Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
July 6, 2009
The IMF is ramping up its financial resources to be able to play a strong role in resolving the current crisis.
Tweedie on IMF plan to issue notes equivalent to bonds: “This is something we have never done before; so we are breaking new ground” (IMF photo)
IMF FINANCIAL RESOURCES
IMF Survey online spoke to IMF Finance Director Andrew Tweedie about the action being taken across a broad range of issues to revamp the Fund’s finances so that it is better placed to help member countries. This is an edited transcript of the interview.
IMF Survey online: With the crisis still ongoing, what’s the main priority for IMF finances?
Tweedie: An immediate priority is to ensure that the Fund has adequate resources to play its role in helping to resolve the current crisis. The Managing Director had proposed in January a doubling of our pre-crisis resources—an increase of $250 billion. The G-20 summit and International Monetary and Financial Committee in April gave an important endorsement of that proposal, agreeing to an immediate increase of $250 billion and a subsequent trebling of our resources through an expanded New Arrangements to Borrow (NAB). They also supported a doubling of our concessional lending resources.
The immediate goal is to make these endorsements concrete, and to do that we are working on several parallel tracks. First, we are working on bilateral borrowing arrangements, because we can move quickly to get them in place. We already have agreements with Japan, Canada, and Norway, and the agreement with France, which would be the first with a member of the European Union, is currently with the Board. We hope to finalize agreements with other EU members and Switzerland over the summer. We are also planning to issue notes (equivalent to bonds) to members for the first time in the Fund’s history.
IMF Survey online: How would the note issuance work?
Tweedie: The Executive Board has just approved the framework for issuing these securities. The notes would be denominated in Special Drawing Rights, the Fund’s unit of account, with an initial maturity of three months, extendable to a maximum of five years.
Under the framework, members may sign purchase agreements up to individually agreed maximum levels. Several members have expressed their interest in buying IMF paper so far, with China signaling its intention to invest up to $50 billion while Brazil and Russia have proposed purchases of up to $10 billion each.
The Fund could begin issuing notes once a purchase agreement has been finalized, and the notes would be issued at times when additional resources are needed for a loan disbursement. Once purchased by member governments, or their central banks, the notes would be transferable within the official sector, which includes all members and their central banks, and also certain multilateral entities such as regional development banks. But the notes would not be traded on private markets, unlike, for example, the bonds issued by the World Bank.
IMF Survey online: What would be the rate of interest?
Tweedie: The notes will pay interest quarterly based on the average SDR interest rate over the previous quarter. Financially, the terms of the notes are equivalent to those of bilateral loans, but they have the added advantage of being in the form of a standard note that is readily tradable within the official sector. This may be attractive to a number of countries that wish to invest part of their reserves in IMF securities. This is also something we have never done before; so we are breaking new ground.
The second broad track we are pursuing on Fund resources is to expand and increase the flexibility of the NAB, which currently has 26 members and totals about $50 billion. The G-20 endorsed an increase of up to $500 million in the NAB, and an expansion to include other large emerging market countries. Of course, the recent approval by the U.S. Congress to raise the U.S. contribution by up to 75 billion SDRs (about $100 billion) is a critical element in reaching that goal, and many other members have signaled their support for expanding the NAB.
IMF Survey online: How would you make the New Arrangements to Borrow more flexible?
Tweedie: Currently the NAB has quite a cumbersome approvals process that needs to be invoked on a loan-by-loan basis, which is not well adapted to a crisis situation. Instead, we are proposing that approvals could be made for a pre-specified period when there is a need to supplement the Fund’s resources.
"An immediate priority is to ensure that the Fund has adequate resources to play its role in helping to resolve the current crisis."
The idea is that many of the bilateral agreements we are negotiating now would eventually be brought together in the multilateral NAB. So another way in which we are thinking to make the NAB more flexible is to allow notes to be issued under the NAB, to help enable both note purchase agreements and bilateral loans to eventually fold into a larger NAB.
These changes would make the NAB a more effective tool for managing crises, but they will not alter its fundamental characteristic, which is as a backstop to quota resources. In other words, it would continue to be used only rarely when the Fund's quota resources are not sufficient to meet the needs of members.
IMF Survey online: What about lending to poor countries?
Tweedie: The third parallel track we are working on is concessional financing. The G-20 leaders also endorsed a doubling of our concessional lending capacity, with particular emphasis on meeting needs associated with the crisis in the next 2 to 3 years. So we are looking at proposals for how to finance that.
We will need both loan resources and subsidy resources, because our concessional lending takes place off the Fund’s balance sheet through the PRGF-ESF Trust. Traditionally, loan resources are easier to raise than subsidy resources, but we need both, so we are beginning to talk with members who might be willing to provide us with these resources. As concerns loan resources, to finance expanded lending through about 2014 we need to raise about 9 billion SDRs (some $13½ billion); for the same period, we will also need close to SDR 3 billion (about $4½ billion) in subsidy resources.
IMF Survey online: How will you raise the money to subsidize the loans?
Tweedie: There are a number of possibilities: one that the G-20 has asked us to look at is the scope for using additional resources from the planned sale of IMF gold that will be used to establish an endowment as part of a new income model for the Fund. We are exploring whether that could be done in a manner that is consistent with the new income model that the membership endorsed in 2008. This is important to safeguard the IMF’s financial integrity by ensuring that we have adequate income to fund our operations. We will also need to look to other sources, including bilateral subsidy contributions, which are traditionally important though we recognize will be more difficult to raise at present given the global crisis.
In terms of sequencing, the first priority is to agree on the framework for increasing the Fund’s concessional lending capacity, including the share of resources linked to gold receipts. Once that is agreed, which we would hope could be done in July, we would then be in a position to bring to the IMF Executive Board a paper with a formal decision on the sale of gold. That paper will also lay out the proposed gold sales modalities, consistent with guidelines previously agreed by the Board. The key principle is that the Fund should not do anything that would disrupt the gold market. Related to this, we also plan to bring to the Board in the summer a first paper on broadening the Fund’s investment mandate that would allow the proceeds of the gold sale to be invested in a broader range of assets than is possible at present.
IMF Survey online: Many people would ask why the Fund needs a new income model now because we are earning revenue from lending.
Tweedie: There are two main reasons. One is that, while the IMF is lending heavily now, this is likely to be temporary. The Fund needs to have in place an income model that is sustainable not just when the world is in a crisis but also in more normal times. Second, the Fund does a lot of things other than lend. It provides important public goods in the form of surveillance and capacity building. The principle underlying the new income model was that these functions should be financed broadly by the whole membership.
IMF Survey online: How does the allocation of SDRs impact on the Fund’s finances?
Tweedie: Two SDR allocations are envisaged in the coming months. The Board recently discussed a general allocation to all members in proportion to their quotas (about 75 percent of quota) that would total $250 billion, which was supported by G-20 leaders to increase global liquidity. A Board decision is expected in coming weeks on submitting this proposal to the Fund’s Board of Governors, and the allocation could then proceed if the Board of Governors approves it by at least an 85 percent majority. In addition, we should soon be able to move ahead with the special allocation of SDRs provided for by the Fourth Amendment of the Fund’s Articles, which is a further $32 billion that is designed to make SDR allocations more equitable, especially for members who have not previously received an allocation.
"The Fund needs to have in place an income model that is sustainable not just when the world is in a crisis but also in more normal times."
A key point regarding SDR allocations is that they do not increase the Fund’s resources available to lend, rather they increase members’ own reserves directly, which will help smooth the need for economic adjustment in the current crisis. At the same time, the Fund is the administrator for the SDR system, and therefore we need to ensure the liquidity of the SDR during this large allocation. To do that we are engaging actively with members to encourage broader participation in voluntary standing buy-sell arrangements for SDRs, through which transactions in SDRs have been conducted for over two decades.
Another element of the G-20 agreement was that the Fund should bring forward the timetable for the next general quota increase. The next general review was originally scheduled to be completed by 2013. The agreement now is that it would be completed by January 2011, two years ahead of schedule, so this is a very accelerated timetable. This is also important, because the general quota review provides an opportunity to increase the Fund’s general resources and would also provide scope for a further rebalancing of quota and voting shares toward dynamic emerging markets and other economies. Initial work is under way to update the quota database for all 186 member countries, and the first Board discussion is expected in September.
Comments on this article should be sent to imfsurvey@imf.org
