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Press Release: IMF Executive Board Reviews Fund's Income Position and Sets Rate of Charge for FY 2005
May 25, 2004
The Executive Board of the International Monetary Fund (IMF) has completed its annual review of the IMF's income position for the fiscal year that ended April 30, 2004, and has set the rate of charge to borrowers for the fiscal year ending April 30, 2005.
As a result of the review, the Executive Board decided to continue for FY 2005 with the current system of setting the basic rate of interest charged to borrowers in the IMF's General Resources Account. The basic rate was set at 154 percent of the Special Drawing Right interest rate for FY 2005, up from 132 percent in FY 2004. In line with the decision, the basic rate of charge effective May 1, 2004 was set at 2.49 percent. The basic rate of charge is a floating interest rate, as the SDR interest rate (on which it is based) is set weekly on the basis of short-term market rates in major money markets.
The Executive Board also adopted a number of other decisions bearing on the IMF's finances in FY 2005, including the maintenance of the system of adding to reserves, burden-sharing for the accumulation of resources in its Special Contingent Account (SCA), and the continuation of the system of special charges for overdue obligations:
• 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. The IMF pays interest to creditor countries at the Special Drawing Right (SDR) interest rate, which is based on short-term rates in major money markets. Additional costs include the amounts needed to be placed in reserves as a safeguard against adverse financial events and to assure the continued financial viability of the institution. 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.
• Interest and Charges
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 cover the cost of operational and administrative expenses and to achieve an agreed net income target for the year. The basic rate, which is set as a proportion of the SDR interest rate, will be 154 percent of the SDR rate for FY 2005. The specific margin above the SDR rate can be adjusted at midyear in light of actual and projected developments in net income.
The basic rate of charge is adjusted to cover any loss of income by the IMF through burden sharing which shares the financial consequences of overdue obligations 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 manner are refunded when overdue interest charges are settled. Additional adjustments to the basic rates of interest charged and paid generate resources for the SCA-1, established specifically to protect the IMF against the risk of loss of principal resulting from arrears.
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. In addition, the IMF imposes surcharges on high levels of credit to discourage unduly large use of credit, and on Supplemental Reserve Facility 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.
• Reserves
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 5.1 billion as of April 30, 2004.
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, 2004, the balance in the SCA-1 amounted to SDR 1.5 billion, compared to overdue principal of SDR 700 million.
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 potential adverse financial consequences of overdue principal. In November 2002, the Executive Board agreed to build up the precautionary balances with the aim of doubling them (to SDR 10 billion) and endorsed the present system of accumulation as appropriate. During its February 2004 discussion on financial risk in the IMF, recognizing that credit risk to the IMF stems mainly from large arrangements with middle-income countries, the Executive Board reconfirmed as broadly appropriate the SDR 10 billion target. The Executive Board also agreed to keep the level of precautionary balances and the pace of their accumulation under close review.
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