Press Release No. 18/38

IMF Executive Board Discusses the Adequacy of the Fund’s Precautionary Balances

February 6, 2018

On January 29, 2018, the Executive Board of the International Monetary Fund (IMF) reviewed the adequacy of the Fund’s precautionary balances. [1]

Precautionary balances, comprising the Fund’s general and special reserves [2] and the Special Contingent Account (SCA-1), are one element of the IMF’s multi-layered framework for managing financial risks. These balances are ultimately available to absorb possible financial losses, thereby helping protect the value of reserve assets represented by member countries’ positions in the Fund and underpin the exchange of assets through which the Fund provides financial assistance to countries with balance of payments needs.

This review of the adequacy of the Fund’s precautionary balances took place on the standard two-year cycle. In conducting the review, the Executive Board applied the framework agreed in 2010. This framework includes an indicative range for precautionary balances, linked to developments in IMF total credit outstanding, that is used to guide decisions on adjusting the target for precautionary balances over time.

Executive Board Assessment [3]

Executive Directors welcomed the opportunity to review the adequacy of the Fund’s precautionary balances on the standard two-year cycle. They emphasized the importance of maintaining an adequate level of precautionary balances to mitigate financial risks, safeguard the strength of the Fund’s balance sheet, and protect the value of members’ reserve positions in the Fund. Directors considered that an adequate level of precautionary balances is an integral part of the Fund’s risk management framework, which includes the strength of the Fund’s lending policies and its preferred creditor status.

Directors agreed that the current rules-based framework adopted in 2010 for assessing the adequacy of precautionary balances remains broadly appropriate. They emphasized the continued importance of judgment and Board discretion in light of a broad assessment of financial risks facing the Fund. At the same time, Directors saw a continued need to keep the framework under review and refine it as warranted by further experience in its application. Many Directors called for a more holistic approach to the Board’s deliberations covering precautionary balances, the Fund’s income position, the Fund’s investment account and access limits and surcharge policies, and requested that staff adopt an approach that would better join these issues together in future Board discussions.

Directors supported retaining the medium-term indicative target for precautionary balances of SDR 20 billion. They observed that, while credit outstanding has continued to fall since the last review, and the indicative range for precautionary balances remains below the target, the financial risks facing the Fund remain elevated. In particular, the Fund’s lending portfolio remains highly concentrated and includes large exposures to members facing deep-rooted and difficult structural adjustment challenges. Also, despite an improved global economic outlook, continued downside risks and vulnerabilities may give rise to a further uptick in demand for Fund credit. Directors further noted that the Fund’s commitments under current precautionary arrangements remain elevated and the Fund’s lending capacity is broadly unchanged. Furthermore, the limited capacity of the burden sharing mechanism increases the potential reliance on precautionary balances in the event of large new arrears.

Directors supported maintaining the minimum floor for precautionary balances of SDR 15 billion, which remains broadly consistent with the risk of a rise in credit during the next lending cycle as well as maintaining a sustainable income position in the medium term. They noted that the floor, which was raised to its current level at the last review in 2016, is driven by longer-term considerations and is not expected to be changed often under the framework.

Directors welcomed the increase in the projected pace of reserve accumulation since the last review. Although precautionary balances are projected to remain just short of the SDR 20 billion target over the medium term, they did not see a compelling case at this time for taking additional steps to reach that target, recognizing that a significant build-up of reserves is projected in the next few years. Directors saw a continued need to monitor the pace of accumulation carefully, particularly as the projected path of precautionary balances is sensitive to developments in Fund credit and commitments, as well as other factors affecting Fund income.