Most resources for IMF loans are provided by member countries, primarily through their payment of quotas. Borrowing provides a temporary supplement to quota resources and has played a critical role in enabling the Fund to meet members’ needs for financial support during the global economic crisis. Concessional lending and debt relief for low-income countries are financed through separate contribution-based trust funds.
The quota system
Each member of the IMF is assigned a quota, based broadly on its relative size in the world economy, which determines its maximum contribution to the IMF’s financial resources. Upon joining the IMF, a country normally pays up to one-quarter of its quota in the form of widely accepted foreign currencies (such as the U.S. dollar, euro, yen, or pound sterling) or Special Drawing Rights (SDRs). The remaining three-quarters are paid in the country’s own currency.
Quotas are reviewed at least every five years. Ad hoc quota increases of 1.8 percent were agreed in 2006 as the first step in a two-year program of quota and voice reforms. Further ad hoc quota increases were approved by the Board of Governors in April 2008, resulting in an overall increase of 11.5 percent. The 2008 reform came into effect in March 2011 following ratification of the amendment to the IMF’s Articles by 117 member countries, representing 85 percent of the IMF’s voting power.
The Fourteenth General Review of Quotas was completed two years ahead of the original schedule in December 2010, with a decision to double the IMF’s quota resources to SDR 476.8 billion.
The IMF’s gold holdings amount to about 90.5 million troy ounces (2,814.1 metric tons), making the IMF the third largest official holder of gold in the world. However, the IMF’s Articles of Agreement strictly limit its use. If approved by an 85 percent majority of voting power of member countries, the IMF may sell gold or may accept gold as payment by member countries but it is prohibited from buying gold or engaging in other gold transactions.
In December 2010, the IMF concluded the limited sales program covering 403.3 metric tons of gold, accounting for about one-eighth of its holdings, as approved by the Executive Board in September 2009. Sales totaling 222 tons were made to official holders, including the Reserve Bank of India (200 tons), the Bank of Mauritius (2 tons), the Central Bank of Sri Lanka (10 tons), and the Bangladesh Bank (10 tons). The gold sale program was conducted under strong safeguards to avoid market disruption and all gold sales were at market prices, including direct sales to official holders.
Profits of SDR 4.4 billion on the sale will fund an endowment as part of the IMF’s new income model, agreed to put the institution’s finances on a sustainable footing. The Executive Board also agreed that SDR 0.5–0.6 billion (end-2008 net present value terms) in resources linked to gold sales would be used to subsidize financing for low-income countries and boost the IMF’s concessional lending for 2009-14.
In February 2012, the Executive Board approved the partial distribution of the Fund’s general reserve to the membership of SDR 700 million from the windfall profits of the recent gold sales. The distribution became effective in October, 2012 when members representing over 90 percent of the distribution had provided satisfactory assurances that the resources would be made available for the Poverty Reduction and Growth Trust (PRGT).
In September 2012 the Executive Board approved a second distribution of the Fund’s general reserves attributed to the remaining gold sales profits as part of a strategy to make the PRGT sustainable in the longer term.
The IMF’s lending capacity
The IMF can use its quota-funded holdings of currencies of financially strong economies to finance lending. The Executive Board selects these currencies every three months. Most are issued by industrial countries, but the list also has included currencies of lower income countries such as Botswana, China, and India. The IMF’s holdings of these currencies, together with its own SDR holdings, make up its own usable resources. If needed, the IMF can temporarily supplement these resources by borrowing (see below).
The amount the IMF has readily available for new (non-concessional) lending is indicated by its forward commitment capacity (FCC). This is determined by its usable resources (including unused amounts under loan and note purchase agreements and amounts available under the IMF’s two standing multilateral borrowing arrangements (see below)), plus projected loan repayments over the subsequent twelve months, less the resources that have already been committed under existing lending arrangements, less a prudential balance.
The IMF maintains two standing multilateral borrowing arrangements—the expanded NAB and the General Arrangements to Borrow (GAB)—with a borrowing capacity of SDR 370.0 billion (about $555 billion). If the IMF believes that its quota resources might fall short of the needs of its member countries—for example, in the event of a major financial crisis—it can activate these arrangements.
In April 2010, the Executive Board adopted a proposal on an expanded and more flexible NAB, by which the NAB was expanded to SDR 367.5 billion, with the addition of 13 new participating countries, including a number of emerging market countries who made significant contributions to this large expansion. The expanded NAB came into effect on March 11, 2011 and was activated shortly afterwards for six months to the amount of SDR 211 billion (about $320 billion). On November 15, 2011, the National Bank of Poland joined the NAB, bringing its total size to SDR 370.0 billion (about $555 billion). The NAB was most recently activated for the maximum period of six months starting on April 1, 2013.
Since the onset of the global crisis, the IMF has signed a number of bilateral loan and note purchase agreements to supplement its quota resources. The first round of bilateral borrowing took place in 2009-2010 and these resources were used to finance commitments under IMF-supported arrangements that were approved prior to the first NAB activation (pre-NAB commitments). The use of 2009-2010 bilateral borrowing has been discontinued since April 1, 2013 and the remaining undrawn balances under pre-NAB commitments are financed with quota resources. Against the background of worsening economic and financial conditions in the euro area, in 2012, 38 countries committed to increase IMF resources further by US$461 billion through bilateral borrowing agreements. To date, agreements with 21 members have been finalized for a total amount of $400 billion. These resources will serve as a second line of defense to Fund’s quota and NAB resources.
IMF concessional lending and debt relief
The IMF provides two primary types of financial assistance to low-income countries: low-interest loans under the Poverty Reduction and Growth Trust (PRGT), and debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative, the Multilateral Debt Relief Initiative (MDRI), and Post-Catastrophe Debt Relief (PCDR). These resources come from member contributions and the IMF itself, rather than from the quota subscriptions. They are administered under the PRGT, the PRG-HIPC, MDRI-I and MDRI-II Trusts, and the PCDR Trust, for which the IMF acts as Trustee.
The predecessor of the PRGT was established to provide lending to eligible low-income countries in support of the related arrangements and to subsidize the market rate of interest down to 0.5 percent per year. Loan resources of about $42 billion (SDR 25.8 billion) have been committed by 23 contributors to the PRGT and its predecessors, while a larger number of member countries have made subsidy contributions.
In July 2009, the Executive Board approved far-reaching reforms of the concessional facilities, in which the PRGT replaced the PRGF-ESF Trust. As part of the reform package, the Board also agreed to provide exceptional interest relief on its concessional loans to all low-income countries, with zero interest payments through end-2011 and subsequently extended to end-2012, to help them cope with the crisis. These reforms became effective in January 2010, when all lenders and bilateral subsidy contributors to the PRGF-ESF Trust consented to the reforms.
It is expected that these reforms will boost the resources available to low-income countries to $17 billion during 2009-14. To meet the new financing commitments, additional loan resources of SDR 10.8 billion (about $16 billion) and new subsidy resources of SDR 1.5 billion (about $2.3 billion, end-2008 net present value terms) need to be mobilized. It is envisaged that, as in the past, the required additional loan resources will be mobilized through bilateral contributions. Most of the needed subsidy resources will, however, come from the IMF’s internal resources—including use of resources linked to the recently concluded gold sales—with additional bilateral contributions of about SDR 0.2-0.4 billion (about $0.3-0.6 billion) being sought to complete the financing package.
In September 2012, the Fund adopted a strategy to support concessional lending of about SDR 1¼ billion (about $2.0 billion) a year, on average, over the longer term. This capacity would be based on the resources and pledges received under the 2009 financing package as well as the new pledges for PRGT subsidy resources of at least SDR 1.575 billion expected from the distribution of reserves attributable to the remaining windfall gold sales profits (of SDR 1.75 billion).
On debt relief, the PRG-HIPC Trust was established to provide debt relief under the HIPC Initiative and to subsidize PRGT lending. The resources available to the Trust consist of grants and deposits pledged from 93 member countries and contributions from the IMF itself. The bulk of the IMF’s contribution comes from off-market gold transactions made during 1999–2000.
The MDRI-I and MDRI-II Trusts were established in early 2006 to provide debt relief under the MDRI. Financed from the IMF’s own resources of SDR 1.5 billion in the Special Disbursement Account (SDA), the MDRI-I Trust is to provide debt relief to countries (both HIPCs and non-HIPCs) with per capita incomes at or below $380 a year (on the basis of 2004 gross national income). The MDRI-II Trust is to provide debt relief to HIPCs with per capita incomes above $380 a year, with financing from bilateral resources of SDR 1.12 billion transferred from the PRGT.
The PCDR Trust was established in June 2010 to provide post-catastrophe debt relief. The Trust was initially financed by SDR 280 million (equivalent to around $422 million) of the IMF’s own resources, and is expected to be replenished through future donor contributions, as necessary.
In addition to the above, there is a separate administered account financed by a group of member countries for interest subsidies on IMF emergency assistance to PRGT-eligible countries in post-conflict or natural disaster situations.
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