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IMF Executive Board has Preliminary Discussions on Charges and Maturities
On June 15, 2005, the Executive Board of the International Monetary Fund (IMF) had preliminary discussions of experience with policies on surcharges and time-based repurchase expectations with a focus on their contributions to discouraging unduly large and prolonged use of IMF credit, and more generally to reinforcing the revolving nature of IMF resources. The staff paper on which the discussion was based is posted on the IMF's website at http://www.imf.org.
Policies on surcharges and on time-based repurchase expectations were introduced with the establishment of the SRF in 1997, as amended in early 2003, and in the context of the Review of IMF Facilities in late 2000 for purchases in the credit tranches, under the Extended Fund Facility (EFF) and the Compensatory Financing Facility (CFF) (See PIN No. 00/101 of November 30, 2000; http://www.imf.org/external/np/sec/pn/2000/pn00101.htm ).
The Board introduced two complementary reforms in 2000 for lending under the credit tranches, EFF and CFF: level-based surcharges, and time-based repurchase expectations. Level-based surcharges, which are differentiated based upon the amount of resources outstanding, were introduced to discourage unduly large use and encourage early repayment for countries in a position to do so. A policy on time-based repurchase expectations was also established, with the aim of securing early repayment, when appropriate. While purchases continue to be subject to repurchase obligations, purchases made after November 28, 2000 are also subject to repurchase expectations. The Board can approve a member's request to extend repurchase expectations to the obligations schedule when repayment on the expectations schedule would lead to undue hardship or risk; in practice, this would generally be the case if the member's external position is not stronger than anticipated at the time of the arrangement. Various elements were identified to be taken into account in this judgment.
The SRF also carries policies on surcharges and time-based repurchases expectations, but with unique characteristics. The maturity structure for the SRF is shorter-term, and there is a stronger presumption of repayment on the expectations schedule; extensions are only to be provided if (i) the member is unable to meet the repurchase expectation without undue hardship; and (ii) the member is taking actions to strengthen its balance of payments. Surcharges are time based (i.e., differentiated by the period in which SRF resources are outstanding) and set at a higher level.
The preliminary discussions of June 15, 2005 complemented the broader Review of IMF Finances discussed by the Executive Board on March 30, 2005. These discussions provided the first opportunity to review experience and consider possible modifications to the policies on surcharges. The Board had considered that the surcharges adopted in September 2000 should not be changed for a period of at least four years. The review on charges and maturities also met the request made by the Board in November 2000, for a review of the policy of time-based repurchase expectations by end-2005.
Executive Board Assessment
The Acting Chair of the Executive Board meeting summed up the discussion as follows:
Directors welcomed the opportunity to review experience with the policies on surcharges and time-based repurchase expectations. This is the first occasion on which the Board has had a chance to take stock of the policies that were introduced in the context of the Review of IMF Facilities in 2000 to address concerns with unduly large and prolonged use of IMF credit. Directors recognized that IMF policies on charges and maturities serve multiple purposes in the interest of the entire membership, including to ensure that members have appropriate and timely access to IMF financing and to reinforce the revolving character of IMF resources. Charges also help ensure that IMF financing receives appropriate remuneration and cover the administrative costs of IMF operations, while surcharge income is the main source of accumulation of precautionary balances. The full range of objectives would need to be taken into account in considering options for reform of these policies.
Most Directors saw room for improvements in the structure of IMF charges and maturities. They noted that the IMF has made a number of adjustments to this structure in recent years, which, while helping the institution and its members adapt to a changing economic environment, have added to its complexity. These Directors therefore suggested that any changes should aim toward simplification, transparency, and clarity. Many Directors also considered that any changes made should be considered as part of a comprehensive and coherent reform package that provides appropriate incentives. Directors stressed that, in view of their complexity, further study of these issues would be important, and that the present benign global environment provides an opportune time for such work. In a similar vein, they noted that the present discussion should be regarded as a preliminary exchange of views and subject to further consideration in the context of the IMF's ongoing strategic review and the review of IMF finances.
Directors observed that surcharges increase the incentives for members with large use of IMF credit to make repayments when their external position improves. Surcharges reduce the difference between the member's cost of borrowing from the market and borrowing from the IMF. At the same time, Directors recognized the difficulty in isolating the incentive effects of surcharges on members' repayment decisions, given the importance of other factors, such as balance of payments prospects and market access. Many Directors also observed that this incentive role needs to be considered in the context of the IMF as a cooperative institution and a preferred creditor.
Most Directors favored an alignment of surcharges across facilities in the General Resources Account (GRA). In their view, alignment would remove the cost incentive for exceptional access financing from the credit tranches rather than under the Supplemental Reserve Facility (SRF), and prevent possible arbitrage across facilities. Some other Directors argued that the SRF, which provides large, short-term liquidity support, should continue to carry a higher surcharge than financing provided in the credit tranches and under the Extended Fund Facility (EFF), which is provided in cases where the balance of payments need is expected to have a longer duration. These Directors did not see the need to align surcharges across facilities, noting that the current structure has created the appropriate incentives for early repurchases and that the differentiation in rates and charges is tailored to the specific purpose of each facility.
Directors asked the staff to give further consideration to the modalities for aligning surcharges, including their structure and threshold. On the structure of surcharges, Directors recognized that a time-based structure, as currently under the SRF, provides a direct link to the objective of encouraging the revolving nature of IMF resources. However, many Directors were concerned that such a structure may be difficult to implement, especially in the context of successor arrangements, and noted that level-based surcharges, as currently in the credit tranches and under the EFF, may be simpler and would discourage large use. It was also noted that the differential between market rates and the cost of borrowing from the IMF would be expected to decline over time as the member regains access to market financing on improving terms, and thus the incentive to repay the IMF increases over time even with level-based charges. Some Directors pointed to the problem of linking any surcharge structure to the amount of access in percent of quota, since the quotas of some members do not adequately reflect their economic size. A number of Directors suggested that a combination of time- and level-based surcharges, would offer a more effective means of ensuring the revolving nature of IMF resources, while avoiding the current problems associated with the choice of a facility in cases of exceptional access. Overall, I believe that today's discussion has provided a useful basis for further work by the staff on specific proposals.
On the choice of a common threshold above which surcharges are applied, many Directors saw merit in applying surcharges when outstanding credit exceeds 200 percent of quota, as currently in the credit tranches and under the EFF. A number of these Directors saw the need for additional steps beyond the cumulative access limit. A few other Directors suggested that, in order to simplify the structure, surcharges should only be applied above the cumulative access limit.
Directors had a preliminary exchange of views on appropriate surcharges to be applied across GRA facilities. They agreed that identifying the optimal level of surcharges is very difficult. Many Directors maintained that variations in experience, the cooperative nature of the IMF, and the positive externalities associated with IMF financing indicate that surcharges should not be set too high. A number of these Directors argued for alignment of surcharges at the 100 to 200 basis point range currently associated with the credit tranches and EFF. There was somewhat broader support for aligning surcharges at 300 to 500 basis points, as under the SRF, as this was considered to be more effective in encouraging early repayment. Other Directors considered that a decision on the optimal level of surcharges could not be made without more detailed information. Directors requested the staff to complement the present analysis on incentives with further work on possible designs and the implications of various surcharge levels and structures on the IMF's income position and level of precautionary balances.
Time-based Repurchase Expectations
While time-based repurchase expectations have resulted in higher amounts being repurchased early, Directors noted that the existence of expectations and obligations schedules is inherently confusing and that time-based repurchase expectations have experienced implementation difficulties. For these reasons, Directors called for abolishing the policy on time-based repurchase expectations; however, many of them made this conditional on establishing appropriate charges-based incentives to make early repurchases by members in a position to do so. Many Directors saw merit in exploring other modalities—either as an addition or as an alternative to price incentives—for encouraging members to make voluntary advance repurchases. One suggestion was that, in light of the provisions of the Articles of Agreement, consideration could be given in Article IV consultations to review a country's capacity for early repayment.
Supplemental Reserve Facility
Most Directors recognized that, while the SRF was intended to serve as the main vehicle for exceptional access in cases involving capital account crises, recent exceptional access cases have not involved the circumstances that the SRF was designed to address. This would suggest that the SRF might not be suitable for all exceptional access cases. In this regard, a few Directors suggested that a modest lengthening of the maturity would be appropriate. A number of other Directors did not, however, believe that a further lengthening would be desirable because the current SRF maturity is appropriate for short-term liquidity needs. In addition, a longer maturity would eliminate a key distinction justifying the SRF. That notwithstanding, many Directors saw the need to review the SRF, in relation to the exceptional access framework, against the background of other IMF facilities. This review should include the question of whether a sunset clause should be envisaged. Some other Directors thought that the SRF should be abolished, especially if surcharges are aligned across facilities, and that some of its useful features be incorporated into the credit tranches policy in high access cases.
Directors asked the staff to explore further the options for aligning surcharges on a level- and/or time-based system, across facilities in the GRA, after the forthcoming discussion on the strategic review, with a work program that could recognize interlinkages but nonetheless ultimately lead to concrete proposals. These proposals could come together with a proposal to abolish the time-based repurchase expectations policy for the SRF, the credit tranches, the Compensatory Financing Facility, and the EFF. Directors also requested consideration of options to encourage members to make voluntary advance repurchases.
Directors indicated that a discussion on the SRF would also have to consider the presumption for using the SRF in exceptional access cases and, more generally, whether the SRF is still useful.
IMF EXTERNAL RELATIONS DEPARTMENT