IMF Executive Board Reviews Fund's Income Position, Sets Rate of Charge for FY 2007 and Approves Establishment of an Investment Account

Press Release No. 06/90
May 4, 2006

On April 28, 2006 the Executive Board of the International Monetary Fund (IMF) completed its annual review of the IMF's income position for the fiscal year ending April 30, 2006 (FY 2006) and set the rate of charge on the use of IMF credit for the fiscal year ending April 30, 2007 (FY 2007).1

Regular net income for FY 2006 is projected at SDR 115 million (US$166.8 million). This is some SDR 75 million less than the amount targeted at the beginning of the fiscal year. The lower-than-projected regular net income largely reflects the recent decline in IMF credit outstanding (see Press Release No. 06/15). Surcharge net income is projected at SDR 107 million (US$155.2 million). Overall, the Fund's reserves are now projected to grow by over SDR 220 million (US$322 million) to around SDR 5.9 billion (US$8.7 billion) in FY 2006.

In light of the changes to the IMF's income outlook following the decline in credit outstanding, the Executive Board agreed in March 2006 on a two-pronged strategy that will first involve immediate steps to address a projected income shortfall in FY 2007, and then lead to the development and assessment of a full range of options available to close projected medium-term financing gaps and to place the Fund's income position on a sustainable footing (see Press Release No. 06/43).2 As immediate steps, the Executive Board now agreed to a temporary suspension of reserve accumulation in FY 2007 and to keep the margin for the rate of charge unchanged at its current level of 108 basis points above the SDR interest rate. In addition, as a first step to broaden the Fund's income base, the Executive Board decided to establish an Investment Account and to transfer to the Investment Account an amount equivalent to the Fund's reserves (see below).3 The Executive Board took note of staff's projections that, even after taking these steps, the IMF could face an income shortfall of around SDR 60 million (US$88 million), or about 10 percent of its operational expenses in FY 2007.

The Executive Board also adopted a number of other decisions that have a bearing on the IMF's finances in FY 2007, including burden sharing for deferred charges and the SCA-1, which is a special account established specifically to protect the IMF against the risk of loss of principal resulting from arrears, and the continuation of the system of special charges for overdue obligations. The Executive Board agreed to keep burden-sharing adjustments to the rate of charge broadly unchanged from FY 2006 levels, which would generate an estimated balance of SDR 60 million in the SCA-1 in FY 2007. The Executive Board noted that on this basis, the IMF's overall precautionary balances, which comprise reserves plus the SCA-1, would be unchanged in FY 2007.


Cost of Funds:

The IMF's major cost of funds is the interest it pays to member countries that make resources available to it for lending. The IMF pays interest to creditor countries at the Special Drawing Right interest rate, which is based on short-term rates in major money markets. Additional costs include the amounts needed to be placed in reserves as a safeguard against adverse financial events and to assure the continued financial viability of the institution.

Interest and Charges:

At the beginning of each financial year, the IMF's Executive Board usually sets the margin for the rate of charge on the use of its resources so as to cover the cost of operational and administrative expenses and to achieve an agreed net income target for the year. For FY 2007, the margin was set without reference to a net income target in light of the changed income outlook that resulted from the decline in credit outstanding. The margin can be adjusted at midyear in light of actual and projected developments in net income.

The rate of charge is adjusted to cover any loss of income arising from overdue obligations owed to the IMF. The financial consequences of overdue obligations are shared equally among creditor and debtor members through a burden-sharing mechanism. Under this mechanism, the interest rate charged to borrowers and paid to creditors is increased and lowered, respectively. Amounts collected in this manner are refunded when overdue interest charges are settled. Additional adjustments to the rate of interest charged and paid generate resources for the SCA-1.

The IMF also receives income from borrowers in the form of service charges and commitment fees, and special charges are levied on any payments overdue less than six months. In addition, the IMF imposes surcharges on high levels of credit to discourage unduly large use of credit, and on Supplemental Reserve Facility (SRF) credit according to the length of time credit is outstanding. Income from surcharges, which is not taken into account in determining the annual net income target, is also added to the IMF's reserves.


The IMF's reserves (or precautionary balances) consist of the General and Special Reserves and the SCA-1. The net income and income from surcharges are placed to the General and Special Reserves, which currently total around SDR 5.9 billion (about US$8.7 billion).

Resources in the SCA-1 are refundable to contributors after all arrears have been cleared, but can be refunded earlier by a decision by the IMF. The current balance in the SCA-1 is SDR 1.7 billion (about US$2.5 billion), compared to overdue principal of SDR 0.6 billion (about US$0.9 billion).

Reserves provide the IMF with protection against financial risks, including income losses and losses of a capital nature, while the SCA-1 affords an additional layer of protection against the potential adverse financial consequences of overdue principal. In November 2002, the Executive Board agreed to build up the precautionary balances with the aim of doubling them (to SDR 10 billion, or about US$14.5 billion).

Investment Account:

The IMF's Articles of Agreement authorize the establishment of an Investment Account to generate income to meet the expenses of conducting the business of the Fund. The establishment of the Investment Account helps diversify the sources of IMF income. The amounts that may be transferred to the Investment Account may not exceed the total amount of the IMF's General and Special Reserves. The assets of the Investment Account may be invested in eligible marketable obligations denominated in SDRs or in the currencies held in the Account. Eligible investments include the domestic government bonds of member countries, their central banks and other official agencies; and marketable obligations of international financial organizations.

The IMF undertook investments to broaden its sources of income during the years 1956-72. The earnings from these investments served initially to offset a deficit that had accumulated as income fell short of expenditure in the early years of the IMF's operations. Investments were continued after the deficit had been cleared and were accumulated in a special reserve.4

1 See Review of the Fund's Income Position for FY 2006 and FY 2007

2 See The Fund's Medium-Term Income—Outlook and Options

3 See Establishment of the Investment Account

4 See Establishment and Operation of the Investment Account


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