## ppea2022062

## Source details

**Canonical URL:** [ppea2022062](https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022062.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/pp/2022/english/ppea2022062.pdf.md)
- [Structured JSON version](/-/media/files/publications/pp/2022/english/ppea2022062.pdf.json)

---

### Executive summary and key findings
- Precautionary balances are central to the Fund’s multilayered framework to mitigate financial risks and safeguard members’ resources.
- Precautionary balances amounted to SDR 21.6 billion as of end-September 2022, up from SDR 19.3 billion at end-July 2021.
- Coverage metrics as of end-September 2022:
  - 3.1 percent of lending capacity
  - 11.8 percent of lending commitments
  - 23.7 percent of credit outstanding
- Staff proposal:
  - Retain the current medium-term target of SDR 25 billion and the minimum floor of SDR 15 billion.
- Projected timing to reach the medium-term target:
  - early FY2025 under the baseline with existing arrangements
  - late FY2024 if new lending under the desk survey scenario is factored in

### Developments in risks and balance-sheet trends
- Credit and other financial risks have increased:
  - Credit outstanding from the General Resources Account (GRA) is close to historical peaks and is expected to remain on a higher trajectory than earlier estimated.
  - Lending to some of the Fund’s largest borrowers has been the main driver of the increase.
  - Credit concentration risks are heightened by a projected peak in repurchases in FY2023‒25, mainly from the largest borrower and emergency financing.
- Income and investment risks:
  - Near-term income risks have moderated but remain subject to concentration risks.
  - Investment risks are elevated amid heightened volatility in the prices of risky assets.
- Global context:
  - October 2022 World Economic Outlook projects global growth to decelerate from an estimated 6 percent in 2021 to 3.2 percent and 2.7 percent in 2022 and 2023, respectively.
  - Global financial conditions have continued to tighten on net, and downside risks are elevated (geopolitical dislocation, food and energy price shocks, tightening financing conditions).

### Framework, targets, and Board views
- Framework:
  - The rules-based framework adopted in 2010 (indicative ratio range of 20-30 percent of a forward-looking credit measure, plus a minimum floor) remains broadly appropriate.
  - Judgment and Board discretion remain important under the framework.
  - Directors welcomed integration of enterprise risks following the recently approved Enterprise Risk Management framework and encouraged staff to work with the Office of Risk Management to ensure all relevant risks are incorporated.
- Board views and decisions:
  - Directors broadly agreed to retain the medium-term target of SDR 25 billion; some Directors argued for a higher target.
  - Directors broadly supported maintaining the minimum floor of SDR 15 billion for now; some Directors would have preferred raising the floor in the current review.
  - Most Directors supported maintaining the regular two-year review cycle, with an interim review if lending developments diverge materially from projections or if credit and other financial risks rise materially (including due to changes in Fund lending policies).
  - A few Directors considered that currently elevated risks warranted an interim review in 2023.
  - Directors agreed the evolution of precautionary balances relative to the target needs close monitoring amid a weakening global outlook and unusually large downside risks.

### Pace of accumulation and operational implications
- Pace of accumulation:
  - Reserve accumulation is slightly faster than projected at the time of the interim review and is judged overall adequate.
  - No additional steps were proposed to reach the precautionary balance target, though the pace should be monitored closely.
- Burden-sharing and commitments:
  - Commitments under precautionary arrangements have declined and burden-sharing capacity has increased significantly since the interim review.
- Income and surcharges:
  - Surcharges have significantly contributed to the Fund’s operational income and the accumulation of precautionary balances.
  - The average cost of borrowing from the Fund, including surcharges, remains significantly lower than market rates; the discount has increased recently.
  - Directors were divided on surcharge relief:
    - Most Directors were open to exploring possible options for providing temporary surcharge relief, with a few supporting a change in policy.
    - A number of other Directors did not see merit in exploring such options at this stage, stressing the critical role of surcharges in the Fund’s risk management framework.

### Composition and coverage of precautionary balances
- Composition:
  - Precautionary balances currently comprise the general reserve and the special reserve.
  - Estimated balances at end-September 2022 before adjusting cumulative pension related (IAS 19) gains/losses of SDR 1.2 billion:
    - General reserves: SDR 13.2 billion.
    - Special reserves: SDR 9.6 billion.
- Coverage metrics (selected comparisons: 2021 → 2022):
  - Precautionary balances (SDR billions): 19.3 → 21.6
  - Precautionary balances (in percent of) Credit outstanding: 21.1 → 23.7
  - Precautionary balances (in percent of) Total commitments: 10.5 → 11.8
  - Precautionary balances (in percent of) Lending capacity: 2.7 → 3.1
  - Burden sharing capacity (SDR millions): 15.2 → 657.0
  - Lending capacity: 709.4 → 692.3

### Credit risk — recent levels, projections, and concentration
- Credit outstanding:
  - Rose to SDR 95.2 billion in March 2022 (highest level in Fund’s history), declined to SDR 91.1 billion as of end-September 2022.
  - SDR 91.1 billion is about SDR 1.4 billion higher than the level at the time of the interim review.
- Drivers:
  - Disbursements from 13 existing Fund arrangements (predominantly Extended Arrangements) approved since 2018 and disbursements from four new arrangements approved since the interim review, as well as a new Rapid Financing Instrument (RFI) for Ukraine.
  - Lending to some of the Fund’s largest borrowers—SDR 1.3 billion for Ecuador and SDR 0.9 billion for Pakistan—was the main driver of the increase.
  - Greece made an advance repayment of SDR 1.5 billion in April 2022 and no longer has outstanding credit to the Fund.
- Projected path:
  - Credit outstanding is projected to rise to a peak of SDR 98.7 billion in March 2023, assuming no early repurchases.
  - Fund credit would remain at SDR 94.5 billion by the end of FY2023 assuming no new arrangements.
  - The trajectory of credit outstanding is on average about SDR 23 billion higher over the period FY2023‒25 than projected at the time of the interim review.
- Concentration details:
  - After increasing to about 36 percent of total credit outstanding as of end-June 2022, credit to Argentina fell to about 34 percent at end-September 2022.
  - Projected to peak at SDR 34.2 billion in March 2023.
  - Concentration to the five largest borrowers increased to 69 percent as of end-September 2022.
  - Extended Arrangements share of credit outstanding rose from 34.5 percent (September 2021) to 45.4 percent (September 2022).
  - Exposure under emergency financing instruments rose by SDR 1 billion to SDR 16.5 billion as of end-September 2022 (about 18 percent of outstanding lending portfolio).
  - Weighted average maturity of the credit outstanding portfolio: 2.9 years as of September 2022.
- Scheduled repurchases and concentration risk:
  - As of end-September 2022, total scheduled repurchases in FY2023-25 amount to an average of SDR 18 billion per year and SDR 54 billion in total.
  - Bulk of RFI repurchases (SDR 14 billion) is due in FY2024-25.
  - Argentina’s scheduled repurchases for FY2023‒24 peak at 322 percent of quota in FY2024.

### Income risks and surcharges
- Operating income margin:
  - Projected total operational income, excluding the impact of any pension-related (IAS 19) gains or losses, would exceed total expenditures by about SDR 1.7 billion annually on average in the five-year period through FY2027, assuming no new arrangements.
- Projected income drivers:
  - Projected lending income for current arrangements is higher over the medium-term compared with the interim review and reflects an increase in average credit outstanding.
  - Investment income is projected to rise over the medium term due to (i) the larger-than-anticipated build-up of reserves invested because of higher lending income and (ii) an upward shift in the projected path of the medium-term SDR interest rate since the last review.
- Projected expenses:
  - Medium-term expenses expected to be higher than in the last review, reflecting mainly an uptick in the U.S. inflation rate and the projected appreciation of the U.S. dollar against the SDR.
- Composition and concentration of lending income:
  - Of the average lending income projected through FY2024, surcharges account for slightly more than half of the total, margin income contributes to around a third.
  - About 57 percent of surcharge income is accounted for by the Fund’s largest borrower and another almost 37 percent by the next four largest borrowers.
- Surcharge projections (selected exact figures — amounts of surcharges income collected, SDR millions):
  - Baseline: FY23 1,411; FY24 1,356; FY25 1,173; FY26 1,029; FY27 934; FY28 778.
  - Desk survey: FY23 1,434; FY24 1,425; FY25 1,257; FY26 1,130; FY27 1,017; FY28 829.
  - WEO model-based: FY23 1,422; FY24 1,422; FY25 1,363; FY26 1,523; FY27 1,584; FY28 1,422.
  - Adverse scenario: FY23 1,456; FY24 2,272; FY25 2,628; FY26 3,424; FY27 3,758; FY28 2,922.
- Impact on precautionary balances (Precautionary Balances, SDR billions, end of year — selected scenario outcomes):
  - Baseline: FY23 22.6; FY24 24.8; FY25 26.5; FY26 27.9; FY27 29.1; FY28 30.2.
  - Desk survey: FY23 22.7; FY24 25.0; FY25 26.9; FY26 28.4; FY27 29.9; FY28 31.1.
  - WEO model-based: FY23 22.7; FY24 25.2; FY25 27.5; FY26 29.9; FY27 32.6; FY28 35.0.
  - Adverse scenario: FY23 22.9; FY24 27.4; FY25 32.5; FY26 38.8; FY27 45.5; FY28 50.9.

### Investment account risks and IA performance
- IA subaccounts: FI and EA objectives and recent performance:
  - FI: support dual objective of income generation and balance sheet protection.
  - EA: provide meaningful income contribution to cover administrative expenditures while preserving long-term real value.
  - Reported FY2022 losses: EA 4.44 percent; FI 1.16 percent.
- FI strategy refinements (January review):
  - Marginally increasing the maximum share of credit related assets (“Group 2”).
  - Lowering minimum eligible credit rating threshold to BBB- for corporate bonds and BBB+ for all other assets.
  - Modifying the investment objective to include an average margin above the SDR interest rate of 50 basis points over time.
- EA strategy refinements:
  - New asset allocation: more diversified; reduced share of low-yielding fixed-income assets; increased allocation to real assets including REITs and infrastructure equities.
  - Equity allocation increases to 55 percent.
  - EA payout: possibility of an initial EA payout to be evaluated in April 2023.

### Scenarios, modeling, and stress outcomes
- Scenarios analyzed: baseline; desk survey; WEO model-based; adverse scenario.
- Key scenario findings:
  - Baseline: forward-looking credit measure would peak at about SDR 86 billion in FY2023; indicative PB range about SDR 17 to 26 billion in FY2023; mid-point about SDR 22 billion.
  - Desk survey: assumes additional demand in FY2023–24 of about SDR 14 billion; indicative range SDR 18 to 27 billion in FY2023.
  - WEO model-based: new demand could reach SDR 63 billion over FY2023–24; indicative range about SDR 20 to 30 billion in FY2023.
  - Adverse scenario: new demand could reach nearly SDR 184 billion; indicative range about SDR 36 to 53 billion in FY2023.
- Lending capacity and reference:
  - Fund’s lending capacity as of end-September 2022: about SDR 692 billion.
  - Executive Board historical reference: precautionary balances to lending capacity ratio of 6 percent would imply an indicative target of about SDR 42 billion.

### Burden sharing mechanism and capacity
- Role and mechanics:
  - Established in 1986 to compensate the Fund for unpaid charges by members in arrears and offset impact on Fund income.
  - Creditor and debtor members contribute temporary financing in equal amounts by increasing rate of charge paid by debtor members and reducing rate of remuneration to creditor members.
- Capacity drivers and measured capacity:
  - Remunerated reserve tranche positions increased to about SDR 109 billion at end-September 2022 (about SDR 101 billion a year ago; about SDR 9 billion in June 2008).
  - SDR interest rate rose from 0.050 percent as of end-September 2021 to 2.007 percent as of end-September 2022.
  - As of end-September 2022, annual burden sharing capacity (based on current floor for remuneration at 85 percent of the SDR interest rate) was about SDR 657 million (comparisons: SDR 23 million at last biannual review in 2020; SDR 15 million in September 2021; SDR 77 million in June 2008).
- Risks if deferred charges exceed capacity:
  - Carrying value of the asset in arrears may need to be reduced; deferred charges in excess of burden sharing capacity would reduce annual lending income and slow accumulation of precautionary balances; potential recognition of an impairment loss.

### Monitoring triggers and policy recommendations
- Monitoring triggers for interim review (examples highlighted by staff and Directors):
  - Significant divergence of lending developments from paper projections.
  - Material rise in credit and other financial risks.
  - Changes in Fund lending policies that materially affect risk.
- Staff proposals and Board decision guidance:
  - Retain medium-term target of SDR 25 billion and SDR 15 billion floor.
  - Maintain regular two-year adequacy review cycle with provision for an interim review if lending developments diverge significantly or risks rise materially.
  - Close monitoring of precautionary balances evolution given weakening global outlook and unusually large downside risks.
  - Board decision rule: Changes to surcharge policy require a 70 percent majority of voting power in the Executive Board.

*Source: Review of the Adequacy of the Fund’s Precautionary Balances (paper summarized in the Executive Board discussion on December 12, 2022).*

### 2021.  They  emphasized the importance of maintaining an adequate level of  precautionary

### ppea2022062 - 2021.  They  emphasized the importance of maintaining an adequate level of  precautionary

### Executive summary and key findings
- Precautionary balances are central to the Fund’s multilayered framework to mitigate financial risks and safeguard members’ resources.
- Precautionary balances amounted to SDR 21.6 billion as of end-September 2022, up from SDR 19.3 billion at end-July 2021.
- Coverage metrics as of end-September 2022:
  - 3.1 percent of lending capacity
  - 11.8 percent of lending commitments
  - 23.7 percent of credit outstanding
- Staff proposal: retain the current medium-term target of SDR 25 billion and the minimum floor of SDR 15 billion.
- Projected timing to reach the medium-term target:
  - early FY2025 under the baseline with existing arrangements
  - late FY2024 if new lending under the desk survey scenario is factored in

### Developments in risks and balance-sheet trends
- Credit and other financial risks have increased:
  - Credit outstanding from the General Resources Account (GRA) is close to historical peaks and is expected to remain on a higher trajectory than earlier estimated.
  - Lending to some of the Fund’s largest borrowers has been the main driver of the increase in credit outstanding.
  - Credit concentration risks are heightened by a projected peak in repurchases in FY2023‒25, mainly from the largest borrower and emergency financing.
- Income and investment risks:
  - Near-term income risks have moderated but remain subject to concentration risks.
  - Investment risks are elevated amid heightened volatility in the prices of risky assets.
- Global context:
  - The October 2022 World Economic Outlook projects global growth to decelerate from an estimated 6 percent in 2021 to 3.2 percent and 2.7 percent in 2022 and 2023, respectively.
  - Global financial conditions have continued to tighten on net, and downside risks are elevated (geopolitical dislocation, food and energy price shocks, tightening financing conditions).

### Framework, targets, and Board views
- Framework:
  - The rules-based framework adopted in 2010 (indicative ratio range of 20-30 percent of a forward-looking credit measure, plus a minimum floor) remains broadly appropriate.
  - Judgment and Board discretion remain important under the framework.
  - Directors welcomed integration of enterprise risks following the recently approved Enterprise Risk Management framework and encouraged staff to work with the Office of Risk Management to ensure all relevant risks are incorporated.
- Board views and decisions:
  - Directors broadly agreed to retain the medium-term target of SDR 25 billion; some Directors argued for a higher target.
  - Directors broadly supported maintaining the minimum floor of SDR 15 billion for now; some Directors would have preferred raising the floor in the current review.
  - Most Directors supported maintaining the regular two-year review cycle, with an interim review if lending developments diverge materially from projections or if credit and other financial risks rise materially (including due to changes in Fund lending policies).
  - A few Directors considered that currently elevated risks warranted an interim review in 2023.
  - Directors agreed the evolution of precautionary balances relative to the target needs close monitoring amid a weakening global outlook and unusually large downside risks.

### Pace of accumulation and operational implications
- Pace of accumulation:
  - Reserve accumulation is slightly faster than projected at the time of the interim review and is judged overall adequate.
  - No additional steps were proposed to reach the precautionary balance target, though the pace should be monitored closely.
- Burden-sharing and commitments:
  - Commitments under precautionary arrangements have declined and burden-sharing capacity has increased significantly since the interim review.
- Income and surcharges:
  - Surcharges have significantly contributed to the Fund’s operational income and the accumulation of precautionary balances.
  - The average cost of borrowing from the Fund, including surcharges, remains significantly lower than market rates; the discount has increased recently.
  - Directors were divided on surcharge relief:
    - Most Directors were open to exploring possible options for providing temporary surcharge relief, with a few supporting a change in policy.
    - A number of other Directors did not see merit in exploring such options at this stage, stressing the critical role of surcharges in the Fund’s risk management framework.

### Specific risks, scenarios, and monitoring triggers
- Credit-concentration and repurchase risks:
  - Projected peak in repurchases in FY2023‒25 poses heightened credit-concentration risk, focused on the Fund’s largest borrowers and emergency financing.
- Monitoring triggers for interim review:
  - Significant divergence of lending developments from paper projections
  - Material rise in credit and other financial risks
  - Changes in Fund lending policies that materially affect risk
- Scenario timelines for reaching SDR 25 billion:
  - Baseline: early FY2025
  - Desk survey (higher new lending): late FY2024

### Other operational and risk-management considerations
- Directors agreed staff should continue to monitor the need for a successor SCA account.
  - A number of Directors stressed the merits of the SCA account to protect the Fund against provisioning for impairment losses and encouraged staff to explore funding options for the account.
- Enterprise Risk Management:
  - Directors welcomed discussion of enterprise risks in the staff report and urged integration of these risks into the assessment of precautionary balances.

*Source: Review of the Adequacy of the Fund’s Precautionary Balances (paper summarized in the Executive Board discussion on December 12, 2022).*

### 5.      This paper is organized as follows. The first section reviews financial  risks the Fund

### ppea2022062 - 5.      This paper is organized as follows. The first section reviews financial  risks the Fund

### PRECAUTIONARY BALANCES AND THE FRAMEWORK FOR ASSESSING RESERVE ADEQUACY
- Precautionary balances address residual financial risks of the Fund, notably those arising from non-concessional lending, after applying other elements of the multilayered credit risk management framework.
- The assessment of the adequacy of precautionary balances uses the transparent and rules-based framework adopted in 2010, which also allows for judgment.

### A. Financial Risks and the Role of Precautionary Balances
- The Fund faces a range of financial risks in fulfilling its mandate:
  - Credit risk: inherent in the Fund’s unique role; typically the predominant risk.
  - Risks to liquidity and adequacy of lending resources.
  - Risks to operational income and cash flows.
  - Market risks and risks of financial loss in operations.
- Notes on risk characteristics and mitigants:
  - The Fund has no exposure to exchange rate risk on holdings of member currencies because Fund credit and borrowings are all denominated in SDRs and members are required to maintain the SDR value of the Fund’s holdings of their currencies.
  - The Fund does not incur interest rate risk on its credit as the rate of charge is linked by means of a fixed margin to the cost of financing (the SDR interest rate).

### Box 1. Typology of Fund Financial Risks and Mitigation (key points)
- Credit risk: any borrowing member’s failure to fulfill its financial obligations to the Fund. Mitigated using a multilayered framework.
- Operational income and cashflow risks: when operational income and cashflows are insufficient to cover operational expenses and to accumulate precautionary balances to the target level. Mitigation: contain operational expenses, prudent IA strategy, set margin for basic rate of charge, accumulate precautionary balances.
- Adequacy and liquidity of lending resources risk: insufficient financial resources to cover members’ needs and repay obligations. Mitigation: regular liquidity reviews, quota reviews, Fund borrowing, prudential balance of quota and borrowed resources. Forward Commitment Capacity (FCC) measures resources available to finance new commitments over the next 12 months and is monitored daily.
- Financial risks related to investment activities (IA: Endowment Subaccount (EA) and Fixed-Income Subaccount (FI)): market risk is predominant; mitigants include Board approved Investment Rules and Regulations, credit rating thresholds, issuer concentration limits, diversification.
- Operational risks: losses from errors/omissions in day-to-day administration; mitigated through strong internal controls.
- Prudential balance currently set at 20 percent of the quotas of members participating in the financing of IMF transactions (Financial Transaction Plan members), because borrowed resources are not currently activated.

### Role of Precautionary Balances within the Multilayered Framework
- Precautionary balances:
  - Provide buffers to absorb losses from credit, income, and other financial risks.
  - Complement other layers: program design and conditionality; lending policies (standard access criteria and limits, charges and surcharges, exceptional access and early repurchase policies); safeguards assessments; post financing assessments; the Fund’s de facto preferred creditor status; cooperative arrears management strategy and burden sharing mechanism.
- Historical drawdowns: Fund drew on precautionary balances during FY2007–08 and in FY2020 to cover net income losses.
- Gold holdings are not included in precautionary balances due to limitations/restrictions on use.

### C. Precautionary Balances: Composition and Coverage
- Precautionary balances currently comprise the general and special reserves:
  - Special reserve: established as a first line of defense to absorb administrative losses; funded initially by proceeds from a gold investment program and later with net income allocations; under the Fund’s Articles, no distributions (dividends) can be made from the special reserve.
  - General reserve: established to absorb capital losses and meet administrative losses; funded through net income allocations; reserves in the general reserve may be distributed to members in proportion to their quota if the Board approves by a 70 percent majority of the total voting power.
- Prior to full distribution in context of Sudan’s arrears clearance in 2021, precautionary balances also included balances in the First Special Contingent Account (SCA-1):
  - SCA-1 held contributions by members via burden sharing targeted to protect the Fund against potential credit losses from ultimate failure of members to settle overdue obligations to the GRA.
  - Distributions of SCA-1 used to facilitate debt relief for Liberia, Somalia, and Sudan.
  - On May 10, 2021, the Board approved distribution of the full remaining amount of resources in the SCA-1 of SDR 1,066 million in the context of Sudan’s arrears clearance and debt relief.
- Recent discussions produced mixed views on merits of a successor account to SCA-1; Directors prioritized Sudan’s arrears clearance over discussion of a successor account.
- Staff view: current pace of precautionary balances accumulation is adequate; no case seen for using burden sharing capacity to provide SCA funding at this juncture given additional burden on debtors and creditors.

### D. Framework for Assessing Precautionary Balances
- Framework adopted in 2010; target is to be broadly maintained within an indicative range linked to a forward-looking measure of credit outstanding, while the Board retains flexibility based on comprehensive assessment of financial risks.
- Key elements:
  - Indicative range for the reserve coverage ratio: set at 20 to 30 percent of a forward-looking measure of credit outstanding.
  - Specific forward-looking credit measure anchoring the range: three-year average of credit outstanding covering the past twelve months and projections for the next two years; commitments under precautionary arrangements excluded from the credit measure used to derive the indicative range, but considered by the Board in setting the target.
  - Minimum floor to protect against unexpected increase in credit risks and ensure sustainable income position.
- Notes on methodology:
  - Two-year projection based on scheduled net disbursements under existing non-precautionary arrangements; methodology does not require explicit analysis of possible future arrangements or delays in scheduled disbursements or early repurchases; scenario analysis can show effects of different projections.
  - Quantification of potential losses from operational risks is not explicitly included in current adequacy assessment framework; adjustments could be considered once proposed changes to enterprise risk management mature.

### Historical Targets and Floors (selected decisions)
- 2010: Board agreed to raise indicative medium-term target by SDR 5 billion to SDR 15 billion.
- 2012: Target increased to SDR 20 billion.
- 2014, 2016, 2018: Target reaffirmed (target exceeded indicative range in 2016 and 2018).
- 2020: Target set at SDR 25 billion due to sharp increase in demand for Fund lending in wake of the pandemic; reaffirmed in 2021.
- Minimum floor history:
  - Agreed in 2010 at SDR 10 billion and reaffirmed in 2012 and 2014.
  - Increased to SDR 15 billion in 2016 as more consistent with maintaining a sustainable income position; SDR 15 billion floor reaffirmed subsequently.
- Framework applies to precautionary balances as a whole; Board has not adopted separate targets for sub-components (special and general reserves and SCA-1 prior to full distribution).

### DEVELOPMENTS SINCE THE INTERIM REVIEW
- Precautionary balances have increased further since the 2021 interim review, and coverage metrics have strengthened; however, credit and other financial risks have also increased somewhat.
- Credit outstanding is close to historical peaks and expected to remain on a higher trajectory than projected at the time of the 2021 interim review.
- Concentration of credit toward the largest borrower and outstanding emergency financing remain elevated.
- Credit concentration risks heightened by a projected peak in repurchases in FY2023–25.
- Near-term income risks have moderated and are mitigated by an increase in the capacity of the burden sharing mechanism but remain subject to concentration risks.
- Investment risks are elevated amid heightened volatility in prices of risky assets.

### A. Size and Coverage of Precautionary Balances (key figures)
- Precautionary balances reached SDR 21.6 billion at end-September 2022, up from SDR 19.3 billion at end-July 2021.
  - Increase reflects mainly higher lending income and a positive one-off adjustment of SDR 205 million to reverse the impact of the cumulative IAS 19 pension gains and losses previously included in their measurement.
- Estimated balances at end-September 2022 before adjusting cumulative pension related (IAS 19) gains/losses of SDR 1.2 billion:
  - General reserves: SDR 13.2 billion.
  - Special reserves: SDR 9.6 billion.

*INTERNATIONAL   MONETARY  FUND*

### 17.      Key precautionary balances coverage metrics have strengthened somewhat. At the

### ppea2022062 - 17.      Key precautionary balances coverage metrics have strengthened somewhat. At the

### Precautionary balances: recent coverage metrics and composition
- Precautionary balances were 2.7 percent of lending capacity at the time of the interim review and increased to 3.1 percent as at end-September 2022.
- Coverage relative to commitments reached 11.8 percent, up from 10.5 percent.
- Precautionary balances are equivalent to 23.7 percent of credit outstanding, compared to about 21.1 percent previously.
- The coverage relative to lending capacity is now exceeding pre-pandemic levels.
- Assumes equal allocation of income earned through end-September.
- Precautionary balances now comprise the special and general reserves (which reflect the accumulation of reserves under the accounting basis, excluding the portion attributable to gold sales profits) adjusted for the impact of the cumulative IAS 19 gains and losses.

### Box 2 — New approach for treatment of pension-related revaluations in precautionary balances
- Directors approved a new approach for pension-related revaluations at the Interim Precautionary Balances Review in December 2021.
- Objectives and key features of the new approach:
  - Reflects the role of precautionary balances as a long-term buffer for economic and financial risks.
  - Recognizes that income volatility stemming from pension-related (IAS 19) gains and losses cannot be eliminated for financial reporting under International Financial Reporting Standards.
  - Replaces the accounting valuation of the net pension-related assets and liabilities with a more long-term economic measure applied prospectively commencing in FY2022, and takes a more prudent stance on any economic gains.
  - Entails monitoring of the economic impact for potential material underfunded positions.
- Financial effect:
  - Adoption entailed a positive one-off adjustment of SDR 205 million to precautionary balances commencing May 1, 2021.
  - The adjustment reversed the impact of the cumulative IAS 19 gains and losses previously included in the Fund’s precautionary balances measurement under the accounting basis.
- Going forward:
  - The annual IAS 19 (accounting) net periodic pension costs (in administrative expenses) and remeasurement gains and losses will be excluded under the new approach for calculating precautionary balances.

*ADEQUACY OF THE FUND’S PRECAUTIONARY BALANCES — INTERNATIONAL MONETARY FUND*

### B. Credit Risk — recent levels, projections, and concentration
- Credit outstanding:
  - Rose to SDR 95.2 billion in March 2022 (highest level in Fund’s history), declined to SDR 91.1 billion as of end-September 2022.
  - SDR 91.1 billion is about SDR 1.4 billion higher than the level at the time of the interim review.
- Drivers of changes:
  - Increase reflects disbursements from 13 existing Fund arrangements (predominantly Extended Arrangements) approved since 2018 and disbursements from four new arrangements approved since the interim review, as well as a new Rapid Financing Instrument (RFI) for Ukraine.
  - Lending to some of the Fund’s largest borrowers—SDR 1.3 billion for Ecuador and SDR 0.9 billion for Pakistan—was the main driver of the increase.
  - Greece made an advance repayment of SDR 1.5 billion in April 2022 and no longer has outstanding credit to the Fund.
  - Disbursements under new Fund arrangements, besides Argentina, were relatively modest at SDR 0.2 billion.
- Projected path:
  - Credit outstanding is projected to rise to a peak of SDR 98.7 billion in March 2023, assuming no early repurchases.
  - Fund credit would remain at SDR 94.5 billion by the end of FY2023 assuming no new arrangements, higher than the current level of SDR 91.1 billion.
  - The trajectory of credit outstanding is on average about SDR 23 billion higher over the period FY2023‒25 than projected at the time of the interim review.
- Total commitments:
  - Rose to SDR 199.2 billion following approval of Argentina’s Extended Arrangement in March 2022.
  - As of end-September 2022, commitments had fallen to SDR 182.4 billion, about SDR 0.6 billion higher than at the time of the interim review.
  - Balances under FCL and PLL arrangements amounted to SDR 62.6 billion as of end-September 2022.
- Credit concentration and exposures (end-September comparisons and changes):
  - Credit outstanding: Actual 89.7 (2021) → 91.1 (2022)
  - Projected peak: 92.8 (2021) → 98.7 (2022)
  - Largest individual exposure: Actual 30.6 (2021) → 30.7 (2022)
  - Largest individual exposure: Projected peak 30.6 (2021) → 34.2 (2022)
  - Credit concentration: Top 5 (percent of total) 67.8 (2021) → 68.8 (2022)
  - Credit concentration: Top 1 (percent of total) 34.1 (2021) → 33.7 (2022)
  - Share of largest regional exposure in total commitments (percent) 68.9 (2021) → 71.1 (2022)
  - Share of RFI in the credit portfolio (percent) 17.3 (2021) → 18.1 (2022)
  - Weighted sovereign credit rating of Fund credit exposures (S&P) 14.5 (2021) → 14.7 (2022)
  - Weighted Sovereign Spreads of Largest Five Borrowers (basis points) 1118 (2021) → 2434 (2022)
  - Share of Fund credit of members rated CCC to CC and SD (percent) 40.4 (2021) → 44.7 (2022)
  - Arrears: 0 (2021) → 0 (2022)
  - Precautionary balances (SDR billions) 19.3 (2021) → 21.6 (2022)
  - Precautionary balances (in percent of) Credit outstanding 21.1 (2021) → 23.7 (2022)
  - Precautionary balances (in percent of) Total commitments 10.5 (2021) → 11.8 (2022)
  - Precautionary balances (in percent of) Lending capacity 2.7 (2021) → 3.1 (2022)
  - Burden sharing capacity (SDR millions) 15.2 (2021) → 657.0 (2022)
  - Lending capacity 709.4 (2021) → 692.3 (2022)
- Concentration toward largest borrower:
  - After increasing to about 36 percent of total credit outstanding as of end-June 2022, credit to Argentina fell to about 34 percent at end-September 2022.
  - Projected to peak at SDR 34.2 billion in March 2023, reflecting frontloading under Argentina’s 30-month Extended Arrangement.
  - Credit would stabilize at SDR 31.9 billion in September 2024, assuming full disbursement, and stay at that level through August 2026.
  - Concentration to the five largest borrowers increased to 69 percent as of end-September 2022.
- Portfolio composition shifts:
  - Since the interim review, Extended Arrangements credit outstanding increased by SDR 10.5 billion while SBAs fell by SDR 9.9 billion.
  - Extended Arrangements share of credit outstanding rose from 34.5 percent (September 2021) to 45.4 percent (September 2022).
  - Exposure under emergency financing instruments rose by SDR 1 billion to SDR 16.5 billion as of end-September 2022, about 18 percent of outstanding lending portfolio.
  - Weighted average maturity of the credit outstanding portfolio remains relatively short at 2.9 years as of September 2022.
- Scheduled repurchases and concentration risk:
  - As of end-September 2022, total scheduled repurchases in FY2023-25 amount to an average of SDR 18 billion per year and SDR 54 billion in total.
  - Bulk of RFI repurchases (SDR 14 billion) is due in FY2024-25.
  - Argentina’s scheduled repurchases for FY2023‒24 peak at 322 percent of quota in FY2024.

### C. Income Risks
- Operating income margin:
  - Projected total operational income, excluding the impact of any pension-related (IAS 19) gains or losses, would exceed total expenditures by about SDR 1.7 billion annually on average in the five-year period through FY2027, assuming no new arrangements.
- Projected income drivers:
  - Projected lending income for current arrangements is higher over the medium-term compared with the interim review and reflects an increase in average credit outstanding.
  - Investment income is projected to rise over the medium term due to (i) the larger-than-anticipated build-up of reserves invested because of higher lending income and (ii) an upward shift in the projected path of the medium-term SDR interest rate since the last review.
- Projected expenses:
  - Medium-term expenses are expected to be higher than in the last review, reflecting mainly an uptick in the U.S. inflation rate and the projected appreciation of the U.S. dollar against the SDR.
- Composition and concentration of lending income:
  - Of the average lending income projected through FY2024, surcharges account for slightly more than half of the total, margin income contributes to around a third.
  - About 57 percent of surcharge income is accounted for by the Fund’s largest borrower and another almost 37 percent by the next four largest borrowers.
- Risks to income:
  - Cancellations and changes in the timing of purchases under existing arrangements.
  - Uncertainties around the global interest rate environment and the U.S. dollar/SDR exchange rate path.
  - Potential need for impairment recognition under IFRS 9 (no provisions for impairment have been recognized to date).

### D. Financial risks related to investments
- (Section heading provided; detailed content for this subsection is not included in the supplied text.)

*Source: IMF Finance Department; ADEQUACY OF THE FUND’S PRECAUTIONARY BALANCES — INTERNATIONAL MONETARY FUND*

### 26.      Financial risks related to the investment assets of FI and EA remain elevated. These

### 26.      Financial risks related to the investment assets of FI and EA remain elevated. These

### Investment Account (IA) subaccounts: FI and EA — objectives and recent performance
- FI (Front Office / FI Subaccount): invested to support dual objective of income generation and balance sheet protection.
- EA (Endowment Account / EA Subaccount): purpose is to provide meaningful income contribution to cover the Fund’s administrative expenditures while preserving the long-term real value of the Subaccount’s resources.
- Since the last review, all investment portfolios recorded negative annual returns, with both equities and fixed-income assets experiencing losses, reflecting persistent inflation pressures and rising bond yields.
- Reported FY2022 losses: EA 4.44 percent; FI 1.16 percent.

### FI: strategy refinements and outlook
- Board-approved incremental refinements (January review) aimed to improve return margin without materially changing FI risk profile, including:
  - marginally increasing the maximum share of credit related assets (“Group 2”);
  - lowering the minimum eligible credit rating threshold to BBB- for corporate bonds and BBB+ for all other assets;
  - modifying the investment objective to include an average margin above the SDR interest rate of 50 basis points over time.
- FY2022 and FY2023: negative performance as short-duration fixed income assets recorded their worst performance in decades.
- FI’s two-tranche structure exhibited relative resilience and outperformed comparable benchmarks such as the SDR 1-3 year government bond index.
- Prospect for achieving the modified investment objective considered reasonable, especially once bond yields stabilize at higher levels.

### EA: strategy refinements, asset allocation changes, and payout timing
- EA long-term return has fallen behind its 3 percent real return target in US dollar terms, driven mainly by the sharp increase in US inflation and rapid increases in bond yields.
- Board-approved refinements (January review) aim to improve prospective long-term returns while maintaining a balanced portfolio to improve resilience to different growth and inflation scenarios.
- New asset allocation: more diversified; reduced share of low-yielding fixed-income assets; increased allocation to real assets including REITs and infrastructure equities.
- Equity allocation increases to 55 percent.
- Expected outcomes: improved returns and better downside risk protection characteristics, but expected long-term returns still below the 3 percent real return target in US dollars despite recent market movements increasing expected long-term returns.
- EA payout: EA has not yet made a payout; under current Board-approved framework the possibility of an initial EA payout will be evaluated in April 2023.

### Precautionary Balances (PB) target assessment and proposed stance
- Staff proposes to retain current target for precautionary balances at SDR 25 billion and the SDR 15 billion floor.
- Current pace of reserve accumulation is somewhat faster than anticipated during the interim review (baseline and desk survey scenarios) and seems broadly adequate.
- Staff proposes to maintain the regular two-year adequacy review cycle, with provision for an interim review if lending developments diverge significantly from projections or if credit and other financial risks rise materially, including due to changes to Fund lending policies.

### Indicative PB target analysis: scenarios and forward-looking credit measure
- Staff reassessed adequacy under four scenarios using forward-looking measure (average credit outstanding over three years: past 12 months average plus projections two years forward).
- Scenarios analyzed: (i) baseline with current arrangements; (ii) desk survey; (iii) WEO model-based scenario; (iv) adverse scenario.

Key scenario findings and numbers:
- Baseline:
  - Forward-looking credit measure would peak at about SDR 86 billion in FY2023.
  - Calculated indicative range for PBs about SDR 17 to 26 billion in FY2023, with mid-point about SDR 22 billion.
  - Current target SDR 25 billion falls within the indicative range.
- Desk survey:
  - Assumes additional demand in FY2023–24 from 10 countries entering new Fund-supported programs and one RFI request, total demand about SDR 14 billion.
  - Indicative range would increase to between SDR 18 billion and 27 billion in FY2023; current target above the mid-point.
- WEO model-based scenario:
  - New demand for Fund programs could reach SDR 63 billion over FY2023–24.
  - Indicative range could be between about SDR 20 billion and SDR 30 billion in FY2023.
  - Forward-looking credit measure in FY2023 would be SDR 39 billion lower than projected at the last review.
  - Current indicative target of SDR 25 billion would remain within the range and just at its mid-point.
- Adverse scenario:
  - New demand for Fund programs could reach nearly SDR 184 billion.
  - All FCL and PLL arrangements assumed fully drawn, for a total of about SDR 63 billion in disbursements.
  - Indicative range would rise to between about SDR 36 billion and SDR 53 billion in FY2023, significantly above the SDR 25 billion target but lower than at the interim review.
- Calculated indicative PB range (FY2023) summary (visualized in source): baseline through adverse scenarios with mid-point and SDR 25 billion target marked.

### Lending capacity and its relation to PB target
- Fund’s lending capacity as of end-September 2022: about SDR 692 billion.
- Executive Board historical reference: precautionary balances to lending capacity ratio of 6 percent would imply an indicative target of about SDR 42 billion (66 percent higher than the current target and slightly above the mid-point of the indicative range under the adverse scenario).
- Lending capacity composition as of end-September 2022: SDR 308.7 billion from quotas; SDR 276.1 billion from the New Arrangements to Borrow (NAB) running through end-2025; SDR 107.5 billion from Bilateral Borrowing Agreements (BBAs) running through end-2023 unless extended for a fourth and final year.
- Ongoing 16th General Quota Review (expected to conclude by end-2023) is reassessing adequacy of Fund resources and mix between quotas and borrowed resources.

### Other relevant risks and risk-related measures (worsened somewhat since last review)
- Global outlook:
  - October 2022 WEO shows significantly weaker global growth outlook than a year earlier.
  - More than one third of the global economy is expected to contract this year or next.
  - China, the euro area and the United States expected to stall.
  - Sharp increase in food and energy prices is putting pressure on government budgets; risks unusually large and to the downside.
- Credit and concentration risks:
  - Sizable total credit combined with heavy concentration of loan portfolio toward the largest borrower.
  - Peak of scheduled repurchases in FY2023–25 compounds credit risks.
  - Significant economic and financial challenges facing Argentina and Ukraine increase risks.
  - Regional concentration increased only slightly; largest credit exposure in the Western hemisphere.
- Level and concentration of precautionary arrangements:
  - Commitments under FCL and PLL arrangements decreased since the last review but remain elevated at about SDR 63 billion as of end-September 2022.
  - All four FCL arrangements and the only PLL arrangement concentrated in the Western hemisphere.
  - Risk of correlated drawdowns is material given output co-movement between members with FCL/PLL arrangements and members with current programs.
- Share of RFIs in loan portfolio:
  - Emergency financing instruments not subject to ex-post/UCT conditionality account for about 18 percent of the credit portfolio.
  - Repurchases are bunched in FY2024–25; associated risks remain high.
- Strength of other credit risk management layers:
  - Remain robust overall despite temporary policy changes during COVID-19 and recent spike in food prices.
  - Policy changes increased overall credit risks temporarily but accompanied by mitigating measures:
    - Strengthening program risk management practices and program design,
    - Strengthened ex ante risk discussions in program documents,
    - Contingency planning, enhancements to debt sustainability tools, and further integration of surveillance and Capacity Development in program design.
  - Other mitigants include debt relief/restructuring initiatives (e.g., Debt Service Suspension Initiative and G20 common framework), tracking governance measures and audits for pandemic-related spending, and transition to UCT-quality Fund-supported programs after emergency financing.
- Historical incidence of drawings on precautionary arrangements has been low; total drawn amount of all precautionary arrangements in the past 20 years accounts for about 1% of the total approved amount.

*ADEQUACY OF THE FUND’S PRECAUTIONARY BALANCES — INTERNATIONAL MONETARY FUND*

### Box 3. Main Changes in the Fund’s GRA Lending Policies during the COVID-19 Crisis

### Box 3. Main Changes in the Fund’s GRA Lending Policies during the COVID-19 Crisis

### Increasing access and disbursement limits to GRA resources
- Temporary increases in access limits for the RFI regular window and the Large Natural Disaster (LND) window will remain in effect through June 2023.
- About a quarter of the members that accessed the Fund’s Rapid Financing Instrument transitioned to Upper-Credit-Tranche-programs as of December 2021.

### Streamlining lending procedures
- The Board approved temporarily streamlined procedures for emergency financing requests and requests for changes in access under existing arrangements in April 2020 to ensure timely disbursements.
- Access to the regular RFI window was first temporarily increased in April 2020 and subsequently extended in September 2020, March 2021 and December 2021.
- For the RFI’s LND window, the temporary access limit increase was introduced in June 2021 and extended in December 2021.

### Streamlining modalities for PPM (renamed PFA)
- Increased access to Fund resources, together with high demand during the pandemic, led to outstanding credit exceeding the post-program monitoring (PPM) threshold for some countries without Fund-supported programs due to emergency financing.
- The Board approved streamlined modalities for PPM, allowing it to be conducted at the time of the Article IV consultations through end-2022, to alleviate the resource constraint the Fund was facing.
- The threshold for PPM was maintained, safeguarding the Fund’s outstanding credit.
- The PPM was renamed “Post Financing Assessment (PFA)” to reflect the coverage of members with credit outstanding from emergency financing.

### Introduction of the Short-term Liquidity Line (SLL)
- The SLL was established by the IMF in Spring 2020 as part of its COVID-19 response, amid heightened global uncertainty and growing demand for liquidity at the onset of the pandemic.
- Purpose: a liquidity backstop that complements the IMF’s lending toolkit and other elements of the global financial safety net, aiming to minimize the risk of shocks evolving into deeper crises and spilling over to other countries.
- The SLL has been used by one member so far.

*Source: Box 3. Main Changes in the Fund’s GRA Lending Policies during the COVID-19 Crisis (ppea2022062).*

### 41.      Surcharge  income is likely to increase, and more countries are likely to pay

### 41.      Surcharge  income is likely to increase, and more countries are likely to pay

### Projections of surcharge incidence and income under scenarios
- Baseline (with existing arrangements):
  - Number of surcharge-paying members: increase from current 18 to 21 in FY2024, then decline to 14 by FY2028.
  - Total surcharge income: decline from about SDR 1.4 billion in FY2023 to about SDR 0.8 billion in FY2028.
  - Share of surcharge income in operational income: decline from about 47 percent in FY2023 to around 34 percent by FY2028.
  - Share of lending income in operational income: decline from around 88 percent in FY2023 to around 54 percent by FY2028.
  - Contribution of the five largest surcharge payers to total surcharge income: edge up to about 98 percent by FY2028.
  - Share of time-based surcharges in total surcharge income: rise to about 33 percent by FY2028.

- Desk survey scenario:
  - Number of surcharge-paying members: increase to 22 during FY2024–25, then decline to 18 during FY2027–28.
  - Total surcharge income: peak at about SDR 1.4 billion during FY2023–24.
  - Share of surcharge income in operational income: decline from about 47 percent in FY2023 to around 34 percent by FY2028.
  - Share of lending income in operational income: decline from around 88 percent in FY2023 to around 56 percent by FY2028.
  - Share of the five largest surcharge payers: hover in the range of about 91–96 percent.
  - Share of time-based surcharges in total surcharges: increase gradually from about 28 percent in FY2023 to 33 percent in FY2028.

- Model-based WEO scenario:
  - Number of surcharge-paying members: increase to 30 in FY2025 from 19 in FY2023.
  - Total surcharge income: increase by about 11 percent to around SDR 1.6 billion by FY2027 from about SDR 1.4 billion in FY2023.
  - Share of surcharge income in operational income: decline from about 47 percent in FY2023 to about 40 percent by FY2028.
  - Share of lending income in operational income: decline from around 88 percent in FY2023 to 68 percent in FY2028.
  - Contribution of the largest five surcharge payers to total surcharge income: decline to the range of 85–87 percent during FY2025–27 from around 94 percent in FY2023.
  - Share of time-based surcharges in total surcharge income: decline from about 29 percent in FY2024 to about 20 percent by FY2027, before returning to about 28 percent by FY2028.

- Adverse scenario:
  - Number of surcharge-paying members: increase to 49 by FY2025–26 from 23 in FY2023.
  - Total surcharge income: more than double from FY2023 level to around SDR 3.8 billion by FY2027.

### Interim Review, Board views, and consideration of surcharge relief
- During the 2021 interim review:
  - Some Directors were open to exploring temporary surcharge relief to help borrowing members address health and economic challenges.
  - Other Directors did not see a need to review surcharge policies or change their design, noting the low total cost of Fund borrowing and the critical role of surcharge income for building risk buffers.
- This review provides technical background on the impact of potential temporary relief amid a weakening global economy and rising interest rates.
- Possible forms of temporary relief: lower surcharge rates and/or higher surcharge thresholds.
- The 2021 interim review included illustrative projections of a hypothetical two-year suspension of surcharges (projected, under the desk survey scenario, to lead to a negative impact of SDR 3 billion on cumulative net operational income and reserve accumulation and to a two-year delay in reaching the targeted level of SDR 25 billion of precautionary balances).

### Box 5 — Illustrative example: temporary relief via higher level-based threshold
- Current surcharge structure (since 2009, updated in 2016):
  - Level-based marginal surcharge: 200 bps applies to GRA credit outstanding in excess of 187.5 percent of quota.
  - Time-based marginal surcharge: 100 bps applies when the threshold is exceeded for more than 36 months (SBA) or 51 months (EFF).
- Illustrative scenario: hypothetical temporary increase in level-based threshold from 187.5 to 300 percent of quota for three years.
  - Under the desk survey scenario:
    - Of 22 members subject to surcharges during FY2024–25, eight members would avoid paying surcharges; 14 members would see reduced surcharges.
    - Compared to the two-year suspension scenario in the 2021 interim review, the temporary threshold increase yields a more balanced distribution of relief between larger and smaller borrowers.
    - Financial impact: negative impact of SDR 1.1 billion on cumulative net operational income and reserves accumulation.
    - Precautionary balances timing: projected to reach the target SDR 25 billion in the course of FY2025, about one year later than currently projected under the unchanged policy desk survey scenario.

### Key quantitative items from Table 4 (selected exact figures)
- Baseline (amount of surcharges income collected, SDR millions, by year): FY23 1,411; FY24 1,356; FY25 1,173; FY26 1,029; FY27 934; FY28 778.
- Desk survey (amount of surcharges income collected, SDR millions, by year): FY23 1,434; FY24 1,425; FY25 1,257; FY26 1,130; FY27 1,017; FY28 829.
- WEO model-based (amount of surcharges income collected, SDR millions, by year): FY23 1,422; FY24 1,422; FY25 1,363; FY26 1,523; FY27 1,584; FY28 1,422.
- Adverse scenario (amount of surcharges income collected, SDR millions, by year): FY23 1,456; FY24 2,272; FY25 2,628; FY26 3,424; FY27 3,758; FY28 2,922.
- Precautionary Balances (SDR billions, end of year) — Baseline: FY23 22.6; FY24 24.8; FY25 26.5; FY26 27.9; FY27 29.1; FY28 30.2.
- Precautionary Balances (SDR billions, end of year) — Desk survey: FY23 22.7; FY24 25.0; FY25 26.9; FY26 28.4; FY27 29.9; FY28 31.1.
- Precautionary Balances (SDR billions, end of year) — WEO model-based: FY23 22.7; FY24 25.2; FY25 27.5; FY26 29.9; FY27 32.6; FY28 35.0.
- Precautionary Balances (SDR billions, end of year) — Adverse scenario: FY23 22.9; FY24 27.4; FY25 32.5; FY26 38.8; FY27 45.5; FY28 50.9.

### Enterprise risk considerations and policy implications
- Maintaining the medium-term target and floor for precautionary balances and the current pace of accumulation is expected to preserve adequate financial buffers and mitigate financial risks, business risks, and reputational risks.
- Residual risks remain: lending demand and credit outstanding could rise more than projected, and precautionary balances could fall below the indicative target range.
- Staff proposes close monitoring and regular reviews of precautionary balances, with provision for an interim review before the regular two-year cycle if lending developments diverge significantly from projections or if credit and other financial risks rise materially.
- Board decision rule: Changes to surcharge policy require a 70 percent majority of voting power in the Executive Board.

### Issues for Directors (for discussion)
- Do Directors agree with staff’s assessment of the credit risks facing the Fund?
- Do Directors agree that the indicative medium-term target for precautionary balances should be retained at SDR 25 billion while being monitored closely?
- Do Directors agree to maintain the normal two-year review cycle but to proceed with an interim review if lending developments diverge significantly from projections or if credit and other financial risks rise materially?
- Do Directors agree that the minimum floor for precautionary balances should be kept unchanged at SDR 15 billion?
- Do Directors agree that it would not appear necessary at this point to take additional steps to accelerate the pace of precautionary balance accumulation?
- Do Directors see merit in exploring possible options for providing temporary surcharge relief?

*International Monetary Fund — Adequacy of the Fund’s Precautionary Balances (section 41).*

### 2.9 percent threshold in a given year. Under this approach, 28 countries are predicted to enter a

### ppea2022062 - 2.9 percent threshold in a given year. Under this approach, 28 countries are predicted to enter a

### Predictions of program demand and model calibration
- Under the 2.9 percent threshold approach, 28 countries are predicted to enter a new Fund-supported program, of which 17 are assumed to come forward in FY2023‒24, based on staff analysis.
- The average size of Fund programs (excluding precautionary arrangements) in the past decade is about 5 percent of GDP (used for access calculations).
- Historical model error definitions:
  - Type I error: ratio of actual new programs that the model failed to predict to total new program observations.
  - Type II error: ratio of predicted programs that did not occur to total non-program observations.
- Higher thresholds of 9.7 and 17.9 percent are identified when Type I and Type II errors are minimized in the ratios of 2:1 and 3:1, respectively, reflecting approaches that penalize false alarms more and flag fewer countries requesting Fund programs.

### Projected aggregate demand under the WEO model-based scenario
- Aggregate new demand for IMF financing under 17 arrangements could reach about SDR 63 billion over FY2023‒24 (adjusted for outstanding Fund credit, projected disbursements and repurchases consistent with applicable exceptional access limits).
- Previously projected at the interim review: 28 new arrangements totaling SDR 148 billion over FY2022‒23.
- The lower projected demand relative to the interim review partly reflects the strong global recovery last year.
- Under the WEO model-based scenario, the outstanding stock of Fund credit is projected to increase relative to the stock with only existing arrangements by about SDR 21 billion at the peak in FY2027.
- Projected composition under the WEO scenario: 5 Stand–By Arrangements (SBAs) and 12 arrangements under the Extended Fund Facilities (EFFs), with even phasing over three years for SBAs and four years for EFF arrangement.
- Average outstanding stock of Fund credit:
  - About SDR 90.5 billion in FY2022 (including existing arrangements and prospective arrangements under the WEO-based scenario).
  - Peak of SDR 114.8 billion in FY2027 (WEO scenario).
  - Peak of SDR 94.1 billion if only existing arrangements are taken into account.
  - Peak of SDR 167 billion at the interim review.

### Precautionary balances under baseline and scenarios
- New demand for Fund programs could lift precautionary balances above the indicative target by FY2024.
- Precautionary balances would peak at SDR 35 billion over the medium-term under the WEO-based scenario (higher than projections based only on existing arrangements).

### Adverse scenario and stress outcomes
- Adverse scenario assumptions:
  - Projected growth for 2022–23 for a country is assumed to fall by ½ standard deviation of its historical values relative to the October 2022 WEO baseline.
  - A high financial market shock with VIX level of 40.
  - Average access per arrangement about 7 percent of GDP (excluding precautionary arrangements).
  - All current FCL and PLL arrangements are drawn.
- Under this adverse scenario:
  - Demand for Fund programs is estimated at SDR 184 billion.
  - Outstanding stock of Fund credit is projected to increase by about SDR 164.1 billion above the peak under the WEO model-based scenario.
  - Precautionary balances would increase to SDR 50.9 billion over the medium-term.

### Key model output (logit estimation results — dependent variable: Start of a GRA Arrangement (dummy))
- Reported dy/dx, Robust SE, P-value for selected independent variables:
  - Past program (dummy): 0.397***, 0.064, 0.000
  - Reserve accumulation: -0.0411, 0.029, 0.154
  - External Financing Needs: 0.755**, 0.316, 0.017
  - GDP growth: -0.0828***, 0.025, 0.001
  - GDP per capita: -1.114***, 0.193, 0.000
  - GDP: 0.0616, 0.115, 0.593
  - Credit gap: 0.0227**, 0.009, 0.014
  - Exchange rate variation: 0.0259, 0.113, 0.819
  - Government stability: -0.295***, 0.075, 0.000
  - 3M US int. rate variation: 0.108, 0.127, 0.395
  - Import coverage: -0.132***, 0.047, 0.005
  - VIX: 0.0668***, 0.026, 0.010
  - Oil price: -0.00836, 0.006, 0.175
  - Access to RFA (dummy): 0.324, 0.310, 0.296
- Model diagnostics and sample:
  - Pseudo R2: 0.443
  - Observations: 2,201
  - Countries: 96
  - GRA Arrangements: 153
  - Likelihood ratio (p-value): 0.000
- Notes: panel logit estimation using random effects. A constant is estimated but not reported. ***, **, and * denote significance at the 1, 5, and 10 percent levels, respectively.

### Role and capacity of the burden sharing mechanism
- Role:
  - Established in 1986 to compensate the Fund for unpaid charges by members in arrears (“deferred charges”) and offset the impact on Fund income.
  - Under burden sharing, creditor and debtor members contribute temporary financing in equal amounts by increasing the rate of charge paid by debtor members and reducing the rate of remuneration to creditor members.
  - The mechanism has enabled the Fund to recognize no impairment for its credit outstanding under IFRS by demonstrating no impairment on a net present value basis despite deferred charges.
- Risks if deferred charges exceed capacity:
  - Carrying value of the asset in arrears on the Fund’s balance sheet may need to be reduced.
  - Deferred charges in excess of burden sharing capacity would reduce annual lending income and slow accumulation of precautionary balances.
  - Recognition of an impairment loss could negatively impact net income and precautionary balances; recognition would consider the Fund’s unique financing mechanism and is not equivalent to writing off claims.
- Maximum feasible adjustment mechanics:
  - Article V, Section 9 (a) limits rate of remuneration to no less than four-fifths (80 percent) of the SDR interest rate.
  - The Board has set current floor for remuneration at 85 percent of the SDR interest rate (changeable with a 70 percent majority of total voting power).
  - Maximum capacity of a symmetrical burden sharing mechanism is twice the maximum feasible reduction in remuneration expenses (debtors and creditors contribute equally).
  - Contributing debtor base declines in the event of arrears, which may limit feasible adjustments without overburdening members.
- Determinants of burden sharing capacity:
  - Quota payments: quota increases raise reserve tranche positions (RTP) and remunerated portions, increasing capacity.
  - Outstanding credit and Fund borrowing: remunerated reserve tranche positions increased to about SDR 109 billion at end-September 2022, compared to about SDR 101 billion a year ago and about SDR 9 billion in June 2008. Borrowed resources do not affect burden sharing adjustments to interest paid to creditors.
  - SDR interest rate: higher SDR interest rate increases total burden sharing capacity. SDR interest rate rose from its floor of 0.050 percent as of end-September 2021 to 2.007 percent as of end-September 2022, triggering the rise in total burden sharing capacity.
- Measured capacity changes:
  - As of end-September 2022, annual burden sharing capacity (based on current floor for remuneration at 85 percent of the SDR interest rate) was about SDR 657 million.
  - Comparisons: SDR 23 million at last biannual review in 2020; SDR 15 million in September 2021; SDR 77 million in June 2008.

### Credit concentration risk — methodology, data, and sample coverage
- Methodology:
  - Comovement measures based on quarterly real GDP growth rates from the October 2022 WEO database from 1990Q1 to 2022Q2 and quarter-end period sovereign spreads from J.P. Morgan Markets from 1993Q4 to 2022Q2.
  - Comovement calculation: simple average of country pairwise correlations in a region or full sample, computed over backward 5-year rolling periods.
  - Definitions in formula:
    - P_t is the simple average of country pairwise correlations at time t.
    - N is number of unique country pairs.
    - P_x,y,t is correlation coefficient of country x and country y (x ≠ y).
    - x_t is value of country x at time t in backward 5-year rolling period; x̄_t is its mean; likewise for y_t and ȳ_t.
- Data sources:
  - Gross domestic product, constant prices, seasonally adjusted, year-over-year percent change: IMF, World Economic Outlook Database.
  - EMBI Sovereign Strip Spreads (bps): J.P. Morgan Markets, Data Query.
- Sample coverage:
  - Includes all countries in the WEO database with data available, including countries with credit outstanding from Fund GRA arrangements, and excludes countries eligible for the PRGT.
  - For Western Hemisphere analysis, current FCL/PLL users are Chile, Colombia, Mexico, Peru and Panama. Members with current UCT-quality Fund-supported program arrangements: Argentina, Costa Rica, Ecuador, and Suriname. Panama and Suriname are excluded from the sample due to data unavailability.
- Country lists and regional groupings are reported in Table III.2 and Table III.3 in the source material.

*International Monetary Fund — Adequacy of the Fund’s Precautionary Balances (ppea2022062)*

---


_Source: https://www.imf.org/-/media/files/publications/pp/2022/english/ppea2022062.pdf_