevant internationally accepted standards—has been assessed positively by the IMF in the latest Article IV consultation and thereafter; and which have constructive relations with private sector creditors with a view to facilitating appropriate private sector involvement. Resources committed under a CCL can be activated only if the Board determines that the exceptional balance of payments financing needs faced by a member have arisen owing to contagion–that is, circumstances largely beyond the member’s control stemming primarily from adverse developments in international capital markets consequent upon developments in other countries. The repayment period for and rate of charge on CCL financing are the same as for the SRF.
  • The Compensatory Financing Facility (CFF), formerly the Compensatory and Contingency Financing Facility (CCFF), provides timely financing to members experiencing a temporary shortfall in export earnings or an excess in cereal import costs, as a result of forces largely beyond the member’s control. In January 2000, the Executive Board decided to eliminate the contingency element of the CCFF since it had rarely been used; see the discussion in this chapter.
  • The IMF also provides emergency assistance to a member facing balance of payments difficulties caused by a natural disaster. The assistance is available through outright purchases, usually limited to 25 percent of quota, provided that the member is cooperating with the IMF to find a solution to its balance of payments difficulties. In most cases, this assistance has been followed by an arrangement with the IMF under one of its regular facilities. In 1995, the policy on emergency assistance was expanded to include well-defined post conflict situations: where a member’s institutional and administrative capacity has been disrupted as a result of conflict, but where there is still sufficient capacity for planning and policy implementation and a demonstrated commitment on the part of the authorities; and where there is an urgent balance of payments need and a role for the IMF in catalyzing support from official sources as part of a concerted international effort to address the post conflict situation. The authorities must state their intention to move as soon as possible to a Stand-By, Extended, or Poverty Reduction and Growth Facility Arrangement.
  • The Emergency Financing Mechanism (EFM) is a set of procedures that allow for quick Executive Board approval of IMF financial support to a member facing a crisis in its external accounts that requires an immediate IMF response. The EFM was established in September 1995 and was used in 1997 for the Philippines, Thailand, Indonesia, and Korea, and in 1998 for Russia.

Concessional Lending Facility

On November 22, 1999, the Enhanced Structural Adjustment Facility (ESAF)–the IMF’s concessional financial facility to assist poor countries facing protracted balance of payments problems—was renamed the Poverty Reduction and Growth Facility (PRGF) and given a more explicit antipoverty focus (see Chapter 5). PRGF-supported programs are expected to be based on country designed poverty reduction strategies, and formulated in a participatory manner involving civil society and developmental partners. The strategy, to be spelled out in a Poverty Reduction Strategy Paper produced by the borrowing country in cooperation with the World Bank and the IMF, should describe the authorities’ goals and macroeconomic and structural policies for the three-year program to be supported by PRGF resources, as well as the associated external financing needs and major sources of financing. PRGF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years with a 5;½-year grace period on principal repayments.

For explanations of IMF quotas and other sources of funds, IMF liquidity, and the purchase-repurchase mechanism, see the Factsheet “How We Lend” on the IMF website.

Under the GAB, 11 participants (industrial countries or their central banks) have agreed to provide resources to the IMF in certain circumstances. The GAB was activated in 1998 for the first time in 20 years to finance an augmentation of the Extended Arrangement for Russia, with the drawings repaid upon receipt by the IMF of the bulk of quota payments under the Eleventh Review.Table 6.3 shows the amounts of credit arrangements of participants in the GAB and the associated agreement with Saudi Arabia.

Table 6.3General Arrangements to Borrow (GAB)(In millions of SDRs)
ParticipantAmount
Belgium595.0
Canada892.5
Deutsche Bundesbank2,380.0
France1,700.0
Italy1,105.0
Japan2,125.0
Netherlands850.0
Sveriges Riksbank382.5
Swiss National Bank1,020.0
United Kingdom1,700.0
United States4,250.0
Total17,000.0
Associated Agreement with Saudi Arabia1,500.0
Total18,500.0

Members’ Use of IMF Resources and Credit Outstanding

In FY2000, member countries’ drawings (purchases) from the General Resources Account (GRA), excluding reserve tranche drawings,5 amounted to SDR 6.3 billion, well below the SDR 21.4 billion drawn in FY1999 (Appendix II, Table II.7). These drawings consisted of SDR 4.1 billion under Stand-By Arrangements (compared with SDR 12.6 billion in FY1999), SDR 1.6 billion under Extended Arrangements (SDR 5.9 billion in FY1999), SDR 0.2 billion under the Compensatory and Contingency Financing Facility (SDR 2.6 billion in FY1999), and SDR 0.4 billion of emergency financing (SDR 0.2 billion in FY1999) for natural disasters and post conflict assistance. The largest borrowers from the IMF in FY2000 were Mexico and Brazil—which drew SDR 1.9 billion and SDR 0.8 billion, respectively, under Stand-By Arrangements—and Indonesia, which drew SDR 0.9 billion under an Extended Arrangement. (For the general terms of the IMF’s financial assistance to member countries, see Table 6.4.)

Table 6.4General Terms of IMF Financial Assistance
Repurchase Terms
Facility or Policy1Charge(s)Period

(years)
Number of installments
Credit tranches, emergencyBasic rate23 ¼–58(quarterly)
assistance, and Compensatory
Financing Facility (CFF)
Extended Fund Facility (EFF)Basic rate24½–1012(semiannual)
Supplemental Reserve Facility (SRF)Basic rate plus surcharge32–2½42
Poverty Reduction and Growth0.5 percent a year5½–1010(semiannual)
Facility (PRGF)
Memorandum
Service charge50.5 percent
Commitment charge(fee)60.25 percent

The Buffer Stock Financing Facility (BSFF) and the contingency element of the Compensatory and Contingency Financing Facility (CCFF) were eliminated by Executive Board decision on February 15, 2000. The Executive Board also decided on April 13, 2000, to terminate the policies on IMF support for Debt and Debt-Service Reduction (DDSR) operations and for Currency Stabilization Funds (CSF).

The basic rate of charge is set as a proportion of the weekly SDR interest rate and is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter, with an additional surcharge for any outstanding credit under the SRF.

The surcharge is 300 basis points during the first year following a drawing under the SRF, and increases by 50 basis points at the end of that first year and every six months thereafter until it reaches 500 basis points.

Repurchases are expected to be made within 1-1 years after a purchase; however, the IMF may, upon a member’s request, decide to extend such repurchase expectation by up to one year. There is an obligation to repurchase within 2-2XA years after purchase.

A one-time service charge is levied on each drawing of IMF resources in the GRA, other than reserve tranche drawings, at the time of the transaction.

An up-front commitment fee is charged on the amount that may be drawn during each (annual) period under a Stand-By or Extended Arrangement. The fee is, however, refunded on a proportionate basis as subsequent drawings are made under the arrangement.

The Buffer Stock Financing Facility (BSFF) and the contingency element of the Compensatory and Contingency Financing Facility (CCFF) were eliminated by Executive Board decision on February 15, 2000. The Executive Board also decided on April 13, 2000, to terminate the policies on IMF support for Debt and Debt-Service Reduction (DDSR) operations and for Currency Stabilization Funds (CSF).

The basic rate of charge is set as a proportion of the weekly SDR interest rate and is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter, with an additional surcharge for any outstanding credit under the SRF.

The surcharge is 300 basis points during the first year following a drawing under the SRF, and increases by 50 basis points at the end of that first year and every six months thereafter until it reaches 500 basis points.

Repurchases are expected to be made within 1-1 years after a purchase; however, the IMF may, upon a member’s request, decide to extend such repurchase expectation by up to one year. There is an obligation to repurchase within 2-2XA years after purchase.

A one-time service charge is levied on each drawing of IMF resources in the GRA, other than reserve tranche drawings, at the time of the transaction.

An up-front commitment fee is charged on the amount that may be drawn during each (annual) period under a Stand-By or Extended Arrangement. The fee is, however, refunded on a proportionate basis as subsequent drawings are made under the arrangement.

Repayments (repurchases) in the GRA during FY2000 totaled SDR 23.0 billion, compared with SDR 10.5 billion in FY1999 (Appendix II, Table II.8), including scheduled and advance Supplemental Reserve Facility (SRF) repayments of SDR 6.5 billion by Brazil, SDR 5.5 billion by Korea, and SDR 3.2 billion by Russia.

Taking into account both drawings and repayments, net credit outstanding in the GRA decreased by SDR 16.7 billion in FY2000, to SDR 44.0 billion as of end-April 2000, from SDR 60.7 billion a year earlier. Including also net lending under the ESAF/PRGF (see below), total net IMF credit outstanding decreased to SDR 50.4 billion as of end-April 2000, from SDR 67.2 billion a year earlier, or by SDR 16.8 billion.

Stand-By and Extended Arrangements

New commitments of IMF resources under Stand-By and Extended Arrangements in FY2000 amounted to SDR 22.3 billion. Eleven new Stand-By Arrangements were approved in FY2000; including augmentations of the existing Stand-By Arrangements for Bosnia and Herzegovina and Cape Verde, commitments totaled SDR 15.7 billion (Appendix II, Table II.1). The largest commitments under Stand-By Arrangements were for Argentina (SDR 5.4 billion), Mexico (SDR 3.1 billion), Russia (SDR 3.3 billion), and Turkey (SDR 2.9 billion). As of end-April 2000, 16 member countries had Stand-By Arrangements with the IMF, with commitments totaling SDR 45.6 billion and undrawn balances of SDR 17.4 billion (Appendix II, Tables II.2 and II.3).

Four new Extended Arrangements were approved in FY2000, and the existing Extended Arrangement for Ukraine was augmented, with total commitments of SDR 6.6 billion. The largest commitments under Extended Arrangements were for Indonesia (SDR 3.6 billion) and Colombia (SDR 2.0 billion). As of end-April 2000, 11 member countries had Extended Arrangements, with commitments totaling SDR 9.8 billion and undrawn balances of SDR 8.2 billion (Appendix II, Table II.4).

Special Facilities and Policies

In January 2000, the Executive Board reviewed the IMF’s Compensatory and Contingency Financing Facility (CCFF) and the Buffer Stock Financing Facility (BSFF). Directors agreed to eliminate the BSFF as it had not been used for 16 years, buffer stocks had not been proven useful in meeting their objectives, there were no longer any commodity agreements for which BSFF eligibility had been approved, and other IMF facilities were sufficient for the purposes the BSFF could serve.

Regarding the contingency element of the CCFF, Directors noted that while the idea behind that mechanism—helping members keep adjustment programs on track when faced with unexpected, adverse current account developments—had some appeal, it had seldom been used, and not at all in the previous eight years. Most Directors favored retaining a streamlined compensatory element of the CCFF—which provides timely financing to members experiencing a temporary shortfall in export earnings or an excess in cereal import costs for reasons largely beyond their control—at least pending a broader review of all IMF facilities. They, however, supported limiting the compensatory element to cases in which an arrangement with upper credit tranche conditionality was in place—with simplified access limits and with phasing of drawings—or where the member’s balance of payments position was satisfactory apart from the temporary export shortfall or cereal import excess.

During FY2000, Algeria and the former Yugoslav Republic of Macedonia drew a total of SDR 237.3 million under the CCFF. The IMF also provided emergency post conflict assistance (totaling SDR 19.1 million) to Guinea-Bissau and Sierra Leone, and emergency natural disaster assistance of SDR 361.5 million to Turkey.

Another special facility—one related to potential Y2K problems—expired unused in March 2000 (see Box 6.3).

Poverty Reduction and Growth Facility

The IMF provides concessional financial assistance to low-income member countries under the Poverty Reduction and Growth Facility (PRGF)–successor to the Enhanced Structural Adjustment Facility (ESAF)–which focuses explicitly on poverty reduction. Currently, 80 member countries of the IMF are PRGF-eligible (see Chapter 5).

During FY2000, the Executive Board approved 10 new PRGF Arrangements with commitments totaling SDR 0.6 billion for Burkina Faso, Cambodia, Chad, Djibouti, Ghana, Mali, Mauritania, Mozambique, São Tomé and Príncipe, and Tanzania; in addition, augmentations totaling SDR 44 million were approved of the arrangements for Albania, Georgia, and Mozambique (Appendix II, Table II.l). As of the end of April 2000, 31 member countries’ reform programs were supported by PRGF Arrangements, with IMF commitments totaling SDR 3.5 billion and undrawn balances of SDR 2.0 billion (Appendix II, Table II.5). Total disbursements amounted to SDR 0.5 billion during FY2000, compared with SDR 0.8 billion in FY1999.

Financing for the PRGF is provided outside of the IMF’s quota-based resources. Loans and grant contributions from a broad cross section of the IMF’s membership constitute the bulk of the financing of the PRGF Trust, which is administered by the IMF. The Trust borrows resources at market related interest rates from loan providers—central banks, governments, and government institutions—and lends them to PRGF-eligible borrowers. The Trust receives contributions to subsidize the rate of interest on PRGF loans and maintains a Reserve Account (providing security for creditor claims on the Trust) in the event of nonpayment by PRGF borrowers.

In August 1999, the Executive Board increased the borrowing limit of the PRGF Trust Loan Account to SDR 11.5 billion from SDR 11 billion in order to meet the potential demand for PRGF resources in the period ahead. As of end-April 2000, total effective lending commitments to the PRGF Trust amounted to SDR 10.9 billion. New borrowing agreements concluded during FY2000 include with Belgium (SDR 200 million), Canada (SDR 200 million), France (SDR 350 million), Italy (SDR 250 million), the Netherlands (SDR 250 million), and Spain (SDR 125 million). A borrowing agreement with Denmark (SDR 100 million) became effective in May 2000 and an agreement with Germany (SDR 350 million) became effective in June 2000. The commitment period for PRGF Trust loans to eligible members runs through December 31, 2001, with disbursements to be made through the end of 2003.

Contributions to the Subsidy Account are used to enable loans from the PRGF Trust to be made at a highly concessional rate of interest (currently 0.5 percent a year). The total value of bilateral subsidy contributions is estimated at SDR 3.4 billion. In addition, SDR 0.4 billion was transferred from the SDA to the Subsidy Account in early 1994. This contribution by the IMF, including the interest it will earn, is valued at SDR 0.6 billion.

The resources in the Subsidy Account were SDR 1.7 billion as of end-April 2000. During FY2000, the PRGF Trust made interest payments to lenders of SDR 201 million; of this amount, SDR 28 million represented interest payments by borrowers from the Trust and the balance of SDR 173 million was drawn from the resources of the Subsidy Account.

Box 6.2Financial Transactions Plan

The amounts of currencies and SDRs to be used in new drawings and repayments by member countries are specified by the Executive Board for successive quarterly periods in the framework of a financial transactions plan (formerly referred to as the operational budget). Use of a member’s currency in new borrowing from the IMF essentially involves the transfer of foreign exchange from the member whose currency is used (the creditor) to the borrowing member, and results in an equivalent increase in the creditor member’s position in the IMF. Similarly, when borrowing members repay the IMF in currencies, this results in the receipt of foreign exchange by the creditor member and in an offsetting decline in its claims on the IMF. These amounts are carefully managed to ensure that the creditor positions in the IMF of the members making their currencies available for use by other members remain broadly equal in relation to quota, the key measure of each member’s rights and obligations in the IMF.

The IMF recently began publishing the outcome of the financial transactions plan. Data on the amounts of resources provided by members to finance IMF transactions are posted on the IMF website after the completion of each quarterly plan, together with an explanatory note to guide readers unfamiliar with the IMF’s particular financial structure and terminology.

Box 6.3Temporary Y2K Facility

The IMF—like the rest of the world—faced a one-time challenge in FY2000: as 1999 ended, would computers read the term “00” as representing the year 1900 or the year 2000? The IMF ensured that its own systems were “Y2K compliant” and played a role in raising member countries’ awareness of the risks of systems failure and of the importance of developing contingency plans for dealing with key problems.

In September 1999, the Executive Board approved the establishment of a temporary Y2K facility. Under this facility, the IMF would extend short-term financing to countries that encountered balance of payments difficulties arising from potential or actual Y2K-related failures of computer systems. The borrowing country had to be cooperating with the IMF and addressing the Y2K problems that gave rise to its balance of payments problems, to the extent that they were within the country’s control. The country also had to have a generally sound policy stance—including policies to address other sources of balance of payments difficulties, if any—and be making appropriate use of its reserves and other available sources of external financing to meet its balance of payments difficulties.

As it turned out, no member made use of the Y2K facility, which expired at the end of March 2000.

For details of PRGF Arrangements, and of borrowing agreements and subsidy contributions for the PRGF Trust, see Appendix II, Tables II.5 and II.10.

Enhanced HIPC Initiative

The Initiative for Heavily Indebted Poor Countries (HIPC Initiative), launched in 1996 by the IMF and World Bank, was considerably strengthened in FY2000, to provide deeper, faster, and broader debt relief for the world’s heavily indebted poor countries (see Chapter 5). The IMF provides HIPC assistance in the form of grants that are used to service part of a member country’s debt to the IMF.

As of end-April 2000, the Executive Boards of the IMF and World Bank had decided to assist nine countries that had reached their decision points under the Initiative (Bolivia, Burkina Faso, Côte d’lvoire, Guyana, Mali, Mauritania, Mozambique, Tanzania, and Uganda); the IMF had committed SDR 467 million to these countries, and five countries (Bolivia, Guyana, Mozambique, Tanzania, and Uganda) had received assistance in the form of grants from the IMF totaling SDR 213 million.

The total cost of the IMF’s participation in the enhanced HIPC Initiative and of the continuation of concessional lending under the PRGF is estimated at $3.5 billion (end-1998 net present value (NPV) terms), with the HIPC Initiative accounting for about two-thirds of the total. The envisaged financing package consists of pledged contributions by member countries of $1.4 billion (end-1998 NPV terms) and contributions by the IMF of $2.1 billion (end-1998 NPV terms). In December 1999, the Executive Board made the necessary decisions for the financing of these initiatives to proceed: namely, to terminate the second Special Contingent Account (SCA-2) (see below) and to undertake off-market gold sales of up to 14 million ounces (see Box 6.4).

Substantial progress has been made in securing the necessary financing. Ninety-three members have pledged contributions to the PRGF-HIPC Trust, a number of them by contributing all or part of their SCA-2 balances. As of end-April 2000, about 60 percent of pledged contributions had either been received or were being provided on the basis of an agreed schedule (Appendix II, Table II.11). As to the IMF, the bulk of its contribution will come from the investment income on the profits generated by off-market sales of 12.9 million ounces of gold, which were completed in early April 2000. The IMF will also provide $0.5 billion from other sources, of which about 45 percent has already been contributed to the PRGFHIPC Trust. The available resources in the PRGFHIPC Trust amounted to SDR 511 million as of end-April 2000 (see Box 6.5)

Income, Charges, and Burden Sharing

At the beginning of each financial year, the IMF sets a rate of charge on the use of its resources that is intended to allow it to achieve a target amount of net income to add to its reserves. In deciding on the amount of income that should be added to reserves, the Executive Board is guided by two principles: precautionary balances should fully cover the credit outstanding to member countries in protracted arrears to the IMF, and precautionary balances should include a margin for the risk related to credit outstanding to other members in good standing.

The basic rate of charge is set as a proportion of the SDR interest rate and is adjusted for burden sharing, described below. In addition, the IMF levies a surcharge on the use of resources under the Supplemental Reserve Facility (SRF) and the Contingent Credit Lines (CCL) (see Table 6.4). The IMF pays remuneration on member countries’ remunerated reserve tranche positions, which on average are equivalent to 88 percent of their total reserve tranche positions. The rate of remuneration is set at 100 percent of the SDR interest rate and is also adjusted for burden sharing.

Since 1986, the Executive Board has employed burden-sharing mechanisms to strengthen the IMF’s financial position against the consequences of overdue obligations and to distribute the financial burden of overdue obligations among debtor and creditor members:

  • The Board has adjusted the rates of charge and remuneration to generate amounts equal to unpaid charges due from members in protracted arrears. When deferred charges that have led to these burden-sharing adjustments are settled, an equivalent amount is refunded to members that have paid additional charges or received reduced remuneration.
  • From FY1989 through FY2000, an amount equal to 5 percent of the IMF’s reserves at the beginning of the financial year was added each year to the first Special Contingent Account (SCA-1) to strengthen the IMF’s financial position. In FY2001, an amount equal to 3.3 percent of the IMF’s reserves at the beginning of the year will be added to the SCA-1.
  • From 1990 through 1997, debtor and creditor members contributed SDR 1 billion to the second Special Contingent Account (SCA-2) to provide liquidity for—and to protect the IMF’s financial position against the risks associated with—disbursements from the GRA to member countries formerly in protracted arrears to the IMF following the completion of a rights accumulation program6 and the clearance of arrears. Subsequently, to facilitate the completion of the financing package for the continuation of the PRGF and the HIPC Initiative, the SCA-2 was terminated in 1999 and the balances in the account were distributed to contributing members.

Box 6.4IMF Off-Market Gold Transactions Help Finance the HIPC Initiative

To help finance its contribution to the HIPC Initiative, the IMF in FY2000 conducted a series of off-market transactions in gold with two member countries over a four-month period, thereby realizing profits corresponding to the difference between the value of the gold at the market price and at the official price of gold in the IMF’s balance sheets.

During December 1999–April 2000, the IMF sold a total of 12.944 million fine ounces of gold to Brazil and Mexico at the prevailing market price on the day of each transaction. The total amount sold was equivalent to SDR 2.7 billion ($3.7 billion). After each sale, the gold was immediately accepted back by the IMF at the same price in settlement of financial obligations of these members to the IMF. The net effect of these transactions left the IMF’s holdings of physical gold unchanged, but the gold accepted back was revalued at the market prices of the transactions. No gold was released to the market, and thus there was no impact on the balance of supply and demand in the market.

In accordance with the Articles of Agreement, the equivalent of SDR 35 per fine ounce from the proceeds of the sales was placed in the General Resources Account. The proceeds in excess of this amount (totaling SDR 2.2 billion, or $3.0 billion, net of transaction costs) are held in the Special Disbursement Account and invested (see Box 6.5 on the recent modification of the IMF’s investment approach). The income from these investments, which will be transferred to the PRGF-HIPC Trust when needed, will be used only to help finance the IMF’s contribution to the HIPC Initiative. To date, the Executive Board has authorized the transfer of nine fourteenths of the investment income to the PRGF-HIPC Trust; the transfer of the remainder will require a further Board decision.

The gold transactions reduce the IMF’s liquidity as well as its net income. For FY2000, the Board decided that the IMF would absorb the loss of net income through a reduced accumulation of reserves; it subsequently adopted a decision on how to deal with the loss of income in FY2001 (see text).

In April 1999, the basic rate of charge for FY2000 was set at 113.7 percent of the SDR interest rate in order to achieve a net income target of SDR 128 million, or 5 percent of the IMF’s reserves at the beginning of the year; the allocation to the SCA-1 was also set at 5 percent of reserves. Any income in excess of the target, other than income from the SRF, Y2K Facility, or CCL, would be used to reduce the rate of charge retroactively. The net income target was effectively reduced to SDR 101 million in December 1999, when the Executive Board decided that the income effects of accepting gold in the settlement of financial obligations to the IMF would be borne by the IMF.

Box 6.5Investment of SDA, PRGF, and PRGF-HIPC Resources

The resources held in the Special Disbursement Account (SDA), in the Reserve and Subsidy Accounts of the PRGF Trust, and in the PRGF-HIPC Trust are the main resources used to finance IMF lending under the PRGF and its contribution to the HIPC Initiative. These resources are invested by the IMF, with the return on the investments used to supplement the resources.

The IMF introduced a new investment approach in March 2000, which is expected to increase investment returns over time while limiting risk. This should enhance the protection provided to lenders to the PRGF Trust, generate additional resources for subsidizing PRGF lending and for interim PRGF and HIPC operations, and expand the size of the self-sustained PRGF.

The large increase in resources available for investment—including those arising from off-market gold sales and the termination of the second Special Contingent Account (SCA-2) in support of interim PRGF and HIPC operations—made the change in investment strategy particularly timely. These resources will peak at about SDR 10 billion in 2003 before declining gradually thereafter.

Previously, investments had been made in short-term SDR denominated deposits with the Bank for International Settlements. Under the new approach, the maturity of the investments will be lengthened by shifting part of the resources to portfolios consisting mainly of bonds issued by the governments of the countries whose currencies are included in the SDR basket and medium-term instruments issued by the Bank for International Settlements.

Unpaid charges due from members in protracted arrears and the allocation to the SCA-1 resulted in adjustments to the basic rate of charge of 16 basis points, and to the rate of remuneration of 17 basis points, in FY2000. The adjusted rates of charge and remuneration averaged 4.33 percent and 3.50 percent, respectively, for the financial year.

The IMF’s net income in FY2000, excluding the effect of the adoption of International Accounting Standard 19 (IAS 19), totaled SDR 271 million. Of this amount, SRF income, net of the annual expenses of administering the PRGF Trust, was SDR 167 million. The GRA was not reimbursed for the expenses of administering the PRGF Trust in FY2000; instead, an equivalent amount was transferred through the Special Disbursement Account to the PRGF-HIPC Trust. Non-SRF income was SDR 104 million. At the end of the financial year, non-SRF income of SDR 3 million in excess of the net income target was returned to members that paid charges, retroactively reducing the FY2000 rate of charge to 113.5 percent of the SDR interest rate.

Following the retroactive reduction in the rate of charge, SDR 268 million was placed to the IMF’s reserves—SDR 167 million of SRF income to the General Reserve and the SDR 101 million of non-SRF income to the Special Reserve. In addition, the adoption of IAS 19 on employee benefits resulted in a onetime accounting gain of SDR 268 million, which was placed to the Special Reserve (see Box 6.6). Total reserves rose to SDR 3.1 billion as of April 30, 2000, from SDR 2.6 billion a year earlier.

Precautionary balances (that is, reserves net of the IAS 19 accounting gain plus the balance in the SCA-1) totaled SDR 4.0 billion as of April 30, 2000, compared with SDR 3.6 billion as of April 30, 1999; they were equal to 409 percent of GRA credit outstanding to members in arrears to the IMF by six months or more and 9.0 percent of total outstanding GRA credit.

In April 2000, the Executive Board decided to set the FY2001 net income target at SDR 48 million (excluding SRF and CCL income)—in light of the loss of income resulting from the off-market gold transactions—and to generate SDR 94 million for the SCA-1 through burden sharing. The FY2001 basic rate of charge was set at 115.9 percent of the SDR interest rate. The Board also renewed the burden-sharing mechanism for deferred charges and agreed to forgo the reimbursement to the GRA for the expenses of administering the PRGF Trust for the financial years from FY2001 through FY2004; an equivalent amount will be made available to the PRGF-HIPC Trust. Finally, the Board decided that net income from the SRF and CCL for FY2001, after meeting the expenses of administering the PRGF Trust, would be placed to the General Reserve at the end of the year.

Overdue Financial Obligations

Total overdue financial obligations to the IMF increased slightly in FY2000, to SDR 2.32 billion as of end-April 2000, from SDR 2.30 billion a year earlier.7 All overdue members as of end-April 2000 were in protracted arrears, that is, overdue by six months or more. No new cases of protracted arrears emerged in FY2000, nor were any of the existing cases resolved, which left the number of member countries in protracted arrears to the IMF at seven. Data on arrears to the IMF by member, type, and duration are shown in Table 6.5.

Table 6.5Arrears to the IMF of Countries with Obligations Overdue by Six Months or More, by Type and Duration, as of April 30, 2000(In millions of SDRs)
By TypeBy Duration
TotalGeneral

Department

(incl. SAF)
SDR

Department
Trust

Fund
Less than

One year
1-2

Year
2-3

Year
3 years

or more
Afghanistan, Islamic State of4.84.81.11.21.21.3
Congo, Democratic Republic of the378.6367.111.519.227.834.9296.7
Iraq40.90.140.83.84.24.128.9
Liberia472.5423.119.330.19.710.610.8441.4
Somalia203.4188.97.76.84.85.26.2187.3
Sudan1,126.61,048.977.719.622.925.11,059.0
Yugoslavia, Federal Republic of
(Serbia/Montenegro)96.375.321.05.05.55.580.3
Total2,323.22,103.4105.1114.663.177.487.82,094.9

Overdue financial obligations continued to be concentrated among four member countries—the Democratic Republic of the Congo, Liberia, Somalia, and Sudan—whose arrears accounted for 94 percent of total overdue obligations to the IMF as of end-April 2000. As of that date, these four members were ineligible under Article XXVI, Section 2(a) to use the general resources of the IMF. Declarations of noncooperation—a further step under the strengthened cooperative arrears strategy (see below)–were also in effect for the Democratic Republic of the Congo (issued on February 14, 1992) and Liberia (issued on March 30, 1990); a declaration of noncooperation regarding Sudan issued on September 14, 1990, was lifted on August 27, 1999. The voting rights of the Democratic Republic of the Congo and Sudan were suspended (effective June 2, 1994, and August 9, 1993, respectively). In addition, a complaint with respect to the compulsory withdrawal from the IMF of Sudan (issued on April 8, 1994) remained outstanding.

Progress Under the Strengthened Cooperative Strategy

The strengthened cooperative strategy on overdue financial obligations to the IMF was initiated in 1990. Prevention of the emergence of new cases of arrears is the first line of defense under the strategy. Preventive measures include IMF surveillance of members’ economic policies, policy conditionality required for the use of IMF resources, technical assistance by the IMF in support of members’ adjustment and reform efforts, and the assurance of adequate balance of payments financing for members under IMF-supported programs.

The intensified collaborative element of the strategy provides a framework for cooperating members in arrears to establish a strong track record of policy performance and payments to the IMF and, in turn, to mobilize bilateral and multilateral financial support for their adjustment efforts and to clear arrears to the IMF and other creditors. Pursuit of the intensified collaborative approach has resulted in the normalization of relations between the IMF and most of the members in protracted arrears at the time of establishment of the intensified cooperative strategy.

The rights approach, established in 1990, allows eligible members (limited to the 11 members in protracted arrears to the IMF at the end of 1989) to build a track record of policy performance and payments, and thereby to accumulate “rights” to a future disbursement under a subsequent IMF arrangement following the conclusion of the rights accumulation program and the clearance of arrears to the IMF. In light of the risks associated with large disbursements to members previously in protracted arrears, the second Special Contingent Account (SCA-2) was established as a precautionary balance and source of additional liquidity to assist in the financing of encashments of rights under arrangements in the GRA. Similarly, the IMF pledged to mobilize up to three million ounces of gold in respect of encashments of rights under PRGF Arrangements, in the event of a potential shortfall in resources available to meet PRGF Trust obligations.

At meetings in late August and early December 1999, the Executive Board considered a proposal for an early termination of the SCA-2 to complete a financing package for the continuation of the PRGF and the HIPC Initiative. The Board agreed that under plausible assumptions, the IMF’s other precautionary balances would provide adequate protection against the risks associated with outstanding and future rights-related disbursements, and that termination of the SCA-2 would not prevent a continuation of the rights approach. Subsequently, the Board decided to extend the availability of the rights approach until end-June 2000.

Box 6.6IMF’s Financial Statements and External Audit

The IMF’s financial statements for FY2000 are presented in full compliance with International Accounting Standards as promulgated by the International Accounting Standards Committee, and have been revised to enhance completeness and transparency.

The financial statements are audited in accordance with International Auditing Standards by an external audit firm. The arrangements for the external audit were revised in FY2000 by shifting the formal responsibility for the audit from the External Audit Committee to the external audit firm, and giving the External Audit Committee an oversight role. The external audit firm is selected by the Executive Board in consultation with the External Audit Committee.

In December 1999, the IMF appointed Pricewaterhouse-Coopers as the external audit firm for a five-year period starting in FY2000, and at the same time named the three members of the External Audit Committee: K.N. Memani of India, Chairman and Country Managing Partner of S.R. Batliboi & Co., a member firm of Ernst & Young International; Giorgio Loli of Italy, Professor of Accounting at Bocconi University in Milan and former Managing Partner of KPMG, Italy; and Juan Humud Giacaman of Chile, Chairman of Ernst & Young Chile.

The final element of the strategy is the timetable of remedial measures applied to member countries with overdue obligations that do not actively cooperate with the IMF in seeking a solution to their arrears problems. This timetable guides Executive Board consideration of remedial measures of increasing intensity, although the application of each particular step is considered in light of the individual circumstances of the member concerned. In the cases of Afghanistan, the Democratic Republic of the Congo, Iraq, and Somalia, where civil conflicts, the absence of a functioning government, or international sanctions have prevented the IMF from reaching a judgment regarding the member’s cooperation, the application of remedial measures has been delayed or suspended until such a judgment can be reached.

In July 1999, the Executive Board decided to establish clear understandings regarding the de-escalation of certain remedial measures to further strengthen incentives for members in protracted arrears to cooperate with the IMF, with the ultimate objective of full clearance of arrears and the restoration of access to IMF resources. Basic steps in the de-escalation process would include a determination by the Board that the member had begun to cooperate in solving its arrears problems, the establishment of an evaluation period during which cooperation would be expected to strengthen further, and the phased lifting of a declaration of noncooperation and, if applicable, the suspension of voting and related rights in the IMF. Shortly after its introduction, de-escalation was applied for the first time in August 1999 in the case of Sudan.

The Executive Board conducted several reviews of member countries’ overdue obligations to the IMF during FY2000. It reviewed Liberia’s overdue obligations on three occasions, deciding to defer further remedial measures in the light of commitments by the authorities to improve policy performance. In February 2000, following the formulation of a new staff monitored program, Directors decided to provide time for the authorities to implement the program and urged Liberia to continue to strengthen its cooperation with the IMF.

No meeting was held during FY2000 on the decision to suspend the Democratic Republic of the Congo’s voting and related rights. In August 1999, prospects for peace improved in the Congo with the signing of a peace agreement by the countries involved in the military conflict that began in August 1998. With the cessation of hostilities, a staff team visited the Congo in February 2000 to review economic developments and discuss with the authorities their readiness to renew cooperation with the IMF. The next review of the Congo’s arrears to the IMF will be held by June 10, 2000.

On two occasions, the Board reviewed the overdue obligations of Sudan, which has the largest and most protracted arrears to the IMF. In August 1999, in view of Sudan’s improved record of cooperation regarding policies and payments to the IMF, the Board decided to lift the declaration of noncooperation with respect to Sudan in place since 1990, and to consider lifting the suspension of Sudan’s voting and related rights in the IMF if Sudan’s cooperation continued to strengthen over the next 12 months. In February 2000, the Board decided not to proceed with a recommendation to the Board of Governors regarding compulsory withdrawal, in light of Sudan’s payments to the IMF and its broadly satisfactory performance under the 1998 and 1999 staff-monitored programs.

SDR Department

The SDR is an international reserve asset created by the IMF under the First Amendment to its Articles of Agreement to supplement other reserve assets. First allocated in January 1970, total SDR allocations currently amount to SDR 21.4 billion. SDRs are held largely by member countries—all of which are participants in the SDR Department—with the balance held in the IMF’s General Resources Account and by official entities prescribed by the IMF to hold SDRs. Prescribed holders do not receive SDR allocations but can acquire and use SDRs in operations and transactions with participants in the SDR Department and with other prescribed holders under the same terms and conditions as participants. During FY2000, the number of prescribed holders remained at 15.8

The SDR is the unit of account for IMF operations and transactions. It is also used as a unit of account, or the basis for a unit of account, by a number of other international and regional organizations and international conventions. In addition, to a very limited extent, the SDR has been used to denominate financial instruments created outside the IMF by the private sector (private SDRs). At the end of FY2000, four member countries’ currencies were pegged to the SDR.

The Board of Governors adopted a resolution in September 1997 proposing a Fourth Amendment to the IMF’s Articles of Agreement to enable all participants in the SDR Department to receive an equitable share of cumulative SDR allocations. The proposed amendment, when approved, will authorize a special one-time allocation of SDR 21.4 billion, which would raise all participants’ ratios of cumulative SDR allocations to quota under the Ninth General Review to a common benchmark ratio of 29.32 percent. Appendix II, Table II.12, shows the amounts of SDRs that existing participants will be eligible to receive under the special allocation. The proposed amendment also provides for future participants to receive a special allocation following the later of the date of their participation, or the effective date of the amendment. The amendment will become effective when ratified by three-fifths of member countries having 85 percent of the total voting power. As of the end of FY2000, 79 members representing 50.2 percent of the total voting power had ratified the proposed amendment. The amendment does not affect the IMF’s existing power to allocate SDRs based on a finding of a long-term global need to supplement reserves.

SDR Valuation and Interest Rate Basket

The SDR’s valuation is determined using a basket of currencies, the composition of which is reviewed every five years. Since 1981, the currencies of five countries—France, Germany, Japan, the United Kingdom, and the United States—have been included in the basket, as successive five-yearly reviews have determined that these are the five countries with the largest exports of goods and services. The five-yearly reviews also specify the initial weights of the currencies in the basket, reflecting their relative importance in international trade and reserves, as measured by the value of exports of goods and services of the countries issuing them and the balances of the currencies held as reserves by members of the IMF.9

With the introduction of the euro on January 1, 1999, the currency amounts of the deutsche mark and French franc in the SDR basket were replaced with equivalent amounts of the euro, based on the fixed conversion rates between the euro and the deutsche mark and the French franc announced by the European Council on December 31, 1998. The calculation of the value of the SDR for the last (business) day of FY2000 is shown in Table 6.6.

Table 6.6SDR Valuation(As of April 28, 2000)
CurrencyAmount of

Currency Units
Exchange

Rate1
U.S. Dollar

Equivalent
Euro(Germany)0.22800.906200.206614
Kuro (France)0.12390.906200.112278
Japanese yen27.2000107.270000.253566
Pound sterling0.10501.568100.164651
U.S. dollar0.58211.000000.582100
1.319209
Memorandum
SDR 1 = US$1.31921921
US$1 = SDR 0.7580308030

Exchange rates in terms of U.S. dollars per currency unit except for the Japanese yen, which is in currency units per U.S. dollar.

Exchange rates in terms of U.S. dollars per currency unit except for the Japanese yen, which is in currency units per U.S. dollar.

Since 1983, the SDR interest rate has been calculated weekly as a weighted average of interest rates on selected short-term instruments in the five countries whose currencies are included in the valuation basket. The financial instruments are reviewed every five years to ensure that they are representative of the instruments actually available to investors in a particular currency and maturity, that the interest rates on the instruments are responsive to changes in underlying credit conditions in the respective markets, and that they have risk characteristics similar to the official standing of the SDR. Since 1991, the financial instruments and rates have been the market yield on three month treasury bills for France, the United Kingdom, and the United States; the three-month interbank deposit rate for Germany; and the three-month rate on certificates of deposit for Japan. With effect from January 1, 1999, the French and German instruments have been expressed in euros. The next review of the SDR valuation and interest rate baskets will take place before the end of 2000, with any changes to take effect on January 1, 2001.

SDR Operations and Transactions

After having peaked in FY1999 at SDR 49.1 billion—largely as a result of the payments of Eleventh Review quota increases—total transfers of SDRs by participants, the GRA, and prescribed holders decreased in FY2000 to SDR 22.9 billion. In addition to the winding down of the quota payments, the decline in transfers can be attributed to delays in a number of large disbursements under arrangements with members during FY2000. Summary data on transfers of SDRs are presented in Table 6.7 (see also Appendix II, Table II.13).

Table 6.7Transfers of SDRs(In millions of SDRs)
Financialy ears Ended April 30
199219931994199519961997199819992000
Transfers among participants and prescribed holders
Transactions by agreement5,0195,0563,1228,9878,9317,4118,56713,8176,639
Transactions with designation
Prescribed operations2405,6104061241,95188864,577293
IMF-related operations14994436301704606901756684
Net interest on SDRs441337121174319268284289214
Total5,84811,0974,0859,58611,9058,3729,83919,4397,831
Transfers from participants to General Resources Account
Repurchases1,8385836421,1815,5724,3642,9184,7613,826
Charges1,8831,7981,4251,3861,9851,6161,8772,8062,600
Quota payments1112,6437724708,644528
Interest received on General
Resources Account holdings5712833626253514435138
Assessments434444433
Total3,79415,1552,4782,8577,6836,0354,84416,2497,094
Transfers from General Resources Account to participants and prescribed holders
Purchases1,8815,7692,6765,9706,4604,0604,2439,5223,592
Repayments of IMF borrowings5003503008621,429
Interest on IMF borrowings7792162974618
In exchange for other members’ currencies
Acquisitions to pay charges2536991669949224205451,577
Acquisitions to make quota payments
Reconstitution
Remuneration1,0099229588151,0921,0551,2201,8261,747
Other89731085125990741,007
Total3,8087,9054,3707,8947,8595,3665,57413,4427,942
Total transfers13,45034,15710,93320,33627,44819,77320,25649,13022,867
General Resources Account holdings at end of period6807,9306,0381,0018251,4947643,5722,724

Transactions in SDRs are facilitated by arrangements with 12 member countries that stand ready to buy or sell SDRs for one or more freely usable currencies provided that their SDR holdings remain within certain limits. These arrangements have helped ensure the liquidity of the SDR system, obviating the need in recent years for recourse to the designation mechanism (under which participants whose balance of payments and reserve positions are deemed sufficiently strong may be obliged, when designated by the IMF, to provide freely usable currencies in exchange for SDRs up to specified amounts). During FY2000, transactions totaling SDR 6.6 billion were conducted under such arrangements, including sales of SDR 3.9 billion and purchases of SDR 2.7 billion.

Transfers of SDRs among participants and prescribed holders fell to SDR 7.8 billion in FY2000 from SDR 19.4 billion in FY1999, mainly because of substantial decreases in transactions by agreement and in the use of the same-day SDR borrowing facility by members paying the reserve asset portion of their Eleventh Review quota increases.

SDR transfers from participants to the GRA declined to SDR 7.1 billion in FY2000 from SDR 16.2 billion in FY1999, reflecting the decrease in quota payments, lower use of SDRs in repayments of IMF credit, and a decline in charges. The large accumulation of SDRs by the GRA in the early part of the year led to an increase in interest received by the GRA on its SDR holdings.

Drawings from the IMF in SDRs amounted to SDR 3.6 billion during FY2000 and represented the largest category of transfers from the GRA, followed by remuneration payments of SDR 1.7 billion to members with creditor positions. Other transfers included the termination of the second Special Contingent Account (SCA-2) in December 1999, which led to the distribution of SDR 1.0 billion from the GRA to participants.

Pattern of SDR Holdings

The IMF’s holdings of SDRs in the GRA are targeted to be within the range of SDR 1.0-1.5 billion. By the end of FY2000, these holdings had fallen to SDR 2.7 billion, from SDR 3.6 billion a year earlier. Holdings of SDRs by participants increased correspondingly to SDR 18.1 billion at the end of FY2000, from SDR 17.4 billion a year earlier.

The SDR holdings of the industrial countries relative to their net cumulative allocations increased to 95.0 percent at the end of FY2000, from 94.6 percent a year earlier. The holdings of the nonindustrial countries rose to 62.5 percent of their net cumulative allocations, from 52.5 percent a year earlier, mainly as a result of the distribution of the balances in the SCA-2 (Appendix II, Table II.14). The SDR holdings of prescribed holders increased during FY2000, mainly reflecting the IMF’s investment of Structural Adjustment Facility (SAF) and PRGF resources in official SDRs held by the Bank for International Settlements.

Issues Related to IMF Support for Member Countries

Review of IMF Financial Facilities

In March 2000, the Executive Board initiated a general review of IMF financing facilities in the light of changes in the world economy. The discussion was preliminary and part of the broader debate on the reform of the architecture of the global financial system (see Chapter 4).

With regard to eliminating facilities not being used or no longer serving members’ needs, Directors agreed that the policies on Currency Stabilization Funds (CSF) and on IMF support for commercial bank Debt and Debt-Service Reduction (DDSR) operations10 could be eliminated. This would bring to four—including the Buffer Stock Financing Facility and the contingency element of the Compensatory and Contingency Financing Facility eliminated earlier in the year—the number of facilities eliminated. At the same time, Directors thought it appropriate to retain policies on the first credit tranche and on emergency assistance for natural disasters and post conflict cases.

As to the Compensatory Financing Facility, Directors’ views were essentially the same as in January 2000 (see discussion above under “Special Facilities and Policies”). Most Directors favored adopting a streamlined CFF along the lines discussed in January for a period of two years, at which time it could be reviewed again, including the cereal import element, in the light of experience with, and of developments in, other facilities.

Considering the IMF’s financing role more broadly, Directors took note, in particular, of the fact that the bulk of IMF financing in recent years was in support of countries hit by financial market crises and, to a lesser degree, in support of transition economies. Directors emphasized that the globalization of capital markets raised important issues regarding the role of the IMF. They recognized the possibility that the large-scale financing provided by the IMF in the crises of capital market confidence of recent years could create an element of moral hazard. Efforts to stem this effect were important. Directors recalled that the Supplemental Reserve Facility (SRF) was created in 1997 in response to the distinct nature of these new crises—notably, the likelihood that they could be reversed relatively quickly—and its design had been influenced by concerns about moral hazard. These considerations were behind the SRF’s shorter maturity and higher charges. The SRF appeared to have proven itself an appropriate tool, and the expectation that members would be able to repay relatively quickly was well-founded. While it was not proposed that modifications be made to the SRF at the time of the discussion, the issues could be revisited at a later stage.

Directors stressed the importance of continued efforts to strengthen the IMF’s policies in the area of crisis prevention, including by redesigning its facilities to encourage members’ efforts in this area. The idea that large precautionary arrangements could perhaps substitute for the Contingent Credit Lines (CCL) was raised. Many Directors, however, noted that a separate CCL facility brought greater flexibility, particularly in terms of maturity and charges, and that the signaling role of the CCL would be difficult to replicate in the context of precautionary arrangements. Most Directors thus favored additional experimentation with the design of the CCL.

Many Directors favored considering a number of suggestions for adjusting the CCL’s design—in particular, lowering the surcharge on the use of CCL resources, reducing the commitment fee, and reducing the IMF’s discretion in its activation; these would increase the incentives for members to use the CCL, rather than relying on access to the SRF once a crisis had begun. A few Directors cautioned against any weakening in CCL conditionality. A few others suggested that modifying the CCL, as well as possibly changing the SRF, should await progress on the issue of private sector involvement in resolving crises.

Many Directors saw merit in permitting precautionary arrangements to be larger than typically in the past, even as experimentation with the design of the CCL continued. Nevertheless, they agreed, average access under precautionary arrangements should continue to be relatively small, with high access limited to a small number of cases.

Directors differed on the use of IMF resources by members with access to capital markets. The Board recognized that, under the Articles of Agreement, these members, like any others, had the right to represent that they had a balance of payments need that justified the use of IMF resources. At the same time, the Board noted that the IMF had instruments through which it could limit access to its resources by members and through which it could influence their incentives to use IMF resources. Most Directors, however, did not see access to IMF resources by members with access to capital markets as a source of concern. They did not believe that such access either discouraged members from, or substituted for, access to capital markets; rather, IMF financing was clearly in some cases complementary to market access as it helped catalyze private financing.

A number of other Directors, however, were concerned that some members might rely unduly on IMF financial assistance in place of market financing. These Directors emphasized that IMF financial support should be available where required in support of a member’s adjustment efforts, thus helping to avoid “excessive” adjustment. But they cautioned against the possibility that members might use IMF resources only to reduce their borrowing costs. They believed that countries should make significant efforts to meet their own financing needs, and stressed that the structure of IMF facilities was a key element in the degree to which the IMF helped market discipline work and supported countries in working with capital markets.

Noting that the rate of charge was key in determining whether and for how long members used IMF resources, a few Directors argued that the rate of charge on credit tranche and/or Extended Fund Facility (EFF) resources should be raised. However, some Directors argued that a “subsidy” element in the rate of charge could be justified based on the positive externalities for the world economy from stronger economic policies. A number of Directors, moreover, indicated that other “costs” not captured by the rate of charge were involved in using IMF resources and emphasized the IMF’s cooperative nature. All in all, Directors wished to consider further the issue of the rate of charge, and possible differentiation of charges among facilities.

The Board discussed what should be the maximum maturities offered by the IMF, consistent with the revolving character of its resources and with members’ evolving needs. It agreed that IMF resources should be used to resolve temporary balance of payments problems, but that interpretations could differ as to what constituted a “temporary” need. Most Directors argued that, within this framework, the EFF continued to play an important role and should be retained. They stressed that certain balance of payments problems required a long time to resolve; by way of example, these Directors cited the transition economies with limited access to capital markets and some of the lower-income members that were ineligible for the Poverty Reduction and Growth Facility. In this connection, many of these Directors believed the 10-year maturity of the EFF remained appropriate. A number of other Directors, however, questioned whether 10-year maturities were consistent with the revolving nature of IMF facilities, and the degree to which the IMF should finance structural reforms. They observed that primary responsibility for such policies had to remain with the World Bank and other development institutions. Some Directors also felt that the distinctions between Extended and Stand-By Arrangements had become less clear, as many Stand-By Arrangements had come to feature important structural reforms, and as multiyear Stand-By Arrangements had become more common. A few Directors proposed that successive Stand-By Arrangements could be a more effective way to address longer-term balance of payments problems. As to the EFF, Directors agreed it was important to ensure that access was granted only when balance of payments difficulties were expected to be longer term, and when an ambitious structural reform program was being pursued. A number of Directors indicated that precautionary extended arrangements should be discontinued, as it was unlikely that a potential balance of payments need would ever be of an extended nature. It was agreed that the discussion would need to continue in the light of the many ideas tabled to modify the EFF’s terms.

Directors noted that the question of tailoring maturities, under both the credit tranches and the EFF, would become a less-pressing issue if the IMF had a well-functioning early repurchase (repayment) policy. Many Directors saw a need to strengthen that policy, although they recognized the difficulty of doing so.

While noting that few members drew on IMF resources year after year, a number of Directors were concerned about repeated IMF arrangements for a relatively large number of members. In particular, Directors were concerned about the number of instances of such arrangements going off-track, and thought that this issue warranted further investigation. Many Directors saw room for the IMF to strengthen its review of country programs when there had been successive arrangements, including the extent to which implementation capacity had constrained performance. Some Directors also emphasized the need for front-loading of policy actions and back-loading of financing in cases where previous IMF-supported programs had not been successful or had gone off-track.

In his summary, the Acting Chairman noted that the Board had made progress in understanding, and narrowing, the differences of view on many points. The area of “streamlining” had proved relatively uncontroversial. On more fundamental issues, there was a broad consensus that the Supplemental Reserve Facility represented an important tool, and that the IMF must continue to make strong efforts to limit moral hazard and involve the private sector in resolving crises. The Board agreed, also, to reconsider the design of the Contingent Credit Lines with a view to strengthening their potential contribution to crisis prevention. Directors expressed various views on the Extended Fund Facility, agreeing that the IMF should grant access only when balance of payments difficulties were expected to be of an extended nature and when the structural reform content was substantial. There was a strong sense that the Stand-By Arrangement in the credit tranches would remain the IMF’s principal instrument, but many Directors felt the need to ensure that there was no undue reliance on IMF resources, particularly by members with ongoing access to capital markets. Concern was also expressed that the IMF had to do more to prevent a succession of arrangements for a given country, and to better monitor members’ performance after their IMF-supported programs had ended.

The Board asked the staff to come back to it with specific proposals for follow-up in FY2001.

Strengthening Safeguards and Addressing Misreporting

Several episodes of misreporting and allegations of misuse of IMF resources in FY2000 led to a reassessment of the adequacy of the IMF’s existing procedures to safeguard its resources. While such episodes have been rare, the IMF views them with the gravest concern, as they represent a breach of trust by certain members and could undermine the IMF’s credibility and reputation as a careful and prudent manager of the resources entrusted to it and as a provider of financial assistance and policy advice to its members. This, in turn, could undermine the IMF’s ability to operate effectively in the longer term.

In September 1999, the Interim Committee called on the IMF to review its procedures and controls to identify ways to strengthen safeguards on the use of its resources. The review of safeguards was aided by a panel of eminent outside experts, who provided the Executive Board with an independent assessment of staff proposals. In October 1999, the IMF’s Executive Board also initiated a separate review of the IMF’s legal framework, policies, and procedures related to misreporting.

In early 2000, the Executive Board discussed both misreporting and safeguards issues. Directors noted that reliable information was essential to every aspect of the IMF’s work—including surveillance, financing, and technical assistance—and that it was critical to ensure that the IMF’s resources were used for their intended purposes.

The existing safeguards for the reliability of information stem from program design, conditionality, and monitoring, and the availability of technical assistance, as well as transparency and governance initiatives; the latter include the establishment and monitoring of codes and standards for data dissemination, fiscal transparency, and transparency in monetary and financial policies (see, for example, Box 6.7 on managing foreign exchange reserves). The IMF also had legal procedures for addressing cases of misreporting that arise.

Nevertheless, Directors felt that strengthening safeguards within member countries would be both desirable and appropriate. The Executive Board agreed on a multifaceted approach to strengthening safeguards on the use of IMF resources. A key element of safeguards within member countries is that central banks publish annual financial statements, independently audited in accordance with internationally accepted standards. Members with existing arrangements and possible disbursements subject to program review after September 2000 are required to furnish the IMF with items 1-3 listed in the Annex. IMF staff would review these documents to assess the adequacy of the external audit arrangements and report to the Board their findings together with any recommendations for improvements.

Box 6.7Managing Foreign Exchange Reserves

At an Executive Board seminar in November 1999, Directors discussed the importance of good reserve management practices to ongoing work within the IMF on ways to strengthen safeguards on the use of its financial resources. The discussion, many Directors observed, was an initial airing of views on a complex set of issues.

Directors underscored that strong IMF-supported programs and the IMF’s preferred creditor status remained the first line of defense for safeguarding IMF resources and preventing crises. At the same time, the IMF had to address how, and to what extent, recent events had underscored the need for improved governance and transparency in reserve management, and possibly in the broader area of the use of governmental resources.

Although intentional misuse of IMF resources appeared to have been rare, cases of mismanagement of foreign exchange reserves may have been more common, with implications for the IMF’s assessment of a country’s external position and policies, and, consequently, for the safeguarding of IMF resources. These cases had raised the issue of how to ensure that the IMF’s resources were being used for their intended purposes, and that members accurately reported their true foreign reserve position.

Directors broadly supported an attempt by the IMF staff to identify generally accepted sound reserve management practices and the auditing and control of these practices, including by promoting greater transparency in members’ foreign exchange operations and reserve holdings. The IMF staff would rely as much as possible on information on member country practices already collected during Article IV consultations and by others, including the World Bank and the Financial Stability Forum. Recognizing, however, the need for consistency and completeness of information, Directors asked the IMF staff to review current risk management and control and transparency practices relating to central bank and exchange fund reserve management operations in several countries. They asked the staff to minimize the demands on both country authorities and IMF staff resources and emphasized that participation in the survey should be voluntary.

The focus of the staff paper on reserve management had potential implications for IMF surveillance. Directors offered a range of views on the merits of including in the surveillance process an assessment of the risk control and management systems that safeguard the integrity of foreign exchange and reserve management operations and supported the transparent reporting of reserves. They noted that a member’s observance of the IMF’s transparency codes and the Special Data Dissemination Standard (SDDS) initiative—supported by sound accounting standards—would be seen as contributing to good governance and, specifically, to good reserve management practices. Directors also noted that faulty reserve management practices could have implications for protecting the use of IMF resources, in the context of both the perceived integrity and credibility of IMF operations, and possible financial risks to the IMF. They stressed that sound management of reserves was indeed a precondition for protecting the use of IMF resources.

The IMF will also introduce two-stage safeguards assessments for countries with new IMF arrangements to evaluate whether the control, accounting, reporting, and auditing systems within their central banks are adequate to control and monitor the resources entrusted to these central banks, including resources provided by the IMF under financial arrangements. In the first stage, the central bank will be asked to provide information and documents related to its internal control and external auditing procedures (see Annex below). If these procedures are judged adequate, the IMF would regard the safeguards assessment as complete. In other cases, a second stage, of an on-site assessment, would follow. The assessment teams for the second stage will be headed by IMF staff, and will include experts from central banks, other multilateral agencies, and private accounting firms. The assessment teams will then propose actions to address any identified weaknesses in internal procedures.

The safeguards assessments and the transitional procedures for countries with existing arrangements are required, on an experimental basis, for all countries starting in mid-2000. The experience with these assessments will be reviewed within 12–18 months with the involvement of the same panel of outside experts that reviewed the original staff proposals.

Experience in FY2000 also underlined the need to ensure that the IMF’s framework of rules adequately covers cases of misreporting that may arise. The main pillars of the IMF’s existing legal framework for addressing cases of misreporting are its Articles of Agreement and the 1984 Guidelines on Misreporting and Corrective Action for the IMF’s general resources (plus analogous guidelines adopted in 1998 for the Poverty Reduction and Growth Facility (PRGF)). The Articles establish the obligations of member countries to provide the IMF with information it needs for its work and specify legal remedies—such as a temporary declaration of ineligibility to use the IMF’s resources—if a country breaches this obligation. The guidelines state that, if the Board has approved a country’s use of IMF resources on the basis of information that proves to be incorrect, the country is expected to repay the IMF promptly.

The Executive Board agreed to broaden the application of the tools for addressing misreporting. In particular, it will act to strengthen the guidelines by applying them to prior actions and other essential information, lengthening the two-year limitation, and applying them to outright drawings. The staff will return to the Board with detailed proposals for implementation. The Board also decided to make public appropriate information on each case of misreporting, after the Board had made its determination, and with Board review of the text.

The IMF’s procedures for gathering and using economic and financial information from members are being reinforced. These procedures have typically been among the institution’s strengths, as the process of assembling information to form an overall assessment of the economic situation provides the opportunity to cross-check, question, and refine the information initially received. IMF staff are taking steps to tighten these procedures further and will continue their efforts to ensure that the information on which the IMF’s decisions are based is the best available.

Summary

The Board agreed that in the past the IMF had been able to rely primarily on trust in members’ readiness to provide needed information and to use the IMF’s resources for the purposes envisaged. While it should be able to continue to operate on this basis, recent cases of misreporting had driven home the need to strengthen the IMF’s procedures. The IMF’s response to misreporting of information and the misuse of its resources combines three elements:

  • strengthening safeguards within member countries,
  • broadening the application of the available legal procedures, and
  • strengthening procedures for handling information in the IMF.

Annex: Information/Documents to Obtain from Member Country Central Banks Under the Safeguards Assessments Policy

  • Copies of audited (or unaudited if no audit is performed) financial statements for the past three years, together with related audit reports.
  • Copies of all management letters issued by the external auditors in connection with their audit of the financial statements for the past three years.
  • Copies of all audit reports (including agreed-upon procedures engagements) issued by the external auditors during the past three years.
  • A description of the central bank’s management structure, including the organizational reporting structure.
  • A description of the organizational structure and reporting lines of the internal audit department, including details of the senior management staff in the department and a summary of staff resources (experience and qualifications).
  • A summary of high-level internal controls in place for the banking, accounting, and foreign exchange departments of the central bank.
  • Listing of all reports issued by the internal audit department in the past three years and a summary description of findings. Potentially, copies of reports dealing with operational and financial controls during the same period.
  • Details of the full legal names of any subsidiaries of the central bank, and a description of their business and the nature of their relationship with the central bank. A listing of all correspondent banks.
  • A listing of all accounts held by government agencies with the central bank.
  • Copies of current legislation governing the central bank.

Program Design Issues: Inflation Targeting and Conditionally

The Executive Board met in January 2000 to discuss the implications of inflation targeting for IMF conditionality. 11 Directors noted that, in light of the growing consensus that price stability should be the main objective of monetary policy, formal inflation targeting had been increasingly used as a framework for monetary policy, typically in the context of flexible exchange rate arrangements. Inflation targeting generally implies that the monetary authorities’ discretion is constrained by the announcement of an explicit inflation target, accompanied by a considerable degree of transparency regarding the link between current monetary policy actions and the pursuit of that inflation target.

Directors saw no inherent obstacle to carrying out monetary policy on the basis of inflation targeting in the context of an IMF-supported program, and they considered the goals of the two to be broadly complementary. Indeed, in the case of Brazil, the IMF had already approved a program with some modifications to traditional conditionality prompted by the government’s inflation-targeting regime.

Successful inflation targeting requires central bank independence and other supportive institutional features, the absence of fiscal dominance, a reasonably good understanding of the inflation process, and a considerable degree of exchange rate flexibility. Although the staff paper did not discuss how frequently these conditions were likely to be met in emerging market economies, a number of Directors thought it essential to examine whether these conditions were in place in a given case before determining if it was appropriate to make use of the “reviews-based” approach to program monitoring proposed by staff. Under such an approach, monetary policy would be subject to periodic reviews focusing on recent inflation results, together with indicators of the implications of monetary policy for future inflation.

Directors generally noted that inflation targeting could be accommodated within the traditional structure of IMF conditionality, including a floor on net international reserves and a ceiling on net domestic assets. While this structure was designed mainly to safeguard IMF resources and check against excessively accommodative monetary policies that would jeopardize macroeconomic stability, Directors thought it could continue to serve those purposes under inflation targeting. A number of Directors, however, saw the possibility of inconsistencies between net domestic asset ceilings and inflation targeting in some circumstances, and consequent confusion about the country’s monetary policy priorities. It was generally acknowledged that this possibility warranted close attention and that the relationship between net domestic asset ceilings and inflation targets—the latter serving as the primary guide to monetary policy—would need to be made clear to the public.

At the same time, Directors noted that bringing conditionality more closely into line with the inflation targeting framework could help enhance the credibility of inflation targeting, and the effectiveness of monetary policy. Such congruence was particularly desirable because of the increasing transparency of the IMF, together with the greater transparency of central bank decision making required by inflation targeting.

Discussing the reviews-based approach to monetary policy conditionality, Directors underscored the importance of broad advance agreement between the IMF and the government on timely monetary responses to possible deviations from the targeted inflation path.

The reviews would be held quarterly, or more frequently if needed. If there were no issues of particular concern, completion of such reviews could be proposed on a lapse-of-time basis. At the same time, Directors emphasized that the main responsibility for day-to-day conduct of monetary policy should continue to reside with governments and that the IMF should not seek to micromanage the implementation of monetary policy.

Directors stressed the indispensable need to safeguard the IMF’s resources, regardless of the monetary policy framework. A floor on net international reserves would remain essential, under the reviews-based approach, as well as under traditional conditionality. Directors agreed that, in any case in which it was necessary to set the net international reserves floor allowing a significant margin for unprogrammed intervention, some mechanism would be needed to limit sterilization. Such a mechanism could entail a reaction function of monetary policy (how the central bank would adjust interest rates in response to threatened target breaches) to unprogrammed reserve losses, or simply the traditional ceiling on net domestic assets. The specific mechanism would have to be worked out case by case.

For an inflation-targeting country, the reviews-based approach had both advantages and disadvantages. Most Directors were therefore ready to support the staff proposal that the reviews-based approach be made an option for countries conducting monetary policy on the basis of inflation targeting. The choice of whether to use the reviews-based approach had to take account of the country’s economic circumstances. Directors believed, therefore, that the appropriate form of monetary policy conditionality should be decided on a case—by—case basis in consultation with governments.

Directors recognized the practical challenges entailed both in adopting an inflation-targeting approach and in implementing the reviews-based approach to conditionality. They suggested that the staff proceed cautiously, advising that further consideration be given to the broad issues related to a reviews-based approach; these included the role of current versus forward-looking indicators of policy, how to address likely data limitations, preparation of inflation forecasts, and similar issues. Directors agreed, however, that, in negotiating programs, the staff should be allowed to set monetary policy conditionality experimentally according to the reviews-based approach. This approach would be reviewed, possibly after about a year.

1Article I (v) of the IMF’s Articles of Agreement.
2As of April 30, 2000, SDR 1=US$1.31921.
3During FY2000, the IMF’s membership remained at 182 countries. The Federal Republic of Yugoslavia (Serbia/Montenegro) has not yet completed arrangements for succession to membership in the IMF following the breakup of the former Socialist Federal Republic of Yugoslavia. The Executive Board decided on December 13, 1999, that the country had until June 14, 2000, to complete such arrangements; on June 13, 2000, this period was extended until December 14, 2000. When these arrangements are completed, the IMF will have 183 members.
4The panel was chaired by Professor Richard Cooper, Harvard University, and included Joseph L.S. Abbey, Center for Economic Analysis, Accra, Ghana; Montek Singh Ahluwalia, Member, Planning Commission, India; Muhammad Al-Jasser, Vice-Governor, Saudi Arabian Monetary Agency; Professor Horst Siebert, President, Institute of World Economies, Kiel, Germany; Gyorgy Suranyi, President, National Bank of Hungary; Makoto Utsumi, Keio University, Japan; and Roberto Zahler, former President, Central Bank of Chile.
5Reserve tranche drawings, which represent members’ use of their own IMF-related assets and not use of IMF credit, totaled SDR 66.4 million by 11 members in FY2000, compared with 93 members drawing SDR 2.7 billion in FY1999. In both years, members drawing their newly created reserve tranche positions arising from the payment of their quota increases under the Eleventh Review accounted for the bulk of the drawings.
6See discussion of progress under the strengthened cooperative strategy for an update on the rights approach.
7The data in this section include the overdue financial obligations of the Federal Republic of Yugoslavia (Serbia/Montenegro), which has not yet completed arrangements for succession to IMF membership.
8Prescribed holders of SDRs are the African Development Bank, African Development Fund, Arab Monetary Fund, Asian Development Bank, Bank of Central African States, Bank for International Settlements, Central Bank of West African States, East African Development Bank, Eastern Caribbean Central Bank, International Bank for Reconstruction and Development, International Development Association, International Fund for Agricultural Development, Islamic Development Bank, Latin American Reserve Fund, and Nordic Investment Bank.
9Specific currency amounts consistent with these weights are fixed on the date on which the decision becomes effective. While these currency amounts remain unchanged for the subsequent five-year period, the actual weights of the respective currencies in the value of the SDR change on a daily basis as a result of changes in exchange rates.
10IMF support for commercial bank DDSR operations partially financed the upfront cost of these operations, to help members reach agreement with their commercial bank creditors. Set-asides (25 percent of access under IMF arrangements) and additional resources from augmentations (up to 30 percent of quota) could be used for instruments involving either debt or debt-service reduction. The setasides and additional resources could be released once the member had reached an agreement with its commercial bank creditors.
11Conditionality refers to the explicit commitments that member countries make to implement remedial policy measures in return for IMF financial support. These commitments ensure that the member is pursuing policies that will ameliorate or eliminate its balance of payments problems and that the IMF will be repaid in a timely way so that its limited pool of resources can be lent to others in balance of payments need.

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