IMFSurvey Magazine: In the News
IMF Moves to Boost Resources to Combat Global Crisis
IMF Survey online
July 6, 2009
- Executive Board approves plan to issue IMF promissory notes
- Part of moves to bolster IMF resources to combat crisis
- IMF aims to triple total resources to $750 billion
The International Monetary Fund (IMF) is putting in place bilateral borrowing arrangements to strengthen its lending war chest to combat the ongoing global economic crisis and plans to go ahead with its first issuance of interest-bearing promissory notes to supplement its lendable resources, the Fund’s finance chief says.
The IMF is also seeking ways to step up its concessional loans and is considering using some earnings from a proposed sale of part of the Fund’s gold holdings to increase lending to poorer countries that have been battered by the crisis, said Andrew Tweedie, Director of the IMF’s Finance Department.
He told IMF Survey online that the Fund was making good progress to secure its target of $250 billion in bilateral government loans as part of moves to triple the IMF’s lendable resources to $750 billion.
Work is also under way to inject additional liquidity into the global economy through a $250 billion general allocation of an IMF reserve asset known as Special Drawing Rights (SDRs).
Tweedie said that the IMF was moving on several parallel tracks to reinforce its resource base to be able to help countries that need to borrow from the Fund amidst the worst global recession in more than 60 years. The key elements include
• Bilateral borrowing. The IMF is on track to meet its target. Agreements are in place with Japan ($100 billion), Canada ($10 billion), and Norway ($4.5 billion). In addition, European Union members have committed around $100 billion, and Switzerland has committed $10 billion. The first EU member agreement with France is already with the Executive Board, and the remaining agreements will be finalized over the summer.
• Note issuance. The IMF’s Executive Board on July 1 endorsed a framework for the Fund’s first issuance of IMF notes. China has already committed to purchase up to $50 billion, with both Russia and Brazil committing up to $10 billion each. The notes have an initial maturity of three months, extendable for up to five years.
• Expansion of credit agreements. The IMF plans that individual bilateral borrowing and notes purchase arrangements could be folded into an expanded formal framework called the New Arrangements to Borrow. It is expected that this would enable the Fund to draw on additional resources of up to $500 billion if needed to combat the global crisis or another emergency if quota resources are depleted.
• New investment mandate. The Executive Board will consider during the summer options for broadening the investment mandate for the Fund as part of plans to implement a new income model that makes the IMF less dependent on earning interest from loans to finance its operations. It plans a limited sale of its gold holdings to create an endowment from which it would earn income.
• Stepped up concessional lending. In parallel with boosting its general resources, the IMF is also planning to at least double its resources for lending to poor countries at very low interest rates.
• General increase in country quotas. A review of the IMF’s permanent resources, known as quotas, that member countries pay into the Fund is to be completed by January 2011, two years ahead of the originally envisaged schedule. This would result in a permanent increase in the level of resources available to the IMF.
“Taken together, this adds up to a major response by the official multilateral sector to the global crisis,” said Tweedie. “All member countries, including low-income countries, will get a boost to their reserves, which will help them deal with the crisis. The Fund will also have a much larger resource base to strengthen market confidence and help countries that need to borrow.
“The boost to our resources will also better align them with the growth that we have seen in world trade and global capital flows.”
How the note issuance could work
The IMF’s Executive Board endorsed a framework on July 1 for the first-ever issuance of securities to member countries.
Under the framework, member countries with strong external positions, and central banks of such members, may sign agreements to purchase these notes up to individually agreed maximum levels. The actual notes would be issued when needed by the Fund to finance loan disbursements to another member.
The notes would be interest bearing and tradable only within the official sector, which includes multilateral entities such as regional development banks.
The notes would be denominated in SDRs, the Fund’s unit of account, with an initial maturity of three months, extendable to a maximum of five years. They will pay interest quarterly based on the average SDR interest rate over the previous quarter. Members holding the notes would be able to obtain immediate payment of the paper, up to a limit of SDR 15 billion, in the event they experience a balance of payments need.
“This innovative framework will further strengthen the IMF’s capacity to bring rapid assistance to its members as and when it is needed,” Managing Director Dominique Strauss-Kahn said. “This new financing tool, and our other financing initiatives demonstrate the commitment of the Fund and its members to tackling head on the effects of the global financial and economic crisis. At the same time, the IMF notes offer a secure investment for our members.”
Expanding the borrowing framework
Tweedie said that the Fund has held discussions with the 26 members of the New Arrangements to Borrow (NAB) framework and potential new members about expanding it and making it more flexible. Approval by the U.S. Congress on June 18 of a package of measures related to the IMF, including up to $100 billion as the U.S. contribution to the expanded NAB, has given the process additional momentum.
Currently, the IMF can raise about $50 billion through the arrangement, with the U.S. share being about $10 billion. The envisaged increase in the NAB of up to $500 billion will ensure that the Fund has the resources it needs to effectively respond to the financial crisis and fulfill its purpose of providing supplemental resources in case of threats to the international monetary system.
Many existing NAB participants have signaled their commitment to increasing the size of their credit arrangements while others have indicated their intention to give favorable consideration to such increases. Also, some other countries in the Group of Twenty (G-20) that are not currently NAB participants have indicated their willingness to consider participating in this exercise.
Plans for gold sales
Tweedie said that the June 18 approval by the U.S. Congress enables the U.S. Executive Director to vote in favor of the sale of a portion of IMF gold to finance an endowment for financing part of the cost of running the international institution.
The Executive Board is expected to consider the process of gold sales this summer, and a decision approving a limited gold sale could be adopted then. The Board has agreed on guidelines to govern the envisaged gold sale to avoid causing disruption of the gold market.
• Sales should be strictly limited to the current stock of post-Second Amendment gold (403.3 metric tons, 12.97 million ounces, or one-eighth of the Fund’s total holdings of gold), and the IMF’s sales should not add to the announced volume of sales from official sources;
• The scope of sales of gold to one or more official holders should be explored. If there is not enough interest, phased on-market sales could be considered.
Increasing concessional resources
The IMF has been forthright in warning about the impact of the current global economic crisis on the developing world and has called for increased resources so that countries can better respond to the crisis—especially to protect priority sectors such as health and education.
The G-20 countries, at their April 2 London summit, called on the Fund to use additional resources from proposed IMF gold sales, together with surplus income, to provide $6 billion additional concessional and flexible finance for the poorest countries over the next 2 to 3 years, so long as such use was consistent with the new income model. Tweedie said that the Executive Board had an initial discussion of this issue in April before the Spring Meetings, and a follow-up discussion is planned for mid-July.
SDR allocation to boost country reserves
The Fund finance chief said that work is under way to make the $250 billion general allocation of SDRs (which was endorsed by the G-20 leaders and the International Monetary and Financial Committee) effective well before the October Annual Meetings of the IMF. The Executive Board has discussed the case for a new general SDR allocation of $250 billion. The remaining steps are the following:
• If Executive Directors support the case, by a majority of votes cast, the proposal by the Managing Director is submitted to the Board of Governors for final approval.
• Approval of a general SDR allocation by the Board of Governors requires an 85 percent majority of the total voting power. It does not require an amendment of the IMF's Articles of Agreement.
• Once approved, the allocation—which is apportioned to each member according to their quota—can be implemented quickly.
Revamping the quota structure
Tweedie said that the next step would be to consider a permanent increase in the Fund’s resources through an increase in the quotas that member countries pay into the Fund. The G-20 endorsed the idea that the next general review of quotas, originally scheduled to be completed by 2013, should be brought forward to January 2011. Tweedie described this as a “very accelerated timetable.”
“This is also important, because the general quota review would increase the Fund’s general resources and would also provide scope for a further rebalancing of quota and voting shares toward dynamic emerging markets and other economies. So, this is another key element of the governance reforms.
“While the immediate borrowing that the Fund is putting in place is critical now for dealing with the crisis, it’s also a very strong intention of the membership and of the G-20 that this is not a substitute for a quota increase, which should be put in place as soon as possible,” he said.
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