Public Information Notice: Executive Board Reviews IMF's Income Position

May 22, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On April 21, 2003, the Executive Board of the International Monetary Fund (IMF) conducted its annual review of the IMF's income position and adopted a number of decisions bearing on the IMF's finances for FY 2003 and FY 2004. The IMF's financial year runs from May 1 through April 30. As part of the IMF's ongoing policy of informing the public of its financial activities, the staff paper prepared for the Board's discussion is being published.

Following the Board's discussion of the Fund's income position, Mr. Shigemitsu Sugisaki, the IMF's Deputy Managing Director and Acting Chairman, stated:

"I welcome the decision of the Executive Board to publish the staff paper for the annual income review. This is one more step in enhancing the transparency of the IMF's financial position. The staff paper adds to the already comprehensive information available on the IMF's finances, including the quarterly financial statements prepared in accordance with International Accounting Standards. The decisions adopted by the Executive Board ensure that the IMF's finances will continue to be maintained on a sound and prudent basis."

Executive Board Decisions for FY 2003 and FY 2004

The IMF's Executive Board adopted five decisions on April 21, 2003:

  • Decision No. 1 places SDR 69 million of the net income for FY 2003 in the IMF's Special Reserve and provides that the FY 2003 expense derived from the application of International Accounting Standard 19 (which relates to employee benefits) shall be charged to the Special Reserve.

  • Decision No. 2 sets the rate of interest charged to borrowers from the IMF's General Resources Account in FY 2004 at 132 percent of the SDR interest rate. It also establishes the net income target for FY 2004 at SDR 108 million.

  • Decision No. 3 gives effect to the principles of burden sharing (as described below, to distribute among debtors and creditors the cost of any income forgone from overdue charges and to generate resources for the Special Contingent Account-1, or SCA-1).

  • Decision No. 4 provides that any income from surcharges, less the cost of administering the PRGF Trust, shall be placed to the General Reserve at the end of FY 2004.

  • Decision No. 5 continues the system of special charges on overdue financial obligations to the IMF.


Cost of funds

Like most financial institutions, the IMF generates income to cover its expenses on a "cost plus" basis. The IMF's major cost is the interest it pays to member countries that make foreign exchange resources available to it for lending. Additional costs include the amounts needed to be placed in reserves as a safeguard against adverse financial events and the organization's administrative expenses. To cover these costs, a margin is established between the rate of interest charged to IMF borrowers and the rate paid to the providers of funds. The IMF's costs are lowered by two factors: (a) a fraction of the funds that creditor members make available for lending do not earn interest; and (b) the reserves that have been accumulated over the years (see below) do not carry an interest cost. As a result, and reflecting the cooperative character of the IMF, the rate charged to borrowers is lower than it otherwise would be.

The IMF pays interest to creditor countries at the Special Drawing Right (SDR) interest rate. This provides a market-related return on the resources countries make available to the IMF as the SDR interest rate (which averaged 1.95 percent in the final quarter of FY 2003) is based on short-term rates in the major money markets.


At the beginning of each financial year, the IMF's Executive Board sets the basic rate of interest charged on regular lending so as to achieve an agreed net income target for the year ahead, including the cost of operational and administrative expenses. For example, the basic rate, which is set as a proportion of the SDR interest rate, will be 132 percent of the SDR rate for FY 2004. The specific margin above the SDR rate can be adjusted at midyear in light of actual and projected developments in net income. The IMF also receives income from borrowers in the form of service charges and commitment fees, and special charges are levied on any payments overdue less than six months. At the end of the financial year, the net income is placed to reserves. Any net income in excess of the target is refunded to the members that paid interest charges during the year and any shortfalls are made up in the following year.

The IMF imposes surcharges on high levels of credit to discourage unduly large use of credit, and on Supplemental Reserve Facility (SRF) loans according to the length of time credit is outstanding. Income from surcharges, which is not taken into account in determining the annual net income target, is also added to the IMF's reserves.

Additional Features

Three additional features to this cost-plus approach have been added over the years to handle specific aspects of the IMF's finances.

First, in 1986, a "burden-sharing" mechanism was introduced so that any loss of income by the IMF because of overdue obligations is spread equally among creditor and debtor members. Under this mechanism, the interest rates charged to borrowers and paid to creditors are increased and lowered, respectively. Amounts collected in this way are refunded when overdue interest charges are settled. Additional adjustments to the basic rates of interest charged and paid generate resources for a SCA-1, established specifically to protect the IMF against the risk of loss of principal resulting from arrears. The average adjustment in FY 2003 was on the order of 1/10th of one percent.

Second, since 1999, as part of the IMF's contribution to funding concessional assistance to its poorest members—low-interest PRGF loans and HIPC grants for debt relief—the IMF has absorbed the cost of administering these operations. These administrative costs are instead paid out of surcharge income. As a result, reserves deriving from surcharges increase at a somewhat slower pace than otherwise. The IMF's Executive Board adopted this approach because contributions to the PRGF-HIPC Trust from members fell short of expectations and will review the mechanism in FY 2004.

Third, in 1999-2000, the IMF conducted off-market transactions in gold in order to generate resources that could be used to finance HIPC debt-relief operations. (See News Brief No. 00/21). Gold was accepted as payment for some members' obligations to the IMF. The result of receiving gold, which is not used in IMF lending, rather than currency, was that creditors' positions remained higher than they otherwise would have been. Consequently, the IMF's interest expenses paid to creditors did not decline. To prevent a rise in the interest charged to borrowers, the IMF Executive Board agreed to lower the target for net income to reflect the financial impact of these transactions and the amounts involved are generated under the burden-sharing mechanism described above.


The IMF's reserves (or precautionary balances) consist of the General and Special Reserves and the SCA-1. The net income and income from surcharges are placed to the General and Special Reserves, which totaled SDR 4.3 billion as of April 30, 2003.

Resources in the SCA-1 are refundable after all arrears have been cleared but can be refunded earlier by a decision by the IMF. As of April 30, 2003, the balance in the SCA-1 amounted to SDR 1.4 billion, compared to overdue principal of SDR 0.7 billion.

Reserves provide the IMF with protection against financial risks, including income losses and losses of a capital nature, while the SCA-1 affords an additional layer of protection against the adverse financial consequences of protracted arrears. As a general policy, the IMF Executive Board keeps the pace of accumulation of the Fund's reserves under close review. In November 2002, the Executive Board agreed to build up the precautionary balances with the aim of doubling them and endorsed the present system of accumulation as appropriate.


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