## CHAPTER XII — Financial Operations and Policies (excerpt)

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### Quota Increase: Rationale and Distribution
- Board considered an overall increase in quotas of SDR146 billion, taking into account:
  - growth of world trade and payments;
  - scale of potential payments imbalances, including those from sharp changes in capital flows;
  - prospective demand for IMF resources in support of member programs;
  - rapid globalization and liberalization of trade and payments since last increase in quotas in 1990;
  - IMF’s liquidity position and adequacy of borrowing arrangements.
- Board reiterated IMF should rely on quota resources as principal financing and resort to borrowing only in exceptional circumstances.
- Distribution principles (Interim Committee communiqué April 1997 and September 1997):
  - 75 percent of the overall increase distributed in proportion to present quotas;
  - 15 percent distributed in proportion to members’ shares in calculated quotas (based on 1994 data);
  - 10 percent distributed among members whose current quotas are “out of line with their positions in the world economy (as measured by the excess of their share in calculated quotas over their share in actual quotas), of which 1 percent of the overall increase would be distributed among five members whose current quotas are far out of line with their relative economic positions, and which are in a position to contribute to the IMF’s liquidity over the medium term.”
- Interim Committee reiterated formulas used to calculate quotas should be reviewed promptly after completion of the Eleventh Review.
- Board confirmed in agreeing size/distribution of increase:
  - no intent to reopen size and composition of the Board;
  - existing representation of developing countries should not be affected.
- Implementation and timing:
  - resolution requested member countries to consent before January 29, 1999;
  - quota increase will not take effect until members having not less than 85 percent of total quotas as of December 23, 1997, have consented;
  - Interim Committee (April 1998) called for rapid implementation of quota increase approved by Board of Governors in January 1998.

### IMF Liquidity and Use of Resources in 1997/98
- IMF liquidity weakened considerably in 1997/98 due to:
  - large new demands from Asian crisis;
  - sustained demand from Russian Federation, Algeria, Argentina, Bulgaria, Philippines.
- Total purchases (gross drawings, including reserve tranche and under the SRF) rose to an unprecedented SDR 20.0 billion in 1997/98.
- Net of repurchases, IMF credit outstanding in the GRA increased by SDR 15.2 billion to a historic high of SDR 49.7 billion at end-1997/98.

### General Resources and Usable Currencies
- Liquid resources = usable currencies and SDRs held in the GRA.
- Changes in list of sufficiently strong countries impacted usable currencies:
  - Exclusion of six members during 1997/98 reduced usable currencies by about SDR 2.4 billion.
  - Inclusion of three members added about SDR 3.0 billion.
- Usable resources declined to SDR 47.3 billion at end-April 1998 from SDR 62.7 billion a year earlier.
- Stock of uncommitted usable resources declined to SDR 32.0 billion at end-April 1998 from SDR 55.7 billion a year earlier.
- Net uncommitted usable resources amounted to SDR 22.6 billion as of April 30, 1998, compared with SDR 43.5 billion a year earlier.
- IMF liquid liabilities at end-April 1998 totaled SDR 50.3 billion, consisting entirely of reserve tranche positions (no outstanding borrowing), up from SDR 36.1 billion a year earlier.
- Traditional liquidity ratio (net uncommitted usable resources to liquid liabilities) declined to 44.8 percent at end-April 1998 from 120.5 percent a year earlier.

### Borrowing: GAB and NAB
- IMF authorized to borrow to supplement usable quota resources temporarily.
- General Arrangements to Borrow (GAB):
  - GAB renewed for five-year period from December 26, 1998.
  - Involves 11 industrial countries/central banks.
  - Amount potentially available under GAB is SDR 17 billion, with additional SDR 1.5 billion under associated agreement with Saudi Arabia.
- New Arrangements to Borrow (NAB):
  - Adopted January 27, 1997, to enhance borrowing resources in circumstances similar to GAB.
  - NAB aims to double resources available under GAB; does not replace GAB.
  - NAB facility of first and principal recourse unless a GAB participant requests IMF resources.
  - Amount potentially available under NAB is up to SDR 34 billion (maximum combined amount under both arrangements).
  - NAB will enter into force when participants with credit arrangements amounting to not less than SDR 28.9 billion adhere, including the five largest credit arrangers.
  - As of April 30, 1998, two-thirds of participants, representing some 55 percent of potential resources, had adhered.
  - Activation rules mirror GAB circumstances; activation of GAB for nonparticipant requires Managing Director judgment of inadequacy of resources after consulting participants.

### Access Policy and Limits on Use of IMF Resources
- 1994 decision raised annual access limit under credit tranches and EFF to 100 percent of quota (from 68 percent) for three years; cumulative access limit unchanged at 300 percent of quota.
- Board reviews access policies annually; November 1997 review maintained the 1994 annual and cumulative limits until next review not later than October 1998.
- These access policies do not apply to special facilities, including the Supplemental Reserve Facility (SRF) established December 1997.
  - Under SRF, IMF makes financial assistance available for up to one year in case of exceptional balance of payments difficulties attributable to...

### Operational Budget (Box 15)
- Quarterly operational budget is mechanism through which IMF makes resources available to members.
- Assistance provided through SDRs and currencies of a wide range of members.
- Members judged sufficiently strong in balance of payments/reserves supply foreign exchange to members with weak positions.
- Providers receive a liquid claim on the IMF earning a market-related return.
- Board establishes guidelines for preparation and implementation of operational budget.
- Board reviewed procedures for assessing members’ balance of payments and reserve strength and concluded:
  - continue relatively simple system based on Articles of Agreement criteria;
  - supplement with a small set of additional indicators, notably short-term external debt and debt service.

### Members’ Use of IMF Resources and Credit Outstanding
- Members’ purchases from GRA (excluding reserve tranche) in 1997/98 amounted to SDR 19.0 billion, nearly four times 1996/97 level of SDR 4.9 billion.
- Purchases composition in 1997/98:
  - SDR 16.1 billion under Stand-By Arrangements (compared with SDR 1.8 billion in 1996/97).
  - SDR 2.8 billion under Extended Arrangements (SDR 2.8 billion in 1996/97).
  - SDR 30 million under policy on emergency postconflict assistance.
  - No purchases under CCFF (SDR 0.3 billion in 1996/97).
- Largest users in 1997/98:
  - Korea: SDR 11.2 billion (including SDR 7.1 billion under the SRF).
  - Indonesia: SDR 2.2 billion.
  - Thailand: SDR 2.0 billion.
  - Russia: SDR 1.5 billion.
  - Philippines: SDR 0.8 billion.
  - Algeria: SDR 0.3 billion.
  - Argentina: SDR 0.2 billion.
  - Bulgaria: SDR 0.2 billion.
  - Ukraine: SDR 0.2 billion.
- Purchases by region:
  - Asian countries: SDR 16.2 billion.
  - European countries (including Baltic States, Russia, former Soviet Union): SDR 2.0 billion.
  - Latin American, Middle Eastern, and African countries combined: SDR 0.7 billion.
- Repurchases in the GRA during 1997/98 totaled SDR 3.8 billion (compared with SDR 6.7 billion previous year).
  - Largest repurchases: Argentina SDR 0.5 billion; India, Mexico, Russia roughly SDR 0.4 billion each; Algeria, South Africa, Venezuela roughly SDR 0.3 billion each.
  - Actual repurchases exceeded scheduled SDR 3.5 billion due to Algeria repurchase (SDR 0.2 billion) and Hungary voluntary advance repurchase (SDR 0.1 billion).
- IMF credit outstanding:
  - GRA credit outstanding increased by SDR 15.2 billion in 1997/98 to SDR 49.7 billion as of April 30, 1998 (from SDR 34.5 billion a year earlier).
  - Including net disbursements under SAF and ESAF, IMF credit outstanding under all facilities increased by SDR 15.5 billion to SDR 56.0 billion on April 30, 1998 (from SDR 40.5 billion a year earlier).
- Repayment expectations under SRF: repurchases expected within 1–1!/2 years of each purchase; Board may extend by up to one year; sizable amount scheduled to be repurchased in 1999 under SRF.

### Stand-By and Extended Arrangements
- 1997/98 commitments under nine new Stand-By Arrangements totaled SDR 27.3 billion.
  - Stand-By Arrangements totaling SDR 26.7 billion approved for:
    - Indonesia SDR 7.3 billion;
    - Korea SDR 15.5 billion (including SDR 10.0 billion available until December 1998 under SRF);
    - Philippines SDR 1.0 billion;
    - Thailand SDR 2.9 billion.
  - SDR 0.6 billion approved for Cape Verde, Estonia, Latvia, Ukraine, Uruguay.
- As of April 30, 1998: 14 countries had Stand-By Arrangements with total commitments SDR 28.3 billion and undrawn balances SDR 12.4 billion.
- Extended Arrangements in 1997/98:
  - Four new Extended Arrangements totaling SDR 2.8 billion for Argentina, Pakistan, Panama, Yemen (Argentina SDR 2.1 billion).
  - Extended Arrangement for the Philippines augmented by SDR 0.3 billion.
  - Extended Arrangements for Pakistan and Yemen approved with ESAF Arrangements.
- As of April 30, 1998: 13 countries had Extended Arrangements with commitments totaling SDR 12.3 billion and undrawn balances SDR 6.8 billion.
- Overall new commitments under Stand-By and Extended Arrangements amounted to SDR 30.4 billion in 1997/98; nearly 90 percent approved for Asian countries affected by regional crisis.

### Special Facilities and Outright Purchases
- Special facilities: CCFF and Buffer Stock Financing Facility (unused since 1983).
- 1997/98:
  - No member used CCFF.
  - Directors suggested reviewing CCFF merits (November 1997).
  - Three countries (Albania, Rwanda, Tajikistan) made purchases totaling SDR 30 million under emergency postconflict assistance.

### SAF and ESAF
- Concessional support to low-income countries under ESAF continued in 1997/98.
- Eight new ESAF Arrangements with commitments totaling SDR 1.7 billion approved for Cameroon, Côte d’Ivoire, Mongolia, Nicaragua, Pakistan, Senegal, Uganda, Yemen.
- As of April 30, 1998:
  - 33 ESAF Arrangements in effect.
  - Cumulative commitments under all approved SAF and ESAF Arrangements totaled SDR 10.3 billion (from SDR 8.8 billion a year earlier).
  - Total ESAF disbursements SDR 1.0 billion during 1997/98 (compared with SDR 0.7 billion in 1996/97).
  - Cumulative SAF and ESAF disbursements through April 30, 1998 amounted to SDR 8.1 billion.
- ESAF financing mainly from member loans/grants to ESAF Trust and SAF resources in SDA.
  - As of April 30, 1998, total disbursements of SDA resources under SAF and ESAF amounted to SDR 2.2 billion.
- Enlarged and extended ESAF Trust (effective February 23, 1994) target total loan resources SDR 10.1 billion.
  - Total effective commitments by lenders to ESAF Trust amounted to SDR 9.7 billion as of April 30, 1998.
  - Commitment period for ESAF Trust loans runs through December 31, 2000; disbursements through end of 2003.
- Subsidy Account and interest:
  - ESAF loans provided at highly concessional rate of interest (currently 0.5 percent a year).
  - Total value of bilateral subsidy contributions estimated at SDR 3.7 billion.
  - Board transferred SDR 0.4 billion from SDA to Subsidy Account in early 1994; contribution valued at SDR 0.6 billion including interest.
  - Availability of resources in Subsidy Account, net of subsidies already paid, rose from SDR 1,562 million as of April 30, 1997, to SDR 1,629 million as of April 30, 1998.
  - ESAF Trust made interest payments of SDR 172 million to lenders in 1997/98, of which SDR 23 million financed by payments of interest by borrowers and SDR 149 million drawn from Subsidy Account.

### ESAF-HIPC Trust
- Established February 1997 to make grants or loans to eligible members under HIPC Initiative and subsidize interest on interim ESAF operations.
- Contributions received from six countries.
- Board amended ESAF Trust Instrument to permit transfer of up to SDR 250 million from Reserve Account to SDA for financing special ESAF operations, with creditor consent.
- Additional Board actions:
  - Forgave reimbursement to GRA of ESAF administration costs in 1997/98 and transferred SDR 40.7 million from ESAF Trust Reserve Account to ESAF-HIPC Trust.
  - Decided no reimbursement to GRA in 1998/99 and authorized quarterly transfers totaling an estimated SDR 45 million from ESAF Trust Reserve Account to ESAF-HIPC Trust.
- April 1998: Uganda reached completion point under HIPC Initiative and SDR 51.5 million disbursed as a grant, held in an administered account to service part of Uganda’s IMF debt under agreed schedule.
- Resources available to ESAF-HIPC Trust from bilateral contributions (including accrued interest) amounted to SDR 3.6 million at end-April 1998.

### IMF Income, Charges, and Burden Sharing
- Rate of charge on use of IMF resources set as proportion of weekly SDR interest rate to achieve target net income.
- Proportion of rate of charge to SDR interest rate was initially set in April 1997 for 1997/98 at 109.6 percent to achieve a net... (midyear adjustments followed).
- Retroactive adjustments and outcomes for 1997/98:
  - Proportion reduced retroactively to 107.0 percent following midyear income review; SDR 31 million returned to members who paid charges through third quarter.
  - At end of year, after actual income exceeding target of SDR22 million returned to members, proportion reduced retroactively to 105.6 percent for 1997/98.
  - Average rate of charge on use of IMF resources in 1997/98 was 4.41 percent, before burden-sharing adjustments.
  - Following retroactive reductions totaling SDR 53 million, net income of SDR 164 million for 1997/98 was placed to IMF’s reserves, of which SDR 65 million placed to the General Reserve.
  - Total reserves increased to SDR 2.1 billion as of April 30, 1998, from SDR 2.0 billion a year earlier.
- For 1998/99, Board agreed proportion of rate of charge to SDR interest rate at 107 percent to achieve target net income of SDR 107 million, in addition to SRF-generated net income.
- Precautionary balances generally available (reserves plus SCA-1) totaled SDR 3.0 billion as of April 30, 1998, equivalent to 293 percent of outstanding GRA credit to members in arrears by six months or more (SDR 1.0 billion).
- Total precautionary balances (reserves and balances in two Special Contingent Accounts) amounted to SDR 4.0 billion, equivalent to 8.1 percent of total outstanding GRA credit as of April 30, 1998.

### Supplemental Reserve Facility (SRF) and SRF Income
- SRF surcharge schedule:
  - First year from approval: surcharge set at 300 basis points above basic rate of charge.
  - At end of first year and every six months thereafter: surcharge increases by 50 basis points until it reaches 500 basis points.
- Net operational income from SRF during 1997/98, after ESAF administration expenses, amounted to SDR 65 million placed to General Reserve.
- Net operational income from SRF for 1998/99, after ESAF expenses, will be placed to General Reserve at end of financial year.

### Remuneration, Norms, and Burden-Sharing Adjustments
- IMF pays remuneration when a member’s norm for remuneration exceeds IMF holdings of its currency (excluding holdings reflecting use of IMF credit).
- Norm for remuneration:
  - For members with quota on April 1, 1978: sum of 75 percent of quota on April 1, 1978 plus any subsequent increases consented to and paid after that date.
  - For members joining after April 1, 1978: sum of (1) a percentage of quota equal to weighted average of norms of existing members relative to quota on admission date and (2) any subsequent increases consented and paid.
- Rate of remuneration before burden-sharing adjustments set at 100 percent of SDR interest rate, which averaged 4.18 percent in 1997/98.
- Adjustments to share financial costs of deferred overdue charges and allocation to SCA-1 applied through rate of charge and rate of remuneration:
  - Adjustments cannot reduce rate of remuneration below 85 percent of SDR interest rate.
  - Unpaid charges in protracted arrears and SCA-1 contributions resulted in adjustments to basic rate of charge of 18 basis points and to rate of remuneration of 21 basis points during 1997/98.
  - Adjusted rate of charge and adjusted rate of remuneration averaged 4.59 percent and 3.97 percent, respectively, during the year.
- Cumulative refunds when deferred charges settled amounted to SDR 961.9 million as of April 30, 1998.
- Settlements of overdue charges previously deferred amounted to SDR 6.5 million in 1997/98, of which SDR 1.2 million gave rise to burden-sharing adjustments.
- Balances in SCA-1 will be returned to contributors when all overdue obligations settled or earlier as IMF decides; SCA-2 balances returned when outstanding purchases related to encashment of rights repurchased or earlier as IMF decides.

### Special Contingent Accounts (SCA-1 and SCA-2) and Precautionary Balances
- SCA-1:
  - For 1997/98, SCA-1 was set at 5 percent of reserves at beginning of year (SDR 99 million).
  - As of April 30, 1998, SCA-1 balances amounted to SDR 884 million.
  - An equal amount to SDR 107 million non-SRF income target for 1998/99 is to be added to SCA-1.
- SCA-2:
  - Established under extended burden-sharing arrangements in July 1990; target amount SDR 1 billion accumulated by 1996/97.
- Directors’ guidance (April 1998) on precautionary balances:
  - Cover fully credit outstanding to members in protracted arrears.
  - Include a margin for risk exposure related to credit extended to members currently meeting obligations.
- Directors agreed to accelerate accumulation of precautionary balances after considering expansion of outstanding IMF credit and qualitative factors.

### Overdue Financial Obligations and Arrears Statistics (as of April 30, 1998)
- Level of outstanding overdue financial obligations increased slightly to SDR 2.3 billion on April 30, 1998, from SDR 2.2 billion a year earlier.
- No new cases of protracted arrears in 1997/98; number of countries in arrears by six months or more remained at seven.
- As of April 30, 1998, four countries ineligible to use general IMF resources under Article XXVI, Section 2(a): Democratic Republic of the Congo (formerly Zaïre), Liberia, Somalia, Sudan — these four accounted for 95 percent of total overdue obligations.
- Declarations of noncooperation in effect for three countries: Democratic Republic of the Congo (issued February 14, 1992), Liberia (March 30, 1990), Sudan (September 14, 1990).
- Voting rights suspended for two countries in 1997/98: Democratic Republic of the Congo (effective June 2, 1994) and Sudan (August 9, 1993).
- Selected arrears table figures (Millions of SDRs, Financial Year Ended April 30):
  - Amount of overdue obligations: 1993: 3,006.4; 1994: 2,911.3; 1995: 2,982.6; 1996: 2,174.9; 1997: 2,212.2; 1998: 2,261.2.
  - Number of countries in arrears: 1993: 12; 1994: 9; 1995: 8; 1996: 6; 1997: 7; 1998: 7.
  - General Department overdue obligations (1998): 2,066.5.
  - SDR Department overdue obligations (1998): 79.1.
  - Trust Fund overdue obligations (1998): 115.6.
  - Number of ineligible members (1998): 4.
- Table 14 totals as of April 30, 1998 (Millions of SDRs):
  - Total overdue obligations: 2,261.2.
  - Breakdown by department: General Department 2,066.5; SDR Department 79.1; Trust Fund 115.6.
  - Total by duration: less than one year 115.6; 1–2 years 88.3; 2–3 years 91.3; 3 years or more 1,990.3.
- Specific country arrears (Millions of SDRs):
  - Afghanistan, Islamic State of: 2.5 (Total).
  - Congo, Democratic Republic of the: 334.0 (Total), General Department 328.6, Trust 5.4.
  - Iraq: 33.0 (Total), General Department 33.0.
  - Liberia: 454.6 (Total), General Department 407.4, SDR Department 16.4, Trust 30.8.
  - Somalia: 194.3 (Total), General Department 180.4, Trust 6.2, SDR Department 7.7.
  - Sudan: 1,156.2 (Total), General Department 1,079.0, SDR Department 0.1, Trust 77.1.
  - Yugoslavia, Federal Republic of (Serbia/Montenegro): 86.6 (Total), General Department 71.1, Trust 15.5.
- Note: Data include overdue obligations of Federal Republic of Yugoslavia (Serbia/Montenegro), which has not completed succession arrangements.

### Strengthened Cooperative Strategy, Rights Approach, and Remedial Measures
- Strengthened cooperative strategy elements: prevention, intensified collaboration, remedial measures.
- Prevention: strong macroeconomic adjustment programs supported by IMF arrangements; technical assistance; adequate financing assessments; medium-term balance of payments viability and capacity to repay IMF.
- Intensified collaboration: framework for members in arrears to establish track record of performance/payments to mobilize support and clear arrears.
- Rights approach (established 1990):
  - Allows eligible members (limited to 11 members in protracted arrears at end-1989) to accumulate “rights” to future IMF purchases through performance and payments.
  - SCA-2 established to safeguard risks and provide liquidity for encashment of rights.
  - IMF pledged to mobilize up to three million ounces of gold for encashments of rights under ESAF arrangements if shortfall.
  - Deadline for entry into rights accumulation program extended, most recently until spring 1999 Interim Committee meeting.
  - Rights approach contributed to clearance and normalization with Peru, Sierra Leone, Zambia.
  - Five other rights-eligible members—Cambodia, Guyana, Honduras, Panama, Vietnam—settled arrears without recourse to rights approach.
  - Of 11 rights-eligible, Liberia, Somalia, Sudan continued to have outstanding overdue obligations.
- Remedial measures timetable:
  - Managing Director notifies Board when member in arrears for one month; six notifications in 1997/98 (five cleared before complaint).
  - Consultation and communications at six weeks of arrears; two consultations in 1997/98.
  - Complaint after two months can lead to Rule K-1 action; one complaint in 1997/98 withdrawn after arrears cleared (October 1997).
  - Specific Board reviews and actions described for Liberia, Democratic Republic of the Congo, Sudan; compulsory withdrawal is final sanction.

### SDR Department and SDR Amendment Proposal
- SDR created under First Amendment; first allocated January 1970.
- Total SDR allocations amount to SDR 21.4 billion.
- SDRs held largely by IMF member countries (participants in SDR Department), balance held in IMF’s GRA and by prescribed official entities.
- Number of prescribed holders unchanged at 15 during 1997/98.
- Currencies of four member countries pegged to the SDR at end-1997/98.
- Board of Governors adopted resolution September 1997 proposing Fourth Amendment to authorize a special one-time allocation of SDR 21.4 billion, which would raise all participants’ ratios of cumulative SDR allocations to quota under Ninth General Review to a common benchmark ratio of 29.315788813 percent (subject to membership approval).

### Special Allocation and Proposed Amendment (Appendix II, Table II.11)
- Appendix II, Table II.11 shows amount of SDRs each participant eligible to receive under special allocation.
- Proposed amendment becomes effective when approved by three-fifths of members having 85 percent of total voting power.
- Proposed amendment provides future participants a special allocation following later of (1) date of participation or (2) effective date of Fourth Amendment.
- Proposed amendment would not affect IMF’s existing power to allocate SDRs based on finding of long-term global need.

### SDR Valuation and Interest Rate Basket
- Since January 1, 1981, SDR value and interest rate based on basket of five currencies.
- Board revised valuation basket effective January 1, 1996 (reviewed September 1995).
- Currencies in current basket: those of five member countries with largest exports of goods and services during five-year period ended one year prior to revision; weights modified.
- Table 15 — SDR Valuation Basket (As of January 1, 1996):
  - U.S. dollar: 39 / 0.582
  - Deutsche mark: 21 / 0.446
  - Japanese yen: 18 / 27.2
  - French franc: 11 / 0.813
  - Pound sterling: 11 / 0.105
- Since August 1, 1983, SDR interest rate calculated weekly as weighted average of interest rates on selected short-term instruments in basket countries.
- With effect January 1, 1991, interest rates and instruments:
  - market yield on three-month treasury bills in United States and United Kingdom;
  - three-month interbank deposit rate in Germany;
  - three-month rate on certificates of deposit in Japan;
  - three-month rate for treasury bills in France.

### SDR Transactions and Operations (1997/98 highlights)
- Total transfers of SDRs in 1997/98 increased slightly to SDR 20.3 billion from SDR 19.8 billion in 1996/97.
- Increase in transfers among participants and prescribed holders: SDR 1.5 billion (offset by decline in transfers involving GRA of SDR 1.0 billion).
- Summary from Table 16:
  - Transfers among participants and prescribed holders rose to SDR 9.8 billion in 1997/98 from SDR 8.4 billion in 1996/97.
  - Transactions by agreement totaled SDR 8.6 billion in 1997/98 (compared with SDR 7.4 billion in 1996/97).
  - IMF-related operations increased to SDR 0.9 billion in 1997/98 from SDR 0.6 billion in 1996/97.
  - Transfers of SDRs from participants to GRA fell to SDR 4.8 billion in 1997/98 from SDR 6.0 billion in 1996/97:
    - Repurchase obligations discharged in SDRs fell to SDR 2.9 billion from SDR 4.4 billion.
    - Charges paid in SDRs increased to SDR 1.9 billion from SDR 1.6 billion.
  - Transfers from GRA to participants and prescribed holders rose slightly to SDR 5.6 billion from SDR 5.4 billion.
    - Members’ purchases made in SDRs amounted to SDR 4.2 billion.
    - Remuneration payments to members with creditor positions amounted to SDR 1.2 billion.
  - Reduction in SDR holdings of prescribed holders during 1997/98: SDR 0.9 billion decrease (from SDR 1.3 billion to SDR 0.4 billion).
  - Requests for acquisitions totaling SDR 0.2 billion by some participants could not be met at fiscal year-end.
- Selected figures from Table 16 (In millions of SDRs):
  - Total transfers (1997/98): 20,256; cumulative 342,408.
  - Transfers among participants and prescribed holders (1997/98): 9,893.
  - Transfers from participants to General Resources Account (1997/98): 4,844.
  - Transfers from General Resources Account to participants and prescribed holders (1997/98): 5,574.
  - General Resources Account holdings at end of period (1997/98): 764.

### Pattern of SDR Holdings
- IMF sought since early 1993 to maintain SDR holdings in range SDR 1.0–1.5 billion by transferring each quarter SDRs it receives to debtors and creditors.
- To meet demand in second half of year, IMF reduced SDR holdings below lower end of target while maintaining provisions for remuneration.
- GRA held SDR 0.8 billion as of April 30, 1998.
- Debtor countries received more SDRs in purchases and transactions by agreement than they sold, increasing their SDR holdings relative to net cumulative allocations.
- Net cumulative allocations during 1997/98:
  - SDR holdings of nonindustrial countries increased from 60.5 percent to 69.4 percent.
  - SDR holdings of industrial countries increased from 99.8 percent to 107.0 percent.
- Increase for industrial countries was mainly because industrial countries absorbed reduction in holdings of prescribed holders, which decreased from SDR 1.3 billion to SDR 0.4 billion, largely due to changes in IMF investments of SAF and ESAF resources in official SDRs at Bank for International Settlements.

### Designation Plan (Box 16)
- Article XIX provides designation mechanism: participants deemed sufficiently strong are obliged, when designated, to provide freely usable currencies in exchange for SDRs up to specified amounts.
- A participant wishing to sell SDRs under designation must represent to IMF it needs to use its SDRs.
- Designation executed through quarterly designation plans approved by Board, listing participants subject to designation and setting maximum limits.
- Since September 1987, no transactions with designation occurred because potential exchanges have been accommodated through voluntary transactions by agreement, primarily among 12 participants with standing arrangements to buy or sell SDRs for freely usable currencies provided SDR holdings remain within a certain range.
- These “two-way” arrangements have facilitated circulation of SDRs.

*Source: Excerpt from IMF Annual Report 1998, “Financial Operations and Policies” chapter (content unit: _file06pdf - 109.6 percent to achieve a net).*

### CHAPTER XII

### CHAPTER XII

### Quota Increase: Rationale and Distribution
- The Board considered an overall increase in quotas (SDR146 billion) taking into account:
  - the growth of world trade and payments;
  - the scale of potential payments imbalances, including those that may stem from sharp changes in capital flows;
  - the prospective demand for the use of IMF resources in support of member countries’ economic programs;
  - the rapid globalization and associated liberalization of trade and payments—including on capital account—since the last increase in quotas in 1990;
  - the IMF’s liquidity position and the adequacy of its borrowing arrangements.
- The Board reiterated that the IMF should continue to rely on its quota resources as its principal form of financing and resort to borrowing only in exceptional circumstances.
- Distribution principles guided by the Interim Committee communiqué of April 1997 and its September 1997 meeting in Hong Kong SAR:
  - 75 percent of the overall increase distributed in proportion to present quotas;
  - 15 percent distributed in proportion to members’ shares in calculated quotas (based on 1994 data);
  - 10 percent distributed among members whose current quotas are “out of line with their positions in the world economy (as measured by the excess of their share in calculated quotas over their share in actual quotas), of which 1 percent of the overall increase would be distributed among five members whose current quotas are far out of line with their relative economic positions, and which are in a position to contribute to the IMF’s liquidity over the medium term.”
- The Interim Committee reiterated that formulas used to calculate quotas should be reviewed by the Board promptly after completion of the Eleventh Review.
- In agreeing on the size and distribution of the quota increase, the Board confirmed:
  - it did not intend to reopen the issues of the size and composition of the Board;
  - the existing representation of developing countries should not be affected.
- Implementation and timing:
  - The resolution requested member countries to consent to the quota increase before January 29, 1999.
  - The quota increase will not take effect until members having not less than 85 percent of total quotas as of December 23, 1997, have consented.
  - At its April 1998 meeting, the Interim Committee called for rapid implementation of the quota increase approved by the Board of Governors in January 1998.

### IMF Liquidity and Use of Resources in 1997/98
- The IMF’s liquidity position weakened considerably in 1997/98 as a result of:
  - large new demands for use of IMF resources arising from the crisis affecting several Asian countries;
  - sustained demand from other member countries, including the Russian Federation, Algeria, Argentina, Bulgaria, and the Philippines.
- Total purchases (gross drawings, including reserve tranche and under the SRF) rose sharply to an unprecedented SDR 20.0 billion in 1997/98, owing largely to heavy frontloading of purchases by Indonesia, Korea, and Thailand under their Stand-By Arrangements.
- Net of repurchases (i.e., repayments) by members, IMF credit outstanding in the GRA increased by SDR 15.2 billion to reach a historic high of SDR 49.7 billion at the end of 1997/98.

### General Resources and Usable Currencies
- Liquid resources of the IMF consist of usable currencies and SDRs held in the GRA.
- Changes in the list of sufficiently strong countries impacted usable currencies:
  - Exclusion of six members during 1997/98 reduced the stock of usable currencies by about SDR 2.4 billion.
  - Inclusion of three other members added about SDR 3.0 billion to the stock of usable currencies.
- More significantly, purchases during the year far exceeded repurchases and the IMF’s usable resources declined:
  - Usable resources declined to SDR 47.3 billion at the end of April 1998 from SDR 62.7 billion a year earlier.
- Stock of uncommitted usable resources (usable resources less the amount committed under current arrangements and considered likely to be drawn):
  - Declined to SDR 32.0 billion at the end of April 1998 from SDR 55.7 billion a year earlier.
- Net uncommitted usable resources (adjusted to reflect the requirement to maintain adequate working balances of currencies):
  - Amounted to SDR 22.6 billion as of April 30, 1998, compared with SDR 43.5 billion a year earlier.
- IMF liquid liabilities at end-April 1998:
  - Totaled SDR 50.3 billion, consisting entirely of reserve tranche positions (the IMF had no outstanding borrowing), up from SDR 36.1 billion a year earlier.
- Traditional liquidity ratio:
  - The ratio of the IMF’s net uncommitted usable resources to its liquid liabilities declined to 44.8 percent at the end of April 1998 from 120.5 percent a year earlier.

### Borrowing: GAB and NAB
- The IMF is a quota-based institution but has authority under its Articles of Agreement to borrow to provide temporary supplements to its usable quota resources.
- General Arrangements to Borrow (GAB):
  - During the financial year, the IMF renewed the GAB for a further five-year period from December 26, 1998.
  - The GAB involves 11 industrial countries or their central banks agreeing to provide resources to forestall or cope with an impairment of the international monetary system.
  - The amount potentially available under the GAB is SDR 17 billion, with an additional SDR 1.5 billion available under an associated agreement with Saudi Arabia.
- New Arrangements to Borrow (NAB):
  - Adopted by the Board on January 27, 1997, to enhance resources potentially available through borrowing in circumstances similar to those covered by the GAB.
  - The NAB represents efforts to double the amount of resources available to the IMF under the GAB.
  - The NAB does not replace the GAB; both arrangements remain in force.
  - The NAB will be the facility of first and principal recourse, unless a GAB participant requests the use of IMF resources.
  - The amount potentially available under the NAB is up to SDR 34 billion, which is also the maximum combined amount available under the two arrangements.
  - The NAB will enter into force when adhered to by potential participants with credit arrangements amounting to not less than SDR 28.9 billion, including the five members or institutions with the largest credit arrangements.
  - As of April 30, 1998, two-thirds of the participants, representing some 55 percent of the potential resources under the arrangements, had adhered to the decision.
  - Activation rules:
    - Credit arrangements under the NAB may be activated for the benefit of an IMF member, either a participant or a nonparticipant, under circumstances similar to those specified in the GAB.
    - Activation of the GAB for the benefit of a nonparticipant requires additionally that, after consulting with the participants, the Managing Director judges that the IMF faces an inadequacy of resources.

### Access Policy and Limits on Use of IMF Resources
- The Board’s 1994 decision raised the annual access limit under the credit tranches and the Extended Fund Facility (EFF) for a period of three years to 100 percent of quota from 68 percent, while keeping the cumulative access limit unchanged at 300 percent of quota.
- The Board reviews access policies annually.
  - At the November 1997 review, it decided to maintain the annual and cumulative access limits set in 1994 until the next review of access policies, to be held not later than October 1998.
- The access policies and limits applicable to the credit tranches and the EFF do not apply to the IMF’s special facilities, including the Supplemental Reserve Facility (SRF), established in December 1997.
  - Under the SRF, the IMF makes financial assistance available to member countries for a period of up to one year in case of exceptional balance of payments difficulties attributable to...

*Source: CHAPTER XII, ANNUAL REPORT 1998*

### Box 15

### Box 15

### Operational Budget
- The quarterly operational budget is the mechanism through which the IMF makes its resources available to member countries.
- 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 foreign exchange available to members with weak balance of payments positions in need of external financing.
- Members providing currencies receive a liquid claim on the IMF that earns a market-related rate of return.
- Guidelines underlying the preparation and implementation of the operational budget are established by the Board.
- During 1997/98, the Board reviewed procedures governing the assessment of members’ balance of payments and reserve strength and concluded:
  - Assessments should continue to rely on a relatively simple system, based on criteria set out in the Articles of Agreement (balance of payments and reserve positions and developments in exchange markets).
  - Assessments should be supplemented by a small set of additional indicators bearing on a member’s external financial strength, including in particular indicators of short-term external debt and debt service.

### Members’ Use of IMF Resources and Credit Outstanding
- In 1997/98, members’ purchases from the GRA, excluding reserve tranche purchases, amounted to SDR 19.0 billion, nearly four times the 1996/97 level of SDR 4.9 billion.
- Purchases composition in 1997/98:
  - SDR 16.1 billion under Stand-By Arrangements (compared with SDR 1.8 billion in 1996/97).
  - SDR 2.8 billion under Extended Arrangements (SDR 2.8 billion in 1996/97).
  - SDR 30 million under the policy on emergency postconflict assistance.
  - No purchases were made under the Compensatory and Contingency Financing Facility (CCFF) (SDR 0.3 billion in 1996/97).
- Largest users of IMF resources in 1997/98:
  - Korea drew SDR 11.2 billion, including SDR 7.1 billion under the SRF.
  - Indonesia SDR 2.2 billion.
  - Thailand SDR 2.0 billion.
  - Russia SDR 1.5 billion.
  - Philippines SDR 0.8 billion.
  - Algeria SDR 0.3 billion.
  - Argentina SDR 0.2 billion.
  - Bulgaria SDR 0.2 billion.
  - Ukraine SDR 0.2 billion.
- Purchases by region in 1997/98:
  - Asian countries: SDR 16.2 billion.
  - European countries (including the Baltic States, Russia, and other countries of the former Soviet Union): SDR 2.0 billion.
  - Latin American, Middle Eastern, and African countries combined: SDR 0.7 billion.
- Repurchases in the GRA during 1997/98 totaled SDR 3.8 billion, compared with SDR 6.7 billion in the previous financial year.
  - Largest repurchases in 1997/98:
    - Argentina SDR 0.5 billion.
    - India, Mexico, and Russia roughly SDR 0.4 billion each.
    - Algeria, South Africa, and Venezuela roughly SDR 0.3 billion each.
  - Actual repurchases exceeded the scheduled level of SDR 3.5 billion due to:
    - A repurchase by Algeria as a result of CCFF overcompensation (SDR 0.2 billion).
    - A voluntary advance repurchase by Hungary (SDR 0.1 billion).
- IMF credit outstanding:
  - IMF credit outstanding in the GRA increased by SDR 15.2 billion in 1997/98, to SDR 49.7 billion as of April 30, 1998 from SDR 34.5 billion a year earlier.
  - Including net disbursements under the SAF and ESAF, IMF credit outstanding under all facilities increased by SDR 15.5 billion in 1997/98, to SDR 56.0 billion on April 30, 1998 from SDR 40.5 billion a year earlier.
- Repayment expectations and SRF:
  - Repurchases under the SRF are expected within 1–1!/2 years of each purchase, although the Board may extend this period by up to one year at which point the member is obligated to repurchase.
  - A sizable amount is scheduled to be repurchased in 1999 under the SRF.

### Stand-By and Extended Arrangements
- In 1997/98, commitments under nine new Stand-By Arrangements totaled SDR 27.3 billion.
  - Stand-By Arrangements totaling SDR 26.7 billion were approved for:
    - Indonesia (SDR 7.3 billion).
    - Korea (SDR 15.5 billion).
    - The Philippines (SDR 1.0 billion).
    - Thailand (SDR 2.9 billion).
  - The arrangement for Korea included SDR 10.0 billion available until December 1998 under the SRF.
  - Stand-By Arrangements totaling SDR 0.6 billion were also approved for Cape Verde, Estonia, Latvia, Ukraine, and Uruguay.
- As of April 30, 1998:
  - 14 countries had Stand-By Arrangements with total commitments of SDR 28.3 billion and undrawn balances of SDR 12.4 billion.
- Extended Arrangements in 1997/98:
  - Four new Extended Arrangements with commitments totaling SDR 2.8 billion were approved for Argentina, Pakistan, Panama, and Yemen (Argentina SDR 2.1 billion).
  - The Extended Arrangement for the Philippines was augmented by SDR 0.3 billion.
  - Extended Arrangements for Pakistan and Yemen were approved in conjunction with ESAF Arrangements.
- As of April 30, 1998:
  - 13 countries had Extended Arrangements with commitments totaling SDR 12.3 billion and undrawn balances of SDR 6.8 billion.
- Overall in 1997/98:
  - New commitments under Stand-By and Extended Arrangements amounted to SDR 30.4 billion (including the augmentation of the Extended Arrangement for the Philippines).
  - Nearly 90 percent of this total was approved for Asian countries directly affected by the regional financial crisis.

### Special Facilities and Outright Purchases
- The IMF’s special facilities consist of the CCFF and the Buffer Stock Financing Facility; the latter has not been used since 1983.
- During 1997/98:
  - No member used the CCFF.
  - Directors suggested reviewing the merits of the CCFF at a meeting in November 1997.
  - Three countries (Albania, Rwanda, and Tajikistan) made purchases totaling SDR 30 million under the IMF’s policy on emergency postconflict assistance.

### SAF and ESAF
- The IMF continued to provide concessional financial support to low-income countries under the ESAF in 1997/98.
- Eight new ESAF Arrangements with commitments totaling SDR 1.7 billion were approved in 1997/98 for Cameroon, Côte d’Ivoire, Mongolia, Nicaragua, Pakistan, Senegal, Uganda, and Yemen.
- As of April 30, 1998:
  - 33 ESAF Arrangements were in effect.
  - Cumulative commitments under all approved SAF and ESAF Arrangements (excluding undisbursed amounts under expired and canceled arrangements) totaled SDR 10.3 billion, compared with SDR 8.8 billion a year earlier.
  - Total ESAF disbursements amounted to SDR 1.0 billion during 1997/98, compared with SDR 0.7 billion in 1996/97.
  - Cumulative SAF and ESAF disbursements through April 30, 1998 amounted to SDR 8.1 billion.
- Financing of the ESAF:
  - ESAF financed mainly from contributions in the form of loans and grants by member countries to the ESAF Trust, and from SAF resources in the Special Disbursement Account (SDA).
  - SAF resources were made available in conjunction with loans from the ESAF Trust until February 1994, when the Board decided to cease approving new commitments of SAF resources under ESAF Arrangements.
  - As of April 30, 1998, total disbursements of SDA resources under SAF and ESAF Arrangements amounted to SDR 2.2 billion.
- The enlarged and extended ESAF Trust (effective February 23, 1994) has a target for total loan resources of SDR 10.1 billion.
  - Total effective commitments by lenders to the ESAF Trust amounted to SDR 9.7 billion as of April 30, 1998.
  - The commitment period for ESAF Trust loans to eligible members runs through December 31, 2000, with disbursements to be made through the end of 2003.
- Subsidy Account and interest:
  - Contributions to the Subsidy Account enable loans from the ESAF Trust to be provided at a highly concessional rate of interest (currently 0.5 percent a year).
  - The total value of bilateral subsidy contributions is estimated at SDR 3.7 billion.
  - The Board transferred SDR 0.4 billion from the SDA to the Subsidy Account in early 1994; this contribution by the IMF, including the interest it will earn, is valued at SDR 0.6 billion.
  - Availability of resources in the Subsidy Account, net of subsidies already paid, rose from SDR 1,562 million as of April 30, 1997, to SDR 1,629 million as of April 30, 1998.
  - The ESAF Trust made interest payments of SDR 172 million to lenders in 1997/98, of which SDR 23 million was financed by payments of interest by borrowers from the Trust and the balance of SDR 149 million was drawn from the resources of the Subsidy Account.

### ESAF-HIPC Trust
- The ESAF-HIPC Trust was established in February 1997 to make grants or loans, or both, to eligible members that qualify for assistance under the Initiative for Heavily Indebted Poor Countries (HIPC) and to subsidize the interest rate on interim ESAF operations to ESAF-eligible members.
- Contributions to the Trust have been received from six countries.
- To proceed quickly with HIPC implementation, the Board amended the ESAF Trust Instrument to permit the transfer of up to SDR 250 million from the Reserve Account of the ESAF Trust to the SDA for financing special ESAF operations, provided other resources are not available. All creditors to the Loan Account of the ESAF Trust consented to such a transfer.
- Additional Board actions to augment the ESAF-HIPC Trust:
  - The Board forgave reimbursement to the GRA of the costs of administering the ESAF Trust in 1997/98 and transferred SDR 40.7 million from the ESAF Trust Reserve Account to the ESAF-HIPC Trust.
  - The Board decided that no reimbursement would be made to the GRA in 1998/99 and authorized quarterly transfers totaling an estimated SDR 45 million from the ESAF Trust Reserve Account to the ESAF-HIPC Trust.
- In April 1998, Uganda reached its completion point under the HIPC Initiative and SDR 51.5 million was disbursed in the form of a grant, which is being held in an administered account to be used to service a part of Uganda’s debt to the IMF under a schedule agreed with the Ugandan authorities.
- Resources available to the ESAF-HIPC Trust from bilateral contributions (including accrued interest) amounted to SDR 3.6 million at the end of April 1998.

### IMF Income, Charges, and Burden Sharing
- At the beginning of each financial year, the IMF sets the rate of charge on the use of its resources as a proportion of the weekly SDR interest rate to achieve a target amount of net income to add to its reserves.
- This method of setting the rate of charge has been in use for a number of years and is intended to ensure operational income closely reflects operational costs, which depend largely on the SDR interest rate, thereby minimizing the need for a discrete increase in the rate of charge during the financial year.
- In April 1997, the proportion of the rate of charge to the SDR interest rate for 1997/98 was set at

*Source: _file06pdf - Box 15*

### 109.6 percent to achieve a net

### _file06pdf - 109.6 percent to achieve a net

### Income targets, rate of charge, and net income placement
- Proportion of the rate of charge to the SDR interest rate was reduced retroactively to 107.0 percent for 1997/98 following a midyear income review; SDR 31 million was returned to members that had paid charges through the third quarter of the financial year.
- At the end of the financial year, after actual income exceeding the target of SDR22 million had been returned to members that paid charges during the year, the proportion of the rate of charge to the SDR interest rate was reduced retroactively to 105.6 percent for 1997/98.
- The average rate of charge on the use of IMF resources in 1997/98 was 4.41 percent, before adjustments for burden sharing.
- Following the retroactive reductions of charges totaling SDR 53 million, net income of SDR 164 million for 1997/98 was placed to the IMF’s reserves, of which SDR 65 million was placed to the General Reserve.
- Total reserves increased to SDR 2.1 billion as of April 30, 1998, from SDR 2.0 billion a year earlier.
- For 1998/99, the Board agreed to set the proportion of the rate of charge to the SDR interest rate at 107 percent, to achieve a target amount of net income of SDR 107 million, in addition to the amount of net income generated under the SRF.
- Precautionary balances generally available (reserves plus SCA-1) totaled SDR 3.0 billion as of April 30, 1998, equivalent to 293 percent of outstanding GRA credit to member countries in arrears by six months or more (SDR 1.0 billion).
- Total precautionary balances—reserves and balances in the two Special Contingent Accounts—amounted to SDR 4.0 billion, equivalent to 8.1 percent of total outstanding GRA credit as of April 30, 1998.

### Supplemental Reserve Facility (SRF) and SRF income
- SRF surcharge schedule:
  - First year from approval: surcharge set at 300 basis points above the basic rate of charge.
  - At the end of the first year and every six months thereafter: surcharge increases by 50 basis points until it reaches 500 basis points.
- Net operational income generated from the use of credit under the SRF during 1997/98, after meeting the expenses of administering the ESAF Trust, amounted to SDR 65 million, which was placed to the General Reserve.
- Net operational income from the SRF for 1998/99, after meeting ESAF Trust administration expenses, will be placed to the IMF’s General Reserve at the end of the financial year.

### Remuneration, norms, and burden-sharing adjustments
- The IMF pays remuneration to a member on the amount by which its norm for remuneration exceeds the IMF’s holdings of its currency, excluding holdings that reflect the member’s use of IMF credit.
- Norm for remuneration:
  - For members with quota on April 1, 1978: sum of 75 percent of the member’s quota on April 1, 1978, plus any increases in quota consented to and paid after that date.
  - For members joining after April 1, 1978: sum of (1) a percentage of the member’s quota equal to the weighted average of the norms of all existing members relative to quota on the date of admission, and (2) any increases in quota consented to and paid after that date.
- The rate of remuneration, before burden-sharing adjustments, is set at 100 percent of the SDR interest rate, which averaged 4.18 percent in 1997/98.
- Adjustments to share financial costs of deferred overdue charges and allocation to SCA-1 were applied through rate of charge and rate of remuneration mechanisms:
  - These adjustments cannot reduce the rate of remuneration to less than 85 percent of the SDR interest rate.
  - Unpaid charges due by members in protracted arrears and contributions to SCA-1 resulted in adjustments to the basic rate of charge of 18 basis points and to the rate of remuneration of 21 basis points during 1997/98.
  - The adjusted rate of charge and the adjusted rate of remuneration averaged 4.59 percent and 3.97 percent, respectively, during the financial year.
- Cumulative refunds when deferred charges settled amounted to SDR 961.9 million as of April 30, 1998.
- Settlements of overdue charges previously deferred amounted to SDR 6.5 million in 1997/98, of which SDR 1.2 million had given rise to burden-sharing adjustments.
- Balances in SCA-1 will be returned to contributors when all overdue financial obligations have been settled or at such earlier time as the IMF may decide.
- Balances in SCA-2 will be returned when all outstanding purchases related to the encashment of rights have been repurchased or at such earlier time as the IMF may decide.

### Special Contingent Accounts (SCA-1 and SCA-2) and precautionary balances
- SCA-1:
  - For 1997/98, SCA-1 was set at 5 percent of reserves at the beginning of the year (SDR 99 million).
  - SCA-1 was established as a precautionary measure; as of April 30, 1998, SCA-1 balances amounted to SDR 884 million.
  - An equal amount to the SDR 107 million non-SRF income target for 1998/99 is to be added to SCA-1.
- SCA-2:
  - Established under extended burden-sharing arrangements in July 1990 to provide added precautionary balances and liquidity for encashment of accumulated rights.
  - Adjustments under extended burden-sharing arrangements ended in 1996/97 after the target amount of SDR 1 billion had been accumulated in SCA-2.
- Directors in April 1998 guided by two principles in assessing precautionary balances:
  - Precautionary balances should cover fully the credit outstanding to members in protracted arrears.
  - Precautionary balances should include a margin for risk exposure related to credit extended to members currently meeting payment obligations to the IMF in a timely manner.
- After considering expansion of outstanding IMF credit during 1997/98 and qualitative factors, Directors agreed to accelerate the rate of accumulation of precautionary balances.

### Overdue financial obligations and arrears statistics (as of April 30, 1998)
- Level of outstanding overdue financial obligations increased slightly to SDR 2.3 billion on April 30, 1998, from SDR 2.2 billion a year earlier.
- No new cases of protracted arrears in 1997/98; number of countries in arrears by six months or more remained at seven.
- As of April 30, 1998, four countries were ineligible to use general IMF resources under Article XXVI, Section 2(a): Democratic Republic of the Congo (formerly Zaïre), Liberia, Somalia, and Sudan. These four accounted for 95 percent of total overdue obligations on that date.
- Declarations of noncooperation were in effect for three countries: Democratic Republic of the Congo (issued February 14, 1992), Liberia (March 30, 1990), and Sudan (September 14, 1990).
- Voting rights suspended for two countries in 1997/98: Democratic Republic of the Congo (effective June 2, 1994) and Sudan (August 9, 1993).
- Selected arrears table figures (end of period, Financial Year Ended April 30):
  - Amount of overdue obligations: 1993: 3,006.4; 1994: 2,911.3; 1995: 2,982.6; 1996: 2,174.9; 1997: 2,212.2; 1998: 2,261.2 (Millions of SDRs).
  - Number of countries in arrears: 1993: 12; 1994: 9; 1995: 8; 1996: 6; 1997: 7; 1998: 7.
  - General Department overdue obligations (1998): 2,066.5 (Millions of SDRs).
  - SDR Department overdue obligations (1998): 79.1 (Millions of SDRs).
  - Trust Fund overdue obligations (1998): 115.6 (Millions of SDRs).
  - Number of ineligible members (1998): 4.
- Table 14 (Arrears by country, type, and duration) totals as of April 30, 1998:
  - Total overdue obligations: 2,261.2 (Millions of SDRs).
  - Breakdown by department: General Department 2,066.5; SDR Department 79.1; Trust Fund 115.6.
  - Total by duration: less than one year 115.6; 1–2 years 88.3; 2–3 years 91.3; 3 years or more 1,990.3 (Millions of SDRs).
- Specific country arrears (Millions of SDRs, General Department total shown where applicable):
  - Afghanistan, Islamic State of: 2.5 (Total).
  - Congo, Democratic Republic of the: 334.0 (Total), General Department 328.6, Trust 5.4.
  - Iraq: 33.0 (Total), General Department 33.0.
  - Liberia: 454.6 (Total), General Department 407.4, SDR Department 16.4, Trust 30.8.
  - Somalia: 194.3 (Total), General Department 180.4, Trust 6.2, SDR Department 7.7.
  - Sudan: 1,156.2 (Total), General Department 1,079.0, SDR Department 0.1, Trust 77.1.
  - Yugoslavia, Federal Republic of (Serbia/Montenegro): 86.6 (Total), General Department 71.1, Trust 15.5.
- Note: Data include overdue financial obligations of the Federal Republic of Yugoslavia (Serbia/Montenegro), which has not yet completed arrangements for succession to IMF membership.

### Strengthened cooperative strategy, rights approach, and remedial measures
- Strengthened cooperative strategy (since May 1990) elements: prevention, intensified collaboration, remedial measures.
- Prevention: specification and implementation of strong, comprehensive macroeconomic adjustment programs supported by IMF arrangements; technical assistance; assurance of adequate financing; assessments of medium-term balance of payments viability and capacity to repay the IMF.
- Intensified collaboration: framework for members in arrears to establish a track record of policy performance and payments to mobilize bilateral and multilateral financial support and clear arrears.
- Rights approach (established 1990):
  - Allows eligible members (limited to the 11 members in protracted arrears at end-1989) to accumulate “rights” to future IMF purchases through track record of performance and payments.
  - SCA-2 established to safeguard against risks associated with large disbursements and to provide liquidity for encashment of rights.
  - IMF pledged to mobilize up to three million ounces of gold in respect of encashments of rights under ESAF arrangements in the event of a shortfall.
  - Deadline for entry into rights accumulation program extended; most recently, availability extended until the spring 1999 meeting of the Interim Committee.
  - Rights approach contributed to clearance of arrears and normalization with three members: Peru, Sierra Leone, and Zambia.
  - Five other rights-eligible members—Cambodia, Guyana, Honduras, Panama, and Vietnam—settled arrears without recourse to the rights approach.
  - Of the 11 rights-eligible countries, Liberia, Somalia, and Sudan continued to have outstanding overdue obligations.
- Remedial measures and timetable:
  - Managing Director notifies the Board when a member is in arrears for one month; six such notifications issued in 1997/98 (five cleared before a complaint).
  - Consultation and communications steps at six weeks of arrears; two such consultations in 1997/98.
  - Complaint (after two months) can lead to Rule K-1 action; one complaint in 1997/98 was withdrawn following clearance of arrears in October 1997.
  - Liberia: Board reviewed overdue obligations on March 2, 1998; decided not to proceed to suspension of voting rights given recent cooperation and payments; to review again within six months.
  - Democratic Republic of the Congo: Board reviewed suspension decision on March 18, 1998; urged authorities to finalize payment schedule; decided to review again by June 29, 1998 and consider compulsory withdrawal unless cooperation resumed.
  - Sudan: procedure for compulsory withdrawal initiated April 8, 1994; Board considered complaint twice during 1997/98; on February 27, 1998 deferred action in light of regular monthly payments and satisfactory program implementation; next review within 12 months or at next Article IV consultation; warned that failure to continue satisfactory performance would prompt prompt Board review and recommendation of compulsory withdrawal.
  - Compulsory withdrawal is the final and most severe sanction in the remedial measures sequence.

### SDR Department and SDR amendment proposal
- SDR is an international reserve asset created under the First Amendment to the Articles of Agreement; first allocated in January 1970.
- Total SDR allocations amount to SDR 21.4 billion.
- SDRs are held largely by IMF member countries (participants in the SDR Department), with balance held in the IMF’s General Resources Account and by prescribed official entities.
- Number of prescribed holders remained unchanged at 15 during 1997/98.
- Currencies of four member countries were pegged to the SDR at end-1997/98.
- Board of Governors adopted a resolution in September 1997 proposing a Fourth Amendment to the Articles of Agreement to authorize a special one-time allocation of SDR 21.4 billion, which would raise all participants’ ratios of cumulative SDR allocations to quota under the Ninth General Review of Quotas to a common benchmark ratio of 29.315788813 percent (subject to membership approval).

*Source: Excerpt from IMF Annual Report 1998, “Financial Operations and Policies” chapter (content unit: _file06pdf - 109.6 percent to achieve a net).*

### Appendix II, Table II.11 shows the amount of SDRs

### Appendix II, Table II.11 shows the amount of SDRs

### Special Allocation and Proposed Amendment
- Appendix II, Table II.11 shows the amount of SDRs each participant will be eligible to receive under the special allocation.
- The proposed amendment will become effective when approved by three-fifths of the members having 85 percent of the total voting power.
- The proposed amendment provides for future participants to receive a special allocation following the later of (1) the date of their participation or (2) the effective date of the Fourth Amendment.
- The proposed amendment would not affect the IMF’s existing power to allocate SDRs based on a finding of a long-term global need to supplement reserves as and when that need arises.

### SDR Valuation and Interest Rate Basket
- Since January 1, 1981, the value of, and interest rate on, the SDR has been based on a basket of five currencies.
- In September 1995, the Board reviewed the valuation of the SDR, and the valuation basket was revised effective January 1, 1996.
- The currencies included in the current basket are those of the five member countries with the largest exports of goods and services during the five-year period ended one year prior to the date of the revision; the currencies are the same as those in the previous basket, but the weights were modified to reflect changes in relative importance in international trade and reserves.
- The initial weights and the corresponding amounts of each of the five currencies in the revised basket are shown in Table 15.

Table 15 — SDR Valuation Basket (As of January 1, 1996)
- Percentage Weight / Amount of Currency Units
  - U.S. dollar: 39 / 0.582
  - Deutsche mark: 21 / 0.446
  - Japanese yen: 18 / 27.2
  - French franc: 11 / 0.813
  - Pound sterling: 11 / 0.105

- Since August 1, 1983, the SDR interest rate has been calculated weekly as a weighted average of interest rates on selected short-term instruments in the five countries whose currencies are included in the valuation basket.
- With effect from January 1, 1991, the interest rates and instruments are:
  - the market yield on three-month treasury bills in the United States and the United Kingdom,
  - the three-month interbank deposit rate in Germany,
  - the three-month rate on certificates of deposit in Japan,
  - the three-month rate for treasury bills in France.

### SDR Transactions and Operations (1997/98 highlights)
- Total transfers of SDRs in 1997/98 increased slightly to SDR 20.3 billion from SDR 19.8 billion in 1996/97.
- Increase in transfers among participants and prescribed holders: SDR 1.5 billion (offsetting a decline in transfers involving the GRA of SDR 1.0 billion).
- Summary points from Table 16 and accompanying text:
  - Transfers among participants and prescribed holders rose to SDR 9.8 billion in 1997/98 from SDR 8.4 billion in 1996/97.
  - Transactions by agreement totaled SDR 8.6 billion during 1997/98, compared with SDR 7.4 billion in 1996/97.
  - IMF-related operations increased to SDR 0.9 billion in 1997/98 from SDR 0.6 billion in 1996/97.
  - Transfers of SDRs from participants to the GRA fell to SDR 4.8 billion in 1997/98 from SDR 6.0 billion in 1996/97:
    - Repurchase obligations discharged in SDRs fell to SDR 2.9 billion in 1997/98 from SDR 4.4 billion in 1996/97.
    - Charges paid in SDRs increased slightly to SDR 1.9 billion in 1997/98 from SDR 1.6 billion in 1996/97.
  - Transfers of SDRs from the GRA to participants and prescribed holders rose slightly to SDR 5.6 billion in 1997/98 from SDR 5.4 billion in 1996/97.
    - Members’ purchases made in SDRs amounted to SDR 4.2 billion.
    - Remuneration payments to members with creditor positions amounted to SDR 1.2 billion.
  - Reduction in the SDR holdings of prescribed holders during 1997/98: SDR 0.9 billion decrease (from SDR 1.3 billion to SDR 0.4 billion).
  - Despite improved supply via transactions by agreement, requests for acquisitions totaling SDR 0.2 billion by a number of participants could not be met as of the end of the financial year.

- Selected figures from Table 16 (annual totals and related series, as presented)
  - Total transfers (aggregate for listed periods, final column): 20,256 (In millions of SDRs) and cumulative 342,408.
  - Transfers among participants and prescribed holders (1997/98): 9,893 (In millions of SDRs).
  - Transfers from participants to General Resources Account (1997/98): 4,844 (In millions of SDRs).
  - Transfers from General Resources Account to participants and prescribed holders (1997/98): 5,574 (In millions of SDRs).
  - General Resources Account holdings at end of period (1997/98): 764 (In millions of SDRs).

### Pattern of SDR Holdings
- The IMF sought since early 1993 to maintain its SDR holdings in a range of SDR 1.0–1.5 billion by transferring each quarter the SDRs it receives to debtor members in connection with their purchases and to creditors in the payment of remuneration.
- To meet part of the substantial demand for use of IMF resources that developed in the second half of the year, the IMF reduced its SDR holdings to levels below the lower end of its target range, while maintaining adequate provisions for the payment of remuneration to its creditor members.
- The GRA held SDR 0.8 billion as of April 30, 1998.
- Debtor countries received more SDRs in purchases from the IMF and in transactions by agreement than they sold or used to meet their financial obligations to the IMF, resulting in an increase in their SDR holdings relative to their net cumulative allocations.
- In terms of net cumulative allocations during 1997/98:
  - The SDR holdings of nonindustrial countries increased from 60.5 percent to 69.4 percent.
  - The SDR holdings of industrial countries increased from 99.8 percent to 107.0 percent.
- The increase for industrial countries was mainly because industrial countries absorbed the reduction in the holdings of prescribed holders, which decreased during 1997/98 from SDR 1.3 billion to SDR 0.4 billion, largely as a consequence of changes in the IMF’s investments of SAF and ESAF resources in official SDRs maintained with the Bank for International Settlements.

### Designation Plan (Box 16)
- Article XIX of the IMF’s Articles of Agreement provides for a designation mechanism under which participants whose balance of payments and reserve positions are deemed sufficiently strong are obliged, when designated by the IMF, to provide freely usable currencies in exchange for SDRs up to specified amounts.
- A participant wishing to sell SDRs in a transaction with designation is required to make a representation to the IMF that it has a need to use its SDRs.
- The designation mechanism is executed through quarterly designation plans, approved by the Board, which list participants subject to designation and set maximum limits to the amounts of SDRs that they can be designated to receive during the quarter.
- Since September 1987, there have been no transactions with designation because potential exchanges of SDRs for currencies have been accommodated through voluntary transactions by agreement with other participants, primarily the 12 participants that have established with the IMF standing arrangements to buy or sell SDRs for one or more freely usable currencies at any time, provided that their SDR holdings remain within a certain range.
- These “two-way” arrangements have helped accommodate members’ desires to both buy and sell SDRs and have facilitated the circulation of SDRs in the system.

*Source: Appendix II, Table II.11 and accompanying text from the IMF Annual Report 1998 chapter on Financial Operations and Policies.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-flagship-issues/external/pubs/ft/ar/98/pdf/_file06pdf.pdf_