Glossary of Selected Financial Terms

Terms and Definitions

Last Updated: October 31, 2006

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“Original sin”

A concept first introduced by Eichengreen and Hausmann in 1999 and subsequently extended by the authors and Panizza in 2002 and 2003, it refers to the inability of some countries (mainly developing countries) to borrow in their own currencies. As such, these countries are forced to borrow in foreign currencies, which, in turn exposes them to currency risk and potentially balance of payments crises. An explanation for the unprecedented accumulation of reserves by emerging markets in recent years is founded on the idea of self-insurance for precautionary purposes when original sin may be an issue.

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2007 Decision (also known as Decision on Bilateral Surveillance over Members’ Policies.)

Surveillance in its present form was established by Article IV of the IMF’s Articles of Agreement, as revised in the late 1970s following the collapse of the Bretton Woods system of fixed exchange rates. Under Article IV, member countries undertake to collaborate with the IMF and with one another to promote exchange rate stability. For its part, the IMF is charged with (i) overseeing the international monetary system to ensure its effective operation, and (ii) monitoring each member's compliance with its policy obligations under Article IV, Section 1. In June 2007, the legal framework for surveillance underwent a major update with the adoption of the Decision on Bilateral Surveillance over Members’ Policies. The Decision clarifies that country surveillance should be focused on assessing whether countries’ policies promote domestic and external stability. This means surveillance should mainly focus on monetary, fiscal, financial, and exchange rate policies and assess risks and vulnerabilities. It also provides guidance to members on how to conduct exchange rate policies in a way that is consistent with the objective of promoting exchange rate stability and avoiding manipulation.

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Access Limits

Policies that govern the use of IMF resources by its members, including access limits set in terms of members’ quotas. The access policy, including annual and cumulative limits, under the credit tranches and the Extended Fund Facility (EFF) are reviewed each year. Access under other facilities also is reviewed periodically. Access under the Supplemental Reserve Facility (SRF) and the Contingent Credit Line (CCL) are not subject to limits in relation to quotas.

Access Limits

Policies that govern the use of IMF resources by its members, including access limits set in terms of members’ quotas. The access policy, including annual and cumulative limits, under the credit tranches and the Extended Fund Facility (EFF) are reviewed each year. Access under other facilities also is reviewed periodically. Access under the Supplemental Reserve Facility (SRF) and the Contingent Credit Line (CCL) are not subject to limits in relation to quotas.

Accounting Unit

The IMF’s unit of account is the special drawing right, or SDR. Members’ currencies are valued by the IMF in terms of the SDR on the basis of their representative rates of exchange, normally against the U.S. dollar at spot market rates if available. Gold held by the IMF is valued at the average historical acquisition cost. As of January 31, 2000, the IMF held about 103 million fine ounces of gold at designated depositories with a book value of SDR 4.9 billion and a value at market prices of about SDR 21.7 billion.

Accounts, IMF

The IMF operates its financial functions through three separate accounting entities: the General Department, the SDR Department, and the Administered Accounts. The financial functions of the IMF are discharged by the Finance Department, which is an organizational unit of the staff. The IMF has 15 other departments that are organizational units, as well as the Office of the Managing Director, four institutes, offices in Paris, Geneva, Tokyo and at the United Nations, and resident representatives located in various member countries.

Adequate Safeguards

Under the Articles of Agreement, the IMF is to make its general resources temporarily available to members "under adequate safeguards." The IMF considers the principal safeguard of repayment to be strong economic adjustment programs but has also adopted specific measures to protect against misuse of IMF resources by ensuring that members have in place adequate accounting, reporting and auditing systems and provide the IMF timely, accurate and comprehensive information (see also Safeguard Assessments and Non-complying Purchase).

Adjustment Program

A detailed economic program, usually supported by use of IMF resources, that is based on an analysis of the economic problems of the member country and specifies the policies being implemented or that will be implemented by the country in the monetary, fiscal, external, and structural areas, as necessary, to achieve economic stabilization and set the basis for self-sustained economic growth.

Administered Accounts

Accounts established for financial and technical services, that are consistent with the purposes of the IMF, including the administration of resources contributed by individual members to provide assistance to other members. All operations and transactions involving the Administered Accounts are separate from those of the IMF’s other accounts.

Amendments to the Articles of Agreement

The Articles of Agreement have been amended three times: The First Amendment (July 1969) introduced the special drawing right (SDR). The Second Amendment (April 1978) reflected the change from the par value system based on a fixed price for gold to an international monetary system based on floating exchange rates. The Third Amendment (November 1992) allowed for the suspension of the voting and certain related rights of a member that fails to fulfill any of its obligations under the Articles (other than obligations with respect to SDRs). The Board of Governors in September 1997 adopted a resolution to amend the Articles to allow for a special one-time allocation of SDRs. The Fourth Amendment will become effective when three-fifths of membership having 85 percent of the total voting power have accepted it.

Amortization

Scheduled reimbursement or repayment of the amount borrowed.

Arrangement

A decision by the IMF that gives a member the assurance that the institution stands ready to provide foreign exchange or SDRs in accordance with the terms of the decision during a specified period of time. An IMF arrangement—which is not a legal contract—is approved by the Executive Board in support of an economic program under which the member undertakes a set of policy actions to reduce economic imbalances and achieve sustainable growth. Resources used under an arrangement carry with them the obligation to repay the IMF in accordance with the applicable schedule, and to pay charges on outstanding purchases (drawings) and loans.

Arrears

A stock of outstanding debt, either domestic or external, resulting from payments not being made when due. Arrears of the government may arise, for example, from a failure to pay interest or amortization obligations when due or when there is a delay in paying bills to contractors, wages to civil servants, or retirement benefits to pensioners beyond the date that these payments are legally obligated to be made.

Article IV Consultation

A regular, usually annual, comprehensive discussion between the IMF staff and representatives of individual member countries concerning the member's economic and financial policies. The basis for these discussions is in Article IV of the IMF Articles of Agreement (as amended, effective 1978) which direct the Fund to exercise firm surveillance over each member's exchange rate policies.

Articles of Agreement

An international treaty that sets out the purposes, principles, and financial structure of the IMF. The Articles, which entered into force in December 1945, were drafted by representatives of 45 nations at a conference held in Bretton Woods, New Hampshire. The Articles have since been amended three times, in 1969, 1978, and 1992, as the IMF responded to changes in the world economic and financial structure; see Amendments (to the Articles of Agreement).

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Balance of Payments (BOP)

A statement summarizing the economic transactions between the residents of a country and nonresidents during a specific period, usually a year. The BOP includes transactions in goods, services, income, transfers and financial assets and liabilities. Generally, the BOP is divided into two major components: the current account and the capital and financial account.

Balance of Payments (BOP)

A statement summarizing the economic transactions between the residents of a country and nonresidents during a specific period, usually a year. The BOP includes transactions in goods, services, income, transfers and financial assets and liabilities. Generally, the BOP is divided into two major components: the current account and the capital and financial account.

Bancor

The IMF's assessment of member’s compliance with their policy obligations under Article IV, Section 1 is implemented through the regular monitoring of economies and the associated provision of policy advice. Bilateral surveillance is intended to identify weaknesses that are causing or could lead to financial or economic instability. IMF’s Executive Board is responsible for conducting bilateral surveillance, and establishes both the legal framework and priorities of IMF surveillance.

Basic Period

Each of the consecutive periods of five years (or less) during which a determination is made whether there is a global need for additional international reserves to justify a new allocation of SDRs. There has not been an allocation since the third basic period (1978-81).

Basic Rate of Charge

The interest rate that is charged on outstanding IMF credit financed from the IMF's general resources. The basic rate is determined by the IMF's net income target in any financial year and is stated as a proportion of the SDR interest rate.

Benchmarks

In the context of IMF programs, a point of reference against which progress may be monitored. Benchmarks may be either quantitative or structural in content, and may be set on a quarterly or semi-annual basis.

Bilateral surveillance (An explanation of surveillance in general is found here and multilateral surveillance, here.)

In his original proposal for a post-war international monetary system, British economist John Maynard Keynes envisaged a global bank (the International Clearing Union or ICU), which would issue its own currency (bancor), based on the value of 30 representative commodities including gold, exchangeable against national currencies at fixed rates. All trade accounts would be measured in bancor, while each country would maintain a bancor account vis-à-vis the ICU (expected to be balanced within a small margin), and also have an overdraft allowance vis-à-vis the ICU. When countries experienced large trade deficits (more than half of the bancor overdraft allowance), they would pay interest on their accounts, undergo economic adjustments (possibly also capital controls) and devalue their currencies. Conversely, countries with large trade surpluses would also be subject to a similar charge and required to appreciate their exchange rates. Keynes expected that this mechanism would bring in a smooth symmetry of adjustments across countries and avoid global imbalances.

"Bretton Woods II."

An explanation for global imbalances first proposed by Dooley, Folkerts-Landau and Garber. It refers to the unilateral actions by emerging markets, especially in east Asia, to manage their exchange rates with reference to the US dollar. In particular, the authors noted that differing economic priorities (export-led growth in EMEs and financial liberalization in advanced countries) ensured that the present international monetary system would be a mixed system of fully floating and managed exchange rates. The authors further contend that the system is robust, though others disagree. Cooper has also noted that the deeper and more sophisticated financial system in advanced countries (in particular, the US) and its more favourable demographics naturally favour such a mixed system. The name “Bretton Woods II” aims to signal parallels between the unilateral actions of some countries at the present time and the earlier (multilateral) compact that characterised the original Bretton Woods system.

Bretton Woods System, The

Refers to the international monetary system in operation in the post-war period until the end of the gold exchange standard in 1971. The name comes from the agreements put in place at Bretton Woods, New Hampshire, where delegations from 44 countries gathered to construct a post-war global monetary and financial architecture, including creating the IMF and the World Bank. The system was characterized by a system of adjustable pegs to the US dollar, which in turn, was pegged to gold at $35 an ounce. Countries could adjust their currency values in consultation with the IMF and their partners. While the system largely prohibited restrictions on current account transactions, capital controls were explicitly allowed, and indeed seen as a means of ensuring the system’s stability. By the late 1960s, a fundamental tension arose whereby the domestic macroeconomic policy imperatives in the United States were at odds with the need to maintain the stability and smooth functioning of the international monetary system. This spurred an effort to find a new reserve asset that could act as a substitute for the dollar or any other national currency, thereby addressing this flaw, which led to the creation of the SDR. The system came to an end when the United States dropped the link between the dollar and gold due to a need to regain monetary independence and the fiscal expenditures related to, among others, the war in Vietnam.

Broad Money

A measure of the money supply in an economy, with broad coverage. Broad money usually includes national currency and deposits held by residents in depository institutions; these deposits may be either transferable, such as demand deposits, or nontransferable, such as term deposits; deposits denominated in foreign currency and held by residents may also be included in broad money.

Budget

A statement of the projected revenues, proposed expenditures, and planned financing of any surplus or deficit of an entity, especially government

Burden Sharing

Decisions adopted by the Executive Board of the IMF since 1986 regarding the sharing, between members paying charges and members receiving remuneration, of the financial consequences to the IMF of overdue obligations. An amount equal to overdue charges (excluding special charges) and an allocation to the Special Contingent Account are generated each quarter by an upward adjustment of the rate of charge and a downward adjustment of the rate of remuneration (see Extended Burden Sharing, Special Charges, Remunerated Reserve Tranche, and Remuneration).

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Capital Account

A standard component of the balance of payments accounts, usually a shortened term for the capital and financial account, which refers to (i) capital transfers and acquisition/disposal of non-produced, nonfinancial assets and (ii) financial assets and liabilities.

Capital account liberalization

Refers to the process of removing or eliminating restrictions that govern the movement of capital across national borders. While the IMF Articles of Agreement do not, with very limited exceptions, impinge on members’ ability to regulate capital flows, there has been a general tendency to greater capital account liberalization over time, including in emerging markets. In theory, capital account liberalization can enhance long-term growth prospects through allowing: (i) access to finance for investment at lower cost; (ii) consumption-smoothing in the face of adverse shocks; (iii) diversification of assets and liabilities across countries; (iv) “technology transfer” from foreign banks; and (v) greater discipline on macroeconomic policy. However, the empirical evidence is mixed, with some studies suggesting considerable gains while others pointing to a weak or even negative relationship between liberalization and growth. It also appears that not all capital is equal: foreign direct investment is generally seen to be beneficial while short-term debt is seen to carry greater risk. In view of this, most commentators, including the IMF, have advocated a cautious and sequenced liberalization framework embedded in a larger program of macroeconomic and financial reforms. In the late 1990s, an effort was made to enshrine capital account liberalization as part of members’ obligations, with safeguards and transitional arrangements, under the IMF Articles of Agreement. This effort was not successful, however, following the onset of the Asian financial crisis. Nevertheless, agreements leading to greater liberalization continue to be concluded through a variety of vehicles including bilateral agreements (e.g., free trade and investment guarantee agreements), regional treaties (e.g., the Treaty on the Functioning of the European Union) and other agreements (e.g., the OECD Code of Liberalization of Capital Movements).

Capital controls

Refer to the measures affecting capital flows into and out of a country. The IMF Articles of Agreement do not, with very limited exceptions, impinge on members’ ability to regulate capital flows, and most countries do maintain some controls on certain aspects of capital flows. On occasion, countries have temporarily imposed capital controls as a means of creating policy space to enact countercyclical monetary policies and, in the face of persistent and large inflows, mitigate the build up of risks. Recent work by IMF staff suggest that these tools could have a role, especially in the face of large and potentially destabilizing inflows, but that these need to be anchored in an appropriate macroeconomic policy framework. The IMF surveys countries to ascertain the measures in place that restrict capital flows. The results are reported in the Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). The AREAER forms the basis for the various measures of financial integration and openness including the well-known ones compiled by Chinn and Ito, Quinn, and Schindler.

Carry trade

An investment strategy whereby an investor borrows in a currency that carries a low interest rate and invests in assets in another economy where rates of return are higher. In most cases, a large and persistent interest differential seems to determine carry trade flows, though conceivably other aspects of returns (expectations of exchange rate appreciation, differing growth and profit outlook) may also play a part. Initially, it was used to describe how leveraged investors in Japan behaved (borrowing in yen cheaply to invest in high yielding assets, mainly in Asia and the Pacific) but has now also come to describe investor behavior in the eurozone and Switzerland in the run up to the crisis, and potentially from the US to faster growing emerging markets in the post-crisis period.

Commitment Fee

A charge of 1/4 of 1 percent a year payable at the beginning of each period (usually one year) on the resources committed for that period under Stand-By and Extended Arrangements. This fee is reimbursed when committed resources are drawn.

Compensatory Financing Facility (CFF)

A special IMF financing facility (window) that was established to provide resources to members to cover shortfalls in export earnings and services receipts, as well as excesses in cereal import costs, that are temporary and arise from events beyond the members’ control.

Conditionality

Economic policies that members intend to follow as a condition for the use of IMF resources. These are often expressed as performance criteria (for example, monetary and budgetary targets) or benchmarks, and are intended to ensure that the use of IMF credit is temporary and consistent with the adjustment program designed to correct a member’s external payments imbalance.

Consumer price index (CPI)

A measure of a country's general level of prices based on the cost of a typical basket of consumer goods and services.

Convertibility

The ability to freely use a currency for international transactions by the residents of any country.

Credit Tranche Policies

Policies under which members may make use of IMF credit. Provided a member is making reasonable efforts to solve its balance of payments problems, it can make use of IMF resources up to the limit of its first credit tranche, equivalent to 25 percent of its quota, on liberal terms. Requests for the use of IMF resources in the "upper credit tranches," or more than 25 percent of quota, require substantial justification for the expectation that the member's balance of payments difficulties will be resolved within a reasonable period of time.

Cross-Conditionality

To avoid duplication of requirements by the IMF and the World Bank—known as cross-conditionality—there is an understanding that each institution must proceed with its own financial assistance according to the standards laid down in its Articles of Agreement and the policies adopted by its Executive Board. In other words, compliance with the requirements of one institution ought not be made a condition for the availability of financial assistance by the other institution.

Currency Holdings

The currency holdings of the IMF are the resources held at its disposal in the IMF No. 1 Account, No. 2 Account, and IMF Securities Account in its member countries which are obtained as a result of member's quota payments and transactions and operations between the IMF and members.

Current Account

The record of all transactions in the balance of payments covering the exports and imports of goods and services, payments of income, and current transfers between residents of a country and nonresidents.

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Debt

Outstanding financial liabilities arising from past borrowing. Debt may be owed to external or domestic creditors and typically, debt financing is in the form of loans or bonds. The debtor may be either a public (government) or private sector entity.

Debt Relief

Agreements by creditors to lessen the debt burden of debtor countries by either rescheduling interest and principal payments falling due over a specified time period, sometimes on a concessional basis, or by partially or fully cancelling debt service payments falling due during a specified period of time.

Debt Service

Scheduled interest and principal payments (amortization) due on public and publicly guaranteed debt outstanding during a year.

Default

In finance, default is the term used when a party is unwilling or unable to pay their debt obligations. This can occur with all debt obligations including bonds, debentures, mortgages, loans, and notes. Default can also occur with sovereign bonds, that is, governments can default on their payments to creditors. In corporate finance, a default is typically a prelude to bankruptcy. With most loans the total amount owed becomes immediately payable on the first instance of a default of payment.

Depository and Fiscal Agency

Each member designates a fiscal agency (ministry of finance, central bank, or similar entity) as a channel for the conduct of financial transactions with the IMF and a depository (central bank or similar agency) to maintain the accounts of the IMF (the IMF No. 1 and No. 2 Accounts and the Securities Account).

Designation Plan

A list of participants in the SDR Department whose balance of payments and reserve positions are sufficiently strong for them to be called upon to provide freely usable currency in exchange for SDRs within a financial quarter, together with the amounts they may be called upon to provide. The designation plan is established in advance of each financial quarter (currently only on a precautionary basis) by approval of the Executive Board.

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Early Repurchase

A repurchase (repayment) made before the end of the established maximum repurchase period. Under specific circumstances, the IMF may call upon a member to make an early repurchase.

Early Repurchase Expectation

The expectation of repurchase (repayment) in advance of its originally scheduled due date. According to the Articles of Agreement, a member is normally expected to repurchase its currency (make repayment of usable currencies) as its balance of payments and reserve positions improve. The current early repurchase policy has been in effect since June 1979 and establishes amounts expected to be repurchased taking into account the level of a member’s reserves and their growth, as well as other parameters. A separate repurchase expectation applies to purchases made under the Supplemental Reserve Facility and the Contingent Credit Line. Such repurchases are expected one year before they become obligatory, except that at the request of the member the IMF may decide to extend the expectation period by up to one year, though not beyond the due date.

Emergency Financing Mechanism

A set of exceptional procedures to facilitate rapid Executive Board approval of IMF financial support for a member while ensuring the conditionality necessary to warrant such support. These emergency measures are used only in circumstances representing, or threatening to give rise to, a crisis in a member’s balance of payments that requires an immediate IMF response.

Emergency Post-conflict Assistance

Since 1962, the IMF has provided emergency assistance in the form of outright purchases to help members overcome balance of payments problems arising from sudden and unforeseeable natural disasters. This assistance was extended in September 1995 to cover certain post-conflict situations. Assistance is normally limited to 25 percent of quota and is available only if the member intends to move within a relatively short time to an IMF arrangement. In post-conflict cases an additional 25 percent of quota can be provided in certain circumstances.

Emerging Markets

The capital markets of developing countries that have liberalized their financial systems to promote capital flows with nonresidents and are broadly accessible to foreign investors.

Enhanced Structural Adjustment Facility (ESAF)

Facility established in December 1987 to provide assistance on concessional terms to low-income member countries facing protracted balance of payments problems. (Changed to the Poverty Reduction and Growth Facility in 1999.)

Enhanced Surveillance Procedure

Policy introduced in 1985 to help members make progress in addressing their debt problems and improving relations with their creditors. During the enhanced surveillance period, economic developments in the member country are monitored by the IMF. The staff prepares an assessment of the member’s economic program, which may be presented by the member to official and private creditors for consideration. The policy was broadened in 1993 to cover any situation in which a member would find this enhanced monitoring by the IMF helpful.

Exchange Rate

The price of one currency in terms of another. Most commonly, exchange rates are expressed as the number of units of domestic currency that will purchase one unit of foreign currency (e.g. units of currency per U.S. dollar). An exchange rate may also be defined as the inverse: the number of units of foreign currency that one unit of domestic currency will purchase.

Exchange rate regimes

In the present IMS, countries have wide latitude to choose exchange rate frameworks, ranging from a fully free-floating currency with minimal intervention, to completely adopting the currency of another country. Currently, the IMF classifies a country as having one of 4 regimes based on the degree of flexibility and the existence of formal or informal commitments to exchange rate paths. These are: exchange rate anchors such as currency boards, full dollarization, pegs, and bands; monetary aggregate targeting; inflation targeting; and others. Recent work by IMF staff suggests that, with floating exchange rates among systemic countries, the system can support more active exchange rate management at the periphery, but as emerging markets increasingly migrate to the core, potential systemic instability arises. Further, even with floating exchange rates, an important concern is that countries at the core of the system need to maintain macroeconomic discipline to foster confidence in their reserve assets, while those that are non-systemic need to anchor their policies on sound fundamentals and prudent policies.

Excluded Holdings

The part of a member’s currency held in the General Resources Account (GRA) that reflects the member’s use of IMF credit and is therefore excluded when determining the member’s reserve tranche position in the IMF. When determining a member’s reserve tranche position, holdings in the IMF No. 2 Account that are less than 1/10th of 1 percent of the member’s quota also are excluded.

Exorbitant privilege

Coined by the then-Finance Minister of France, Valéry Giscard d'Estaing, the term refers to the greater macroeconomic space accorded to a country issuing a major reserve currency (especially the United States) by virtue of the greater liquidity of its markets, ability to borrow in its own currency abroad at lower cost, as well as the seigniorage earned from issuing an internationally used currency (distinct from, but associated with, its role as a reserve asset). Owing to the reliance of the IMS on the quality of policies in the centre country, some have spoken of an “exorbitant responsibility” or “exorbitant duty”, especially if no likely alternative is apparent. The extent to which this privilege (and resulting responsibility) is significant is the subject of some disagreement, with some commentators arguing it is trivial, and others contending that a large benefit accrues to the U.S.

Extended Arrangement

A decision of the IMF under the Extended Fund Facility that gives a member the assurance of being able to purchase (draw) resources from the General Resources Account (GRA) in accordance with the terms of the decision during a specified period, usually three years, and up to a particular amount.

Extended Burden Sharing

The IMF established a second Special Contingent Account on July 1, 1990, and decided to place SDR 1 billion to the account within about five years (through quarterly downward adjustments to the rate of remuneration and upward adjustments to the basic rate of charge). These actions were taken to safeguard against possible losses arising from undischarged repurchase obligations related to purchases financed by the encashment of "rights" following the successful completion of a rights accumulation program. The target of SDR 1 billion was reached in February 1997. The account was dissolved in 1999 and the resources made available to contributors to assist in financing special assistance to poor countries under the HIPC/PRGF initiatives. (See Burden Sharing.)

Extended Fund Facility

A financing facility (window) under which the IMF supports economic programs that generally run for three years and are aimed at overcoming balance of payments difficulties resulting from macroeconomic and structural problems. Typically, the member's economic program states the general objectives for the three-year period and the specific policies for the first year; policies for subsequent years are spelled out at the time of program reviews (see Extended Arrangement).

External Debt

Financial obligations to a creditor who is not a resident of the debtor's country

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Financial Transactions Plan

The Executive Board adopts a financial transaction plan (previously known as the operational budget) for each upcoming quarter specifying the amounts of SDRs and selected member currencies to be used in purchases and repurchases (transfers and receipts) expected to be conducted through the General Resources Account during that period.

Financing Assurances

An IMF policy developed in response to the external debt crisis of the late 1970s and early 1980s to help mobilize financial support from the international banking community for countries experiencing debt-servicing difficulties. Under the policy, the IMF would not make its resources available to a member undertaking an adjustment program until receiving assurances that the financing for the program would be forthcoming.

First Credit Tranche Purchase

See Credit Tranche Policies.

Floating Facilities

Purchases (drawings) made under the special facilities (currently the Compensatory Financing Facility and the Supplemental Reserve Facility) are not counted in calculating annual and cumulative access limits. These are therefore termed "floating facilities." However, for the purpose of determining the level of conditionality (whether first tranche or higher), all purchases are taken into account.

Foreign Direct Investment (FDI)

The acquisition of at least ten percent of the ordinary shares or voting power in a public or private enterprise by nonresident investors. Direct investment involves a lasting interest in the management of an enterprise and includes reinvestment of profits.

Foreign Exchange

Any type of financial instrument that is used to make payments between countries is considered foreign exchange. Examples of foreign exchange assets include foreign currency notes, deposits held in foreign banks, debt obligations of foreign governments and foreign banks, monetary gold, and SDRs.

Freely Usable Currency

A currency that the IMF has determined is widely used to make payments for international transactions and widely traded in the principal exchange markets. At present, the euro, Japanese yen, pound sterling, and U.S. dollar are classified as freely usable currencies.

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G20 MAP

See Mutual Assessment Program.

General Arrangements to Borrow (GAB)

Long-standing arrangements under which 11 industrial countries stand ready to lend to the IMF to finance purchases (drawings) that aim at forestalling or coping with a situation that could impair the international monetary system. The GAB currently amounts to SDR 17 billion, and there is also an associated arrangement with Saudi Arabia for SDR 1.5 billion. Since their establishment in 1962, these arrangements have been renewed every four or five years.

General Department

An accounting entity of the IMF comprised of the General Resources Account (GRA), the Special Disbursement Account (SDA), the Investment Account (not activated), and the Borrowed Resources Suspense Accounts (inactive since December 1991).

General Resources

Assets, whether ordinary (owned) or borrowed, maintained within the IMF’s General Resources Account (GRA)

General Resources Account (GRA)

The principal account of the IMF, consisting of a pool of currencies and reserve assets, representing the paid subscriptions of member countries' quotas. The GRA is the account from which the regular lending operations of the IMF are financed.

Global financial safety net

Refers to the global network of crisis financing instruments. This network encompasses self-insurance (reserves); bilateral arrangements (e.g., swap lines between central banks during periods of stress); regional arrangements such as those in Asia, Europe and Latin America where members stand ready to support one another; and a multilateral system with the IMF at its centre. An important part of the IMF’s reform agenda is to weave these elements of the safety net more closely together so that they are complementary and comprehensive. In recent discussions with regional financing arrangements from Asia, Europe, Latin America and the Middle East, it was agreed that the ultimate objective should be to strengthen surveillance and the effectiveness of co-financing mechanisms for countries vulnerable to crises. This could be done through a variety of means including IMF involvement in surveillance, such as being done with Asia; and exploring co-financing arrangements during crises, as being carried out in Europe.

Global financial safety net

Refers to the global network of crisis financing instruments. This network encompasses self-insurance (reserves); bilateral arrangements (e.g., swap lines between central banks during periods of stress); regional arrangements such as those in Asia, Europe and Latin America where members stand ready to support one another; and a multilateral system with the IMF at its centre. An important part of the IMF’s reform agenda is to weave these elements of the safety net more closely together so that they are complementary and comprehensive. In recent discussions with regional financing arrangements from Asia, Europe, Latin America and the Middle East, it was agreed that the ultimate objective should be to strengthen surveillance and the effectiveness of co-financing mechanisms for countries vulnerable to crises. This could be done through a variety of means including IMF involvement in surveillance, such as being done with Asia; and exploring co-financing arrangements during crises, as being carried out in Europe.

Global imbalances

Refers to the phenomenon whereby some major systemic countries—most notably the US – run large and persistent current account deficits, which are mirrored by large surpluses in a number of countries, especially export-oriented economies in east Asia, and the oil exporters. They also refer to savings/investment balances, where countries have an excess of saving versus investment opportunities. The lack of an automatic mechanism for dealing with global imbalances was seen as a key flaw in the international monetary system, and thus became a key concern of the international community, leading the IMF to convene multilateral consultations to discuss the issue in 2006. The worry was these imbalances were unsustainable and could lead to a disorderly adjustment caused by a collapse in the value of the US dollar. In the global financial crisis, a flight to safety led to a strengthening of the dollar. Nevertheless, many remain concerned that allowed to persist, these imbalances would derail the recovery by stymieing the needed adjustment in deficit countries. Some commentators also point to the potential for the large capital flows engendered by these imbalances to contribute to asset price bubbles and sow the seeds for further instability.

Globalization

The process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies. Major factors in the spread of globalization have been increased trade liberalization and advances in communication technology.

Gold standard

A global monetary system whereby countries anchored their currencies to gold. While there are variations of the system, in all of them, it was expected that surplus countries would eventually experience domestic inflation, which would erode their competitiveness while deficit countries would see their competitiveness restored through disinflation or even deflation. In practice, the system was not able to function as expected as adherence to the standard often removed the prospect of allowing domestic monetary policy to adjust to demand conditions. While proponents point to this as a mechanism that forces discipline on governments and central banks, others have noted a number of problems including that the supply of gold changes slowly and often unpredictably leading to deflation in the long run, and hoarding of specie by surplus countries that may cause disproportionate contractions in other countries in the short term. Most commentators have concluded that adherence to the gold standard was, at the very least, not helpful in the face of the Great Depression in the early 20th Century, though disagreements remain on how central the system was in causing and propagating the downturn.

Gross Domestic Product (GDP)

Gross domestic product is the most commonly used single measure of a country's overall economic activity. It represents the total value of final goods and services produced within a country during a specified time period, such as one year.

Gross National Product (GNP)

Gross national product was formerly used as a measure of a country's overall economic activity, equal to GDP less compensation of employees and property income payable to the rest of the world plus the corresponding items receivable from the rest of the world; GNP has been renamed gross national income (GNI) in the System of National Accounts.

Group of Twenty (G-20)

Formed in 1999, the G-20 brings together finance ministers and central bank governors from 19 countries and the European Union (represented by the President of the European Council and the European Central Bank). The heads of governments of the G-20 nations began meeting periodically from 2008, in the wake of the global financial crisis. While an informal group with no permanent secretariat, the G-20 has become a key forum, bringing together the key advanced countries of the G-7 (Canada, France, Germany, Italy, Japan, the US and the UK), Australia, and 11 major emerging markets (Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa, and Turkey). Leadership of the G-20 rotates, with France holding the chair in 2011. More information on the IMF’s relationship with the G-20 can be found here.

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Heavily Indebted Poor Countries Initiative (HIPC)

The HIPC Initiative, adopted in 1996, provides exceptional assistance to eligible countries to reduce their external debt burdens to sustainable levels, thereby enabling them to service their external debt without the need for further debt relief and without compromising growth. It is a comprehensive approach to debt relief which involves multilateral, Paris Club, and other official and bilateral creditors. To be eligible, countries must (1) have established a strong track record of performance under programs supported under the Poverty Reduction and Growth Facility (PRGF) and the International Development Association (IDA); (2) be IDA-only and PRGF-eligible; (3) face an unsustainable debt burden; and (4) have developed a Poverty Reduction Strategy Paper. A strong track record of policy implementation is intended to ensure that debt relief is put to effective use. Following a comprehensive review in 1999, the Initiative was enhanced to provide faster, deeper, and broader debt relief and to strengthen the links between debt relief, poverty reduction, and social policies. In 2005, the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI).

Holdings Rate

The exchange rate of the member’s currency against the SDR, at which the IMF holds the currency of the member (see Representative Rate).

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Inflation

A sustained increase in the general price level, often measured by an index of consumer prices. The rate of inflation is the percentage change in the price level in a given period.

Interest

Scheduled payments made to a creditor in return for the use of borrowed money and which will be determined by the interest rate, the amount borrowed (principal) and the duration of the loan.

Interest Rate

The fixed charge or return, usually expressed on an annual basis, on a financial asset expressed as a percentage of the price of the asset.

International Monetary Fund (IMF)

Organization established by international treaty in 1945 to promote monetary cooperation among its members. Its statutory purposes include promoting the balanced growth of international trade, stability of exchange rates and the maintenance of orderly exchange arrangements among members. The IMF monitors global economic and financial developments and gives policy advice, lends to member countries with balance of payments problems, and provides technical assistance in its areas of expertise.

International monetary system (IMS)

Refers to the rules and institutions for international payments. Less abstractly, it refers to the currency/monetary regimes of countries, the rules for intervention if an exchange rate is fixed or managed in some way, and the institutions that back those rules if there is a problem (through official credits, controls, or parity changes). After the collapse of the Bretton-Woods system, the present system has evolved in an ad hoc fashion with the key currencies floating against one another, and currencies of economies on the periphery largely managed in some manner against these core currencies (often the U.S. dollar), leading some to dub the arrangements a “non-system”. A key notion in this setup is that of reserve asset: countries, even those with floating currencies, will need to have access to foreign currency assets that can be used to intervene in markets during periods of stress. This is even more so if a country fixes or manages its exchange rate. Since the demise of real assets like gold as monetary anchors, the U.S. dollar has been the world’s principal reserve asset, with the euro playing an important role. Other important reserve currencies include the British pound and the Japanese yen. In recent years, the accumulation of reserves by emerging market economies has accelerated, and risks undermining the stability of the IMS.

Investment

Investment from the perspective of the domestic economy is the purchase of capital equipment, e.g., machines and computers, and the construction of fixed capital, e.g., factories, roads, housing, that serve to raise the level of output in the future. From the perspective of an individual, investment is expenditure, usually on a financial asset, designed to increase the individual's future wealth.

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Letter of Intent (LOI)

A document in which a member country of the IMF formally requests an arrangement to use the Fund's financial resources and describes its commitments to strengthen its economic and financial policies. The letter of intent may be accompanied by a more detailed Memorandum of Economic and Financial Policies

LIBOR

LIBOR stands for the London Interbank Offered Rate and is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale (or "interbank") money market.

Liquidity Ratio

A measure used to gauge the IMF's capacity to provide financial assistance to members and meet members' claims on the IMF. It is the ratio of the IMF’s net uncommitted usable resources to its liquid liabilities.

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Money

Anything that is generally accepted in exchange as payment for goods and services. While the key function of money is to act as a medium of exchange, money also serves as a store of value, unit of account, and standard of deferred payment.

Moral Hazard

In general, a feature of insurance that arises when the provision of insurance increases the probability of the occurrence of the event being insured against, usually because the insurance diminishes the incentives for the insured party to take preventive actions. For example, banks may lend for riskier ventures than they otherwise would if they expect losses to be effectively covered by the government through deposit insurance or otherwise. On an international level, recourse to IMF financing may generate moral hazard on the part of both borrowers and lenders, leading to less due diligence by private lenders, and allowing borrowing governments to incur larger debts and get by with weaker policies and institutions. Hence, the availability of IMF financing, while offering a cushion to countries in times of financial crises, may increase the likelihood of such crises occurring.

Multilateral Debt Relief Initiative (MDRI)

The Multilateral Debt Relief Initiative (MDRI) provides for 100 percent relief on eligible debt from three multilateral institutions to a group of low-income countries to free up additional resources to help these countries reach the MDGs. All countries that reach the completion point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative), and those with per capita income below US$380 and outstanding debt to the Fund at end-2004, are eligible for the MDRI. Unlike the HIPC Initiative, the MDRI does not propose any parallel debt relief on the part of official bilateral or private creditors, or of multilateral institutions beyond the IMF, IDA, and the AfDF.

Multilateral surveillance (for surveillance in general, see here and bilateral surveillance, see here)

Multilateral surveillance refers to the process of assessing developments, risks and vulnerabilities of the international monetary system as a whole. The IMF conducts such surveillance through a number of vehicles including reports (World Economic Outlook, Global Financial Stability Reports), vulnerability and early warning assessments (Early Warning Exercise and vulnerability assessments for advanced and emerging market economies, and most recently, low-income countries) and in cooperation with other groups, most notably the G-20 Mutual Assessment Program. The IMF’s mandate on conducting multilateral surveillance is set out in its obligation to “oversee the international monetary system to ensure its effective operation”.

Multiple currency system

Refers to an international monetary system that is based on a group of currencies rather than primarily just one currency. In a multiple currency system, it is conceivable that there would be greater discipline on reserve currency issuers as users could shift their holdings from one currency to another. This would also spread the “exorbitant privilege” currently accruing to the US by virtue of the dollar’s dominance.

Mutual Assessment Program

At the Pittsburgh Summit in 2009, G-20 Leaders launched the Framework for Strong, Sustainable, and Balanced Growth. The backbone of this framework is a multilateral process through which G-20 countries identify objectives for the global economy and the policies needed to reach them. The IMF was requested to provide the technical analysis needed to evaluate how members’ policies fit together—and whether, collectively, they achieve the G-20’s goals. Specifically, the G-20 requested that the Fund (1) analyze how the G-20’s respective national and regional policy frameworks fit together, and (2) develop a forward-looking analysis of whether policies pursued by individual G-20 countries are collectively consistent with more sustainable and balanced trajectories for the global economy. A blog post on the MAP by the Fund’s Economic Counsellor can be found here, and an IMF Report on the MAP is posted here.

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Narrow money

Designation of a narrow measure of the money supply - usually including currency held outside banks and demand deposits.

Net Cumulative SDR Allocations

Cumulative allocations of SDRs less any SDR cancellations. (As of end-March 2000, there have been no cancellations of SDRs.)

New Arrangements to Borrow (NAB)

Arrangements, which became effective in 1998, under which 25 member countries or their financial institutions stand ready to lend to the IMF under circumstances similar to those covered by the General Arrangements to Borrow (GAB). The NAB do not replace the GAB but are to be the first and principal recourse in the event of a need to provide supplementary resources to the IMF. The total amount of the NAB is SDR 34 billion, and the combined amount that can be drawn under the NAB and the GAB also cannot exceed SDR 34 billion.

Nominal effective exchange rate

A measure of the exchange rate of a currency in terms of the exchange rates of a group of currencies. It is typically calculated for a particular country's currency as a weighted average of the bilateral exchange rates of the currencies of that country's main trading partners and presented as an index number.

Noncomplying Purchase

A purchase (drawing) made by a member under a Stand-By or an Extended Arrangement that the member is later found not entitled to make—that is, a purchase made on the basis of incorrect information. The IMF has a set of guidelines to apply in such cases.

Norm for Remuneration

Calculated as the total of (1) 75 percent of a member’s quota before the Second Amendment of the Articles (April 1, 1978), plus (2) any subsequent increases in its quota. For a country that became a member after April 1, 1978, the norm is the percentage of its quota equal to the weighted average relative to quota of the norms applicable to all other members on the date that the member joined the IMF, plus the amounts of any increases in its quota afterwards. At each quota increase, a member’s norm rises, becoming closer to 100 percent of its quota. A member’s norm determines its remunerated reserve tranche position.

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Official Development Assistance (ODA)

Official development assistance - loans, grants, and technical assistance that governments provide to developing countries. It is administered with the promotion of the economic development and welfare of developing countries as its main objective, and it is concessional in character, containing a grant element of at least 25% (calculated at a rate of discount of 10%). "Aid" often stands for development aid and is usually used to refer specifically to Official Development Assistance (ODA).

Operations

The use or receipt of monetary assets by the IMF, other than exchanges of monetary assets (that is, other than transactions.) Examples are the payment of remuneration and receipt of charges. Operations in SDRs are uses of SDRs other than exchanges of SDRs for monetary assets (that is, other than transactions by agreement or with designation).

Ordinary Resources

Assets held in the General Resources Account (GRA) that derive from members’ quota subscription payments and the undistributed net income from the use of these resources.

Outright Purchase

A purchase (drawing) for which there is no formal IMF arrangement, such as a purchase under a special policy, e.g., the policy on the emergency assistance.

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Performance Criteria

Macroeconomic indicators such as monetary and budgetary targets that must be met, typically on a quarterly or semi-annual basis, for the member to qualify for purchases under the phasing schedule for Stand-By Arrangements, Extended Fund Facility (EFF) Arrangements, and Poverty Reduction and Growth Facility Arrangements. Some performance criteria are those necessary to implement specific provisions of the Articles of Agreement. (See also Benchmarks.)

Periodic Charges

Charges (interest) are payable by a member on its outstanding use of IMF credit.

Phasing

The practice of making the IMF’s resources available to its members in installments over the period of an arrangement. The pattern of phasing can be even, front-loaded, or back-loaded, depending on the financing needs and the speed of adjustment.

Poverty Reduction and Growth Facility (PRGF)

Established as the Enhanced Structural Adjustment Facility (ESAF) in 1987, enlarged and extended in 1994, and further strengthened in 1999 to make poverty reduction a key and more explicit element. The purpose of the facility is to support programs to strengthen substantially and in a sustainable manner balance of payments positions, and to foster durable growth, leading to higher living standards and a reduction in poverty. Eighty low-income countries are currently PRGF-eligible. Loans are disbursed under three-year arrangements, subject to observance of performance criteria and the completion of program reviews. Loans carry an annual interest rate of 0.5 percent, with a 5-1/2 year grace period and a 10-year maturity.

Precautionary Arrangement

A Stand-By or an Extended Arrangement under which the member agrees to meet specific conditions for use of IMF resources although it has indicated to the Executive Board its intention not to make purchases (drawings).

Precautionary Balances

Balances held in the form of General and Special Reserves, and the Special Contingent Accounts that were established in the context of the arrears strategy.

Prescribed SDR Holder

A nonparticipant in the SDR Department that has been prescribed by the IMF as a holder of SDRs.

Program Monitoring

Monitoring by the IMF to determine whether the performance criteria specified and policy commitments made in the context of a Stand-By or an Extended Arrangement are being observed by the member receiving resources (see Conditionality).

Purchases and Repurchases

When a member draws on the IMF's general resources, it does so by purchasing SDRs or other members’ currencies in exchange for its own (domestic) currency. The IMF’s general resources are, by nature, revolving: purchases (or drawings) have to be reversed by repurchases (or repayments) in installments within the period specified for a particular policy or facility.

Purchasing Power Parity (PPP)

A theory which relates changes in the nominal exchange rate between two countries currencies to changes in the countries' price levels. The purchasing power parity theory predicts that an increase in a currency's domestic purchasing power will be associated with a proportional currency appreciation, and that a decrease will be associated with a proportional currency depreciation.

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Quota

Each member of the IMF is assigned a quota, denominated in SDRs, that is based broadly on the country's economic position relative to other members. The size of a country's quota takes into account its GDP, current account transactions, and official reserves. Quotas determine members' capital subscriptions to the Fund, voting power, and the amount of financial assistance available to them from the Fund. Quotas are reviewed regularly, normally every five years. During reviews they may be adjusted to reflect changes in the global economy or changes in members' economic positions relative to other members.

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Rate of Remuneration

The IMF pays remuneration (interest) on members' reserve tranche positions; the basic rate of remuneration has been set equal to the SDR interest rate since February 1, 1987 and must be maintained in the range of 80-100 percent of the SDR interest rate.

Real Effective Exchange Rate

A broad summary measure of the prices of one country's goods and services relative to the prices of goods and services in that country's trading partners. It is typically calculated as a weighted average of the ratios of a country's domestic price index to the price indices of its foreign trading partners, where the indices are expressed in the same currency units.

Remunerated Reserve Tranche Position

A member receives remuneration from the IMF (at a rate determined by the IMF) on any excess of its reserve tranche position over the difference between its quota and its norm for remuneration.

Remuneration

The interest paid by the IMF every quarter on a member’s remunerated reserve tranche position.

Representative Rate

The exchange rate of a member's currency—normally against the U.S. dollar. If the member has an exchange market where a representative spot rate for the U.S. dollar (against the member's currency) can be readily ascertained, then that representative rate will be used. If such a market rate cannot be readily ascertained for the U.S. dollar but can be ascertained for another currency for which a representative market rate against the U.S. dollar exists, then that cross rate can be used. Otherwise, the IMF determines a rate for the currency that is appropriate.

For members whose currencies are used in Fund financial transactions, the representative rate is reported daily to the Fund by the issuing central bank. A currency's representative rate, in conjunction with the SDR/USD rate determines the SDR per currency rate, which would be used in the Fund's transactions and operations with that member.

Reserve accumulation

Following the crisis episodes faced by emerging markets in the late 1990s and the early part of the 2000s, a number of major EMEs started to accumulate significant levels of reserves. By 2009, reserves totalled 13 percent of global GDP, a threefold increase from a decade earlier, with the growth coming from EMEs. This accumulation, while initially understandable, has become a concern in the system because it leads to a paradoxical situation where capital flows uphill to developed countries instead of to emerging markets where the need is greater. Additionally, the scale of these flows may have caused distortions in the pricing of advanced country financial assets.

Reserve currency

In general, reserve currencies are those fully convertible currencies that are in wide use in the international monetary system, both because they account for the bulk of reserve assets held by authorities and because they are widely used in current account and financial transactions. Reserve currencies also tend to be characterised by the fact that many countries other than the issuer may have liabilities in these currencies due to the deeper markets in these currencies. Conversely, one of the characteristics of a reserve currency issuer is its freedom from original sin

Reserve Position in the IMF

A member has a creditor (or reserve) position in the IMF if it has lent reserve assets to the IMF under a loan agreement, and/or the member has provided reserve assets to the IMF either as a result of its initial quota payment or through IMF use of the holdings of the member's currency to provide financial assistance to other members. More precisely, the creditor (or reserve) position is the sum of outstanding borrowing by the IMF from the member, if any, and the member’s reserve tranche position.

Reserve Tranche Position

The extent to which the IMF's holdings of a member's currency (excluding holdings that reflect the member's use of IMF credit, and holdings in the IMF number two account that do not exceed 10 percent of quota) are less than the member's quota. The reserve tranche position is part of the member country's external reserves.

Rights Accumulation Program (RAP)

An economic program agreed between the IMF and an eligible member in protracted arrears to the IMF that provides a framework for the member to establish a satisfactory track record of policy and payments performance, and permits the member to accumulate rights to future drawings of IMF resources following clearance of arrears to the IMF, up to the level of arrears outstanding at the beginning of the program.

Rights Approach

A special approach to address the situation of members that were in protracted arrears to the IMF at end-1989, on the basis of a rights accumulation program.

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Safeguards Assessment

A two-stage evaluation of a member country central bank's control, accounting, reporting and auditing systems to ensure that resources, including those provided by the Fund, are adequately monitored and controlled. The first stage will determine whether there are clear vulnerabilities in these systems, based on information provided by central banks. If weaknesses in internal procedures are suspected, a second stage will comprise on-site evaluations and recommendations for improvements. Safeguards assessments for all new users of Fund resources will begin after mid-year 2000 and will run on an experimental basis no later than end-2001.

SDR -- Special Drawing Right

The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

The SDR is neither a currency, nor a claim on the IMF. Rather, it is a right to access freely usable currencies from other SDR Department participants in case of balance of payments difficulties.

SDR Department participants can obtain freely usable currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges (also available to other holders of SDRs that are not SDR Department participants); and second, in the event of balance of payments difficulties, by the IMF designating SDR Department participants with strong external positions to purchase SDRs from the participant with such balance of payments difficulties. Under the IMF’s Articles of Agreement, participants in the SDR Department also undertake to collaborate with the IMF and other participants to ensure the SDR system functions properly. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.

Details on how SDRs are created, allocated and used can be found here.

SDR -- Special Drawing Right

The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

The SDR is neither a currency, nor a claim on the IMF. Rather, it is a right to access freely usable currencies from other SDR Department participants in case of balance of payments difficulties.

SDR Department participants can obtain freely usable currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges (also available to other holders of SDRs that are not SDR Department participants); and second, in the event of balance of payments difficulties, by the IMF designating SDR Department participants with strong external positions to purchase SDRs from the participant with such balance of payments difficulties. Under the IMF’s Articles of Agreement, participants in the SDR Department also undertake to collaborate with the IMF and other participants to ensure the SDR system functions properly. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.

Details on how SDRs are created, allocated and used can be found here.

SDR basket

The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1971, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-equivalent of the SDR, as well as its value against other major currencies, is posted daily on the IMF’s website. It is calculated as the sum of specific amounts of the five basket currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market. The basket composition is reviewed every five years by the Executive Board to ensure that it reflects the relative importance of currencies in the world's trading and financial systems. In the most recent review (completed in November 2010 and effective January 1, 2011), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies that were held by other members of the IMF. The currency amounts for the new SDR basket were announced on December 30, 2010. The next review will take place by 2015.

SDR Interest Rate

Weighted average of interest rates on short-term financial instruments in the markets of the currencies included in the SDR valuation basket. The SDR Interest Rate Calculation is determined on a weekly basis and is subject to a 0.050 percent floor.

Self-Financing PRGF

Under a self-sustained Poverty Reduction and Growth Facility, loans would not be financed by PRGF Trust borrowing (as under the current PRGF), but by IMF resources currently in the PRGF Trust Reserve Account, on a revolving basis.

Service Charge

A fixed charge of 1/2 of 1 percent levied on each purchase (drawing) of IMF resources in the General Resources Account other than reserve tranche purchases, which carry no charges. The service charge is payable at the time of the transaction.

Sovereign debt

A debt instrument issued by a sovereign government. Most sovereign debt takes the form of bonds.

Special Charges

Charges in addition to the basic rate of charge levied on a member’s overdue repurchases and charges.

Special Contingent Accounts

Accounts established to hold precautionary balances in order to strengthen the IMF’s financial position in connection with members’ overdue financial obligations.

Special drawing rights (SDR)

The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a right to access freely usable currencies from other SDR Department participants in case of balance of payments difficulties. SDR Department participants can obtain freely usable currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges (also available to other holders of SDRs that are not SDR Department participants); and second, in the event of balance of payments difficulties, by the IMF designating SDR Department participants with strong external positions to purchase SDRs from the participant with such balance of payments difficulties. Under the IMF’s Articles of Agreement, participants in the SDR Department also undertake to collaborate with the IMF and other participants to ensure the SDR system functions properly. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations. Details on how SDRs are created, allocated and used can be found here.

Staff Monitored Program (SMP)

A staff-monitored program is an informal and flexible instrument for dialogue between the IMF staff and a member country on its economic policies. Under a staff-monitored program the country's targets and policies are monitored by the IMF staff; a staff-monitored program is not supported by the use of the Fund's financial resources; nor is it subject to the endorsement of the Executive Board of the IMF.

Stand-By Arrangement

A decision of the IMF by which a member is assured that it will be able to make purchases (drawings) from the General Resources Account (GRA) up to a specified amount and during a specified period of time, usually one to two years, provided that the member observes the terms set out in the supporting arrangement.

Structural Adjustment

Changing the way in which an economy is organized in order to raise productive capacity. Reforms associated with structural adjustment can include liberalization of trade and investment policies and anti-competitive agricultural policies; removal of exchange and price controls; and reform of tax policies.

Structural Adjustment Facility (SAF)

A financial facility of the Fund established in 1986 to provide concessional loans to low-income Fund member countries. It recycled resources lent under the IMF's Trust Fund. It was superseded by the Enhanced Structural Adjustment Facility (ESAF) which was established in 1987 to promote stronger adjustment and reform measures than those under the SAF. The ESAF was replaced by the Poverty Reduction and Growth Facility in 1999.

Substitution account (also reserve substitution account)

During periods of strong dollar liquidity growth, calls have been made to diversify reserve assets, including most recently by China. One idea that has been broached is that of a substitution account whereby reserve holders have a transparent method of swapping their short-term dollar assets for other assets. It would involve having the IMF (or some other supranational body) set up an account that would allow central banks to swap dollar assets (typically, short-term U.S. T-bills) for SDRs (alternatively, to boost the number of SDRs, central banks could swap reserves in exact proportion to the components of the SDR basket). The account would in turn convert the U.S. T-bills for longer-term claims on the U.S. Treasury, with the spread between the long-term interest rate and the short-term rate paid to SDR holders helping to cover the exchange rate risk. However, there was no assurance that the exchange rate risk would be covered (e.g., the shift in relative demand could flatten the yield curve and reduce the term premium). Other mechanisms for sharing the exchange rate risk were floated, such as investing in government bonds of the SDR component currencies or using a portion of the IMF’s gold stock to absorb the costs. All the proposals over the years have not been acted on, in part because countries were never able to settle on a mechanism for sharing exchange rate risk, but also because the dollar’s value recovered and a more sanguine view regarding its prospects re-emerged.

Supplemental Reserve Facility (SRF)

A financial facility of the IMF, established in 1997, designed to provide financial assistance to member countries experiencing exceptional balance of payments difficulties due to a large short-term financing need related to a sudden and disruptive loss of market confidence. There are no explicit access limits. Financial resources under this facility are provided under an associated stand-by or extended arrangement when access under either of these arrangements would exceed either the annual or cumulative limit.

Surveillance

An essential aspect of the IMF’s responsibilities associated with overseeing the policies of its members in complying with their obligations specified in the Articles of Agreement in order to ensure the effective operation of the international monetary system.

Surveillance

See definitions of bilateral and multilateral surveillance. The IMF, through the Executive Board, is tasked with assessing whether members meet their obligations to promote a stable system of exchange rates. The IMF carries out this responsibility by monitoring developments in its member countries, as well as at regional and global levels, to ascertain potential sources of instability, with the aim of fostering international dialogue and cooperation to deal with these concerns. This process is known as surveillance. The modalities of surveillance vary and include bilateral consultations with members (also known as “Article IV Consultations”), the production of global and regional reports such as the World Economic Outlook, Global Financial Stability Report and the Fiscal Monitor, and exercises to assess vulnerabilities in member countries (Early Warning Exercise, vulnerability exercises for advanced and emerging economies). Other IMF activities, such as the Financial Sector Assessment Program (FSAP) informs surveillance. The IMF periodically reviews its experience with surveillance through the Triennial Surveillance Review, last conducted in 2008. The next Review will be completed in 2011. Based on the outcome of the Review, the Executive Board will then set out the priorities that will guide Fund surveillance over the medium term in a Statement of Surveillance Priorities. Key priorities for IMF surveillance include better assessment of tail risks, enhancing financial sector surveillance and real-financial linkages, improved understanding of multilateral perspectives and more effective analysis of risks to external stability.,A number of initiatives that would improve this include better and more comprehensive treatment of spillovers in its reports, and better oversight over the financial sector are the goals.

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Tranche

A slice or segment, usually used as either "reserve tranche," the name given to a country's creditor position in the Fund, or as "credit tranche," a designation of the extent of a country's purchases (borrowing) from the Fund. When a country borrows from the Fund under a stand-by arrangement, credit is typically made available in segments, or tranches, traditionally equivalent to 25 percent of a country's quota. Policies that govern the IMF's general lending practices under stand-by arrangements are referred to as "Credit Tranche Policies."

Transactions

An exchange of monetary assets by the IMF for other monetary assets (for example, a purchase or a repurchase).

Transactions by Agreement

Transactions in which participants in the SDR Department (currently all members) and/or prescribed holders voluntarily exchange SDRs for currency at the official rate as determined by the IMF. These transactions are usually arranged by the IMF.

Transparency

Openness, honesty, and accountability in public and private transactions. The term "transparency" is frequently used to mean openness in the working of institutions. It is linked to a variety of demands for broader public access to information. The IMF has developed codes of good practices on fiscal transparency, and transparency in monetary and financial policies.

Triffin dilemma

Named after economist Robert Triffin who first proposed it, the dilemma refers to what he thought was an inherent tension in the original Bretton Woods system. He noted that the US could not simultaneously supply the necessary volume of high quality reserve assets demanded by faster growing economies, while ensuring parity with gold. At that time, because global trade (and therefore demand for dollars to settle trade) was increasing more quickly than growth in the US, any emissions of US debt would necessarily be domestically inflationary and likely fiscally unsustainable. On the other hand, if the US were to rein in spending and reduce both its fiscal and external deficits, the world would lose its injections of needed dollars and was in danger of slipping into a deflationary spiral. Coupled with this, the US was also confronted with the expenditures related to the war in Vietnam which saw it finally abandon the gold standard in 1971.

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Upper Credit Tranches

Originally, referred to credit available from the Fund in an amount between 25 and 100 percent of a country's quota. Since access to IMF credit is now permitted substantially above 100 percent of quota, the upper credit tranches now refer to any use of IMF credit above 25 percent of quota.

Use of IMF Resources

The extension of credit to members through the use of IMF resources under the General Resources Account, loans made to members of resources in the Special Disbursement Account or resources borrowed by the IMF as Trustee for the PRGF Trust.

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Valuation Adjustment

Each member has the obligation of maintaining the value in terms of the SDR of the balances of its currency held by the IMF. Whenever the holdings of a member’s currency are revalued, a receivable (for the IMF) or a payable (by the IMF) is established for the amount of currency payable by or to the member.

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World Bank

The World Bank includes two development institutions owned by 184 member countries: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD is concerned with middle income and creditworthy poor countries, while the IDA focuses on alleviating poverty in the poorest countries in the world. Both institutions provide low-interest loans, interest-free credit and grants to developing countries for projects and programs to, for example, build schools and health centers, provide water and electricity, fight disease, and protect the environment. World Bank assistance is funded both by member country contributions and through bond issuance.