8 Borrowing by the IMF
- Jacob Frenkel, and Morris Goldstein
- Published Date:
- September 1991
Jacques J. Polak has been a delegate to the Bretton Woods Conference, a senior official on the staff of the International Monetary Fund (IMF), and an Executive Director of the organization. I can think of only one other person who has had such a career, but the services of Jacques Polak were performed over a considerably longer period. His impact on the policies and practices of the IMF has been pervasive and will be enduring. As a close colleague of his in the longest stretch of his tripartite career, I have found it difficult to choose a single aspect of the IMF on which to contribute an essay in his honor. My choice has been determined finally by the fact that he was one of the small group that took the initiative to recommend and negotiate the first borrowing agreement and by the further fact that little has been written in a systematic way about the powers of the IMF to borrow, its practice in the exercise of the powers, and the effects of that practice.
I. Borrowing by IMF Under Article VII
Origin of Power to Borrow
The IMF has had a power to borrow under the first version and the amendments of the IMF’s Articles of Agreement (Articles).1 The origin of the power was the contest between John Maynard Keynes and Harry Dexter White on the fundamental character of the organization they foresaw, particularly in providing monetary resources to its member states. Keynes advocated an International Currency (or Clearing) Union that would be able to create a new international reserve asset, bancor, to meet the needs for liquidity of members in balance of payments difficulty. Members in surplus would willingly accept this asset.2 Keynes contemplated quotas for debit balances in the Union, but “[t]here need be no limit to the amount of a credit balance.”3 White, however, preferred an organization in which the burden on each member would not be open-ended or as extensive as whatever its surplus might be. He preferred a subscription equal to a defined quota, which would be negotiated and known. His view prevailed. A member would negotiate its original quota, and although the IMF might be willing to adjust quotas at any time, an adjustment could not be made without the member’s consent.4 The provision requiring the member’s consent was safeguarded by another provision, under which acceptance by all members was necessary for amendment of the safeguard.5 The political and financial importance of both the absolute and the relative sizes of quotas justified other safeguards. Decisions on the adjustment of quotas, whether the decisions related to a single member or to members in general, could be taken only by the Board of Governors and only by a high majority of the voting power of all members.6 As the Board of Governors was likely to be composed mostly of persons holding ministerial rank, they would probably give weight to political considerations that affected the distribution of power, benefits, and burdens. Furthermore, each Governor would be able to speak for his own country and would cast separately the number of votes allotted to the country for which he spoke, in contrast to the practice in the Executive Board in which most Executive Directors would perform their functions for a constituency of members and would reflect the views of the group in taking positions. All the safeguards mentioned here were in the original Articles and have been retained in the present version.
The explanation of the difference between the approaches of Keynes and White is obvious. Keynes expected the United Kingdom to be in deficit in its balance of payments, and his concern was to ensure that the new organization would have adequate resources for taking care of his country’s needs as well as the needs of other countries in a similar predicament during a postwar period of uncertain duration. White was confident that his country would be one of the few countries in surplus following the war, and would certainly have the largest surplus.
The compromise made to accommodate Keynes, at least to some extent, was the IMF’s power to borrow to augment the resources derived from subscriptions. Keynes cited this power in a letter to Joan Robinson, who, it seems, had criticized the project for an IMF in the form in which it was emerging. The power to borrow, he wrote, could be exercised in order to enable the IMF to waive the twelve-month and cumulative limits7 on a member’s outstanding use of the IMF’s resources and permit it to make a larger use.8 “The quotas,” he wrote, “are a minimum, not a maximum. The U.S. representatives were always eager to explain to us that this is strictly how they regarded them.” He made the further point that the decision to grant a waiver could be taken by a majority vote, by which he meant that a special high majority would be unnecessary. Nevertheless, he expected the IMF to be “very chary” of borrowing the currency of a member that was in short supply in the IMF, except to give that member an opportunity “to find another way out.”9 In expressing these views, Keynes seems to have been saying that a country in surplus that caused undue difficulties for other members could lend its currency to the IMF, while taking other measures to reduce or eliminate its surplus, and in this way avoid a declaration of scarcity by the IMF that would authorize other members to discriminate against the member in surplus.10
There is ample evidence to support Keynes’s version of the U.S view. The U.S. Treasury issued its Questions and Answers on the International Monetary Fund on June 10, 1944, a few days before the preliminary drafting conference at Atlantic City and the subsequent Bretton Woods Conference. The answer to Question 5 stated that:
The Fund may sell foreign exchange for additional local currency, even when its holdings exceed the prescribed limits, if the Board of Directors approves the sale and the member country is taking satisfactory measures to correct the disequilibrium or to reduce the excess local currency holdings of the Fund.11
The answer to Question 15 explained in detail why the United States preferred the approach based on quotas and subscriptions and rejected the approach of the Currency Union. The answer concluded with these words:
Fourth, if the operations of the Fund reveal a need for additional resources for its successful functioning, such resources can be secured through the borrowing power of the Fund, without the indirect compulsion inherent in the creation of credit.12
In the answer to Question 5, this view was expanded somewhat:
The Fund’s resources will probably be adequate for all ordinary needs of member countries. When the Fund has been strengthened and a larger proportion of its assets are in the form of gold, it will undoubtedly be able to meet even extraordinary needs for any particular currency or currencies. In the meantime, if the Fund should find its holdings of any member currency inadequate, it may borrow the needed amounts of that currency with the approval of the member country concerned and on terms and conditions agreed between them.13
The U.S. Treasury, therefore, did not expect that there would be much need to exercise the IMF’s power to borrow, and to this extent the Treasury shared Keynes’s opinion. The reasons, however, were different. Keynes was expressing a principle to guide the IMF’s exercise of the power: the IMF should invoke the power to give the member in troublesome balance of payments surplus sufficient time to deal with this disequilibrium. The Treasury’s explanation of the reason why exercise of the power would be infrequent was related to the IMF’s stock of gold. Members would pay part of their subscriptions in gold. Subscribed gold would be supplemented over time by the repurchase obligations of members using the IMF’s resources that accrued in gold, in accordance with the formulas prescribed by the Articles, and also by possible purchases of gold by the IMF from members.14 The importance of the IMF’s gold stock was that the IMF could compel a member to sell its currency to the organization in return for gold, thus reducing the need for borrowing by the organization.15 Keynes and White would have been surprised if they could have foreseen the abundant use the IMF has made of its original and its expanded powers to borrow. Notwithstanding the U.S. Treasury’s view on the use of gold, the Articles did not require the IMF to sell gold before trying to borrow. Nor was any priority given to borrowing, even though the power to borrow was set forth in the provision on replenishment before the power to sell gold. Any inclination to infer that one measure took priority over the other would have been incompatible with the language that preceded both powers: “The Fund may…take either or both of the following steps.” This formulation has been retained by the present Articles. The original and the current provisions of Article VII on replenishment are appended to this paper.
Problems of Interpreting Article VII
Article VII has given rise to many problems of interpretation, some of which are noted here:
Article VII has always included three powers of the IMF. In the original treaty, Article VII was headed “Scarce Currencies,” and the title of the three provisions in which the powers were set forth referred either to “scarcity” or to “scarce currencies.” First, the IMF could find that a general scarcity of a particular currency was developing. The IMF could then inform members of this fact, issue a report on the causes of the scarcity, and make recommendations for bringing it to an end. Second, the IMF could take either or both of two actions to replenish its holdings of a member’s currency described in the title of the provision as “scarce.” Third, if it was evident that the demand for a currency threatened the IMF’s ability to supply it, the IMF could formally declare the currency scarce. The effect was to authorize discrimination by other members against the issuer of the scarce currency. This last provision was the “scarce currency clause” of legendary importance in the negotiation of the original Articles.16
The provisions seemed to follow a logical order. A widespread or worldwide shortage of a currency might develop, and to counteract it the IMF could apply the sanction of private and public opprobrium. A scarcity in the world could lead to a scarcity in the IMF because of the drain on its resources. A member could prevent a scarcity in the IMF and could avoid the sanction of mobilized shame by lending to the organization. In borrowing, the IMF was not imposing a sanction, but if the member did not lend adequate amounts, the IMF could resort to the severe sanction of the scarce currency clause.
One problem raised by Article VII was whether a condition of resort to the second provision (borrowing) was action by the IMF under the first provision (the report) or possibly the third provision (the declaration of scarcity). Did scarcity have one, two, or three meanings under the three provisions? The IMF concluded that there were indeed three meanings and that they were independent of each other. The independence of the third from the first meaning was made explicit in the third provision (“whether or not it [the IMF] has issued a report…”). The IMF held that the independence of the second provision from the other two was implied, so that there was no reason to reduce the apparently unlimited scope of the discretionary authority suggested by the clause “if it [the IMF] deems such action [borrowing] appropriate.”17 This understanding gave the IMF a more effective discretion to borrow than any other conclusion, because it freed the IMF from the unpleasant necessity of imposing a sanction under the first or the third provision as a prelude to borrowing. For many years in the life of the IMF, sanctions were a rebarbative idea for conduct contrary to the purposes of the IMF, but in those years the breach of financial obligations was unthinkable.
The Second Amendment put the issue of the relationship among the provisions on the matter of scarcity beyond controversy. The heading of Article VII became “Replenishment and Scarce Currencies” instead of “Scarce Currencies.” The original order of the provisions was abandoned, and the provision giving the IMF power to replenish its holdings of a currency was placed first. In addition, the word “scarce” was suppressed in the amended title of that provision.
The IMF’s power to borrow has always been to “replenish” its holdings of a member’s currency.18 The ordinary modern meaning of the word is to fill up again, although there is an archaic meaning of simply filling a need completely, somewhat in the Biblical sense of fruitfulness. Was the IMF’s power limited, in accordance with the modern sense, to borrowing a member’s currency in an amount that raised the IMF’s holdings of the currency to the level, but not beyond, of the actual currency subscription made by the member originally or to the ideal currency subscription of 75 percent of quota if that amount had been exceeded originally?
An argument could have been made for a third limit: replenishment could increase the IMF’s holdings of a member’s currency to the level of the member’s quota. The argument would have run along these lines. The concept of replenishment applied to both borrowing and the obligation of a member to transfer its currency to the IMF in return for gold. At Bretton Woods, an inconsistency was pointed out between suggested provisions on borrowing and on the authority of members to buy their currency from the IMF with gold.19 The language of the latter proposal was that “a member country may repurchase from the Fund for gold any part of the latter’s holdings of its currency.”20 The purpose of this proposal was to harden the IMF’s resources by allowing a member to substitute gold for any part of its currency held by the IMF if the member was reluctant to have these holdings put into circulation by sales to other members.21
The inconsistency was that the IMF could require a member to provide its currency for gold, but the member could counteract this transaction at once or at any time later by reacquiring the currency with gold. The dilemma was resolved by allowing a member to purchase its currency with gold only to the extent that the IMF’s holdings exceeded the level of the member’s quota.22 The rationale of this limited authorization was that a member should be able at any time to avoid incurring the charges levied on the IMF’s holdings of the member’s currency in excess of quota.
An argument might have been made, therefore, that as the member would be able to buy with gold the IMF’s holdings of its currency in excess of quota, even if the excess was borrowed, replenishment should not enable the IMF to borrow currency that increased holdings beyond the level equivalent to quota. The argument would not have been persuasive, however, because a member intending to reacquire its currency, at least at the time of proposed borrowing by the IMF, could refuse to lend or to concur in loans of the currency to the IMF by others.
The decisive argument against the original or the ideal currency subscription or the quota as the limit up to which the IMF’s holdings could be increased by borrowing was that the IMF could arrange to borrow a larger amount but to call for it in installments that were disposed of in the IMF’s transactions in such a way that the limit, whatever it might be, was never transcended. Immediate disposition, however, made it an inconvenient and empty ceremony to negotiate loans for advances in installments. The problem would have been complicated further if there was little or no room for borrowing below the limit. Whatever the size of a borrowing, however, the effect of the immediate disposition of the contractual amount was that at the end of the day on which the IMF received the amount, its holdings of the currency would be the same as they were at the beginning of the day. It could be said, therefore, that replenishment was given the archaic meaning of filling the IMF’s need whatever it might be.
This meaning, however, has not been the only one the IMF has observed. Sometimes, the ordinary or modern meaning has guided practice and has had the effect of limiting replenishment to amounts that did not increase the IMF’s holdings of a currency beyond the level of the ideal currency subscription of 75 percent of quota. This practice was followed when the currency obtained by replenishment was to be retained by the IMF and not used in immediate transactions. The practice, though, was the consequence of pragmatic considerations rather than semantics. For example, before the Second Amendment of the Articles, if the IMF’s holdings of a member’s currency were increased above 75 percent of the member’s quota, repurchase obligations might accrue for the member that would require it to reduce the IMF’s holdings to the level of 75 percent. (It is for this reason that 75 percent has been referred to as the ideal currency subscription, because the obligation to repurchase could accrue simply because a member had made a larger original currency subscription.) Furthermore, if replenishment were allowed to increase the IMF’s holdings of a member’s currency beyond the level of quota, the member would be required to pay charges to the IMF on the holdings in excess of quota. The absurd situation would then have been that the member paid charges to the IMF while the IMF paid interest to the member on the borrowing.
If the accrual of repurchase obligations were the only pragmatic consideration, the level to be observed if the IMF retained currency received in replenishment would now be the quota. The Second Amendment substituted that level for 75 percent of quota as the level above which the IMF’s holdings of a currency are subject to an obligation of repurchase. The pragmatic considerations, however, are more complex: any addition of a member’s currency to the IMF’s holdings in the General Resources Account can affect the member’s position in the IMF by making the position less beneficial or more detrimental. For example, in some circumstances, the IMF’s acquisition of a member’s currency can reduce the amount of remuneration the IMF pays to the member. The reduction of this benefit can be suffered even though the IMF’s holdings are not raised to or beyond the “remuneration norm.” The norm is the percentage of a member’s quota that enters into the IMF’s calculation of the extent to which the norm exceeds the IMF’s average daily balances of the member’s currency. The IMF pays remuneration on the amount by which the average of daily holdings is below the norm.23
The practical importance of not retaining borrowed currency in the General Resources Account can create a dilemma. The IMF seeks to comply promptly with a member’s proper request for resources. To comply, the IMF may have an immediate need for the resources promised to it under existing borrowing agreements. Prompt compliance with unprogrammed calls for advances under borrowing agreements, however, can complicate a lender’s management of its reserves. The IMF had to adapt its practice as a condition of borrowing from the Saudi Arabian Monetary Agency (SAMA) to assist in the financing of transactions under the IMF’s policy on enlarged access. Under agreements of 1981 and 1984 with SAMA, the IMF undertook to give substantial advance notice of its intention to make calls,24 and it agreed also to make repayments on fixed dates.25 For similar reasons, the IMF established special value dates for transactions with members under the enlarged access policy financed with borrowed resources and for repurchases in respect of such transactions. 26 Currency received from SAMA before the IMF could use it in transactions or received from members before the IMF could use it in the repayment of borrowing from SAMA made it necessary to hold the currency in a suspense account pending use so as to avoid bringing the currency into the General Resources Account immediately on receipt and affecting the rights and obligations in the IMF of the issuer of the currency.27 The establishment of suspense accounts raises the question whether the IMF should borrow resources for unforeseeable future needs in contrast to borrowing resources to meet predictable requests by members.
The technique of the suspense account did not solve all problems, because eventually the currency would have to be brought into the General Resources Account for immediate use in transactions of the IMF with members or in operations to repay SAMA. These transactions and operations would be conducted on the basis of the SDR as the IMF’s unit of account. The SDR value of the currency at the time of disbursement by the IMF might differ from the SDR value at the date of receipt. The IMF decided, therefore, that it had an implied power to invest the currency in specified deposits or marketable obligations denominated in the SDR.28 Under another implied power, the currency could be exchanged at the time of deposit in the suspense account for the currency of another member in which an investment was to be made.
The power to borrow, therefore, has been a source of authority from which the IMF has been able to derive various implied powers that are deemed to be both necessary and appropriate to make the borrowing power effective. A condition for the recognition of an implied power under a treaty is subject to a third test: the power must not be inconsistent with the express provisions of the treaty. The insistence by a potential lender on certain terms as the conditions on which it is willing to lend does not automatically justify the conclusion that the terms are consistent with the express or implied provisions of the Articles. This principle was a source of controversy in the negotiation of the General Arrangements to Borrow (GAB), but finally it was agreed that the principle had to be observed.29
The IMF can borrow a member’s currency from the member itself or from any other source, whether located inside or outside the member’s territories. No limitation is placed on potential lenders: they can be the member whose currency is to be borrowed, other members, official institutions of the member or of any other member, nonmembers or their official institutions, international organizations, or private entities. No member or other entity, official or nonofficial, approached for a loan is compelled to lend. The terms and conditions of a loan are subject to agreement between the IMF and the lender, but as seen already the terms and conditions must be consistent with the Articles and must not be a pretext for what would be, in effect, an ad hoc modification of the Articles without observing the requirements for amendment.
If the IMF proposes to borrow a member’s currency from a lender other than the member, the IMF must obtain the member’s concurrence. The reason for this requirement is that the IMF should not interfere with the member’s domestic monetary policies or impede the member’s own ability to borrow, particularly in the market. The IMF is not empowered to manage the markets.
A subtlety lurks in the word “concurrence.” The corresponding word in the original Articles was “approval.” The Second Amendment made the substitution because the words have different connotations in the Articles and in the IMF’s practice. In seeking “approval,” the IMF is not entitled to exert pressure on the member to approve on the ground that there is a presumption the member will approve: the two parties are on an even plane. “Concurrence,” however, connotes a presumption in favor of the member’s acquiescence in the IMF’s request. Good faith requires that the member should have a bona fide reason for withholding concurrence and should explain its position to the IMF if concurrence is withheld.
The IMF has not borrowed from private lenders, although the Interim Committee of the IMF’s Board of Governors and other official bodies have shown tentative interest in the practice, usually by favoring study of it by the Executive Board and staff. The Bretton Woods legislation of the United States had provided that neither the President nor any person or agency acting on behalf of the United States should make a loan to the IMF unless Congress by law authorized such action. In November 1983, Congress amended the legislation by providing that neither the President nor any person or agency acting on behalf of the United States should consent to borrowing by the IMF, other than borrowing from a foreign government or other official public source, of funds denominated in U.S. dollars, unless the Secretary of the Treasury transmits notice of such borrowing to both Houses of Congress at least 60 days before the date on which the borrowing is scheduled to take place.
On March 15, 1985, the Treasury, acting in response to a statutory direction, transmitted a report to Congress expressing its opposition to proposals for borrowing dollars in the private market. Such borrowing, the Treasury concluded, “although feasible, could have an adverse impact on the cooperative international monetary character of the IMF and the ability of the United States to influence IMF policies.”30 It seems, therefore, that the United States is not likely to concur in a proposal of the IMF to borrow dollars in the market, unless the Treasury changes its attitude because the dangers foreseen in 1985 are thought to have disappeared.
In all versions of the Articles, the resources the IMF has been empowered to borrow under Article VII have been limited to “any member’s currency.” This limitation excludes authority to borrow the currency of a nonmember, even from the nonmember itself, and even though the IMF has borrowed from Switzerland as a nonmember. The fundamental reason for the limitation is that, although the Articles require each member and the IMF to maintain the value of the IMF’s holdings of the member’s currency, there would be no such obligation on the IMF, members, or a nonmember to maintain the value of the IMF’s holdings of the nonmember’s currency if the IMF could borrow that currency.31 Even though a nonmember’s contractual obligation to lend to the IMF may be and has been expressed in the SDR as the IMF’s normal unit of account,32 the nonmember would not be bound by that form of denomination to maintain the SDR value of the IMF’s holdings of the nonmember’s currency if the IMF could receive it. When the IMF borrowed from Switzerland in the past, the agreement specified that advances under it were to be made in a member’s currency.33
Another consequence of the limited power of the IMF to borrow under Article VII is that the IMF has not been able to borrow gold or SDRs. Even before the role of gold was reduced by the Second Amendment, the IMF could not borrow gold. The fundamental reason was that the IMF was not authorized to sell gold to members requesting use of the IMF’s resources under Article V. The most important use the IMF could make of gold was to compel a member to provide its currency for gold in replenishment of the IMF’s holdings of that currency. Therefore, if the IMF needed to replenish its holdings of a currency, the IMF could borrow the currency or sell gold already held to obtain the currency but could not borrow gold in order to sell it for the currency.
Another, perhaps less important, reason for denying the IMF the power to borrow gold may have been the paradox that the power might reduce the IMF’s stock of gold. The lender might insist on repayment in gold, but the repurchase obligation of a member receiving balance of payments assistance from the IMF, either with the borrowed gold (if that transaction had been permitted by the Articles) or with the proceeds of the sale of borrowed gold, might not accrue in gold. The provisions of the Articles on repurchase were tightly drawn and mandatory. If, then, the IMF had been authorized to borrow gold and exercised that power with a contractual obligation to repay in gold, the IMF would have had to draw down its gold holdings to discharge its undertaking.
One of the modifications of Article VII by the Second Amendment was the substitution of SDRs for gold as the resource with which the IMF can require the replenishment of its holdings of a currency.34 This change was one of the many such substitutions made throughout the Articles in order to diminish the role of gold. Although an objective of the Second Amendment was to make the SDR “the principal reserve asset in the international monetary system,”35 the IMF was not empowered to borrow SDRs. An effort was made to include this power in the revised Articles, but the effort did not succeed. The refusal may seem all the more surprising because although the IMF could not provide gold to members for balance of payments assistance, the IMF can now provide SDRs for this purpose.36
It follows that the reason for denying a power to borrow SDRs cannot be that the IMF is unable to make them available to a member as balance of payments assistance. If the IMF were empowered to borrow SDRs, it would be able to provide them to members. These members might have to dispose of the SDRs at once for currencies, if, for example, the member was intervening in the market or discharging obligations. It was deemed advisable, therefore, to empower the IMF to borrow currency only and not SDRs.
A more powerful motive for objection by some negotiators may have been the fear that if the IMF were able to borrow SDRs, it might be tempted to make allocations in the hope of being able to borrow a substantial proportion of them, instead of seeking an increase in quotas. Adjustment of a member’s quota and loans to the IMF require legislative approval in some countries, including the United States, but support for an allocation of SDRs might not. The uneasiness of the U.S. Congress about allocations is evident in a statutory enactment of 1983, which provides that neither the President nor anyone else acting on behalf of the United States shall vote to allocate SDRs without consultations, at least 90 days prior to any such vote, by the Secretary of the Treasury with the Chairman and ranking minority members of specified committees and appropriate subcommittees of the Senate and the House of Representatives. The consultations must include an explanation of the consistency of the proposed allocation with the Articles, and in particular with the criterion of a long-term global need to supplement reserves as it appears in the Articles.37
Against the background of this legislative provision, consider a procedure that has been suggested for funneling SDRs into the General Resources Account of the IMF notwithstanding the inability of the IMF to borrow SDRs for use in transactions conducted through that Account. The IMF would conclude that the conditions of the Articles for an allocation of SDRs were met, but a decision would be taken only if there was the assurance that a sufficient number of newly allocated SDRs would be brought into the General Resources Account under the following scheme. A participant (Patria) would agree to lend to the IMF an amount of the currencies of other participants equivalent to the SDRs Patria had agreed to make available to the IMF under the scheme, and the IMF would undertake in the borrowing agreement to use the borrowed currencies only in accordance with the scheme. Simultaneously with this operation, the IMF would purchase SDRs from Patria with the currencies borrowed from it.38 When the arrangement had run its course, the IMF would resell to Patria, for the currencies of other participants, the amount of SDRs the IMF had received from Patria,39 or would pay the equivalent of them in currency if the IMF could not provide SDRs. Other steps would be necessary to restore the situation of all parties, including the members that benefited from the IMF’s acquisition of the SDRs. Each step in this series, taken alone, would be authorized by the language of a provision of the Articles.
The weakness of the scheme is that in some and perhaps many legal systems such a scheme would be considered a “step transaction.” All the steps would be treated as a single transaction designed to achieve an objective contrary to law. Thus, in England, the House of Lords, the highest judicial tribunal, has held, in United City Merchants (Investments) v. Royal Bank of Canada  1 A.C. 168, that an even longer staircase constituted a “step transaction” and was really “a monetary transaction in disguise” designed to evade exchange control provisions. According to this analysis, the scheme described above would be considered a borrowing of SDRs in disguise and ultra vires.40The principle of good faith in the interpretation of treaties is fundamental in international law and should require the conclusion that the step transaction described here would be a détournement de pouvoir. If there is an ambiguity or an inadvertent gap in legal provisions, courts may be less likely to invalidate a step transaction, but they are unlikely to tolerate an attempt to evade a prohibition or a denial of authority. The absence of an express power of the IMF to borrow SDRs is neither ambiguous nor inadvertent.
The IMF can borrow currencies under Article VII only for use in “transactions” conducted through the General Resources Account. The IMF has no power to borrow for the purposes of the other two Accounts of the General Department (namely, the Special Disbursement Account and the Investment Account). Furthermore, the IMF is unable to borrow for the purpose of “operations,” even if they are conducted through the General Resources Account. The Articles define “transactions” as exchanges of monetary assets by the IMF for other monetary assets, and “operations” as other uses or receipts of monetary assets by the IMF.41 The most obvious “transaction” is the IMF’s sale of currencies or SDRs in return for the purchasing member’s currency. The repayment of borrowing by the IMF is a leading example of an “operation.” When the IMF repays, it discharges an obligation and does not receive an asset: the IMF gets nothing that it can hold or use.42
The Second Amendment brought about a reduction in the IMF’s power to borrow by making two changes in the Articles. First, authority to borrow if the IMF deems such action appropriate to replenish its holdings of any member’s currency was qualified by adding “needed in connection with its [the IMF’s] transactions.” Second, definitions of “transactions” and “operations” were included in the Articles for the first time.
It follows from the definitions that the IMF is unable to borrow currencies to repay its indebtedness. A reason for this limitation is that members are required to terminate their use of the IMF’s resources on time, and the IMF is expected to manage its financial activities in such a way that it should have no difficulty in repaying its indebtedness without incurring new indebtedness. Some of the negotiators of the Second Amendment were not enthusiastic about borrowing and even more were uncomfortable with the prospect of prolongation of the IMF’s indebtedness. In addition, the negotiators of the Second Amendment thought it desirable to avoid any implication that because the IMF had a power to borrow to repay its indebtedness, the IMF might be willing to permit use of the IMF’s resources by members beyond the assigned period. Yet another reason for the change in the power to borrow was the nervous reaction of some negotiators to the newly minted definitions of transactions and operations. Transactions were reasonably clear and limited, but the concept of operations was a residual category of unlimited and undefined scope. The breadth of the word “operations” was troubling and provoked the fear that it might include questionable activities, although no examples were cited. Inability to foresee examples gave rise to an anxiety that was relieved by limiting the power to borrow.
Lenders could be confident that when a member repurchased in respect of a transaction with the IMF financed with borrowed resources, the IMF would necessarily have the resources with which to repay the lender if the borrowing agreement correlated repurchases by members and repayments by the IMF. To encourage potential lenders further, the IMF has sought to endow claims by lenders with attractive characteristics. One characteristic has been that a lender is able to obtain repayment by the IMF before the due date if unfavorable changes develop in the balance of payments position of the lender.43
The assumption that the IMF will have no difficulty in repaying a lender with ordinary resources when a member repurchases in respect of a transaction financed with the borrowing cannot be made when a lender requests early repayment. To give the lender confidence of early repayment, the IMF has negotiated contractual rights to borrow from other lenders to repay a lender requesting early repayment. The IMF negotiated such a term before the Second Amendment when the IMF borrowed from a group of lenders under a single agreement with them or from a number of lenders under individual but standardized agreements in support of the same specified policy of the IMF. The GAB falls within the first of these two categories; the agreements for loans in support of the oil facilities of 1974 and 1975 and the supplementary financing facility (SFF, 1977) fell into the second category.
A term of this kind had become so entrenched in the IMF’s practice that the term continued to be included in the GAB when it was revised in 1983, five years after the Second Amendment. As the repayment of a loan is an “operation” of the IMF and not a “transaction,” borrowing to make the settlement is not authorized by the Second Amendment. The IMF has suffered a regrettable loss of authority. The term in question is now ultra viresand should be deleted from the GAB. Even if the term is not deleted, a participant in the GAB could validly refuse to lend for what was interpreted to be an ultra virespurpose.
Efforts to Authorize Borrowing for “Operations”
In the drafting of the Second Amendment a proposal was made to include operations among the activities for which the IMF could borrow. The supporters of the suggestion were content not to insist on it against the opposition, because they assumed that the IMF would manage its currency resources in such a way that the amount to be borrowed for transactions could be estimated after making allowance for the resources needed to finance operations. As a precaution against too lavish or too loose an estimate of the amounts to be borrowed for transactions, however, the word “needed” was introduced into the provision to give the impression that estimates should be conservative. The fact that members could be compelled to accept SDRs for replenishment of the IMF’s currency resources made some drafters more willing to draft a narrower provision on borrowing than had been included in the original Articles.
Toward the end of the negotiations on the Second Amendment, there was a return to the issue of borrowing for operations. A strong attempt was made to include in the Articles authority for the IMF to engage at least in all operations and transactions in SDRs that were permitted between members, between members and other holders of SDRs prescribed by the IMF, or between prescribed other holders.44 The argument for the proposal was the illogicality of a narrower authority for the IMF itself than for members and other holders of SDRs. The main argument in opposition was again uncertainty about the categories of future operations in SDRs that members and other holders might be permitted to engage in. This argument prevailed, though unresponsive in logic, because at the late stage at which the proposal was made there was widespread reluctance to endure further delay in completing the already lengthy negotiation of the Second Amendment.
The advocates of the idea that the IMF should be authorized to engage in all the categories of operations and transactions in SDRs that were permitted for others then retreated to an even more humble proposal. The IMF should be authorized at least to engage in the one operation of borrowing SDRs. Impatience to wind up the negotiations was responsible for rejecting this proposal also, but there was another reason for opposing it. Some of the negotiators were discomfited by the thought that the IMF might pay interest on the borrowing of SDRs at a rate higher than the rate of interest paid on holdings of SDRs and the rate of remuneration paid to members whose currencies were used in the IMF’s activities.45
The Executive Board is the organ that exercises the IMF’s power to borrow. As a special majority for the exercise of the power is not required, the Executive Board can decide to borrow by the basic, which is also the lowest, majority for taking decisions: the majority of the votes actually cast.46 The basic majority continues to suffice for decisions to borrow, notwithstanding the explosive increase in the number of categories of decisions for which special majorities were made necessary by the Second Amendment. A reason for the modest majority is that a decision to borrow does not bind any member or other entity to lend or any member to concur in a borrowing when concurrence is necessary.
The majority for decisions to borrow implies that they were not considered matters of high policy involving political interests or the development of the international monetary system. They were regarded as operating decisions, much like decisions to adopt policies on the use of the IMF’s resources and to approve transactions under the policies, for which the same majority suffices. Sales of gold by the IMF provide the IMF with additional resources in the form of currency, and therefore are still a form of replenishing currency resources, even though the sales are now authorized by Article V instead of Article VII. That sales of gold presuppose willing purchasers heightens the similarity to borrowing currency, and so too does the fact that if the IMF sells gold, it must consult the member for whose currency the gold is to be sold. The Second Amendment, however, is designed to prevent restoration of the role of gold by the IMF. Therefore, obligations with respect to gold, including the obligation of members to purchase gold from the IMF for the replenishment of its currency resources, have been abrogated. Decisions by the IMF to sell gold under its present residual powers on gold require a majority as high as 85 percent of the total voting power of the membership.47
Established Encouragements to Lend
The Articles offer two special benefits to members that can be considered encouragements to lend or rewards for having done so. One benefit is that for two categories of decisions related to the use of the IMF’s general resources, a member’s voting power is increased on the basis of net sales by the IMF of the member’s currency. The amount of the increase is limited to ensure that voting power will not be modified too radically, particularly for the benefit of the strong at the cost of the reduced voting power of the weak. The formula for the calculation permits an increase that takes account of the IMF’s sales of subscribed and borrowed currency up to a maximum amount equal to the member’s quota.48 The maximum effect of the formula is that the adjustment of voting power cannot exceed 25 percent of the voting power based on quota. Adjustment, however, has not had much influence in the affairs of the IMF. The categories of decisions for which adjustment is required are few, the size of adjustments is not substantial, and the occasions on which adjustments could affect the outcome are perhaps rare. It is unlikely that the adjustment of voting power has been a real incentive for members to lend to the IMF.
The second benefit, and probably a more effective one if members are in a strong enough position to make loans, is offered by a different provision. The two members that have made available to the IMF the largest average amounts of resources in use in the two years before a biennial election of Executive Directors may each appoint an Executive Director for the next biennial period if these members do not appoint an Executive Director because they have one of the five largest quotas.49 The calculation for this purpose takes into account average resources subscribed or lent by a member and in outstanding use without limit. This provision does not adjust voting power and so can produce no distortion in it among members.50
Aspects of Practice Under Article VII
Reasons for Borrowing
The IMF has never attempted to formulate a general policy on when to initiate negotiations to borrow (or on when to compel replenishment by sales of gold before the Second Amendment or by sales of SDRs now). The Articles are admirably vague in providing only that the IMF may borrow if it “deems such action appropriate.” It has been said sometimes that subscribed resources take care of normal needs of the IMF and that borrowing can take care of abnormal or exceptional needs. It is, of course, difficult to distinguish between normal and abnormal or exceptional needs, particularly in view of the frequency with which the IMF has entered into agreements to borrow. Four of the last five Managing Directors of the IMF, including the present Managing Director, have taken the initiative to propose borrowing, and the fifth was in office when the First Amendment, to create the SDR, was negotiated.
Abnormal or exceptional need, if indeed there is such a criterion, embraces a variety of ideas, which may be recognized either separately or in some sort of combination as the justification for borrowing in the circumstances that have developed. One idea is that a current or prospective demand for use of the IMF’s resources places, or is likely to place, an uncomfortable strain on the resources that are, or will be, suitable for use. A second idea is that the international monetary system faces a present or looming threat. The inadequacy of the IMF’s sources, even if there is no other alleged threat to the system, is sometimes considered a threat in itself. A third idea is that an improvement in the international monetary system is within reach with the help of additional resources.
Inadequate resources by hypothesis make the case for replenishment according to the first idea. To defend the system against threat or to achieve improvement of the system may make replenishment necessary or advisable to enable the IMF to do what is appropriate in the circumstances. It is difficult to be categorical in selecting a single motive for each resort to borrowing. One example of borrowing51 in which the predominant impulse can be considered relief from strain on the IMF’s resources is the borrowing to help finance the enlarged access policy (1981). The purpose of the policy has been to “provide balance of payments assistance to members facing serious balance of payments imbalances that are large in relation to their quotas”52 and needing a relatively long period for adjustment and a maximum period for repurchase longer than the traditional three to five years.
Present or prospective strain on the IMF’s resources may be the result of outstanding use or reasonably foreseeable requests of considerable magnitude because of the number of existing policies of the IMF, the unusually large amounts that can be provided under one or more of them, commitments to provide resources under stand-by arrangements already approved by the IMF, delay in the effectiveness of a general review of quotas, or a combination of some of these circumstances. Delay in the effectiveness of the Eighth General Review of Quotas showed that borrowing for a brief period might be advisable as well as borrowing for longer periods to relieve both short-run and more prolonged strain.
Borrowing by the IMF to finance transactions under its oil facilities of 1974 and 1975 can be regarded as an example of borrowing to resist a threat to the international monetary system. The policy was designed to assist members to deal with the impact on their balances of payments of the increased costs of importing petroleum and petroleum products without the introduction or intensification of restrictions on trade and payments.
The GAB is an example of borrowing to facilitate an improvement in the international monetary system. The GAB, which entered into force on October 24, 1962, is of historic interest for many reasons, including the fact that it was the first experiment by the IMF in arranging to borrow. The environment in which the GAB was negotiated was described as follows in the original preamble: “In order to enable the International Monetary Fund to fulfill more effectively its role in the international monetary system in the new conditions of widespread convertibility, including greater freedom for short-term capital movements,….”53
The GAB was intended to help the IMF improve the system by encouraging the spread of convertibility and freedom for exchange markets that began at the end of the 1950s, but the GAB demonstrates the difficulty of choosing a single motive to explain a borrowing arrangement. One reason why it seemed advisable to consider borrowing was an announcement by President Kennedy that the United States might use the IMF’s resources. The announcement was welcomed but created concern that the IMF’s resources might then be inadequate to meet the requests of all members that might need assistance. Therefore, assurance of the adequacy of the IMF’s resources in the special circumstances that were foreseen was an important objective of the GAB.
The preambular language of the GAB as quoted above was changed in 1983 so that it now reads: “In order to enable the International Monetary Fund to fulfill more effectively its role in the international monetary system,....”54 Thus, the emphasis on the original motive for the GAB has been softened, and the primary purpose is more the defense than the improvement of the international monetary system. Even the original text of the GAB was ambiguous in this respect, because it referred also to borrowing in support of an exchange transaction or stand-by arrangement of the IMF that the Managing Director considered necessary “to forestall or cope with an impairment of the international monetary system.” This language, as well as other provisions, which reflected the sense that the GAB was for the benefit of the United States and its hegemonic currency, or mainly for the benefit of that member and the dollar, is still present in the current text. The GAB is now usually regarded by members and others as an arrangement reserved for dealing with emergencies that threaten the system.
Although a strain on the IMF’s resources has not been considered in itself the justification for invoking the GAB, the need for supplementary resources has always been a condition. In other words, the GAB is not available even if there is a need to replenish the IMF’s resources unless there is an actual or threatened impairment of the international monetary system, but equally the GAB is not available even though there is an actual or threatened impairment if the IMF can respond to it effectively with the resources already available to it.
Special Policies and Transactions
It will be apparent from the discussion so far that the IMF has borrowed in support of such special policies on the use of its resources as the oil facility, the SFF, and the enlarged access policy. The IMF concluded that it would not have been able to establish such policies without borrowing. In addition, however, the IMF has borrowed, not to finance a special policy, but to finance commitments under stand-by arrangements or transactions under its basic policy, the so-called credit tranche policy. The GAB is an arrangement that was designed for this latter purpose and was not associated with a new policy on the use of the IMF’s resources that the IMF would have been unable, or at least reluctant, to establish without the assurance of borrowing specifically in support of the policy.
The existence of the GAB deterred participants from lending to the IMF outside those arrangements to finance assistance under the credit tranche policy. In the 1960s, there was some disposition within the IMF staff to negotiate a ring of bilateral borrowing agreements so as to avoid the complicated procedures of the GAB and to get firm assurances of loans by individual members. It was hoped by this strategy to circumvent the obstruction the participants in the GAB had erected by agreeing among themselves that their joint acquiescence would be necessary as a condition of lending by any of them under the GAB. In addition, the strategy might have enabled the IMF to avoid the demand for concomitant sales of some of its gold that the participants, when approached for loans, had insisted on as a condition of their acquiescence in activation of the GAB. The efforts of the IMF to negotiate a competing ring of bilateral agreements failed.
In 1966, however, the IMF did enter into a bilateral borrowing arrangement of a unique character in its practice. Italy had accumulated large reserves of U.S. dollars and wished to obtain a guarantee in some form of the gold value of at least part of these holdings. Italy would probably have requested the conversion of some of its holdings with gold or lire by the United States. Lire could be purchased by the United States from the IMF for the conversion of dollars under Article VIII, Section 4, the provision on the obligation of a member to convert foreign official holdings of its currency. If the United States purchased lire under the provision, the effect would be to increase the entitlement of Italy to make purchases from the IMF, the value of which was guaranteed in relation to gold. A conversion by means of such a transaction by the United States, however, was not feasible at the time because the IMF’s holdings of lire were at too low an ebb. The solution was an arrangement by which the IMF borrowed lire from Italy and sold them in a transaction with the United States, which used them to redeem Italy’s holdings of an equivalent amount of dollars. As a result of this arrangement, Italy obtained a right, guaranteed in gold value, to repayment by the IMF in lire or another convertible currency or in gold itself.55 The financial terms of the agreement to borrow from Italy were patterned on those of the GAB.
The arrangement as described above provided an impetus for further efforts on the part of the management and staff of the IMF to arrange a series of bilateral loan agreements of a stand-by character. They could be either in standard form or they could vary with the circumstances and according to the wishes of a potential lender. To promote the idea, it was suggested that the borrowings might be used exclusively for financing members’ transactions in the gold tranche.56 The object was to induce members to lend by offering them a guarantee of the safety of their gold tranche—their reserve assets in the IMF. The offer was not a sufficient inducement, perhaps because gold tranches seemed safe enough, and no arrangements of the kind proposed were entered into.
For the present purpose, the borrowing from Italy demonstrates the flexible use that can be made of Article VII, Section 2. In particular, the episode shows that borrowing is feasible even if it is not in support of a new policy of the IMF on the use of its resources, or associated with an improvement in the international monetary system, or intended to forestall or deal with a threat to the system. It might be said, however, that in protecting the gold stock of the United States by making it unnecessary for Italy to demand gold from the United States in performance of its undertaking to buy and sell gold with other members for the settlement of international transactions, the borrowing helped in a modest way to avoid a threat to the system.
Joint and Single Lenders
Adistinction has been drawn between borrowing by the IMF from a group of lenders jointly and borrowing from lenders separately. The latter kind of borrowing may be from a single member or from a number of members under individual agreements but for a common purpose. The archetype of joint lending is the GAB. The joint character of the arrangement is evident, for example, in the provision that the GAB was not to become effective unless a specified number of potential participants with a specified total of credit commitments adhered to the GAB as contracting parties. Other terms provide for joint procedures of the participants—which they have supplemented by understandings among themselves—and for proportionate loans of the currencies of participants in a borrowing, as well as proportionate repayments to lending participants. A feature of an agreement such as the GAB is that as there is only one agreement between the IMF and the participants as a group, the terms and conditions are necessarily the same for all participants unless special provisions are included for a nonmember participant, such as those made for the Swiss National Bank.
A joint arrangement such as the GAB can be distinguished from the practice followed in borrowing from 7 members or central banks to help finance the 1974 oil facility and from 12 such lenders for the purpose of the 1975 oil facility. The IMF established standard terms and offered them to potential lenders, but subject to the understanding expressed in the IMF’s decision to borrow that the terms and conditions could be adapted for good reason in individual cases, such as domestic legal requirements or the character of the lending institution. Clearly, this qualification was not meant to encourage substantive departures from the standard form of agreement, and in particular from the financial terms. The IMF did not enter into a joint agreement with all lenders under these arrangements. The possible lenders to be approached for the GAB and the oil facility arrangements were chosen by the IMF, but the lenders for the oil facility did not constitute themselves into a group or follow common procedures. Nevertheless, the IMF’s decision to authorize borrowing for the oil facility contained undertakings on proportionate calls for advances under the individual agreements and on proportionate repayments. These undertakings were not included in the agreements and so were not subject to individual negotiation.
A feature of the agreements, however, was that the IMF could call for loans from a lender under an existing agreement either to finance transactions under the oil facility or to repay a borrowing by the IMF from a lender under another agreement of the same kind. This term was evidence that the lenders regarded themselves as having common interests.
The provision enabling the IMF to borrow to repay indebtedness incurred to finance transactions under the oil facility followed the precedent of the original GAB. Under that arrangement, if the IMF’s holdings of currencies in which early repayment of a participant’s claim should be made were not wholly adequate, the IMF could approach individual participants to provide the necessary balance under the GAB. They were not bound to make loans for this purpose, and therefore the GAB prescribed the form in which the IMF would make repayment if they refused to lend. Borrowing to repay indebtedness under the original GAB (or the oil facility) created no legal problem, because until the Second Amendment became effective the IMF’s power to borrow was not restricted to the financing of “transactions.” It will be recalled that the provision of the GAB on borrowing to repay indebtedness57 has not been amended in the revised GAB and that the provision cannot be reconciled with the present Articles.
The arrangements to borrow from 14 members and central banks to finance the SFF followed the model of the earlier arrangements to finance the oil facility. The IMF entered into individual agreements but again based on a common form. The IMF reserved somewhat more flexibility to accept departures from that form: the terms and conditions would be “uniform to the maximum extent possible.” The IMF undertook a commitment to observe proportionality in calling for advances, but again with the prospect of greater diversity under the SFF. For the purpose of the oil facility, the IMF would “take into account” the formula for proportionality, but in the case of the SFF the IMF would observe the formula “subject to such operational flexibility as the Fund may find necessary.” The IMF gave no commitment on proportional repayments. The agreements included authority to borrow from a lender to repay another lender under the SFF, but these agreements also were entered into before the Second Amendment.
The discussion so far has noted three distinct techniques for borrowing: a joint agreement with lenders to finance transactions of the IMF but not for the purpose of a special policy; a set of separate agreements in more or less standardized form to finance transactions under a special policy of the IMF; and a single agreement to finance a single transaction of an unusual character. All these techniques have provided for the lender to make loans to the IMF. Two further techniques will now be noted. One of them has been an agreement with the IMF in such form as is appropriate when a lender links its lending in some way with the GAB, and therefore not for the purpose of financing transactions under a special policy of the IMF. The agreements in this form have been few but diverse in form and content.
In 1974, the Swiss Confederation entered into an agreement with the IMF under which the Confederation undertook to consider lending resources directly to a participant in the GAB when the IMF activated the GAB for the benefit of the participant. The terms and conditions of this agreement with the IMF were to some extent, but not broadly, assimilated to those of the GAB.
In contrast to this agreement, the Swiss National Bank, in 1976, entered into an agreement with the IMF to lend to the IMF for the purpose of helping to finance transactions under a stand-by arrangement approved by the IMF for the United Kingdom. The IMF had activated the GAB for the benefit of the United Kingdom under the stand-by arrangement. The terms and conditions of this agreement with the Swiss National Bank were closely assimilated to those of the GAB. Again, in 1977, the Swiss National Bank entered into a similar agreement with the IMF in similar circumstances, but on this occasion for the benefit of Italy.
The borrowings by the IMF under the 1976 and 1977 agreements were not made under the 1974 agreement with the Swiss Confederation, and they differed from that earlier agreement in expressing a commitment related to a specific stand-by arrangement of the IMF instead of a general understanding not designed for the benefit of a particular member. These two agreements can be grouped with the agreement to borrow from Italy for the purpose of facilitating the conversion of dollar holdings—even though the purpose of the two agreements was not unusual—rather than grouping them with agreements of general association with the GAB. The Swiss National Bank became a participant in the GAB in 1983, which raised the number of participants from 10 to 11, and eliminated the need for an association agreement on the part of Switzerland.
The other agreement of association with the GAB was entered into by Saudi Arabia on the occasion of the revision and substantial enlargement of the GAB in 1983. Most of the provisions of this association agreement parallel corresponding provisions of the GAB. The association agreement, like the GAB, is of a stand-by character, running for five years but subject to renewal, with the expectation that it will be renewed. In this respect, the GAB and the association agreement of Saudi Arabia differ from all other borrowing agreements of the IMF so far, because these other agreements have not been timeless in concept. They have been designed for financing particular policies that are subject to expiration or for financing a specified stand-by arrangement or transaction.
The fifth technique to be noted relates to borrowing by the IMF in accordance with agreements for financing transactions under the enlarged access policy. Of these 22 agreements with members, central banks, and the Bank for International Settlements (BIS), all have been for borrowing over the short term, 1 over the medium term, and 18 over the longer term. The technique of these agreements differs from other techniques for borrowing from a number of lenders in support of the same policy on the use of the IMF’s resources. The difference is not that individual agreements have been entered into, but that the agreements have been entered into at different dates over a substantial number of years, are not standardized, and indeed vary much more among themselves than under any other technique for borrowing from more than one lender for a common purpose. The agreements contain little evidence of an interrelationship among them, even though the enlarged access policy was not to become effective until the borrowing agreements contemplated by the IMF were concluded. Even if there is little or no legal interrelationship among agreements, individual lenders may have resolved not to enter into an agreement to lend unless other prospective lenders undertook a similar obligation.
Agreements to help finance transactions under the enlarged access policy are examples of the fifth technique. A complex agreement for medium-term borrowing for this purpose was entered into by the IMF with SAMA in 1981, followed by a supplementary agreement in 1984 and amendments in 1986. A few terms of these agreements have been incorporated in other agreements, but on the whole the agreements with SAMA have not been a model for wider use. In 1981, the IMF entered into an agreement with the BIS in support of the enlarged access policy, but in a form that differed from the agreement with SAMA and from pre-1981 agreements. Also in 1981, the IMF decided (”the readiness decision”) that it would stand ready to enter into an agreement with any member, the central bank or other agency of any member, or any official entity prescribed by the IMF as a holder of SDRs, on terms and conditions substantially the same as those of the 1981 agreement with the BIS, except as those terms and conditions might be adjusted and supplemented by the provisions of the readiness decision. The IMF entered into 17 agreements on the model of the 1981 agreement with the BIS.
Later in the 1980s, the IMF entered into agreements with the BIS, SAMA, the Government of Japan, and the National Bank of Belgium, but not in accordance with the terms of the readiness decision. Subsequent amendments were made in all these agreements. The terms and conditions differed from the model of the readiness decision and differed even among these four agreements, notwithstanding the fact that the IMF considered them at the same time and that they entered into force at the same date.
An unusual feature of the 1981 agreement with SAMA is that although there was no explicit relationship between that agreement and any other agreement that the IMF might enter into, SAMA obtained a guarantee that, given the contingencies mentioned below, it too would have the benefit of any more favorable terms enjoyed by other lenders under subsequent agreements entered into by the IMF. The subsequent agreements thus referred to were not confined to those that might be for the support of the enlarged access policy, but the period of two years mentioned in the next paragraph as part of the first (but not the second) contingency gave some assurance that the other agreements also would be for financing the enlarged access policy.
The contingencies for activation of the guarantee were that the IMF entered into an agreement with a member or its central bank (1) during the period of two years following entry into force of the agreement with SAMA, on financial terms in the later agreement that could reasonably be regarded by either SAMA or the IMF as more favorable to the lender than those of the agreement with SAMA, or (2) contained provisions under which the IMF waived immunity from judicial process with respect to the settlement of disputes. In either situation, SAMA and the IMF would consult at the request of SAMA and with a view to amending the SAMA agreement in order to give SAMA comparable financial terms or a comparable waiver of immunity with respect to loans by SAMA under the agreement and notes issued by the IMF as a result of borrowing under the agreement. A similar consultation for the purpose of reaching agreement on an amendment is to be held at the request of SAMA if, at any time while any loan by SAMA under the agreement is outstanding, the IMF issues notes containing a more extensive waiver of immunity than has been made available to the holders of notes, whoever they might be, issued by the IMF under the SAMA agreement.
SAMA insisted on another safeguard: if at any time while a loan by SAMA under its agreement was outstanding, the IMF gave security in respect of indebtedness under any other borrowing agreement, SAMA was to have equal and ratable security for outstanding loans under its agreement. In addition, if the IMF created other indebtedness that ranked ahead of its indebtedness under the SAMA agreement, repayment to SAMA was to rank pari passu with such other indebtedness in respect of the priority of repayment.
In view of the diversity of practice developed so far, it may be useful to express some broad distinctions between leading characteristics of many of the agreements mentioned so far.
- A joint agreement of the IMF with lenders; individual agreements with lenders.
- An agreement regarded as permanent (though subject to periodic renewal); agreements regarded as impermanent.
- Agreements in support of the credit tranche policy; agreements in support of a special policy.
- Individual agreements in support of the same policy and in more or less standard form; agreements in support of the same policy but not in such form.
- Agreements to finance various stand-by arrangements or transactions under the same policy; agreements to finance a single stand-by arrangement or transaction.
The normal procedure for borrowing is that the Managing Director initiates and negotiates a proposal to borrow from entities he regards as appropriate potential lenders in the circumstances giving rise to the proposal. The Managing Director proposes the amount and the financial and other terms and prepares draft agreements. Usually, he approaches potential lenders after the Executive Board has decided, or at least reacted favorably to his recommendation, that a special policy on the use of the IMF’s resources should be adopted, if indeed he thinks that a special policy is advisable and that it should be financed wholly or partly with borrowed resources.
The Managing Director has sometimes negotiated with potential lenders individually, and sometimes with a group of them at the same time as on the occasions when he negotiated the GAB and financing for the SFF. The agreements that emerge from these negotiations become effective only after they are approved by both the willing lenders or group of willing lenders and the Executive Board. The degree of collegiality among lenders, the relative amounts they are willing to lend, the interrelationships among the agreements, the adherence of all parties to a single agreement or the use of individual agreements have depended to some extent on the procedure followed by the Managing Director in negotiating the agreements. Often in the history of the IMF, procedure has had a decisive influence on substance, with the consequence that procedure itself has sometimes been controversial.58
Contractual Obligation and Discretion to Lend
In the negotiation of the GAB, participants were fearful that the strength of the United States in the IMF might be powerful enough to enable that member to use the resources of the IMF, supplemented by resources advanced under the GAB, without meeting the criteria of the credit tranche policy that all members are supposed to satisfy. The GAB provided, therefore, and still provides, that a proposal by the Managing Director for loans under the GAB becomes effective only if accepted by the participants and then approved by the Executive Board. The participants have agreed in an independent instrument of their own (”the Baumgartner letter” of December 15, 1961) on the procedure they will follow for deciding whether to accept a proposal. If, in reacting to a proposal, the participants are not unanimous, they vote, with voting power proportioned to the amounts of their participation in the GAB, and with special majorities of the number of participants and the volume of voting power required for a decision to accept a proposal. The participant that is to be the beneficiary of borrowing by the IMF under the GAB is not entitled to vote in this procedure. In all these matters, the participants have departed, as they are free to depart, from the model of the Articles on voting power and decisions. If the participants decide to accept a proposal, further consultations are held with the Managing Director on the amount to be provided by each of the participants that are going to make loans.
It is obvious that the GAB does not impose an obligation on any participant to lend when the Managing Director proposes to borrow from participants. The GAB raises the question whether it is an international agreement, because in systems of national law a commitment to “lend” only if “the lender” sees fit is not regarded as a contract.59 The management, staff, and many members of the IMF have always disliked the discretionary character of the GAB, but not for reasons of legal taxonomy: the objection is that the IMF has no assurance that resources will be forthcoming to finance transactions or support a particular policy. The IMF, however, could not reasonably object to the reservation of a similar discretion by the Swiss Confederation in its former agreement for association with the GAB and by Saudi Arabia in its present association agreement.
The IMF has not entered into any other borrowing agreement under Article VII in which the potential lender has reserved the discretion to decide whether to comply with a call for advances under the agreement. Nevertheless, although all other agreements bind the lender to lend on call by the IMF, participants have some other discretionary rights with respect to their commitments. The right to request early repayment has been discussed already. In addition, a participant in the GAB on which the Managing Director proposes to make calls may protest in the procedure under the Baumgartner letter that, because of the participant’s present and prospective balance of payments and reserve position, calls should not be made on it or should be made for an amount smaller than is proposed. The other participants then consult among themselves in order to provide substitute amounts. If a proposal for a call on a participant has become effective, the participant may give notice to the IMF that, for the reason mentioned above, calls should no longer be made or should be made for a smaller amount. The Managing Director may then propose to other participants that they should provide substitute amounts. The original proposal remains effective unless and until it is settled that other participants will provide substitute amounts.60
The association agreement with the Swiss Confederation while in force contained a provision enabling the lender to withhold or reduce requested advances under an effective proposal because, in the lender’s opinion, its present and prospective balance of payments and reserve position justified this reaction. The present association agreement with Saudi Arabia contains a similar provision.
The association agreement with the Swiss Confederation gave it an unchallengeable right to react in this way, but in the case of Saudi Arabia, a member of the IMF, its representation receives “the overwhelming benefit of any doubt.” The practical effect of this inspissated formulation, however, is that a challenge by the IMF of the alleged justification of the present and prospective balance of payments and reserve position, though not legally precluded, is highly unlikely. A similar formulation has been used in the standard borrowing agreements to help finance the SFF, except that in those agreements the reference to the balance of payments and reserve position included no mention of the prospective position. The formulation of the overwhelming benefit of any doubt goes back to the time when the original Articles prevented a de jure undertaking by the IMF that it would not challenge requests for transactions in the gold tranche.61 The de facto assurance left open the possibility, though slim, of challenge by the IMF. Inclusion of the language in borrowing agreements has been considered useful because the possibility of challenge, though again remote, gives the IMF the opportunity to contest a lender’s clearly unjustifiable effort to derogate from its commitment to comply with calls.
The agreement with Saudi Arabia in support of the enlarged access policy includes a different provision. Saudi Arabia may represent to the IMF that the country’s balance of payments and reserve position does not justify further calls and may request the IMF to suspend such calls. The IMF is able to determine whether or not suspension is justified. No mention is made of the overwhelming benefit of any doubt in response to the representation, perhaps because of skepticism that a representation would be sustainable. The standard form of agreement for borrowing from central banks and other official institutions in support of the enlarged access policy on terms similar to those of the agreement with the BIS does refer, however, to the overwhelming benefit of any doubt that the IMF gives to a lender’s representation with respect to the balance of payments and reserve position. A similar provision appears in the agreements with Japan and the National Bank of Belgium in support of the enlarged access policy.
It is sometimes said that the concept of the IMF as an international monetary organization is that the monetary authorities of members pool a portion of the national reserves for use by the IMF in accordance with its Articles. This concept is clearer than ever in the present Articles, under which a member pays part of its subscription in SDRs or the currencies of other members selected by the IMF; and the member is bound, if requested when its currency is purchased from the IMF, to exchange it for a currency deemed by the IMF to be “freely usable” if the purchased currency is not itself of that character.62 As replenishment under Article VII provides the IMF with resources that supplement subscriptions, it is logical to assume that members should be regarded as the primary potential lenders. It has been seen that the origin of the IMF’s power to borrow was the desire to find a compromise with those who, like Keynes, favored an open-ended commitment as the responsibility for the proper functioning of the international monetary system that members in balance of payments surplus should bear.
The IMF’s practice in borrowing under Article VII has recognized the desirability of lending by members, including their official institutions that exercise national monetary functions, as a manifestation of the responsibility of members for the effective functioning of the IMF. It is clear, however, that the proper functioning of the international monetary system has been given greater weight insofar as realization of that objective depends on adequacy of the IMF’s resources. Therefore, Article VII has always empowered the IMF to borrow resources from any willing lenders. Lenders that are not members are referred to simply as “some other source,” without limitation, and to make it clear that there is no limitation, it is added that they may be “either within or outside the territories of the member” whose currency the IMF deems it appropriate to borrow. In view of the breadth of the IMF’s power to borrow, it must be understood that the concept of pooling some portion of members’ monetary reserves is not preclusive: the IMF may borrow resources that are not part of a member’s monetary reserves. Furthermore, there is not even a condition that the lenders must be subject to the jurisdiction of the member whose currency the IMF borrows, although the need for the member’s concurrence enables it to control the IMF’s borrowing of the currency from both domestic and external entities willing to lend.
The IMF has relied most heavily on borrowing from the monetary authorities of members, and even when the IMF has borrowed under Article VII from other sources, it has borrowed from official entities within the international monetary system: Switzerland, its National Bank, and the BIS. The IMF has not borrowed hitherto from nonofficial entities, although there has been some flirtation with the idea because of difficulty or delay in increasing quotas.63
The IMF and its members have been unwilling to risk weakening the status of the IMF as the central institution of the international monetary system by diluting the sense of responsibility of the membership for the IMF and the system that might result from looking to the market for replenishing the General Resources Account. In addition, members have not wanted to risk the reduction of their influence over the policies of the IMF.
Nevertheless, the borrowing agreement with one lender, SAMA, has important features that would be of interest to nonofficial lenders. Indeed, the agreement with SAMA could result in financial obligations of the IMF to nonofficial obligees, which they would be able to enforce by judicial process. These features of the agreement were unprecedented in the experience of the IMF. In the negotiation of the agreement, SAMA was represented by private American legal advisers who may have sought safeguards, not only because of their experience with commercial lending, but also because of the fears inspired by the action of the United States in freezing official assets of the Islamic Republic of Iran. The amount that could be borrowed under the agreement with SAMA was substantial. Repayment might be made in U.S. dollars and the dollars might be held within the reach of the prescriptive jurisdiction of the United States.
The unusual terms and conditions, some of which have been referred to already, include covenants with respect to equal and ratable security; pari passu treatment of indebtedness in the ranking of lenders for repayment; and comparable benefits if the IMF should agree to more favorable financial terms or waivers of immunity under subsequent borrowing agreements with other lenders. A default under any subsequent security arrangement between the IMF and another lender was to be deemed a default under the agreement with SAMA, and on default SAMA could terminate its agreement and demand accelerated repayment. Any question between SAMA and the IMF concerning their rights and obligations that did not relate to interpretation of the Articles and could not be settled by agreement was to be submitted to arbitrators.
The agreement with SAMA authorizes it to assign its claims against the IMF under the agreement to certain specified official entities, but there is nothing original in that provision. The contrast with earlier practice is to be found in another, and as at the date of entry into the agreement, completely novel set of provisions. At any time, SAMA could request the IMF to deliver promissory notes in bearer form in exchange for any part of any claim to repayment. No limitations were placed on possible transferees of the bearer notes, so that they could be official or private holders. If SAMA retained notes, it could demand payment of them by the IMF in any currency, other than U.S. dollars, included in the basket of currencies by reference to which the value of the SDR is defined.
The bearer of a note could demand payment of it by any one or more of the financial institutions acceptable to SAMA that the IMF was required to designate as paying agents in Frankfurt, London, New York, Paris, and Tokyo. The bearer of a note had the option to demand payment by a paying agent outside New York by a check drawn on a bank in New York. The notes were to be governed by and construed in accordance with the laws of the State of New York. If the IMF failed to pay any amount due under a note or an interest coupon attached to it, the bearer could sue in designated courts in New York, England, or the Canton of Geneva. For this purpose, the IMF irrevocably waived its immunity from suit in these courts, and also from execution of a final judgment in any member country or in Switzerland. The IMF undertook to appoint agents to receive process in any action instituted in the courts in which the IMF waived immunity from suit. If the IMF failed to comply with a request for notes, the rights and obligations of SAMA and the IMF were to be determined not by the provisions of the agreement but by the provisions of the model note appended to the agreement.
Whether the terms of the agreement with SAMA outlined above will become precedents for future borrowing agreements under Article VII cannot be predicted. The 1981 agreement with the BIS did not contain the novel provisions of the agreement with SAMA that have been outlined above. The standard agreements for borrowing from central banks and other official institutions on terms similar to the 1981 agreement with the BIS, however, did contain terms and conditions on the issuance of bearer notes that resemble the provisions of the agreement with SAMA on this matter. The probable reason was not so much the fear of another freeze of assets by the United States as the effort to fortify the case that the loans were squarely within the investment powers of the central banks and other lenders. Later, a freeze by the United States of Libya’s official assets did occur, but it did not impel the BIS, the Government of Japan, or the National Bank of Belgium to insist on the inclusion of provisions with respect to bearer notes in their subsequent agreements with the IMF in 1984.
With only one exception, the borrowing agreements of the IMF under Article VII have not been entered into for the express purpose of financing use of the IMF’s resources by a selected number of specified members. The special policies in support of which the IMF has borrowed have included criteria for use of the resources under the policies, but the members likely to meet the criteria were not named.
A different procedure was followed in the case of an agreement that was not for the support of a special policy: the agreement was the original GAB. Under it, the IMF could borrow only to finance use of the IMF’s resources by the eight participating members and the two members whose central banks were participants. This limitation provoked sharp and sustained criticism on the part of numerous nonparticipants. The participants replied that the GAB made more of the IMF’s ordinary resources available for use by other members than would have been available if the GAB had not reduced strain on the resources. Eventually, however, revision of the GAB opened up the possibility of borrowing by the IMF to finance the use of its resources by nonparticipants without any specified selection among them.
Borrowing to finance transactions by nonparticipants, however, is subject to restrictive conditions that do not apply to borrowing for the benefit of participants. First, the use of the IMF’s resources by nonparticipants financed wholly or partly by borrowing under the GAB must meet the IMF’s more demanding standards of conditionality. Second, the Managing Director may initiate the procedure leading to borrowing for the benefit of nonparticipants only if he considers that the IMF “faces an inadequacy of resources to meet actual and expected requests for financing that reflect the existence of an exceptional situation associated with balance of payments problems of members of a character or aggregate size that could threaten the stability of the international monetary system.”64 Third, in making proposals for calls for this purpose, the Managing Director must pay due regard to potential calls for the benefit of participants.
Switzerland as a nonmember could not have the benefit of the revised GAB even though the Swiss National Bank became a participant in the GAB with effect from April 10, 1984. The Articles do not allow a nonmember to use the IMF’s resources. Switzerland’s position was prima facie less advantageous than it had been under its agreement for association with the GAB. Switzerland could not use the IMF’s resources as a result of that agreement also, but it provided that Switzerland would consider making resources available to a participant in the GAB only under an implementing agreement that required reciprocal financial assistance between Switzerland and the participant if Switzerland wished to have reciprocity.65
Some Institutional Effects of Borrowing
In an investigation of the institutional effects of borrowing by the IMF, the Group of Ten comes to mind immediately, because it emerged solely as a result of the GAB. The Managing Director and his assistants who negotiated the GAB foresaw the possibility that the ten potential lenders might assume a de facto collective personality and act through their Governors and Executive Directors as a steering group in the IMF, in which they would have a substantial preponderance of voting power. Evidence of the attempt to forestall this development can be detected in certain provisions of both the original and the current version of the GAB. The effort by the IMF’s negotiators to have these provisions included in the GAB succeeded, but this success did not prevent the emergence of the Ten as a de facto collectivity. Almost at once, the participants assumed the role that had been feared and began to take initiatives in matters involving the IMF, to the vast annoyance of members that were not participants and the disappointment of the IMF’s negotiators.
Only a few comments need be made here on the Group of Ten. The Group sometimes has justified its activities by claiming to have a de jure function as a kind of instrumentality of the IMF, with the provisions of the GAB as the Group’s charter. In more recent years, the Group has viewed the will of the ten, and now eleven, countries as the source of its birthright, rather than the agreement of these countries with the IMF.
The view that the Group of Ten has been responsible in one way or another for the creation of other durable groups in the international monetary system is not too extreme. This view is safe enough to help explain the formation of the Group of Twenty-Four by developing countries, but it may be that in addition the Group of Ten has had some influence in bringing the Groups of Five and Seven into existence as clubs designed to be even more exclusive in composition than the Group of Ten. In any event, there is no doubt that adverse reactions to the Group of Ten by nonparticipants in the GAB has been a major political influence in establishing the model for the composition of important bodies within the IMF. These bodies are not organs of the IMF and they do not take decisions of the IMF or bind its members, but they deal with issues of policy on which the guidance of persons having ministerial rank is advisable or necessary for the resolution of contested issues within the organization. To be effective, these bodies must not be excessive in size, but their composition must be seen to be a microcosm of the total membership of the IMF. The only model, it is now clear, that meets this test of what has been called legitimacy is the structure of the Executive Board. This model determined the composition of the Committee of Twenty, and now controls the composition of the Interim Committee. The composition of the Development Committee follows the model of the Executive Board of the IMF and of the World Bank for alternating periods of two years.
Another consequence of the GAB has been clarification of an important aspect of the authority of members to use the IMF’s resources. As recalled earlier, a primary objective of the original GAB was to supplement the IMF’s resources to help it assist members that suffered outflows of short-term capital in the new conditions of greater freedom for the markets. A problem that had to be solved before negotiation of the GAB could be undertaken was the effect of the prohibition in the original Articles of “net use” of the IMF’s resources to meet “a large or sustained outflow of capital” from a member country. The IMF was empowered by the Articles to request a member to exercise controls to prevent such use, and a member that did not comply could be declared ineligible to use the IMF’s resources. These provisions are still included in the Articles.66 In 1946, the United States, attempting to meet the concern of Congressional and other critics, requested the IMF to adopt an authoritative interpretation of the Articles on the proper use of the IMF’s resources. In response to the request, the IMF decided that use of the IMF’s resources was “limited” to temporary assistance in financing balance of payments deficits on current account for monetary stabilization operations.67
The interpretation ignored much language in the Articles on capital transfers and was too restrictive. The words “large” and “sustained” were the main issues in a re-examination in 1961 of the interpretation and of all relevant provisions in the new conditions of the day and in the light of the practice already followed by the IMF. “Sustained” was not a lofty hurdle, because it could be surmounted by understanding the word to refer to timely repurchase by a member that was using the IMF’s resources. Repurchase would be facilitated by reflows of short-term capital. As for “large,” that word ceased to be an obstruction once it was realized that the measurement made to determine whether use was “large” could take account of the volume of resources available to the IMF.68 If they were supplemented adequately by borrowing, the IMF could conclude that, notwithstanding capital outflow from a member, there was sufficient leeway for its use of the IMF’s resources in accordance with the provisions of the Articles without prejudice to the IMF’s ability to supply resources for financing deficits on current account.
The way was open to negotiation of the GAB. The clarification meant also that the problem did not arise in connection with any of the subsequent borrowing agreements of the IMF. These agreements have enabled the IMF to expand existing policies and initiate new policies on the use of its resources.
A policy made possible in this way has sometimes helped to settle disputed issues of the IMF’s practice. For example, at one time there was a division of opinion on the propriety of including in stand-by arrangements a term that interrupted a member’s right to make further purchases if the member introduced new or intensified existing restrictions on trade transactions. Some critics objected to this practice on the ground that the IMF’s jurisdiction to approve or disapprove restrictions was confined to restrictions on payments and transfers for current international transactions and did not extend to restrictions on the trade or other current account transactions themselves. The decision on the oil facility, however, provided that a member would not be able to make purchases under the policy unless the IMF was satisfied that the member was not introducing or intensifying restrictions on payments and transfers for current international transactions or on the transactions themselves.
The true issue was not the IMF’s regulatory jurisdiction to approve or disapprove restrictive measures but the proper use of the IMF’s resources. It has now become normal practice to include in stand-by or extended arrangements a term that suspends a member’s right to make new uses of resources under an arrangement if the member “imposes [or intensifies] import restrictions for balance of payments reasons” or “imposes [or intensifies] restrictions on payments and transfers for current international transactions.”69 After suspension, consultations are held to determine in what circumstances the right to make new uses can be resumed.
For some of its practices, the IMF has had to make a distinction between borrowed resources and other (“ordinary”) resources of the General Resources Account. (The correct distinction is between ordinary and borrowed resources and not the frequently made distinction between “owned” and “borrowed” resources, because the IMF owns both of them.) Under the enlarged access policy, the IMF’s charges for the use of its resources financed by borrowing exceed the charges for use financed with ordinary resources. The net cost of borrowing and an additional margin enter into determination of the first of these two categories of charges.70 To ensure fairness among members using resources under the enlarged access policy, the IMF has adopted a decision on the proportions of the two kinds of resources to be drawn on in financing use by members under the enlarged access policy.71 A similar practice has been followed for the SFF.72 Under both the enlarged access policy and the SFF, a distinction has been made between the two kinds of resources for the purpose of repurchase also. A longer period may be allowed before repurchases must be made in respect of use financed with borrowed resources.73
Another consequence of borrowing is the IMF’s conclusion that it is advisable to adopt guidelines—a word the IMF understands to connote a degree of flexibility—on the combined total of outstanding borrowing by the IMF and unexecuted contractual undertakings to lend (or to consider lending) to it. A number of conflicting considerations entered into determination of the guidelines. For example, lenders might wish to set a limit lower than the one preferred by members likely to use the IMF’s resources: the lenders might dwell on protection of their claims to repayment while other members might wish to be assured that the IMF would have sufficient resources to meet their needs. However, members in both classes might not favor a limit too high in relation to quotas, so as not to discourage consensus on increases in quotas. At the same time, too low a limit might provoke frequent negotiations on increases in quotas and might shake the confidence of lenders in the soundness of the IMF’s capacity to repay indebtedness.
The guidelines as adopted declare that the IMF will not allow the total of outstanding borrowing and the unused portions of all types of credit lines under Article VII to exceed the range of 50 percent to 60 percent of total quotas. In calculating the total of outstanding borrowing and the unused portions of credit lines, the IMF applies a special formula to the GAB and associated borrowing agreements, because not all participants and associated lenders might be in a balance of payments and reserve position that would justify contemporaneous lending by them.
If the total reaches 50 percent, the Executive Board must assess the situation, but while the assessment is being made the total may be allowed to rise to 60 percent. Assessment of the situation would give the IMF the opportunity to consider whether quotas rather than borrowing should be increased. Article III, Section 2(a)requires the IMF to conduct a review of quotas at intervals of not more than five years, and therefore the IMF may conduct a review and propose the adjustment of quotas at any time before the five years have elapsed.
If “major” developments should occur, or if there should be a “significant” change in the GAB or associated agreements, the Executive Board must review the guidelines and may adjust them. Whatever the proportions for borrowing may be from time to time under the guidelines, the proportions are not to be considered targets for borrowing.
The guidelines include no explicit asset or liquidity ratio, that is, a relationship of total borrowing to the total of assets the IMF regards as usable according to its economic criteria, with due account taken of potential needs for all purposes. This omission from the guidelines avoids such complications as the changing calculation of “usable” assets, but it does not follow that the asset ratio is regarded as irrelevant.
II. Direct Loans by Lenders to Members
All but one of the arrangements discussed so far have been agreements (1) to lend to the IMF (2) for the purpose of augmenting the resources formerly held by the IMF in the General Resources Account and since the Second Amendment in the General Resources Account of the General Department. The one exception has been the agreement by which the Swiss Confederation associated itself with the GAB. The parties to that agreement were the Swiss Confederation and the IMF, but it was provided that to make the agreement effective the Confederation would consider entering into an individual “implementing agreement” with any participant in the GAB requesting such an agreement.74 Under an implementing agreement, direct loans would be made by the lender to the participant. The agreement to which the IMF was a party was a kind of stipulation pour autrui, a concept which in national law would give rise to the question whether a third-party beneficiary could assert an entitlement to the benefit of the agreement.75
The procedure to be followed was that if the Managing Director made proposals for calls on participants under the GAB for the benefit of a participant that had entered into an implementing agreement, he would propose to the Swiss Confederation that it should make a specified amount of resources directly available to the participant. The terms and conditions for the timing of repayment were to correspond, to the maximum extent practicable, to the terms and conditions of the GAB. Furthermore, the IMF agreed that, at the request of a party to an implementing agreement, the IMF would make any determination, or use its good offices, to facilitate the operation of the implementing agreement, although without accepting any responsibility or liability as the result of these activities.
An issue that had to be resolved as a condition of entry into the association agreement was whether the IMF possessed authority to enter into such an agreement. Article VII was broad enough to authorize the IMF to borrow from a nonmember, but the agreement with the Swiss Confederation provided for possible loans to participants in the GAB and not to the IMF. Article IX, Section 2 declares that the IMF has full juridical personality, and, in particular, the capacity to contract. Article IX, Section 1, however, provides that to enable the IMF to fulfill its functions, the status, immunities, and privileges set forth in Article IX were to be accorded to the IMF “in the territories of each member.” Switzerland was not a member. It was concluded that the IMF had “objective legal personality” and therefore the power to contract with nonmembers to fulfill the purposes of the IMF. The International Court of Justice had recognized that “fifty States, representing the vast majority of the members of the international community, had the power, in conformity with international law, to bring into being an entity [the United Nations] possessing objective international personality, and not merely personality recognized by them alone.”76 The IMF could be said to have a similar power.
An advantage of the technique embodied in the association agreement was that while the IMF has no power to borrow the currencies of nonmembers, the Swiss Confederation could agree to lend Swiss francs to a participant with which an implementing agreement had been made. The association agreement referred only to the “resources” that the Swiss Confederation might lend, and the total was expressed as equivalent to an amount denominated in Swiss francs.
The technique of an agreement in this form has not been followed as a precedent for associating a lender with borrowing arrangements negotiated under Article VII. It remains, however, a possibly useful technique for the direct provision of loans to a member, whether the lender is a member or a nonmember. The technique might be particularly useful when for some reason borrowing by the IMF would be beyond its powers because of the constraints on those powers as discussed in this paper, but the agreement would have to be for an object consistent with the purposes of the IMF. It will be seen below that the IMF has entered into an agreement for direct loans by a lender to members by way of association with borrowing agreements of the IMF negotiated under the authority of Article V, Section 2(b)and not Article VII.
III. Borrowing Under Article V, Section 2(b)
The Power to Borrow Under Article V, Section 2(b)
Anew era in the history of borrowing by the IMF has begun with the inclusion of Article V, Section 2(b) in the Second Amendment:
If requested, the Fund may decide to perform financial and technical services, including the administration of resources contributed by members, that are consistent with the purposes of the Fund. Operations involved in the performance of such financial services shall not be on the account of the Fund. Services under this subsection shall not impose any obligation on a member without its consent.
No comparable provision was included in the original Articles. The provision is an unusual one in treaty law, and some trepidation was expressed about its breadth in the negotiation of the Second Amendment.
Although there was such concern, the provision is narrower than other proposals that were made. For example, it was proposed that the IMF should be empowered to create new Departments, in addition to the General Department and the Special Drawing Rights Department which would be established by express direction of the Articles, and to adopt the provisions that would govern a new Department. Another proposal was that the IMF should be authorized to establish new Accounts within the General Department, beyond the three to be created by the amended Articles, and to decide which provisions of the Articles or newly fashioned provisions should govern a further Account. A third proposal, of special interest for the present purpose, was that all resources borrowed by the IMF should be managed through the medium of one of these techniques. The objection to the techniques, which prevailed, was that they would constitute de facto amendments of the Articles without respecting the procedure for amendment. This objection could not be made to Article V, Section 2(b)because even before the Second Amendment the IMF had relied on an implied power of similar character to establish the Trust Fund that was an essential element in the compromise on the treatment of gold by the proposed Second Amendment. In fact, the Trust Fund was largely the inspiration for Article V, Section 2(b).
Borrowing from Nonmember
Borrowing is deemed to be authorized by the clause in the provision “including the administration of resources contributed by members.” A power to borrow had been included in the instrument creating the Trust Fund.77 Although the resources are said to be those contributed by members, the IMF has borrowed under the provision from a nonmember, the Swiss Confederation, as a means of financing the enhanced structural adjustment facility (ESAF).78 Perhaps this borrowing was deemed to be authorized by an implied power analogous to the express power of Article V, Section 2(b). It is always difficult to decide whether or to what extent an express power displaces the possibility of implying analogous powers. Does an express power make it impossible to hold that an alleged implied power of an analogous kind meets the test for implied powers that they must be consistent with the express provisions of the treaty?
If the power to borrow from a nonmember is an implied power, would it be equally possible to imply a power to borrow from the market under Article V, Section 2(b) notwithstanding the language of the provision that refers to “resources contributed by members”? The contrast with the broad empowering language of Article VII, Section 1 is striking. An equally strong contrast is the absence of any express direction to seek the concurrence of a member under Article V, Section 2(b)if the IMF were to borrow a member’s currency from some source other than the member itself.
One difficulty with the view that the IMF is authorized to borrow from the market under the provision involves the reference to “services.” For whom would the services be performed? If they were regarded as performed for the benefit of the private parties making the loans, the IMF would be undertaking an unusual function. The beneficiaries of the borrowed resources undoubtedly would be members, because of the condition that the services must be consistent with the purposes of the IMF, but this condition does not mean that the “services” would be rendered to them. The problem considered here does not arise in connection with Article VII, Section 1, because the word “services” does not appear in that provision.
An alternative to the theory of an implied power to justify borrowing from nonmembers is possible and preferable. The clause that begins with the word “including” can be understood to mean that the financial and technical services mentioned in the clause are exemplary and not exhaustive.79 The IMF’s administration of resources borrowed from lenders other than members would be a further example of authorized financial and technical services. The problem of the consistency of authorized services with the purposes of the IMF would still arise.
In agreeing to lend to the IMF for the purpose of the ESAF, the President of the Swiss Confederation made a number of unusual statements in his letter dated April 15, 1988 to the Managing Director.80 He explained in some detail that the ESAF was monetary in character, by which he seemed to be clarifying that in his view it was authorized by the purposes of the IMF, and that at the same time it was consistent with Swiss legislation on international cooperation with respect to development. The object of this analysis may have been to prevent criticism that the agreement was ultra vireseither under the Articles or, perhaps of greater interest, under Swiss law, because the beneficiaries of the ESAF are confined to low-income developing countries and the aim is to support programs of structural adjustment that will substantially strengthen the balance of payments and promote growth.
The President also stated that, as the Swiss Confederation was a nonmember of the IMF and was not “represented on the Executive Board,” the Confederation should be informed and consulted before the IMF took any decision to amend the instrument or the lending policy of the ESAF. He proposed, and the Managing Director agreed on behalf of the IMF, that there should be periodic meetings between representatives of the IMF as Trustee of the ESAF and representatives of the Confederation to exchange views and information, as well as the transmission of documentation to the Confederation that would be necessary to keep it abreast of developments affecting the ESAF.
The letter suggests the broader question whether a lender, whatever its character, is entitled, under general principles of law and in the absence of a contrary term of the agreement, to be consulted before the IMF takes a decision to amend a policy for the financing of which the lender has agreed to lend. A further question that arises is whether a lender is entitled to terminate its agreement to make advances under an agreement if the lender considers an amendment of the policy unsatisfactory.
Constraints on Power to Borrow
It has been seen that the letter from the President of the Swiss Confederation implies that a policy for which the IMF borrows as Trustee under Article V, Section 2(b)should be demonstrably consistent with the purposes of the IMF and therefore intra vires. Consistency with the IMF’s purposes is one of the few express constraints on exercise of the power to borrow under the provision. A second express constraint is that no obligation can he imposed on a member under the provision without the member’s consent. A prima facie third constraint is that the resources the IMF can administer under the provision are contributed by members, but, as discussed above, a case can be made for accepting contributions by a nonmember, and the IMF has not refrained from administering resources contributed by one of them.
The final express constraint is that activities conducted under the provision “shall not be on the account of the Fund.” The rationale of Article V, Section 2(b) is thus made obvious: the IMF can perform voluntary financial services, provided that they do not involve a present or potential reduction in the assets of the IMF or an increase in its liabilities, subject to the possible qualification discussed in the next paragraph. A condition of the IMF’s services is that the contributor of the resources or some other entity must bear any loss incurred in the course, or as the result, of the IMF’s administration of the resources, even if the loss can be attributed to maladministration of any kind. The condition does not apply to technical services, but the IMF is able to charge for them. It was expected that financial obligations would not be undertaken or liabilities arise in the performance of technical services.
There is no difficulty in understanding contributed resources to include resources lent to the IMF. Nor is there any difficulty in understanding the provision to mean that the IMF can take the initiative to suggest that resources should be donated or lent. In the negotiation of the provision, however, it was thought that members would take the initiative to seek the services of the IMF, as is evident from the opening words (”If requested, the IMF may…”).
This assumption made it possible to reach a compromise with those who had doubts about the wisdom of the provision. Requests for services could be complied with by the IMF, but on the strict condition that the IMF would not accept liability and the reduction of its assets in the General Department.
If the IMF takes the initiative to seek loans, it is all the more likely that the lenders approached in this way, aware of the immunization of the three Accounts of the General Department and the emergence of members’ arrears in the financial activities of the IMF, will press for safeguards that repayment will be made.
The question arises whether, notwithstanding the language of Article V, Section 2(b), the IMF would be able to sell gold, transfer the proceeds in excess of the former official price to the Special Disbursement Account,81 and use those proceeds to repay borrowing contracted under Article V, Section 2(b). The provision authorizing the sale of gold permits the excess proceeds to be used for “operations and transactions that are not authorized by other provisions of this Agreement but are consistent with the purposes of the” IMF. The question is whether this language authorizes uses of the proceeds that are contrary to the express constraint in Article V, Section 2(b)that operations involving the performance of financial services “shall not be on the account of the Fund.”
A principle of interpretation is that all provisions of a treaty must be respected. According to this principle, the language of Article V, Section 2(b) would be a limitation on the provision authorizing use of the proceeds of the sale of gold. The strongest argument for authorization is that any use of the proceeds of the sale of gold in operations and transactions not authorized by other provisions is contrary to the Articles. A logical distinction, it could be argued, cannot be drawn between uses that are contrary to an express provision (such as Article V, Section 2(b)) and uses that go beyond express authority. The latter uses are contrary to implied prohibition.
The Executive Board, when drafting the Second Amendment, did not intend this latter interpretation. The Executive Board’s Commentary on the Second Amendment makes the following statement in explaining Article V, Section 2(b):
Operations and transactions involved in the performance of these financial services would not be on the account of the Fund. That is to say, the assets in the Accounts of the General Department or any assets in the Special Drawing Rights Department would not be available to meet obligations or liabilities incurred in the course of these services.82
This statement clarifies that the protection of the IMF’s assets against risk conferred by Article V, Section 2(b)extends to the assets held in all the Accounts of the General Department. The assets therefore include those held in the Special Disbursement Account. The only assets in that Account are proceeds of the sale of gold in excess of the former official price, the obligations in which the proceeds are invested, and the income of investment.
The prohibition of financial risk on the part of the IMF is absolute. The prohibition is not a privilege or an immunity that the IMF can waive. The IMF is unable, by means of a waiver, to accept contractual liability under Article V, Section 2(b)that would encumber holdings in the General Department. In addition, the IMF cannot be held responsible in tort, or under any other head of liability, for maladministration of contributed resources. Resources held in an account administered under Article V, Section 2(b), however, are also assets of the IMF, even though they are held by the IMF as Trustee, and as such they are within the ambit of the IMF’s privileges and immunities.83
The inability of a lender to the IMF under Article V, Section 2(b) to obtain repayment from, or in some other way reach, the resources of the IMF held in the Accounts of the General Department may give a potential lender pause in deciding whether to lend. As noted earlier, the emergence of arrears on the part of some members as the result of transactions conducted through the General Resources Account may cause anxiety about the repayment of loans by the IMF to members contracted under Article V, Section 2(b)and the consequent inability of the IMF to repay loans made to it. Therefore, action has been taken, or ideas adumbrated, to give assurances to potential lenders to encourage them to lend for the purpose of the ESAF.
The most obvious assurance is the structure of the ESAF Trust itself as governed by its Trust Instrument. The operations and transactions of the Trust are conducted through the elaborate structure of a Loan Account, a Reserve Account, and a Subsidy Account. Loans may be made to the IMF as Trustee for the benefit of the Loan Account or the Subsidy Account. Disbursements by the Trustee to eligible members, repayments by them, and repayments by the Trustee to lenders are made through the Loan Account. The purpose of the Subsidy Account is to ensure that eligible members will pay no more than a highly concessional rate of interest on disbursements to them without prejudice to the Trustee’s ability to pay interest to lenders. The difference between the two rates of interest is to be financed by annual donations, but in exceptional circumstances the IMF may borrow from official lenders to prefinance donations that have been firmly committed. Repayments of loans for the benefit of the Subsidy Account and interest are paid from the donations when made, income from investment, and proceeds of the liquidation of investment. The assets held in the Reserve Account, which come from various specified sources but without power for the Trustee to borrow for the benefit of that Account, are used to make payments of principal and interest to lenders to the extent that all other resources available for those purposes are inadequate. If, in such circumstances, the resources of even the Reserve Account are inadequate, the Trustee must review the situation in a timely manner.
It will be apparent from this greatly simplified sketch of the ESAF Trust how difficult, and indeed impossible, it may be to give lenders total assurance that they will receive payments of principal and interest in accordance with the contractual terms, given the absence of authority for the IMF to commit assets not subject to the ESAF Trust for these purposes. Part of the complexity of the ESAF Trust and the difficulty of giving assurance to lenders, however, must be attributed to the special circumstance of the IMF’s desire to provide assistance at highly concessional rates of interest to developing countries with low income. The ESAF Trust need not be a precedent for the administration of other resources borrowed under Article V, Section 2(b)for the purpose of other trusts.
Another attempt of the IMF to give lenders an express assurance that the financial terms of their loan contracts with the IMF in support of the ESAF will be performed at the due dates or without prolonged delay after those dates is set forth in the decision of the IMF that adopts the annexed Trust Instrument:
2. The Fund is committed, if it appeared that any delay in payment by the Trust to lenders would be protracted, to consider fully and in good faith all such initiatives as might be necessary to assure full and expeditious payment to lenders.84
This statement is carefully drafted to constitute no more than an obligation—if it can be regarded as an obligation at all—to “consider” initiatives, although the word “committed” might be interpreted to convey a promissory intent.
The idea has been advanced that the IMF might possibly sell some of its gold to raise proceeds in order to route the amount in excess of the former official price from the Special Disbursement Account to the Reserve Account of the ESAF to repay borrowing contracted under Article V, Section 2(b) for financing that facility.85 The authority of the IMF to use proceeds in this way has been discussed earlier in this paper.86
Paragraph 2 of the decision adopting the Trust Instrument avoids the sharper language that the drafters of “comfort letters” sometimes adopt by referring, for example, to a “policy” of ensuring that another entity, such as a subsidiary, will meet certain liabilities that are not liabilities of the entity that is the author of the letter. Comfort letters have produced much litigation and scholarly debate.87
The authors of the letters intend to acknowledge a moral but not a legally enforceable liability. A comfort letter can create an unfortunate dilemma: if a court holds that the letter is legally enforceable, the party tendering it is frustrated; and if it is held not to be legally enforceable, the recipient is disappointed. The IMF would not be subject to suit by a lender, but there could be disputes about the binding quality of the assurance given by paragraph 2 of the decision quoted above and by any other representations.
As a third assurance, the Executive Board has taken a decision authorizing the Managing Director to confirm to lenders that he did not intend to propose to the Executive Board borrowing in excess of SDR 6 billion for the Loan Account of the ESAF except after consultation with all creditors regarding the justification for such additional borrowing and the adequacy of the resources of the Reserve Account in relation to further borrowing.88 The purpose of the decision is to assure lenders of a contemplated total of SDR 6 billion that the Trust will have the resources necessary for repaying this amount.
Another idea in the nature of an assurance to lenders relates not to the repayment of borrowing but to the lender’s use of the IMF’s general resources.89 According to this idea, if a member having a claim against the ESAF Trust were to represent that it had a need for liquidity not exceeding its claim because of developments in its reserves in the sense of Article V, Section 3(b)(ii), and the IMF, having taken into account the amount of the requested purchase, agreed that the purchase was justified, the member would be able to use the IMF’s general resources.
Article V, Section 3(b)(ii) certainly authorizes a member to use the IMF’s general resources because of “developments in its reserves,” but there remain two questions. First, according to the idea, lending to the ESAF, which must mean the claim to repayment arising from such lending, “could” be considered by the IMF to be part of a member’s “official reserves.” Perhaps the verb “would” has been avoided because two of the published borrowing agreements show that the lenders under them are not members’ monetary authorities (Caisse Centrale de Cooperation Economique of France and the Export-Import Bank of Japan).90 To treat the claims of such lenders as part of a member’s “official reserves” would be unconventional, unless this expression is to be distinguished from “monetary reserves,” in which event an interpretation of “reserves” in Article V, Section 2(b)(ii) would be implied. The Articles before the Second Amendment used the expression “monetary reserves,” but the present Articles refer to “reserves,” “reserve assets,” or “reserve position.” The Articles do not refer to “official reserves,” but the expression “their [members’] official holdings of gold and foreign exchange” can be found in some contexts.
The second question is the meaning of the statement that if the liquidity problem can be addressed on its own, there would be no need for an adjustment program to solve the balance of payments problem. This statement should not be understood to mean that the use of the IMF’s general resources to meet liquidity problems only would not be subject to conditionality. The statement should be taken to mean that the resources would be available because of the assumption that a member’s policies already in place satisfied the criteria of conditionality applicable to the tranche in which the transaction would take place. In such circumstances, an adjustment program of different or modified policies would not be necessary. The member’s only problem would be liquidity and not the correction of its policies. Since the First Amendment, the Articles have denied the IMF authority to permit new unconditional uses of its resources. The theory of this denial is that needs for such liquidity can be met by allocations of SDRs, provided that there exists a long-term global need to supplement reserves.91 The negotiators of the First Amendment intended in this way to avoid the anomaly that although a majority of 85 percent of the total voting power of members is required for allocations of SDRs, a majority of the votes cast is sufficient for decisions on policies related to the use of the IMF’s general resources.
The necessity for conditionality is expressed by the requirement in Article V, Section 3(a) that the IMF must adopt policies on the use of its resources. An unconditional use would not be a policy: it would be a negation of the requirement of a policy. To understand the statement as accepting the possibility of an unconditional use would be contrary not only to Article V, Section 3(a)but also to Article V, Section 2(b), because the administration of contributed resources would then be “on the account of the Fund.”
It is difficult to see why the liquidity problem for which use of the general resources might be justifiable would be tied so rigidly to the amount of the lender’s claim. If the liquidity problem was larger, the member should qualify for broader use of the general resources in the circumstances that have been postulated. Limiting the use to the amount of the claim to repayment might give the impression that after all an unconditional use was contemplated for that amount.
Finally, it has been suggested that the assurance to lenders of prospective purchases by them from the IMF could be given some attractive characteristics. For example, the IMF could decide, by an 85 percent majority of total voting power, that special repurchase periods could be permitted in respect of the purchases and that a member’s reserve tranche would not be reduced by the purchases. Nothing in these characteristics requires them to be attached to unconditional use.
The emphasis on assurances and the chafing against the restraint that financial services must not be on the account of the IMF can be understood as a consequence of the initiative taken under Article V, Section 2(b). It is useful to repeat that the assumption with which that provision was adopted was that normally, or at least frequently, a member or members would take the initiative to contribute resources, and that the IMF would respond by agreeing to administer them. If, as in the case of the ESAF, the IMF takes the initiative to raise contributed resources, and members respond with loans, lenders may feel the need for assurances that they would not expect if they had taken the initiative to provide resources.
A possible implied constraint on borrowing has been mentioned already. If borrowing is contracted on the understanding that it is for financing a particular policy of the IMF, whether the borrowing is under Article V, Section 2(b)or Article VII, the lender might insist that a change in the policy gives it the right to terminate the agreement to lend, even though the right is not made explicit by the agreements. It would be wise, therefore, for the IMF to consult the lender before a change was made.
The IMF can give an express undertaking not to change any provisions, or certain specified provisions, of a Trust Instrument that authorizes borrowing by the IMF. The provisions can relate not only to the terms and conditions for borrowing but also to the character of the policy in support of which the IMF borrows. The Trust Instrument of the ESAF contains such an undertaking.92
Often when the IMF borrows resources under Article V, Section 2(b), it does indeed administer them under a Trust Instrument. A second unexpressed constraint arises from this practice. A trustee is bound by certain duties that are inherent in the concept of trusteeship. To take one example, a trustee cannot engage in “self-dealing” in administering a trust, and so the IMF is not permitted to invest in the claims of lenders to the trust no matter how attractive these claims may be. For the same reason, the IMF cannot invest assets of the trust in the IMF’s obligations.93
A third constraint not expressed in Article V, Section 2(b)is that even as trustee the IMF cannot borrow SDRs under the provision. The reason is not the same as for the similar constraint on borrowing under Article VII. That provision is formulated restrictively so as to preclude the borrowing of SDRs. The IMF can hold SDRs only in the General Resources Account,94 and the organization has no authority to prescribe itself as an other holder of SDRs in its capacity as trustee.95 Trusteeship gives the IMF new duties but does not change its legal personality. The IMF cannot prescribe a trust itself as a holder of SDRs, because a trust is not a legal entity in the sense of being a bearer of rights or a subject of duties. The trustee is the legal entity that owns the trust property, acquires claims, and incurs liabilities in administering the trust, although the trustee does so in the interests of the beneficiaries.96
The ESAF Trust Instrument refers to loans or donations of SDRs, but although the language is not free from ambiguity, it is not quite said that the IMF can hold SDRs in its capacity as Trustee:
Loans or donations to the Trust may also be made in or exchanged for SDRs in accordance with such arrangements as may be made by the Trust for the holding and use of SDRs.97
The language beginning with the phrase “in accordance” should be understood to mean that the arrangements to make loans or donations in SDRs or to exchange the proceeds of loans or donations for SDRs would have to involve qualified holders of SDRs acting for the benefit of the Trust.98 A loan of SDRs can be made directly to a member by another member or a prescribed holder of SDRs, whether or not on the initiative of the IMF, because loans of SDRs have been authorized by the IMF as permitted operations in SDRs.99 An exchange of currency for SDRs between members is authorized by the Articles100 and between members and prescribed holders has been authorized by decisions taken pursuant to the Articles.101
Freedom from Constraints
Borrowing under Article V, Section 2(b)is free from most of the constraints that apply to borrowing under Article VII. For example, the problems associated with the need for replenishment of the IMF’s holdings of a currency in the General Resources Account do not arise, and, however advisable it may be to obtain the concurrence of the issuer of a currency to be borrowed under Article V, Section 2(b), concurrence is not a legal requirement. The power to borrow under Article V, Section 2(b)is not limited to use of the borrowed currency in “transactions”: borrowing can be entered into for the purpose of “operations” without transgressing the Articles. The doctrine of uniformity, which requires that all members that meet the criteria for use of the IMF’s resources under a particular policy must be entitled to the benefit of the policy, does not apply to a policy financed with resources borrowed under Article V, Section 2(b). The beneficiaries can be one or more members selected by the lenders if the IMF is willing to administer resources contributed for such a purpose.102
The terms and conditions of the operations and transactions the IMF can enter into with the resources it borrows and administers under Article V, Section 2(b)are not subject to the provisions of the Articles or of the IMF’s subordinate law that govern the conduct of operations and transactions through the General Resources Account, unless the IMF decides that some of those provisions are to apply by analogy.103 The terms and conditions can be highly concessional and can be adopted by decisions of the IMF that do not require special majorities of voting power. Transactions under Article V, Section 2(b)can take the form of loans by the IMF instead of the exchange of currencies, and if loans are the chosen technique the complications of maintaining the value of the IMF’s holdings of currency do not arise.
Lending to the IMF under Article V, Section 2(b)may be free from national constraints also, whether legal or financial, that apply to lending by members under Article VII. The character of the policy of the IMF for which a “contribution” is made for administration by the IMF may be such that the loan can be undertaken by an official institution of a member under the institution’s own legal authority, from its own funds, and without an impact on the national budget, even though the member itself may lack authority to lend to the IMF without special measures or procedures under its law. The result may be that traditional monetary reserves are not pooled in support of policies financed under Article V, Section 2(b). The IMF has borrowed from development institutions because of the content of structural adjustment programs followed by developing countries that qualify for assistance under the ESAF. Another consequence can be considerable diversity among the borrowing agreements entered into to finance a policy under Article V, Section 2(b), even if certain standard terms are prescribed by the Trust Instrument in accordance with which the agreements are made. The agreements to provide resources to the IMF for the Loan Account of the ESAF Trust have had the characteristics noted here.
Practice connected with the ESAF Trust demonstrates also that a lender can agree with the IMF under Article V, Section 2(b)to make associated loans to a member. The Saudi Fund for Development (SFD) agreed (1989) with the IMF that if a member entered into an arrangement with the IMF under the ESAF, the SFD would make associated loans to the member in accordance with the terms of an agreement between the member and the SFD. The associated loans are to be used to finance imports of the recipient country that are defined as eligible for this purpose. The loans are made through a special account financed by the SFD and administered by the IMF as agent for the SFD.104
It may seem surprising that the IMF has undertaken to administer an account for financing specified imports rather than the general balance of payments. The question the arrangement raises is whether it complies with the condition in Article V, Section 2(b)that the services the IMF undertakes must be consistent with its purposes. The condition must be observed even if the arrangement is considered technical and not financial. Perhaps the justification in this case is the breadth of the imports or the notional amalgamation of the resources with all the resources borrowed by the IMF for financing the ESAF. If the conditions of Article V, Section 2(b)are not met, the failure is not cured by the fact that the IMF is acting as an agent of the lender. In undertaking the service, the IMF would be no more justified by the concept of agency than it would be if it undertook as agent to handle the export of pencils for a member. The controversy over the GAB settled the issue long ago that the powers of the IMF are governed by the treaty and cannot be enlarged or diminished by agreement with a member.
The arrangement with the SFD creates a third approach in the IMF’s practice to the recruitment of resources by means of loans. The first approach is, of course, an agreement between the IMF and a lender that provides for resources to be made available by the lender to the IMF, which receives and disburses them in the capacity of a principal. The lender’s commitment to advance resources to the IMF may be firm or it may be subject to the lender’s ad hoc consent when approached by the IMF for an advance under the agreement.
The second approach is an agreement by which Patria associates itself with an agreement of the first kind between the IMF and Terra, but Patria provides no resources to the IMF. Instead, Patria agrees with the IMF to make resources available directly to a third member, Regio, under a separate agreement between Patria and Regio, subject to such terms as the IMF has prescribed by its agreement with Patria, the condition that the IMF has decided to provide resources to Regio, and the further condition that Patria is satisfied that the terms of its separate agreement with Regio are met.
The third approach is similar to the second, except that Patria transfers resources to the IMF for disbursement, but subject to the same conditions as have been mentioned in connection with the second approach. According to the third approach, the IMF receives and disburses the resources provided by Patria, but in both steps as agent for Patria and not as principal. The IMF holds the resources, but not as a borrower. In the case involving the SFD, in which the third approach has been followed, the only loans are those made by the SFD to recipient countries (such as Regio in the example cited above).
The second approach permits a loan of SDRs to be made directly between members (Patria and Regio), but the third approach would not enable a member to lend SDRs by transferring them to the IMF as disbursing agent for passing them on to members. An advantage for the IMF and for lenders to it of both the second and third approaches in such an arrangement as the ESAF Trust is that loans pursuant to these approaches place no burden on the resources of the Reserve Account of the Trust.
IV. The Case for Borrowing
Ever since the IMF embarked on borrowing with the negotiation of the GAB there have been frequent declarations by the IMF, its officials, or members that the IMF should not have to rely on borrowing to supplement its resources in order to enable it to perform its functions effectively. This opposition has almost completely abated in relation to the GAB, particularly after the expansion of total commitments under it from the original equivalent of US$6 billion to the present SDR 17 billion, and more particularly after the concurrent amendments that permit the IMF to borrow in certain circumstances for financing the transactions of nonparticipants in the GAB. Discontent with the GAB has declined because the resources that can be advanced under it are now regarded as a fund for emergencies that could threaten the stability of the international monetary system. For that reason, however, the GAB is less likely to be relied on than in the past, especially now that it has become common practice and almost commonplace for the IMF to borrow without recourse to the GAB if difficult conditions develop in which augmentation of the IMF’s resources is advisable.
The basic objection to reliance on borrowing is that the IMF cannot respond as promptly and as adequately as it should to the changes that can develop in international financial and economic conditions. The IMF lacks this flexibility because it must negotiate borrowing, and there is no certainty that it will succeed. It is also possible that the IMF can succeed only on terms that are considered not altogether favorable to it or to beneficiary members in some respects. A further objection that could be made is that the anxiety to borrow has led to certain exercises of the powers to borrow that raise questions about whether they are intra vires.
Disquiet about borrowing by the IMF has not prevented interest in developing new techniques for borrowing. For example, officials have expressed interest from time to time in borrowing under Article VII from nonofficial lenders. It is thought that this technique might avoid the difficulties encountered in negotiating with official entities. Some members have been cautious about the volume of claims on the IMF they hold, while private entities, it is assumed, might welcome the opportunity to hold such claims.
Some ambivalence about borrowing can be suspected, even on the part of those who profess the wish to eliminate the practice, because the new provision, Article V, Section 2(b), has become the launching pad for new forms of borrowing as well as other projects. A major reason for this development in the practice of the IMF on borrowing is the broad exemption of activities under the provision from legal constraints that apply to Article VII and the General Resources Account. Article V, Section 2(b) gives the IMF considerable maneuverability, so that the IMF might find it useful to exercise this freedom even if its subscribed resources were deemed satisfactory for traditional activities.
The major disadvantage of borrowing under Article V, Section 2(b) is that a wall, intended to be impregnable, protects the resources the IMF holds in the General Department against liabilities and obligations related to the performance of financial services under the provision. The IMF has tried to assure lenders that borrowing will be repaid on time and that ways may be found to repay them if difficulties about repayment should nevertheless arise.
Even if the IMF were not prevented by Article V, Section 2(b)from using proceeds of the sale of gold in excess of the former official price to repay borrowing contracted under the provision, there might still be problems. In the United States, for example, Section 5 of the Bretton Woods Agreements Act, as amended by Public Law 95-147(1977), provides that:
Unless Congress by law authorizes such action, neither the President nor any person or agency shall on behalf of the Unites States… (g) approve either the disposition of more than 25 million ounces of Fund gold for the benefit of the Trust Fund established by the Fund on May 6, 1976, or the establishment of any additional trust fund whereby resources of the International Monetary Fund would be used for the special benefit of a single member, or of a particular segment of the membership, of the Fund.
If this provision applies to the sale of gold to raise proceeds for the repayment of borrowing in accordance with trust arrangements established under Article V, Section 2(b), and the provision is not amended, the authorization of Congress would be necessary to enable the Executive Director appointed by the United States to vote in favor of the sale. If Congress did not provide this authorization, a proposed sale would be vetoed, because a majority of 85 percent of the total voting power of members is necessary for a decision to sell gold.
Part of the case against borrowing is that lenders can demand special advantages, whether the borrowing takes place under Article VII or under Article V, Section 2(b). These advantages, if conceded, can be incorporated in the borrowing agreement or can be extrinsic to it. It must be said at once that advantages for a lender are not necessarily disadvantages for the IMF, but the possibility that they might be can help to explain the doubts about borrowing as an acceptable feature of the life of the IMF. Some official opposition to borrowing from nonofficial sources has certainly been based on the influence over the policies of the IMF that these lenders might try to exert and, if they were to succeed, the consequent reduction in the influence of members in the affairs of the IMF and the international monetary system.
Contractual terms favorable to a lender might be financial or nonfinancial. Contractual terms of a financial character have already led to modifications in the IMF’s practice, such as the institution of suspense accounts for resources the IMF receives before it can use them and the extension of its powers of investment. The waiver of the IMF’s immunity from suit and from the execution of adverse judgments are examples of terms that may or may not be financial. The IMF would probably have preferred not to concede such terms, as is suggested by the normal practice of providing in the IMF’s borrowing agreements that disputes are to be settled to the mutual satisfaction of the contracting parties. Contractual terms that have been particularly unwelcome to the IMF are those that reserve to the lender the option not to lend when approached by the IMF for loans to it or to a member under the agreement. The ancestor of such a term was, and still is, a feature of the GAB. The Baumgartner letter shows that the participants have reserved the right to judge for themselves whether the program of the member for whose benefit the IMF wishes to invoke the GAB is satisfactory, even though the Managing Director will already have reached a favorable judgment.105
The willingness of a lender to lend may be dependent on advantages it seeks that are not included in the borrowing agreement. SAMA’s massive loan agreement of 1981 was accompanied by a substantial ad hoc increase in Saudi Arabia’s quota in the IMF. The use of Saudi Arabia’s subscription and SAMA’s loans to the IMF have given Saudi Arabia the power to appoint an additional Executive Director as the result of the biennial calculations made for this purpose.106 Furthermore, an understanding was reached at the time of the 1981 agreement that, as a safeguard for lenders, the IMF would consider a limit on the volume of borrowing, and such a limit has now been established. An advantage that a lender seeks may be not only outside its agreement with the IMF but also outside the IMF. The agreements of the Swiss Confederation and SAMA for association with the GAB were responsible for the seats Switzerland and Saudi Arabia have occupied in meetings of the Group of Ten. The case of Switzerland produced the anomaly of a voice for a nonmember in the affairs of the IMF.
However persuasive the arguments against borrowing may be, it is unlikely that it will ever be regarded as a practice the IMF should renounce. Experience demonstrates that increases in quotas are difficult to negotiate, that negotiations do not result in agreement to provide the IMF with resources adequate to the tasks it should undertake, and that such agreements as are reached become effective only after unhelpful delay. Even if subscribed resources should ever become adequate, borrowing under Article V, Section 2(b)might still be considered attractive as a technique for giving financial assistance to poorer members without the constraints that are imposed by other provisions and policies.
If increases in quotas were to provide the IMF with resources deemed adequate at the time to meet the needs of the IMF under all its policies, circumstances might develop that subject the resources to unforeseen strain. For instance, one or more members with large quotas may wish to use the IMF’s resources or may request early repayment of loan claims to meet unexpected difficulties in their balances of payments, with the consequence that the resources available, according to the IMF’s economic criteria, for use by other members are reduced to an uncomfortable level. The distribution of surpluses and deficits among members may produce a similar stringency if the surpluses are enjoyed by members with quotas too small to provide the IMF with sufficient usable resources to meet all legitimate needs.
For any one of the reasons mentioned above, Managing Directors may demonstrate their activism as much in the future as in the past by initiating projects to borrow on the most favorable terms that they can negotiate.
Article VII. Scarce Currencies
Section 1. General scarcity of currency
If the Fund finds that a general scarcity of a particular currency is developing, the Fund may so inform members and may issue a report setting forth the causes of the scarcity and containing recommendations designed to bring it to an end. A representative of the member whose currency is involved shall participate in the preparation of the report.
Section 2. Measures to replenish the Fund’s holdings of scarce currencies
The Fund may, if it deems such action appropriate to replenish its holdings of any member’s currency, take either or both of the following steps:
- (i)Propose to the member that, on terms and conditions agreed between the Fund and the member, the latter lend its currency to the Fund or that, with the approval of the member, the Fund borrow such currency from some other source either within or outside the territories of the member, but no member shall be under any obligation to make such loans to the Fund or to approve the borrowing of its currency by the Fund from any other source.
- (ii)Require the member to sell its currency to the Fund for gold.
Section 3. Scarcity of the Fund’s holdings
(a)If it becomes evident to the Fund that the demand for a member’s currency seriously threatens the Fund’s ability to supply that currency, the Fund, whether or not it has issued a report under Section 1 of this Article, shall formally declare such currency scarce and shall thenceforth apportion its existing and accruing supply of the scarce currency with due regard to the relative needs of members, the general international economic situation, and any other pertinent considerations. The Fund shall also issue a report concerning its action.
(b)A formal declaration under (a)above shall operate as an authorization to any member, after consultation with the Fund, temporarily to impose limitations on the freedom of exchange operations in the scarce currency. Subject to the provisions of Article IV, Sections 3 and 4, the member shall have complete jurisdiction in determining the nature of such limitations, but they shall be no more restrictive than is necessary to limit the demand for the scarce currency to the supply held by, or accruing to, the member in question; and they shall be relaxed and removed as rapidly as conditions permit.
(c)The authorization under (b)above shall expire whenever the Fund formally declares the currency in question to be no longer scarce.
B. Present Articles
Article VII. Replenishment and Scarce Currencies
Section 1. Measures to replenish the Fund’s holdings of currencies
The Fund may, if it deems such action appropriate to replenish its holdings of any member’s currency in the General Resources Account needed in connection with its transactions, take either or both of the following steps:
- (i)propose to the member that, on terms and conditions agreed between the Fund and the member, the latter lend its currency to the Fund or that, with the concurrence of the member, the Fund borrow such currency from some other source either within or outside the territories of the member, but no member shall be under any obligation to make such loans to the Fund or to concur in the borrowing of its currency by the Fund from any other source;
- (ii)require the member, if it is a participant, to sell its currency to the Fund for special drawing rights held in the General Resources Account, subject to Article XIX, Section 4. In replenishment with special drawing rights, the Fund shall pay due regard to the principles of designation under Article XIX, Section 5.
Section 2. General scarcity of currency
If the Fund finds that a general scarcity of a particular currency is developing, the Fund may so inform members and may issue a report setting forth the causes of the scarcity and containing recommendations designed to bring it to an end. A representative of the member whose currency is involved shall participate in the preparation of the report.
Section 3. Scarcity of the Fund’s holdings
(a)If it becomes evident to the Fund that the demand for a member’s currency seriously threatens the Fund’s ability to supply that currency, the Fund, whether or not it has issued a report under Section 2 of this Article, shall formally declare such currency scarce and shall thenceforth apportion its existing and accruing supply of the scarce currency with due regard to the relative needs of members, the general international economic situation, and any other pertinent considerations. The Fund shall also issue a report concerning its action.
(b)A formal declaration under (a) above shall operate as an authorization to any member, after consultation with the Fund, temporarily to impose limitations on the freedom of exchange operations in the scarce currency. Subject to the provisions of Article IV and Schedule C, the member shall have complete jurisdiction in determining the nature of such limitations, but they shall be no more restrictive than is necessary to limit the demand for the scarce currency to the supply held by, or accruing to, the member in question, and they shall be relaxed and removed as rapidly as conditions permit.
(c) The authorization under (b)above shall expire whenever the Fund formally declares the currency in question to be no longer scarce.
|BIS Bank for International Settlements|
|ESAF Enhanced structural adjustment Agency facility|
|GAB General Arrangements to Borrow|
|IMF International Monetary Fund|
|SAMA Saudi Arabian Monetary Agency|
|SDR Special drawing right|
|SFD Saudi Fund for Development|
|SFF Supplementary financing facility|