IMF Executive Board Discusses the Adequacy of the Fund’s Precautionary Balances
IMF News, April 4, 2024
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- Published: April 4, 2024
Background and assessment framework
- Review concluded the 2024 Review of the Adequacy of the Fund’s Precautionary Balances; review took place somewhat ahead of the standard two-year cycle in view of the imminent attainment of the current indicative medium-term target of SDR 25 billion.
- The Fund’s precautionary balances consist of the general and special reserves and serve as a buffer against potential losses from credit, income, and other financial risks; they help protect the value of reserve assets represented by member countries’ positions in the Fund and underpin the exchange of assets through which the Fund provides financial assistance.
- The review was based on the assessment framework established in 2010, which:
- Uses an indicative range for precautionary balances linked to a forward-looking measure of total IMF non-concessional credit to guide adjustments to the medium-term target over time.
- Takes into account the macroeconomic environment, characteristics of Fund lending, and the Fund’s financial and operational risks.
- Allows for judgement and Board discretion in setting the target based on a broad range of factors affecting adequacy.
Executive Board assessment and judgment
- Directors welcomed the opportunity to review precautionary balances following the last review in December 2022 and stressed maintaining adequate precautionary balances as a key element of the Fund’s multilayered risk management framework.
- Directors agreed the current transparent and rules-based framework adopted in 2010 remains broadly appropriate and emphasized the important role of judgement and Board discretion.
- Directors noted methodological evolution and enhancements to the framework, including:
- Allowing judgemental consideration of commitments under precautionary arrangements.
- Development of a model-based quantitative measurement of credit risks to inform the Board’s judgement.
- Directors observed that precautionary balances have continued to increase and are expected to reach the current medium–term target of SDR 25 billion by the end of FY2024, for the first time since the introduction of the framework.
- Directors noted the attainment will be ahead of schedule and saw this as an opportunity to review policies related to the pace of accumulation of precautionary balances, including the surcharges policy; some Directors saw merit in considering ways to utilize excess precautionary balances accumulated above the target, including to address challenges faced by low-income countries.
- Directors welcomed that coverage metrics have continued to strengthen despite Fund lending in response to multiple shocks remaining near historical peaks.
Risk assessment and financial position
- Directors concurred that financial risks remain high but are broadly unchanged from the last review, taking into account strengthened risk mitigants.
- Measures of credit risk in the lending portfolio have generally increased reflecting a more challenging economic and financial landscape; likelihood of arrears has somewhat risen, albeit remaining at considerably low levels.
- Credit concentration risks and near-term bunching of repurchases have eased slightly from high levels.
- Commitments under precautionary arrangements have declined.
- Capacity of the burden sharing mechanism has increased.
- Medium term operational income remains strong but subject to concentration risk.
- Investment risks are elevated, though the medium-term outlook for investment returns has improved.
Decisions, targets, and scenarios
- Most Directors concurred with retaining the current medium-term target for precautionary balances of SDR 25 billion; a few Directors favored raising the target.
- Directors recognized the expected upward shift in the trajectory of Fund credit; the target is expected to remain within the indicative range of the forward-looking credit measure:
- Above its mid-point in the desk survey demand scenario.
- Closer to the lower bound in the adverse scenario.
- A few Directors were skeptical of the assumption of only a partial drawdown on precautionary arrangements under the adverse scenario.
- Directors supported increasing the minimum floor for precautionary balances from SDR 15 billion to SDR 20 billion, citing:
- Need to protect against an unexpected rise in credit or deterioration in credit risks and to ensure sufficient investment income.
- Justification from higher and longer lasting credit peaks and higher and more volatile commitments.
- Role of investment income from precautionary balances as an important source of income diversification to stabilize Fund reserves and income during periods of lower Fund credit.
Policy recommendations and next steps
- Maintain the current target of SDR 25 billion (majority view), with consideration by some Directors of raising the target.
- Increase the minimum floor for precautionary balances to SDR 20 billion (supported).
- Review policies related to the pace of accumulation of precautionary balances, including the surcharges policy, given earlier-than-expected attainment of the target.
- Consider possible uses of excess precautionary balances accumulated above the target, including support for low-income countries (noted by a number of Directors).
- Continue close monitoring of the adequacy of precautionary balances to ensure the Fund remains financially strong amid large global uncertainty.
- Maintain the biennial review cycle, with earlier reviews if developments materially affecting adequacy occur.
Summary of Executive Board views expressed during the March 20, 2024, Executive Board discussion on the “Review of the Adequacy of the Fund’s Precautionary Balances.”