The International Monetary Fund (IMF) - Activities
A. Resources of the IMF
The Fund obtains its necessary financial resources from the accumulated subscriptions made by its members. How much a member government subscribes to the Fund's resources is determined by the quota assigned to that country. As mentioned above, the quota also determines the country's voting strength in the IMF. Furthermore, the quota, which is expressed in SDRs, determines the amounts that the country may draw from the Fund's currency pool, as well as the country's allocations of SDRs.
In determining a member's quota, the IMF considers relevant economic data, including the country's national income, its international reserves, and the volume of its imports and exports.
The method of payment for initial quota subscriptions or increases in quotas was modified when the Second Amendment to the Articles of Agreement went into effect in 1978. Under the original Articles, members were required to pay 25% of their quota in gold and the remainder in their own currencies. Following the Second Amendment, an amount not exceeding 25% of new members' initial quotas, or existing members' increases in quotas, is paid in reserve assets, while the remainder is paid in the members' own currencies.
The Fund is required by its constitution to review its members' quotas at regular intervals of not more than five years and to propose called-for adjustments in quotas. A member may also at any time request an adjustment of its own quota. All quota changes must be approved by an 85% majority of the total voting power.
Several reviews of the adequacy of members' quotas have led to general and selective increases of Fund quotas. A special review in 1958/59 resulted in a 60.7% increase in quotas, which was followed by a 30.7% general increase in 1965 and a further 35.4% general increase in 1970. The 1976 review of quotas was affected by developments in the international monetary system, including the quadrupling of oil prices. As a result of that review, total quotas were increased by 33.6%, to SDR 39 billion, reflecting a doubling of the collective share in total quotas of the major oil-exporting countries. The share of all other developing countries was maintained at its then existing level. The 1978 review provided for a 50.9% general quota increase for most members and additional special increases for 11 members. Consents to increases under this review raised total quotas to SDR 59.6 billion. The 1983 review increased quotas by 47.5%, to SDR 90 billion, and the quotas increased by 50.0% in November 1992 as a result of the Ninth General Review (in 1990).
The Tenth General Review in 1995 did not result in an increase. As of September 1996, total quotas amounted to SDR 145.3 billion (about US $210 billion). In September 1997, the IMF's Executive Board concluded the Eleventh General Review, which resulted in an agreement on an overall increase in quotas of 45%, to SDR 210 billion (about US $283 billion). The IMF stated that the increase reflected changes in the size of the world economy, the scale of potential payments imbalances, and the rapid globalization and liberalization of trade and payments. The quota increase became effective in January 1999. The Twelfth General Review began in December 2001 with the formation of a Committee of the Whole to consider the possible need to increase quotas.
The Fund is authorized under its Articles to supplement its resources by borrowing. In January 1962, a four-year agreement was concluded with 10 industrial members (the Group of 10)—subsequently joined by Switzerland as an associate and by Saudi Arabia under a special arrangement in 1983—by which they undertook to lend to the Fund to finance drawings by participants of the General Arrangements to Borrow (GAB) "if this should be needed to forestall or cope with an impairment of the international monetary system." These General Arrangements to Borrow have been renewed every four or five years, most recently in November 2002.
On 19 January 1983, the ministers of the Group of 10 agreed in principle to enlarge the GAB to SDR 17 billion, from approximately SDR 6.0 billion, and to permit the Fund to borrow under the enlarged credit arrangements to finance exchange transactions with members that are not GAB participants. In addition, the ministers agreed to authorize Swiss participation in the agreement. The amounts of credit arrangements (in millions of SDRs) are as follows: the United States, 4,250; the Deutsche Bundes-bank of Germany, 2,380; Japan, 2,125; France, 1,700; the United Kingdom, 1,700; Saudi Arabia, 1,500; Italy, 1,105; Switzerland, 1,020; Canada, 892.5; the Netherlands, 850; Belgium, 595; and the Riksbank of Sweden, 382.5.
In January 1997, the IMF approved the New Arrangements to Borrow (NAB). The NAB combines with the GAB to provide supplementary resources to the IMF. The amount of the resources available to the IMF under the NAB (which became effective November 1998) and the GAB is SDR 34 billion (about US $45 billion), twice the amount of the GAB alone.
The Fund has also, in the past, supplemented its resources by borrowing, for example, for the oil facility for 1974 and 1975 and for the supplementary financing facility, whose resources of SDR 7,784 billion were borrowed from 14 members or institutions.
B. General Obligations of IMF Members
The economic philosophy of the Bretton Woods Agreement holds that monetary stability and cooperation and the unhampered movement of money, especially in payment of current international transactions, will promote national and international prosperity. This principle is reflected in certain general obligations that countries undertake by accepting the IMF's Articles of Agreement. The Articles favor stabilization measures to help overcome short-term balance-of-payments difficulties, and they discourage exchange controls under normal conditions. The Agreement also enables the Fund to help governments in short-term payments difficulties.
Consultations with members are an essential component of the Fund's work and provide a major instrument for Fund surveillance of members' policies in several key areas.
Article IV of the Articles of Agreement, entitled "Obligations Regarding Exchange Arrangements," allows individual members considerable freedom in the selection of their exchange arrangements, but it also stipulates general obligations and specific undertakings.
In order to help the Fund ensure observance of these obligations through the exercise of "firm surveillance" over exchange-rate policies, members are required to consult with the Fund regularly under Article IV, in principle on an annual basis. These consultations provide an opportunity for detailed review of the economic and financial situation and the policies of members from both the national and international viewpoints. They also help the Fund deal expeditiously with members' requests for the use of Fund resources and for proposed changes in policies or practices that are subject to Fund approval. For the individual member, regular consultations provide the occasion for an external appraisal of policies and for discussion of any special difficulties that may arise from the actions of other members.
Members availing themselves of the transitional arrangements permitted under Article XIV of the Articles of Agreement to maintain multiple exchange rates or other restrictions on current international payments are required to consult annually with the Fund. Article VIII countries have accepted the obligation to avoid such practices. Consultations under Article IV include the regular consultations under Article VIII and Article XIV and are required for all members.
Between annual consultations, there is a supplemental surveillance procedure under which the managing director initiates an informal and confidential discussion with a member whenever he thinks that a modification in the member's exchange arrangements or exchange-rate policies or the behavior of the exchange rate of its currency may be important or may have important effects on other members.
Special consultations with selected countries also supplement regular consultations in connection with the periodic reviews of the world economic outlook undertaken by the Executive Board. The purpose of these consultations is to provide up-to-date knowledge of the economic situation in countries whose external policies are regarded as being of major importance to the world economy.
D. Transactions Between the Fund and Its Members
Use of Resources
Members of the Fund may draw on its financial resources to meet their balance-of-payments needs. As of 30 June 2002, the IMF had credits and loans outstanding to 88 countries for an amount of SDR 66.3 billion (or about US $88 billion). Financial assistance is made available under a number of policies and facilities. Member countries may, for example, use the reverse tranche and the credit tranche, or they may receive emergency assistance. The IMF has set up various facilities for specific purposes—the Compensatory and Contingency Financing Facility (CCFF); the Buffer Stock Financing Facility (BSFF); the Extended Fund Facility; and the Structural Adjustment Facility (SAF), which was superceded by the Enhanced Structural Adjustment Facility (ESAF). (For full descriptions of these policies and facilities, see farther on.).
For any drawing, a member is required to indicate to the Fund that the desired purchase is needed to stabilize its balance-of-payments or reserve position or to deal with adverse developments in its reserves.
When a member draws on the Fund, it uses its own currency to purchase the currencies of other member countries or SDRs held by the General Resources Account. Thus, a drawing results in an increase in the Fund's holdings of the purchasing member's currency and a corresponding decrease in the Fund's holdings of other currencies or SDRs that are sold. Within a prescribed time, a member must reverse the transaction (unless it is a reserve tranche purchase; see farther on) by buying back its own currency with SDRs or currencies specified by the Fund. Usually, repurchases are to be made within three to five years after the date of purchase. However, under the extended Fund facility, the period for repurchases is within four and a half to ten years, and under the supplementary financing facility, within three and a half to seven years. In addition, a member is expected normally to repurchase as its balance-of-payments or reserve position improves.
Reserve Tranche. The difference between a member's quota and the Fund's holdings of that member's currency is referred to as the member's reserve tranche. Purchases in the reserve tranche—a reserve asset that can be mobilized by the member with minimum delay—are subject to balance-of-payments need but not to prior challenge, economic policy conditions, or repurchase requirements. This drawing does not constitute a use of IMF credit, as its reserve position is considered part of the member's foreign reserves, and is not subject to an obligation to repay.
Credit Tranche. Credits under regular facilities are made available to members in tranches (segments) of 25% of quota. For first credit tranche drawings, members must demonstrate reasonable efforts to overcome their balance of payments difficulties. Upper credit tranche drawings (over 25%) are normally phased in relation to certain conditions or "performance criteria."
Policy on Emergency Assistance. The IMF provides emergency assistance to members to meet balance of payments needs arising from sudden and unforeseeable natural disasters and in post-conflict situations. Normally this takes the form of an outright purchase of up to 25% of quota, provided the member is cooperating with the IMF. For post-conflict cases, additional access of up to 25% of quota can be provided.
All requests for the use of the Fund's resources other than use of the reserve tranche are examined by the Fund to determine whether the proposed use would be consistent with the provisions of the Articles of Agreement and with Fund policies.
The criteria used by the Fund in determining whether its assistance should be made available are more liberal when the request is in the first credit tranche (that is, when the Fund holdings of a member's currency are above 100% but not above 125% of the member's quota) than when it is in the higher credit tranches (that is, when the Fund's holdings following the drawing exceed 125% of quota).
A member requesting a direct purchase expects to draw the full amount immediately after approval of the request; under a standby arrangement (SBA), a member may make the agreed drawing at any time during the period of the standby arrangement.
Requests for purchases in the higher credit tranches require substantial justification. Such purchases are almost always made under standby or similar arrangements. The amount available under a standby arrangement in the upper credit tranches is phased to be available in portions at specified intervals during the standby period, and the member's right to draw is always subject to the observance of certain key policy objectives described in the program or to a further review of the situation.
Compensatory and Contingency Financing Facility. In November 1987, the Executive Board began to examine the need to address external contingencies in Fund arrangements and the design of appropriate contingency financing mechanisms. These deliberations resulted in the establishment of the Compensatory and Contingency Financing Facility (CCFF) in August 1988. The CCFF incorporated existing facilities—the Compensatory Financing Facility (established in 1963), which provided financial assistance to members experiencing temporary export shortfalls, and the facility providing compensatory financing for excesses in cereal import costs that were largely attributable to circumstances beyond the members' control. The CCFF also introduced a new element—the external contingency mechanism (ECM). This mechanism gave members with fund arrangements the opportunity to protect themselves from unexpected, adverse external developments.
The compensatory element of the CCFF is designed to provide compensation to member countries experiencing shortfalls in export earnings and/or excesses in cereal import costs The eligibility criteria require that the shortfall/excess be temporary and stem from factors beyond the authorities' control, and that the member have a balance of payments need. In addition, where the member is experiencing balance of payments difficulties beyond the effects of the temporary shortfall/excess, the member is expected to cooperate with the Fund in an effort to address them. The export shortfall (cereal import excess) is calculated as the amount by which a member's export earnings (cereal import costs) for a 12-month period are below (above) their medium-term trend. Other provisions of the CCFF ensure that requests for compensatory financing are met in a timely fashion, in particular that a request cannot be made later than six months after the end of the shortfall year, and that the calculation for the shortfall year may include up to 12 months of estimated data.
The Buffer Stock Financing Facility. In 1969 the BSFF was established to provide assistance to members in connection with their contributions to international buffer stocks of primary products, operating in the context of approved international commodity agreements (ICAs). The BSFF was the Fund's contribution to efforts to stabilize commodity prices, which were seen at the time as excessively volatile, with damaging consequences for the stability of export earnings of developing countries heavily dependent on commodity exports. The BSFF provides support in the context of those ICAs whose objective is the stabilization of international prices through market intervention by buffer stocks, and that satisfy certain participation requirements adopted by the United Nations Economic and Social Council, in particular that they are open to participation of both consuming and producing countries, and that they do not maintain artificially high prices through long-term restrictions of supply. The IMF had, as of December 1999, authorized the use of its resources in connection with buffer stocks of cocoa, tin, sugar, and natural rubber. At that time, all eligible commodity agreements had expired (he last to expire was the 1987 International Natural Rubber Agreement in December 1993): there were no agreements under which drawings under the BSFF could be made. But the Fund has recently been requested to consider whether the International Rubber Agreement (1995) was suitable for BSFF support.
Extended Facility. Under the extended facility, the Fund may provide assistance to members to meet their balance-of-payments deficits for longer periods and in amounts larger in relation to quotas than under the credit tranche policies. For example, a member might apply for assistance under the facility if it has serious payments imbalances relating to structural maladjustments in production, trade, and prices and if it intends to implement a comprehensive set of corrective policies for two or three years. Use of the facility might also be indicated by an inherently weak balance-of-payments position that prevents the pursuit of an active development policy.
Drawings under extended arrangements generally take place over periods of up to three years, although this may be extended to four years.
Structural Adjustment Facility. In response to the particularly difficult situation confronting the low-income members of the Fund, the Executive Board established in March 1986 a Structural Adjustment Facility (SAF) within the Fund's Special Disbursement Account. This facility provided concessional balance-of-payments assistance—in conjunction with the World Bank and other lenders—to low-income countries eligible for IDA loans that were facing protracted balance-of-payments problems and were undertaking comprehensive efforts to strengthen their balance-of-payments position.
In December 1987 the IMF established the Enhanced Structural Adjustment Facility (ESAF). As successor to the SAF, it was similar in objectivity, eligibility and program features, but differed in scope, terms of access, and funding sources. The ESAF was renewed and extended since its creation; in September 1996 the IMF decided to make it a permanent facility, as the centerpiece of the agency's strategy to help low-income countries. It also decided that the IMF's participation in the initiative to lower the debt of the heavily indebted poor countries (HIPCs) would be through special, more concessional ESAF operations. The HIPC Initiative was established in 1996, to reduce the debt burdens of the world's poorest countries. As of April 2002, 27 low-income countries—23 in sub-Saharan Africa—had begun to receive debt relief under the HIPC Initiative.
Poverty Reduction and Growth Facility (PRGF) . In September 1999, the IMF established the Poverty Reduction and Growth Facility (PRGF), as a low-interest lending facility for poor countries, to replace the ESAF. This allowed the IMF to include a more explicit focus on poverty reduction in the context of a growth oriented strategy. These broad objectives were reaffirmed in the review of the PRGF in March 2002.
A country making use of the Fund's resources is generally required to implement economic policies aimed at achieving a viable balance-of-payments position over an appropriate period of time. This requirement is known as "conditionality," and it reflects the principle that balance-of-payments financing and adjustment must go hand in hand.
A comprehensive review of the guidelines for conditionality was undertaken in 1979. These guidelines include the use of consultation clauses in Fund-supported programs, the phasing of purchases, and the injunction that objective indicators for monitoring performance be limited only to those variables necessary to ensure achievement of the objectives of the programs. In addition, the guidelines emphasize the need to encourage members to adopt corrective measures at an early stage of their balance-of-payments difficulties; to recognize that in many cases adjustment will take longer than the period associated with standby arrangements; to provide for the adoption of a flexible approach for the treatment of external borrowing in adjustment programs; and to stress the necessity to pay due regard to the domestic social and political objectives, the economic priorities, and the circumstances of members, including the causes of their payments problems.
Within the context of the guidelines, Fund-supported programs emphasize a number of major economic variables, including certain financial aggregates, such as domestic credit, public sector financial needs, and external debt, as well as some key elements of the price system, including the exchange rate, interest rates, and, in exceptional cases, the prices of commodities that bear significantly upon public finances and foreign trade.
The Fund-supported corrective strategy provides for a reorientation of the economy toward sustained growth and avoids purely deflationary policies that may have a deleterious effect on investment and fail to encourage the required shift of resources to the external sector.
Charges for Use of Resources and Remuneration on Creditor Positions
The Fund applies charges for the use of its resources, except for reserve tranche purchases. A service charge of 0.5% is payable on purchases other than reserve tranche purchases. In addition, the Fund levies charges on balances of members' currencies resulting from purchases. The rate of charge on purchases in the four credit tranches and under the extended Fund facility, the compensatory financing facility, and the buffer-stock financing facility is determined at the beginning of each financial year on the basis of the estimated income and expense of the Fund during the year and a target amount of net income. The average rate of charge on the use of the Fund's ordinary resources as of 20 December 2002 was2.55%, after adjustments for burden sharing, and an average rate of remuneration of 1.82%. Members that use the Fund's borrowed resources pay charges that reflect the Fund's borrowing costs plus a margin.
When the Fund's holdings of a member's currency are reduced below a specified level, the member acquires a creditor position in the Fund on which it earns remuneration (that is, interest). The Fund pays remuneration on creditor positions at a rate determined by a formula based on short-term market interest rates in the United States, the United Kingdom, Germany, France, and Japan.
E. Technical Assistance
Technical assistance is a major activity of the Fund. Staff officials are sent to member countries, sometimes for extended periods, to give advice on stabilization programs, the simplification of exchange systems, the modification of central banking machinery, the reform of fiscal systems and budgetary controls, or the preparation of financial statistics. The Fund collects and publishes a considerable number of statistics supplied by members. As part of its technical cooperation, the Fund established the IMF Institute in May 1964 to coordinate and expand its training program for staff members of finance ministries and central banks. The IMF established the Joint Vienna Institute in the Fall of 1992. In May 1998, the IMF inaugurated its Singapore Regional Training Institute (STI). Additionally, the agency operates other regional training programs. Today, the IMF provides approximately 300 person-years of technical assistance annually to its member countries. In the late 1990s technical assistance projects grew larger and more complex, requiring multiple sources of financing to underwrite costs.
F. Special Drawing Rights (SDRs)
The SDR is an international reserve asset created by the Fund and allocated to its members as a supplement to existing reserve assets. The Fund has allocated a total of SDR 21.4 billion in six allocations.
The last allocation of SDRs in the third basic period was made on 1 January 1981, when a total of SDR 4,052 million was allocated to the 141 countries that were members of the Fund at that time. Similar amounts were allocated in each of the two previous years. The Fund allocates SDRs to its members in proportion to their quotas at the time of allocation. In deciding on the timing and amount of SDR allocations, the Fund considers whether there exists a global need to supplement existing reserve assets, and it takes into account the objectives of the Fund's Articles of Agreement, which call upon Fund members to collaborate with each other and with the Fund with a view to making the SDR the principal reserve asset of the international monetary system.
All 184 member countries of the Fund are participants in the SDR Department and are eligible to receive allocations. They may use SDRs in transactions and operations among themselves, with prescribed "other holders," of which there are now 15, and with the Fund itself. The SDR is the Fund's unit of account, and, increasingly, commercial transactions and private financial obligations are being denominated in SDRs.
Members with a balance-of-payments need may use SDRs to acquire foreign exchange in a transaction with designation—that is, one in which another member, designated by the Fund, provides currency in exchange for SDRs. The Fund designates members to provide currency on the basis of the strength of their balance-of-payments and reserve positions. However, a member's obligation to provide currency does not extend beyond the point at which its holdings are three times the net cumulative allocation that it has received. Fund members and "other holders" may also use SDRs in a variety of voluntary transactions and operations by agreement. They may buy and sell SDRs, both spot and forward, use SDRs in swaps and in settlement of financial obligations, or make donations (grants) with SDRs.
The valuation of the SDR is determined on the basis of a basket of five currencies. Since 1981, the currencies of France, Germany, Japan, United Kingdom, and United States have been included in the five-year reviews since these countries have the largest exports of goods and services. With the introduction of the euro on January 1, 1999, the currency amounts of the deutsche mark and French franc were replaced with the euro. The latest review of the SDR valuation basket was completed in fiscal year 2001. The value of the SDR in U.S. dollar terms is calculated daily as the sum of the values in U.S. dollars of the specific amounts of four currencies (euro, U.S. dollar, Japanese yen, pound sterling), based on exchange rates quoted at noon at the London Market. On 24 December 2002, SDR 1 equaled US $1.34663. The SDR exchange rate is posted daily on the IMF web site http://www.imf.org .
G. Gold Sales by the Fund
The Fund's original Articles of Agreement required members to pay one-fourth of their quota subscription in gold. The establishment of the SDR in 1969 and the Second Amendment to the Articles of Agreement in 1978 virtually eliminated the monetary role of gold from the Articles, although gold still remains an important component in the reserve holdings of member countries. As a result of these developments, the Executive Board decided to sell off a portion of the Fund's gold holdings, beginning in 1976. In May 1980, the Fund completed a four-year gold sales program, through which 50 million oz, or one-third of the Fund's gold holdings at the beginning of the period, were sold. One-sixth of the gold (25 million oz) was sold to members at the former official price of SDR 35 an ounce. Another one-sixth was sold at auction for the benefit of developing countries. Some of the profits from these auctions were used to finance a trust fund, providing concessional balance-of-payments assistance to eligible developing countries. Repayments of these concessional loans form the basic funding for the structural adjustment facility.