IMF Executive Board Discusses the Adequacy of the Fund’s Precautionary Balances

IMF News, December 16, 2021

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Canonical URL: IMF Executive Board Discusses the Adequacy of the Fund’s Precautionary Balances

Press Release No. 21382, December 16, 2021.
Interim Review of the Adequacy of the Fund’s Precautionary Balances concluded by the Executive Board following the December 13, 2021 Executive Board discussion.
Precautionary balances comprise the Fund’s general and special reserves (except the portion of the Special Reserve attributed to gold sales profits). Prior to its full disbursement in the context of the Sudan arrears clearance operation, balances in the First Special Contingent Account (SCA-1) were also included in precautionary balances.
Review advanced ahead of the standard two-year cycle because of heightened uncertainty linked to the pandemic and the path and timing of the recovery.

Purpose of precautionary balances:
- Provide a buffer to protect the Fund against potential losses from credit, income, and other financial risks.
- Protect the value of reserve assets represented by members’ positions in the Fund and underpin the exchange of assets through which the Fund provides financial assistance.
Risk environment:
- Overall financial risks remain elevated but have not increased significantly since the last review.
- Credit risks are driven by: historically high exposure; significant loan concentration toward the largest borrower, whose repurchases schedule is bunched in the near future; and a sizable share of emergency financing without ex-post conditionality.
Directors’ views:
- Emphasized importance of maintaining an adequate level of precautionary balances to mitigate financial risks and safeguard the Fund’s balance sheet.
- Broad agreement to leave the medium-term target and minimum floor unchanged at this time.
- Some Directors felt raising the medium-term target would have been justified; a few others thought the level could be reduced once the crisis abates.
- Target to be reassessed at the next regular review in about a year’s time.
- Directors asked staff to closely monitor risks.

Medium-term target: SDR 25 billion.
Minimum floor: SDR 15 billion.
Staff assessment:
- Taking into account expected new demand for Fund lending, the SDR 25 billion target remains within the indicative range of the forward-looking measure of average credit outstanding.
- With projected increase in lending income and even after the proposed budget augmentation, the SDR 25 billion target would be reached in early Fiscal Year 2025 under the desk survey scenario for future lending—one year earlier than projected at the 2020 review.
- The minimum floor could be revisited after the review of the Investment Account.

Directors welcomed staff analysis on the role of surcharges as part of the Fund’s risk management framework and their financial implications on members.
Views on surcharge policy:
- Some Directors open to exploring temporary surcharge relief to help borrowing members address pandemic-related health and economic challenges; some suggested reflecting on how best to implement surcharges during pandemic situations.
- A number of Directors did not see a need to review surcharge policies or change their design at this stage, citing overall low total cost of borrowing and the critical role of surcharge income in building risk buffers.
- Most other Directors expressed openness to an appropriately-timed, more holistic review of surcharge policies in the context of the Fund’s income model and overall financial outlook.

Issues discussed: IFRS 9 credit impairment provisioning; income volatility from accounting for pensions revaluations under IAS 19.
Directors broadly supported staff measures to mitigate volatility of precautionary balances caused by IAS 19 pension revaluations.
New approach:
- Replace accounting valuation of net pension-related assets and liabilities with a more long-term economic measure.
- Take a more prudent stance on any economic gains.
- Transition applied prospectively, commencing in FY 2022.
Rationale: reflect precautionary balances’ role as a long-term buffer and reduce volatility in determining precautionary balances, while recognizing that pension-related gains and losses cannot be eliminated for financial reporting under IFRS.

Directors broadly supported keeping the SCA-1 open with a zero balance for the time being.
Staff actions requested:
- Monitor the need and opportunities for further SCA-1 funding and engage the Executive Board as warranted.
- Explore further options for providing funding for the SCA-1 as encouraged by some Directors.
Additional Director concerns:
- Importance of the burden-sharing mechanism and timely completion of the 16th General Review of Quotas.
- With SCA-1 balance depleted, a need to book a provision for credit impairment could potentially arise; Directors emphasized the Executive Board should be informed ex-ante.

Source: IMF Press Release No. 21382, December 16, 2021.