1998 IMF Survey Supplement on the Fund / September 1998

New Arrangements

Borrowing Supplements Ordinary Resources
The IMF’s ordinary resources, currently totaling about SDR 146 billion, derive from its members’ quota subscriptions. The IMF’s Articles of Agreement, however, authorize it to borrow if necessary to supplement those resources. To date, the IMF has borrowed only from official sources, such as governments and central banks and the Bank for International Settlements, but it is also authorized to borrow from private sources. Currently, the General Arrangements to Borrow (GAB) are in place and, in 1997, the IMF Executive Board approved New Arrangements to Borrow (NAB), which are being adhered to by potential participants.

Under the GAB arrangements, 11 industrial countries or their central banks agree to stand ready to lend to the IMF up to specified amounts of their respective currencies under special circumstances at market-related rates of interest. Established in 1962 amid concerns about the adequacy of official sources of international liquidity and the disruptive effects of short-term capital movements, the GAB have been revised and renewed several times. Most recently, the IMF renewed the GAB for a further five-year period from December 26, 1998. The GAB participants are Belgium, Canada, the Deutsche Bundesbank, France, Italy, Japan, the Netherlands, the Sveriges Riksbank, the Swiss National Bank, the United Kingdom, and the United States. The IMF also has an associated arrangement with Saudi Arabia under similar terms. The potential amount of credit available to the IMF under the GAB currently totals SDR 17 billion, with an additional SDR 1.5 billion available under the associated arrangement with Saudi Arabia.

Borrowing under the GAB may be made available to the IMF to finance any exchange transaction of GAB participants with the IMF needed “to forestall or cope with an impairment of the international monetary system.” Stricter criteria are in place for nonparticipants: drawings must be in connection with an IMF-supported adjustment program under a Stand-By or an Extended Arrangement (or an upper credit tranche drawing), and the IMF must be deemed to face an inadequacy of resources to meet actual and expected requests for financing that reflect an “exceptional situation associated with balance of payments problems of members of a character or aggregate size that could threaten the stability of the international monetary system.” In July 1998, the participants agreed to lend the IMF SDR 6.3 billion under the GAB to augment support for Russia’s adjustment program. This was the first activation of the GAB in 20 years and the first time it was used for a nonparticipant.

With the growing realization that substantially more resources might be needed to prevent or cope with future financial emergencies, the Executive Board strengthened the IMF’s ability to borrow by approving the New Arrangements to Borrow in January 1997. Under the NAB, potentially 25 participant countries and institutions would stand ready to lend the IMF up to SDR 34 billion (about $45 billion) to supplement its regular quota resources when needed to forestall or cope with an impairment of the international monetary system or to deal with an exceptional situation that threatens the stability of the system—that is, under similar circumstances to those envisaged under the GAB.

The NAB decision marked the culmination of intensive efforts that began in June 1995 when the Group of Seven industrial countries called for a doubling of the amount available under the GAB to respond to financial emergencies. The NAB will enter into force when the decision has been adhered to by potential participants with credit arrangements amounting to not less than SDR 28.9 billion (85 percent of the total), including the five members or institutions with the largest credit arrangements. As of April 30, 1998, more than two-thirds of the participants representing some 60 percent of potential resources under the arrangements had adhered to the decision.

NAB credit lines may be drawn on for the benefit of all NAB participant countries or for nonparticipants under circumstances similar to, but somewhat more flexible than, those under the GAB. The new arrangements, when they become effective, will not replace the GAB. However, the maximum combined amount drawn under these two arrangements cannot exceed SDR 34 billion. The NAB will be the facility of first and principal recourse in the event of a need to provide supplementary resources to the IMF, except that for GAB participants either facility may be called upon; if a proposal for calls under the NAB is not accepted, a proposal for calls may be made under the GAB.

Operational Budget
The quarterly operational budget is the mechanism through which the IMF makes its resources available to member countries. Reflecting the cooperative nature of the IMF and the revolving nature of its resources, IMF financial assistance is provided through the use of  SDRs and the currencies of a wide range of members—large and small, including advanced, developing, and transition economies. Members whose balance of payments and reserve positions are judged sufficiently strong for their currencies to be included in the operational budget make their currencies available to the IMF for the benefit of members with weak balance of payments positions in need of external financing. In return for the use of their currencies through the operational budget, members receive a liquid claim on the IMF in the form of a reserve tranche position that earns a market-related rate of return.

The Board establishes guidelines underlying the preparation and implementation of the operational budget. During 1997/98, the Board reviewed the procedures governing the assessment of members’ balance of payments and reserve strength. It concluded that assessments should continue to rely on a relatively simple system, based on criteria set out in the Articles of Agreement (that take into account balance of payments and reserve positions of members and developments in exchange markets), supplemented by a set of additional indicators bearing on a member’s external financial strength, including indicators of short-term external debt and debt service.