How to Increase the IMF’s Lendable Resources
The unprecedented shock confronting the global economy has led to a rapid increase in the demand for IMF financing. In order to ensure that the IMF continues to have sufficient resources to meet this demand, the Group of 20 leading economies (G-20) endorsed on April 2, 2009 measures to triple the IMF’s regular lending capacity from $250 billion to $750 billion. There are a range of options available for temporarily supplementing the Fund’s resources, including entering into bilateral loan agreements, issuing notes to the official sector, and enlarging existing borrowing arrangements. As a first step to supplement the Fund’s resources, a number of members have pledged to make bilateral loans to the IMF, and the possibility to issue notes is also being considered. At the same time, work to expand and make more flexible the New Arrangements to Borrow is underway. |
How the IMF finances itself
Quota subscriptions from member countries are the IMF’s main source of financing, but the organization can supplement its quota resources through borrowing if it believes that these resources might fall short of member countries’ borrowing needs. The IMF is authorized to borrow under its Articles of Agreement in order to replenish its holdings of currencies in the General Resources Account (GRA) that are needed in connection with its lending transactions.
Through the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB), a number of member countries and institutions stand ready to lend additional funds to the IMF of up to US$34 billion (US$50 billion) to forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system.
On February 13, 2009, the IMF concluded an agreement with Japan under which Japan committed to lend up to US$100 billion (about SDR 67 billion) as a measure to help overcome the current global economic and financial crisis.
A historical perspective on IMF borrowing
Borrowing has provided an important temporary supplement to quota resources in the past. Borrowing has been considered appropriate at times when the IMF’s current or prospective liquidity was regarded as inadequate. The Fund has also borrowed when the time and size of a general quota increase was uncertain, and to finance the operations of newly-established facilities.
Examples of the latter include the oil facilities in 1974–75, the supplementary financing facility in 1979–81, and the enlarged access policy of 1981–86. Borrowing peaked in the mid 1980s, but played its most important role in relation to the size of the IMF in the late 1970s when borrowing financed over 60 percent of IMF credit, and represented almost 30 percent of total quotas.
How the IMF could borrow
The focus is now on three different ways to increase the IMF’s lendable resources:
1) through bilateral borrowing agreements with members
2) through placing notes in the official sector
3) through enlargement of the multilateral NAB
Under the Fund’s Articles, the IMF has a range of options for borrowing. It can even borrow directly from the private sector. This option has been considered on several occasions in the past but has not been pursued. Private sector borrowing would raise a broader range of policy, financial and legal issues that would take more time to address, which could limit the immediate utility of this option in addressing the current crisis. In contrast, the first two options can supplement Fund resources in a timely manner. Enlargement of the existing NAB would allow a broader range of countries to help provide a stronger backstop to the Fund’s quota resources.
Bilateral loan agreements
Bilateral loan agreements offer flexibility and could potentially be put in place quickly. Under such an agreement, the member normally commits to allow the Fund to make drawings up to a specified ceiling during the period for which drawings can be made. Japan’s bilateral loan agreement with the IMF for up to $100 billion has already been signed and others have also made pledges.
Placement of IMF notes in the official sector
Some official creditors may prefer to invest in paper or notes issued by the IMF. The Board approved a framework for the placement of notes in the early 1980s, although no notes were actually issued. A note placement agreement (NPA) would enable creditors to commit to purchase notes up to a specified ceiling during an agreed period, at the request of the Fund. The notes would be transferable within the official sector (for instance, IMF members and their central banks) but could not be held privately.
Expanding the NAB
Work on expanding and enlarging the NAB, as well as making it more flexible, is underway. Currently there are 26 participants with credit arrangements in the NAB. So this would involve increasing the size of the current participants’ credit arrangements and expanding the number of NAB participants. Increasing the flexibility of the NAB would make it a more effective backstop to quota resources. Both an increase in current arrangements or an amendment to the NAB would require the agreement of current NAB participants representing 85 percent of total credit arrangements and a decision of the IMF. Also, in some cases, legislative approval may be needed before participants can agree to increases in their credit arrangements or to other significant changes in the NAB.