## Executive Summary (content unit: _082207)

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### Overview and purpose
- Annual review of progress under the Fund’s strengthened cooperative strategy on overdue financial obligations.
- Proposal to extend the availability of the rights approach by another year, to end‑August 2008.
- A draft decision to extend the rights approach is provided in Section V of the source.

### Level and structure of arrears (end‑June 2007)
- Total arrears: SDR 1,890 million (increase of about SDR 2 million since one year earlier).
- Distribution of total arrears by Fund account:
  - General Resources Account (GRA): 87 percent of total arrears.
  - Trust Fund: 6 percent.
  - PRGF‑ESF Trust: 4 percent.
  - SDR Department: 2 percent.
  - Structural Adjustment Facility (SAF): less than 1 percent.
- Table 1 (excerpted totals; In millions of SDRs):
  - End‑June 2006 / End‑June 2007 — Total arrears: 1,887.9 / 1,889.5
  - Principal: 764.2 / 730.3
    - GRA principal: 591.8 / 557.9
    - PRGF‑ESF Trust principal: 75.0 / 74.9
    - Other principal1/: 97.4 / 97.4
  - Interest: 1,123.7 / 1,159.3
    - GRA interest: 1,045.1 / 1,075.6
    - PRGF‑ESF Trust interest: 9.7 / 11.5
    - Other interest2/: 68.9 / 72.2
  - Source: Finance Department.
  - Notes: 1/ Comprises Trust Fund and SAF overdue principal obligations. 2/ Comprises overdue net SDR charges, SDR member assessments, and Trust Fund and SAF special charges and interest obligations.

### Protracted arrears and country shares
- Four members remain in protracted arrears to the Fund: Liberia, Somalia, Sudan, and Zimbabwe.
- All overdue obligations as of end‑June 2007 were protracted arrears.
- Share of total arrears by country (end‑June 2007, in millions of SDRs):
  - Liberia: 534
  - Somalia: 235
  - Sudan: 1,034
  - Zimbabwe: 86
- Sudan accounted for 55 percent of total arrears.
- Liberia, Somalia, and Sudan (arrears dating to mid‑1980s) account for 95 percent of total arrears; Zimbabwe accounts for the remaining 5 percent.

### Rights approach — background, conditions, and proposal
- Background and eligibility:
  - Initiated in 1990; previously used for Peru, Sierra Leone, and Zambia in the 1990s.
  - Eligibility initially restricted to eleven members with protracted arrears at end‑1989.
  - Remaining eligible members: Liberia, Somalia, and Sudan.
- Conditions under the rights approach:
  - Eligible member must establish a track record of cooperation on policies with the Fund by undertaking an economic program with conditionality equivalent to upper credit tranche Fund arrangements.
  - Member expected to make payments to the Fund (and the World Bank) at least sufficient to meet new obligations falling due.
  - By establishing the track record, the member accumulates “rights” to future drawings of Fund resources following arrears clearance.
  - Bilateral creditors would provide a bridge loan to clear arrears to the Fund, followed by access to new Fund financing.
- Proposal:
  - Extend availability of the rights approach to end‑August 2008.

### Financial costs and burden‑sharing
- Deferred burden‑shared charges to the GRA: SDR 894 million as of end‑June 2007 (increase of SDR 31 million from a year earlier).
- Arrears to the Trust Fund: SDR 119 million (reduced Reserve Account resources for PRGF‑ESF Trust).
- SDR 75.7 million has been drawn from the PRGF‑ESF Trust Reserve Account since 2001 to repay Trust lenders due to Zimbabwe’s arrears.
- Overdue GRA charges increase burden‑sharing adjustments; mechanism established in 1986 shifts remuneration/charge rates between creditor and debtor members to generate income equal to new overdue GRA charges.
- For FY2008 no new balances are being accumulated in the SCA‑1.

### Arrears to other international financial institutions (as of end‑June 2007)
- Total arrears by the protracted arrears members to major IFIs:
  - World Bank: SDR 1,038 million.
  - African Development Bank Group (AfDB): SDR 558 million.
  - Combined total (Fund + World Bank + AfDB): SDR 3,485 million.
- Country breakdown (In millions of SDRs; as of end‑June 2007):
  - Liberia: Fund 534 / World Bank 313 / AfDB 158 / Total 1,005
  - Somalia: Fund 235 / World Bank 108 / AfDB 43 / Total 386
  - Sudan: Fund 1,034 / World Bank 286 / AfDB 119 / Total 1,439
  - Zimbabwe: Fund 86 / World Bank 331 / AfDB 238 / Total 655
- Note: World Bank amounts converted at the US$/SDR exchange rate of June 30, 2007.

### Overdue currency valuation adjustments
- Overdue currency valuation adjustments for 17 members amounted to SDR 2,398.9 million (SDR 2.4 billion) at end‑June 2007.
- Protracted arrears cases accounted for SDR 1,323.3 million of that amount (sum of Liberia 267.8, Somalia 120.1, Sudan 535.3, Zimbabwe 360.1 = 1,283.3 — note: table total and narrative indicate protracted cases accounted for about half; source tables list totals as above).
- Such valuation adjustments are an essential element of members’ financial obligations to the Fund and are actively pursued for settlement.
- Table 10 (Overdue currency valuation adjustments, In millions of SDRs):
  - Angola 226.8
  - Belarus 196.0
  - Congo, Dem. Rep. of 60.1
  - Iraq 515.5
  - Lebanon 3.2
  - Liberia 267.8
  - Marshall Islands 0.1
  - Micronesia 0.2
  - Palau 0.3
  - Samoa 0.6
  - Sao Tome and Principe 1.6
  - Somalia 120.1
  - Sudan 535.3
  - Suriname 74.5
  - Syrian Arab Republic 3.8
  - Trinidad and Tobago 32.9
  - Zimbabwe 360.1
  - Total 2,398.9

### Short‑term arrears (less than six months)
- Four members (8 instances) incurred short‑term arrears during the period under review, down from 13 members (22 instances) in the previous review.
- Most short‑term arrears were settled before remedial measures were applied; in two instances the Executive Board was notified of the occurrence of arrears.

### Developments in individual protracted arrears cases (high‑level findings)
- Liberia:
  - Continued satisfactory progress implementing reforms and rehabilitation under difficult circumstances.
  - Implementing staff‑monitored programs (SMPs) since February 2006.
  - Executive Board initiated de‑escalation of remedial measures on October 2, 2006, and lifted a declaration of non‑cooperation that had been in place since 1990.
  - Board indicated it could consider lifting suspension of Liberia’s voting and related rights following satisfactory performance after an approximately twelve‑month evaluation period.
  - At July 13 meeting on the third review of the SMP, a broad majority of the Board agreed that macroeconomic and structural policies under the 2007 SMP meet standards associated with arrangements in the upper credit tranches.
  - Liberia made monthly payments of US$60,000 to the Fund during the period under review; these payments represented 4 percent of Liberia’s new obligations falling due to the Fund and, on an annual basis, 0.1 percent of the stock of its arrears to the Fund, 0.5 percent of its estimated export receipts, and 1 percent of its fiscal revenue.
  - Net official reserves estimated at US$22 million (½ month of imports) at end‑2006 (staff estimate).
  - Liberia also made monthly payments to the World Bank (US$25,000) and AfDB (US$15,000); World Bank payments are currently placed in an escrow account at the Central Bank of Liberia.
  - External debt described as unsustainable; Fund management proposed a financing package to mobilize necessary financing for arrears clearance and debt relief.
- Sudan:
  - Record of cooperation mixed; broadly satisfactory in first half of 2006, but policy performance deteriorated in second half of 2006 and early 2007 due mainly to fiscal slippages and lower‑than‑expected oil production and prices.
  - External current account deficit worsened; net international reserves of central bank fell from US$1.9 billon at end‑2005 to about US$560 million by end‑May 2007.
  - Authorities reached agreement with staff on an 18‑month SMP to arrest deterioration and restore macroeconomic stability; program aims include low inflation, rebuilding international reserves, fiscal tightening, and greater exchange rate flexibility.
  - Authorities agreed to limit contracting nonconcessional loans to no more than US$700 million annually in 2007 and 2008.
  - Payments to the Fund exceeded new debt service obligations falling due: in 2006 Sudan paid US$50.7 million (SDR 34.1 million) versus new obligations falling due of SDR 16.5 million and its SMP commitment of US$45 million (SDR 30.5 million).
  - Payment of US$21 million received on January 2, 2007 (instruction issued December 27, 2006; received January 2, 2007 owing to holiday season delays).
  - Subsequent payments in April, May, and August 2007 totaled US$20.9 million.
  - Under the new 18‑month SMP the authorities committed to pay a minimum of US$50 million in 2007 and at least the same amount in 2008, to be made on a regular monthly basis.
- Zimbabwe:
  - Cooperation with the Fund remained weak.
  - After settlement of arrears to the GRA in February 2006, Zimbabwe remained in arrears to the PRGF‑ESF Trust (outstanding arrears of SDR 86 million at end‑June 2007).
  - Weak policy performance contributed to a deepening economic crisis; urgent adoption of a comprehensive program of macroeconomic stabilization and structural reforms is called for.
  - Zimbabwe is the first and only case of protracted arrears to the PRGF‑ESF Trust.
- Somalia:
  - Continued security problems and inadequate information on economic and financial developments, precluding a full assessment of cooperation with the Fund.
  - The Board has postponed its review of Somalia’s overdue financial obligations since October 1990.

### Payment attribution by members in arrears — issues, legal position, and staff engagement
- Key facts:
  - Three of the four remaining protracted arrears cases—Liberia, Somalia, and Sudan—continue to have increases in overdue GRA charges which give rise to ongoing burden‑sharing adjustments.
  - Liberia and Sudan currently make annual payments to the Fund of about US$0.7 million and US$50 million, respectively.
  - Authorities have notified the Fund that their payments should be applied to overdue GRA principal.
  - In Sudan, payments are first used to cover any net SDR charges falling due, with the remainder to be applied to overdue GRA principal.
- Mechanics and burden‑sharing considerations:
  - Under the current burden‑sharing mechanism for deferred charges (established in 1986), the Fund’s creditor and debtor members contribute to generate additional income equal to the amount of new overdue GRA charges by creditors receiving a lower rate of remuneration and debtors paying a higher rate of charge.
  - An amount equal to the proceeds of burden‑shared deferred charges will be refunded to contributing members when overdue GRA charges are repaid.
  - The financial burden on debtor countries under this mechanism has increased recently as outstanding Fund credit has declined and is concentrated on a small number of remaining debtor countries.
- Concerns and legal position:
  - A member is entitled to repurchase at any time the Fund’s holdings of its currency that are subject to periodic charges (Article V, Section 7(a) of the Fund’s Articles of Agreement).
  - Since the right to repurchase at any time holdings that are subject to charges is unconditional, a member has the right to attribute any payment that it makes to the Fund to the repurchase of such holdings.
  - The Fund could not adopt a rule that requires GRA charges falling due to be paid by members in preference to overdue repurchases.
  - Currently, members in arrears are required to notify the Fund of their intention on payments attribution; absent notification, the Fund applies payment to the first maturing obligation (Decision No. 8271‑(86/74) adopted April 30, 1986).
- Staff engagement:
  - Staff has consulted with Sudanese and Liberian authorities; Sudan reiterated preference to attribute payments to overdue GRA principal; Liberia indicated need more time to consider the issue.
- Role of burden‑sharing in Fund income and accounting:
  - Burden sharing of deferred charges is essential for protecting the Fund’s current income position against the impact of unpaid charges and facilitates accounting treatment showing balances in arrears at face value on the Fund’s balance sheet.
  - Sustainability of the burden‑sharing system for deferred charges is called into question at very low credit levels; while not projected to be a problem for FY2008, staff will keep the issue under close review.

### Availability of the rights approach — proposed extension to end‑August 2008 and remedial timetables
- Proposed decision and rationale:
  - Proposal: “The Fund has reviewed progress under the strengthened cooperative strategy with respect to overdue financial obligations to the Fund as described in EBS/07/96. The Fund reaffirms its support for the strengthened cooperative strategy and agrees to extend the availability of the rights approach until end‑August 2008.”
  - Context: “In light of the considerations in Section III, it is proposed that the availability of the rights approach be extended for another year, to end‑August 2008.”
- Executive Board adoption mechanics:
  - The decision “may be adopted by a majority of the votes cast.”
- Timetable of remedial measures — General Department and SDR Department (Annex I) — key steps and timelines:
  - Immediately: staff sends a cable urging prompt payment; member is not permitted any use of the Fund’s resources and no request for use of Fund resources is placed before the Executive Board until arrears are cleared.
  - 2 weeks: Management sends a communication to the Governor stressing seriousness and urging full settlement.
  - 1 month: Managing Director notifies the Executive Board that an obligation is overdue.
  - 6 weeks: Managing Director notifies the member that a complaint will be issued unless obligations are settled; may recommend communication to selected or all Fund Governors.
  - 2 months: A complaint is issued by the Managing Director to the Executive Board.
  - 3 months: A brief factual statement noting existence and amount of arrears is posted on the Fund’s external website; complaint is given substantive consideration by the Executive Board; Board usually decides to limit the member’s use of general resources and, if overdue SDR obligations are involved, to suspend right to use SDRs; press release issued following Board decisions.
  - 6–12 months: Executive Board will review its decision on limitation within three months (with possibility of a second review); declaration of ineligibility will be considered to take effect not more than twelve months after emergence of arrears; sending of communications to Governors and heads of selected IFIs considered.
  - Up to 15 months: Declaration of noncooperation will be considered within three months after dispatch of communications; technical assistance suspension may follow.
  - Up to 18 months: Decision on suspension of voting and representation rights will be considered within three months after declaration of noncooperation.
  - Up to 24 months: Procedure on compulsory withdrawal will be initiated within six months after decision on suspension.
- Timetable of remedial measures — PRGF‑ESF Trust (Annex II) — key steps and timelines:
  - Immediately: staff sends a cable urging prompt payment; member’s access to Fund resources, including Trust resources, is suspended.
  - 2 weeks: Management sends a communication to the Governor stressing seriousness and urging full settlement.
  - 1 month: Managing Director notifies the Executive Board that an obligation to the Trust is overdue.
  - 6 weeks: Managing Director notifies the member that a report will be issued to the Executive Board unless settled; may recommend communication to selected or all Governors.
  - 2 months: A report is issued by the Managing Director to the Executive Board requesting limitation of member’s use of PRGF‑ESF Trust resources.
  - 3 months: Report is given substantive consideration by the Executive Board; factual statement posted on the member’s country‑specific page; press release issued following decisions.
  - 6 months: Executive Board reviews limitation and may remove member from list of PRGF‑ESF‑eligible countries; reinstatement requires new Board decision; press release issued on removal or reinstatement.
  - 12 months: Declaration of noncooperation with PRGF‑ESF Trust may be issued depending on assessment; upon declaration, Fund could suspend technical assistance; Managing Director may limit technical assistance if judged not contributing to resolution.
  - Note: Based on Decision No. 12545‑(01/84) PRGF (August 22, 2001), as amended by Decision No. 13590‑(05/99) ESF (November 23, 2005, effective January 5, 2006).

### Key statistics and tables (selected figures from source tables)
- Countries with protracted arrears (As of end‑June 2007): Liberia, Somalia, Sudan, Zimbabwe.
- Table 7 (As of end‑June 2007) — Total indebtedness and overdue (SDR millions; % of quota):
  - Liberia: Total Indebtedness 533.9 (% of quota 748.9) — Overdue Principal 222.9, Interest 311.0, Total 533.9
  - Somalia: Total Indebtedness 235.1 (% of quota 531.8) — Overdue Principal 112.0, Interest 123.1, Total 235.1
  - Sudan: Total Indebtedness 1,034.1 (% of quota 609.4) — Overdue Principal 320.4, Interest 713.7, Total 1,034.1
  - Zimbabwe: Total Indebtedness 86.4 (% of quota 24.4) — Overdue Principal 74.9, Interest 11.5, Total 86.4
  - Total (these countries): Total Indebtedness 1,889.5 (% of quota 730.3) — Overdue Principal 1,159.3, Total overdue 1,889.5
- Table 8 (Obligations falling due and payments by current protracted arrears cases, 1995–Jan.–June 2007; totals shown — Jan.–June 2007):
  - Obligations falling due — Liberia 6.4, Somalia 3.2, Sudan 8.6, Zimbabwe 2.0, Total 20.2
  - Payments made to the Fund — Liberia 0.2, Somalia --, Sudan 25.0, Zimbabwe 0.4, Total 25.7
  - Payments made as percent of obligations falling due — Total 127.4
- Table 9 (Deferred GRA charges of countries with protracted arrears, FY 2003–FY 2008; as of end‑June 2007):
  - Balances and net deferrals:
    - Liberia: Balance June 30, 2007 276.4 (Net deferrals June 30, 2007 1.8)
    - Somalia: Balance June 30, 2007 108.9 (Net deferrals June 30, 2007 0.9)
    - Sudan: Balance June 30, 2007 695.4 (Net deferrals June 30, 2007 2.4)
    - Total: Balance June 30, 2007 1,080.7 (Net deferrals June 30, 2007 5.1)
- Table 5 (Overdue Financial Obligations to the Fund by Type, end‑period totals; selected row snapshots for June 2007):
  - June 2007: Charges and Interest 558, Repayments and Repurchases 1,076, Total 1,724; (GRA Total 273, Net SDR Charges 1,159, Total 1,890)
- Table 6 (Number of countries incurring late payments, 1991–2007; selected figures for twelve months to June 30, 2007):
  - Number of members with obligations falling due during the period: 146
  - Members with late payments during the period: 45
  - Protracted cases: 4
  - Protracted cases as percent of members with obligations falling due during the period: 5.2 percent
- Remedial measures applied to countries in protracted arrears (summarized examples):
  - Complaints, suspension of voting rights, declaration of ineligibility, and declaration of non‑cooperation are among measures applied depending on duration and persistence of arrears.
  - Example actions: Liberia complaint for suspension of voting and related rights issued on 4/8/02; Zimbabwe removed from PRGF‑ESF eligible list on 9/24/01; full settlement of arrears to the GRA on 2/15/06 led to withdrawal of complaint dated 2/6/04.

*Source: IMF—Executive Summary (content unit: _082207 - Executive Summary).*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview and purpose
- Annual review of progress under the Fund’s strengthened cooperative strategy on overdue financial obligations.
- Proposal to extend the availability of the rights approach by another year, to end-August 2008.
- A draft decision to extend the rights approach is provided in Section V of the source.

### Level and structure of arrears (end-June 2007)
- Total arrears: SDR 1,890 million (increase of about SDR 2 million since one year earlier).
- Distribution of total arrears by Fund account:
  - General Resources Account (GRA): 87 percent of total arrears.
  - Trust Fund: 6 percent.
  - PRGF-ESF Trust: 4 percent.
  - SDR Department: 2 percent.
  - Structural Adjustment Facility (SAF): less than 1 percent.
- Table 1 (excerpted totals): End-June 2006 / End-June 2007
  - Total arrears: 1,887.9 / 1,889.5 (In millions of SDRs)
  - Principal: 764.2 / 730.3
    - GRA principal: 591.8 / 557.9
    - PRGF-ESF Trust principal: 75.0 / 74.9
    - Other principal1/: 97.4 / 97.4
  - Interest: 1,123.7 / 1,159.3
    - GRA interest: 1,045.1 / 1,075.6
    - PRGF-ESF Trust interest: 9.7 / 11.5
    - Other interest2/: 68.9 / 72.2
  - Source: Finance Department.
  - Notes from source: 1/ Comprises Trust Fund and SAF overdue principal obligations. 2/ Comprises overdue net SDR charges, SDR member assessments, and Trust Fund and SAF special charges and interest obligations.

### Protracted arrears and cases
- Four members remain in protracted arrears to the Fund: Liberia, Somalia, Sudan, and Zimbabwe.
- All overdue obligations as of end-June 2007 were protracted arrears.
- Share of total arrears by country (Figure 1, end-June 2007, in millions of SDRs):
  - Liberia: 534
  - Somalia: 235
  - Sudan: 1,034
  - Zimbabwe: 86
- Sudan alone accounted for 55 percent of total arrears.
- The three members with arrears dating to the mid-1980s—Liberia, Somalia, and Sudan—account for 95 percent of total arrears; Zimbabwe accounts for the remaining 5 percent.

### Progress under the strengthened cooperative strategy
- No changes proposed to the Fund’s strategy on arrears; strategy remains broadly effective.
- Strategy elements:
  - Prevention.
  - Intensified collaboration (including the rights approach).
  - Remedial measures.
- Timetables for remedial measures for the General and SDR Departments and the PRGF-ESF Trust are in Annexes I and II (source).

### Rights approach
- Rights approach remains an important option for arrears clearance for remaining eligible countries.
- Background and eligibility:
  - Initiated in 1990; previously used for Peru, Sierra Leone, and Zambia in the 1990s.
  - Eligibility initially restricted to eleven members with protracted arrears at end-1989.
  - Remaining eligible members: Liberia, Somalia, and Sudan.
- Conditions under the rights approach (as described in source):
  - Eligible member must establish a track record of cooperation on policies with the Fund by undertaking an economic program with conditionality equivalent to upper credit tranche Fund arrangements.
  - Member expected to make payments to the Fund (and the World Bank) at least sufficient to meet new obligations falling due.
  - By establishing the track record, the member accumulates “rights” to future drawings of Fund resources following arrears clearance.
  - Bilateral creditors would provide a bridge loan to clear arrears to the Fund, followed by access to new Fund financing.
- Proposal: extend availability of the rights approach to end-August 2008.

### Financial costs and burden-sharing
- Deferred burden-shared charges to the GRA: SDR 894 million as of end-June 2007 (increase of SDR 31 million from a year earlier).
- Arrears to the Trust Fund: SDR 119 million (reduced Reserve Account resources for PRGF-ESF Trust).
- SDR 75.7 million has been drawn from the PRGF-ESF Trust Reserve Account since 2001 to repay Trust lenders due to Zimbabwe’s arrears.

### Arrears to other international financial institutions (as of end-June 2007)
- Total arrears by the protracted arrears members to major IFIs:
  - World Bank: SDR 1,038 million.
  - African Development Bank Group (AfDB): SDR 558 million.
  - Combined total (Fund + World Bank + AfDB): SDR 3,485 million.
- Country breakdown (In millions of SDRs; as of end-June 2007):
  - Liberia: Fund 534 / World Bank 313 / AfDB 158 / Total 1,005
  - Somalia: Fund 235 / World Bank 108 / AfDB 43 / Total 386
  - Sudan: Fund 1,034 / World Bank 286 / AfDB 119 / Total 1,439
  - Zimbabwe: Fund 86 / World Bank 331 / AfDB 238 / Total 655
- Notes from source: World Bank amounts converted at the US$/SDR exchange rate of June 30, 2007. Source data: African Development Bank Group, World Bank, and IMF Finance Department.

### Overdue currency valuation adjustments
- Overdue currency valuation adjustments for 17 members amounted to SDR 2.4 billion at end-June 2007.
- Protracted arrears cases accounted for SDR 1.3 billion of that amount (about half of the total).
- Such valuation adjustments are an essential element of members’ financial obligations to the Fund and are actively pursued for settlement.

### Short-term arrears (less than six months)
- Four members (8 instances) incurred short-term arrears during the period under review, down from 13 members (22 instances) in the previous review.
- Most short-term arrears were settled before remedial measures were applied; in two instances the Executive Board was notified of the occurrence of arrears.

### Developments in individual protracted arrears cases (high-level findings)
- Liberia:
  - Continued satisfactory progress implementing reforms and rehabilitation under difficult circumstances.
  - Implementing staff-monitored programs (SMPs) since February 2006.
  - Executive Board initiated de-escalation of remedial measures on October 2, 2006, and lifted a declaration of non-cooperation that had been in place since 1990.
  - Board indicated it could consider lifting suspension of Liberia’s voting and related rights following satisfactory performance after an approximately twelve-month evaluation period.
  - At July 13 meeting on the third review of the SMP, a broad majority of the Board agreed that macroeconomic and structural policies under the 2007 SMP meet standards associated with arrangements in the upper credit tranches.
  - Liberia made monthly payments of US$60,000 to the Fund during the period under review; these payments represented 4 percent of Liberia’s new obligations falling due to the Fund and, on an annual basis, 0.1 percent of the stock of its arrears to the Fund, 0.5 percent of its estimated export receipts, and 1 percent of its fiscal revenue (source).
  - Net official reserves estimated at US$22 million (½ month of imports) at end-2006 (staff estimate).
  - Liberia also made monthly payments to the World Bank (US$25,000) and AfDB (US$15,000); World Bank payments are currently placed in an escrow account at the Central Bank of Liberia.
  - External debt described as unsustainable; Fund management proposed a financing package to mobilize necessary financing for arrears clearance and debt relief.
- Sudan:
  - Record of cooperation mixed; broadly satisfactory in first half of 2006, but policy performance deteriorated in second half of 2006 and early 2007 due mainly to fiscal slippages and lower-than-expected oil production and prices.
  - External current account deficit worsened; net international reserves of central bank fell from US$1.9 billon at end-2005 to about US$560 million by end-May 2007.
  - Authorities reached agreement with staff on an 18-month SMP to arrest deterioration and restore macroeconomic stability; program aims include low inflation, rebuilding international reserves, fiscal tightening, and greater exchange rate flexibility.
  - Authorities agreed to limit contracting nonconcessional loans to no more than US$700 million annually in 2007 and 2008.
  - Payments to the Fund exceeded new debt service obligations falling due: in 2006 Sudan paid US$50.7 million (SDR 34.1 million) versus new obligations falling due of SDR 16.5 million and its SMP commitment of US$45 million (SDR 30.5 million).
  - Payment of US$21 million received on January 2, 2007 (instruction issued December 27, 2006; received January 2, 2007 owing to holiday season delays).
  - Subsequent payments in April, May, and August 2007 totaled US$20.9 million.
  - Under the new 18-month SMP the authorities committed to pay a minimum of US$50 million in 2007 and at least the same amount in 2008, to be made on a regular monthly basis.
- Zimbabwe:
  - Cooperation with the Fund remained weak.
  - After settlement of arrears to the GRA in February 2006, Zimbabwe remained in arrears to the PRGF-ESF Trust (outstanding arrears of SDR 86 million at end-June 2007).
  - Weak policy performance contributed to a deepening economic crisis; urgent adoption of a comprehensive program of macroeconomic stabilization and structural reforms is called for.
  - Zimbabwe is the first and only case of protracted arrears to the PRGF-ESF Trust.
- Somalia:
  - Continued security problems and inadequate information on economic and financial developments, precluding a full assessment of cooperation with the Fund.

*Source: IMF—Executive Summary (content unit: _082207 - Executive Summary).*

### 17.      The Executive Board last reviewed Sudan’s overdue financial obligations to the

### _082207 - 17.      The Executive Board last reviewed Sudan’s overdue financial obligations to the

### Sudan
- The Executive Board last reviewed Sudan’s overdue financial obligations to the Fund and the Managing Director’s complaint with respect to the suspension of Sudan’s voting and related rights in the Fund on December 1, 2006.
- In light of Sudan’s record of cooperation with the Fund, the Board decided that no further remedial measure be taken at the time with respect to the Managing Director’s complaint on the suspension of Sudan’s voting and related rights in the Fund.

### Zimbabwe — cooperation, Board decisions, and recommended policy package
Findings and Board decisions:
- Zimbabwe’s cooperation on policies and payments with the Fund was poor.
- The Executive Board reviewed Zimbabwe’s cooperation with the Fund on policies and payments with respect to its arrears to the PRGF-ESF Trust on February 23 and July 23, 2007, respectively.
- In light of Zimbabwe’s deteriorating policy performance and payments to the Fund, the Board kept in place the decisions previously taken to address Zimbabwe’s arrears to the PRGF-ESF Trust. These are:
  - the declaration of non-cooperation,
  - the suspension of technical assistance,
  - the removal of Zimbabwe from the list of PRGF-ESF-eligible countries.
- At the February 23 meeting, the Board also considered the sanctions, including the suspension of voting and related rights, that had been imposed on Zimbabwe with respect to its arrears to the GRA, which were settled in full in February 2006. The Board made no decision on this issue and agreed to return to it at a later date.
- On both occasions, the Board expressed deep concern over Zimbabwe’s deteriorating economic and social conditions and warned that, without fundamental policy changes, the crisis would deepen.

Requested policy package (Board urged Zimbabwe to implement):
- Terminate all quasi-fiscal activity by the Reserve Bank of Zimbabwe and transfer existing quasi-fiscal activity transparently to the government budget.
- Substantially tighten fiscal policy and prioritize spending towards essential social areas.
- Unify the exchange rate and eliminate exchange restrictions with respect to the making of payments and transfers for current international transactions.
- Liberalize prices and impose a hard budget constraint on public enterprises.
- Establish a strong monetary policy nominal anchor.
- Implement medium-term structural reforms to sustain economic recovery and growth, including:
  - public enterprise and civil service reform,
  - public expenditure management reform,
  - strengthened property rights,
  - improvements in governance.

### Somalia — review postponed
- The Board has postponed its review of Somalia’s overdue financial obligations since October 1990 as there continues to be no basis for assessing Somalia’s cooperation with the Fund due to its unsettled political and security situation and the absence of information on economic and financial developments.
- Staff continues to closely monitor the developments in Somalia, together with its counterparts in the World Bank and other multilateral institutions.

### IV. ISSUES REGARDING PAYMENT ATTRIBUTION BY MEMBERS IN ARREARS
Key facts and figures:
- Three of the four remaining protracted arrears cases—Liberia, Somalia, and Sudan—continue to have increases in overdue GRA charges which give rise to ongoing burden-sharing adjustments.
- Among these, Liberia and Sudan currently make annual payments to the Fund of about US$0.7 million and US$50 million, respectively.
- In both cases, the authorities have notified the Fund that their payments should be applied to overdue GRA principal.
- In the case of Sudan, payments are first used to cover any net SDR charges falling due, with the remainder to be applied to overdue GRA principal.
- The authorities’ decisions were largely based on the consideration that paying down overdue GRA repurchase obligations was more beneficial to them than paying current GRA charges falling due as overdue GRA repurchases continue to carry the regular rate of charge (and also special charges, if applicable), while overdue GRA charges do not incur additional interest.

Mechanics and burden-sharing considerations:
- Increases in overdue GRA charges to the Fund by members in arrears impose a financial burden on the Fund’s debtor and creditor members because, under the current burden-sharing mechanism for deferred charges (established in 1986), the Fund’s creditor and debtor members contribute to generate additional income that is equal to the amount of new overdue GRA charges.
- This is achieved by creditors receiving a lower rate of remuneration and by debtors paying a higher rate of charge.
- An amount equal to the proceeds of burden-shared deferred charges will be refunded to contributing members when overdue GRA charges are repaid.
- While not a particular issue in the past, the financial burden on debtor countries under this mechanism has increased recently, as outstanding Fund credit has declined and is concentrated on a small number of remaining debtor countries.
- Between FY1987 and FY2007, similar burden-shared adjustments were also made to the SCA-1 to generate resources to shield the Fund against the possible failure of members to meet outstanding repurchase obligations. For FY2008, however, no new balances are being accumulated in the SCA-1.

Concerns and legal position:
- A few Directors expressed concerns that, by electing not to pay GRA charges falling due, members in arrears impose burden-sharing costs on the Fund’s membership, and enquired whether the members with overdue GRA obligations and who were making payments to the Fund were aware of this issue and what options might exist to address it.
- From a legal point of view, a member is entitled to repurchase at any time the Fund’s holdings of its currency that are subject to periodic charges (see Article V, Section 7(a) of the Fund’s Articles of Agreement).
- Since the right to repurchase at any time holdings that are subject to charges is unconditional, a member has the right to attribute any payment that it makes to the Fund to the repurchase of such holdings.
- Accordingly, the Fund could not adopt a rule that requires GRA charges falling due to be paid by members in preference to overdue repurchases.
- Currently, members in arrears are required to notify the Fund of their intention on payments attribution. In the absence of such a notification, the Fund applies payment by the member concerned to the first maturing obligation regardless of the type of the obligation (see Decision No. 8271-(86/74) adopted April 30, 1986).

Staff engagement and member responses:
- Staff has consulted with both the Sudanese and Liberian authorities regarding the attribution of their payments to the Fund.
- Staff explained that, while they have the right to attribute their payments to overdue GRA principal rather than current GRA charges, doing so imposes a financial burden to the Fund membership, and noted that such a burden has increased significantly for a few remaining large debtor countries to the Fund.
- The Sudanese authorities took note of these concerns, but reiterated their preference to continue attributing payments to overdue GRA principal.
- The Liberian authorities indicated that they would need more time to consider this issue.

Role of burden-sharing in Fund income and accounting:
- Burden sharing of deferred charges is essential for protecting the Fund’s current income position against the impact of unpaid charges.
- It also facilitates the Fund’s accounting treatment of showing balances in arrears at face value on the Fund’s balance sheet; the burden sharing system for deferred charges enables the Fund to demonstrate that, while GRA principal may be in arrears, on a net present value basis, the Fund does not suffer a loss.
- It is apparent that the sustainability of the burden-sharing system for deferred charges is called into question at very low credit levels.
- While sustainability is not projected to be a problem for FY2008, staff will keep the overall issue under close review.

*Source: _082207 - 17.      The Executive Board last reviewed Sudan’s overdue financial obligations to the*

### 27.      In light of the considerations in Section III, it is proposed that the availability of the

### Availability of the rights approach — proposed extension to end‑August 2008

### Proposed decision and rationale
- Proposal: “The Fund has reviewed progress under the strengthened cooperative strategy with respect to overdue financial obligations to the Fund as described in EBS/07/96. The Fund reaffirms its support for the strengthened cooperative strategy and agrees to extend the availability of the rights approach until end‑August 2008.”
- Context: “In light of the considerations in Section III, it is proposed that the availability of the rights approach be extended for another year, to end‑August 2008.”

### Executive Board adoption mechanics
- The decision “may be adopted by a majority of the votes cast.”

### Timetable of remedial measures — General Department and SDR Department (Annex I)
- Immediately: staff sends a cable urging prompt payment; member is not permitted any use of the Fund’s resources and no request for use of Fund resources is placed before the Executive Board until arrears are cleared.
- 2 weeks: Management sends a communication to the Governor stressing seriousness and urging full settlement.
- 1 month: Managing Director notifies the Executive Board that an obligation is overdue.
- 6 weeks: Managing Director notifies the member that a complaint will be issued unless obligations are settled; may recommend communication to selected or all Fund Governors.
- 2 months: A complaint is issued by the Managing Director to the Executive Board.
- 3 months: A brief factual statement noting existence and amount of arrears is posted on the Fund’s external website; complaint is given substantive consideration by the Executive Board; Board usually decides to limit the member’s use of general resources and, if overdue SDR obligations are involved, to suspend right to use SDRs; press release issued following Board decisions.
- 6–12 months: Executive Board will review its decision on limitation within three months (with possibility of a second review); declaration of ineligibility will be considered to take effect not more than twelve months after emergence of arrears; sending of communications to Governors and heads of selected IFIs considered.
- Up to 15 months: Declaration of noncooperation will be considered within three months after dispatch of communications; technical assistance suspension may follow.
- Up to 18 months: Decision on suspension of voting and representation rights will be considered within three months after declaration of noncooperation.
- Up to 24 months: Procedure on compulsory withdrawal will be initiated within six months after decision on suspension.

### Timetable of remedial measures — PRGF‑ESF Trust (Annex II)
- Immediately: staff sends a cable urging prompt payment; member’s access to Fund resources, including Trust resources, is suspended.
- 2 weeks: Management sends a communication to the Governor stressing seriousness and urging full settlement.
- 1 month: Managing Director notifies the Executive Board that an obligation to the Trust is overdue.
- 6 weeks: Managing Director notifies the member that a report will be issued to the Executive Board unless settled; may recommend communication to selected or all Governors.
- 2 months: A report is issued by the Managing Director to the Executive Board requesting limitation of member’s use of PRGF‑ESF Trust resources.
- 3 months: Report is given substantive consideration by the Executive Board; factual statement posted on the member’s country‑specific page; press release issued following decisions.
- 6 months: Executive Board reviews limitation and may remove member from list of PRGF‑ESF‑eligible countries; reinstatement requires new Board decision; press release issued on removal or reinstatement.
- 12 months: Declaration of noncooperation with PRGF‑ESF Trust may be issued depending on assessment; upon declaration, Fund could suspend technical assistance; Managing Director may limit technical assistance if judged not contributing to resolution.
- Note: Based on Decision No. 12545-(01/84) PRGF (August 22, 2001), as amended by Decision No. 13590-(05/99) ESF (November 23, 2005, effective January 5, 2006).

### Key statistics and figures (as presented in source tables)
- Countries with protracted arrears (As of end‑June 2007): Liberia, Somalia, Sudan, Zimbabwe.
- Table 7 (As of end‑June 2007) — Total indebtedness and overdue (SDR millions):
  - Liberia: Total Indebtedness 533.9 (% of quota 748.9) — Overdue Principal 222.9, Interest 311.0, Total 533.9
  - Somalia: Total Indebtedness 235.1 (% of quota 531.8) — Overdue Principal 112.0, Interest 123.1, Total 235.1
  - Sudan: Total Indebtedness 1,034.1 (% of quota 609.4) — Overdue Principal 320.4, Interest 713.7, Total 1,034.1
  - Zimbabwe: Total Indebtedness 86.4 (% of quota 24.4) — Overdue Principal 74.9, Interest 11.5, Total 86.4
  - Total (these countries): Total Indebtedness 1,889.5 (% of quota 730.3) — Overdue Principal 1,159.3, Total overdue 1,889.5
- Table 8 (Obligations falling due and payments by current protracted arrears cases, 1995–Jan.–June 2007; totals shown):
  - Jan.–June 2007: Obligations falling due — Liberia 6.4, Somalia 3.2, Sudan 8.6, Zimbabwe 2.0, Total 20.2
  - Jan.–June 2007: Payments made to the Fund — Liberia 0.2, Somalia --, Sudan 25.0, Zimbabwe 0.4, Total 25.7
  - Jan.–June 2007: Payments made as percent of obligations falling due — Total 127.4
- Table 9 (Deferred GRA charges of countries with protracted arrears, FY 2003–FY 2008; as of end‑June 2007):
  - Balances and net deferrals (selected snapshot):
    - Liberia: Balance June 30, 2007 276.4 (Net deferrals June 30, 2007 1.8)
    - Somalia: Balance June 30, 2007 108.9 (Net deferrals June 30, 2007 0.9)
    - Sudan: Balance June 30, 2007 695.4 (Net deferrals June 30, 2007 2.4)
    - Zimbabwe: Balance entries show earlier balances; no balance listed for June 30, 2007 in table extract
    - Total: Balance June 30, 2007 1,080.7 (Net deferrals June 30, 2007 5.1)
- Table 10 (Countries with overdue currency valuation adjustments, as of end‑June 2007; In millions of SDRs):
  - Angola 226.8
  - Belarus 196.0
  - Congo, Dem. Rep. of 60.1
  - Iraq 515.5
  - Lebanon 3.2
  - Liberia 267.8
  - Marshall Islands 0.1
  - Micronesia 0.2
  - Palau 0.3
  - Samoa 0.6
  - Sao Tome and Principe 1.6
  - Somalia 120.1
  - Sudan 535.3
  - Suriname 74.5
  - Syrian Arab Republic 3.8
  - Trinidad and Tobago 32.9
  - Zimbabwe 360.1
  - Total 2,398.9
- Table 5 (Overdue Financial Obligations to the Fund by Type, end‑period totals, selected year‑end snapshot):
  - June 2007 (2007 June): Charges and Interest 558, Repayments and Repurchases 1,076, Total 1,724; (GRA Total 273, Net SDR Charges 1,159, Total 1,890) — as presented in table rows
- Table 6 (Number of countries incurring late payments, 1991–2007; selected figures):
  - Twelve months to June 30, 2007: number of members with late payments as a percent of members with obligations falling due during the period — protracted cases 5.2 percent (of which: protracted cases 4/ count 4)
  - Twelve months to June 30, 2007: number of members with obligations falling due during the period 146; members with late payments during the period 45; protracted cases count 4
- Remedial measures applied to countries in protracted arrears — excerpts (Table 3 and narrative):
  - Complaints, suspension of voting rights, declaration of ineligibility, and declaration of non‑cooperation are among measures applied depending on duration and persistence of arrears.
  - Example country actions noted: Liberia complaint for suspension of voting and related rights issued on 4/8/02; Sudan lifting of suspension of voting rights on 8/1/00 and subsequent adjustment to complaint formulations; Zimbabwe removed from PRGF‑ESF eligible list on 9/24/01 and full settlement of arrears to the GRA on 2/15/06 led to withdrawal of complaint dated 2/6/04.

*Source: Finance Department (excerpts from IMF document).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/2007/eng/_082207.pdf_