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Financial
Organization and Operations of the IMF
Members'
Quotas
General
Arrangements to Borrow (GAB)
New
Arrangements to Borrow (NAB)
Concessional
Financing Through ESAF
Fund
Rates
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How
We Lend
September 5, 1999
What are the sources of IMF funds? How does the IMF lend money? Where
does the money go, and what interest rate does the IMF charge? This fact
sheet answers these and other questions regarding the conduct of IMF financial
operations.
What are the Sources of IMF Finance?
The IMF is a cooperative institution—in some ways like a credit union—which
derives the bulk of its financial resources from its members' subscriptions
(called quotas). Generally speaking, these resources are available for
temporary lending to any member that experiences difficulties in paying
its import bills and/or servicing its foreign debt, and that agrees to
undertake reforms to correct the imbalances that underlie the problem.
Members' quota subscriptions constitute the largest source of
funds at the IMF's disposal. Members pay 25 percent of their quota subscriptions
in "acceptable" (hard) currencies or in SDRs (a special reserve asset created
by the IMF), and the rest in their own domestic currency. A review of quotas
is conducted every five years to determine whether they need to be adjusted
in light of the growth of the world economy and changes in individual countries'
economic positions. The quota increase under the latest General Review
became effective in January 1999 and the payments for the bulk of the quota
increase were received by the end of February 1999, bringing total quotas
to about $300 billion.
In addition to quotas, the IMF can draw on lines of credit that have
been established since 1962 with 11 industrialized countries. These credit
arrangements, which are called the General Arrangements to Borrow (GAB),
currently amount to about $23 billion. An additional $2 billion is available
through an associated agreement with Saudi Arabia. In July 1998, the GAB
were activated for $8.4 billion, of which only $1.9 billion was drawn.
Following the quota increase, the GAB activation was canceled and the borrowed
amount was repaid in early March 1999.
In January 1997, the IMF's Executive Board decided to supplement the
GAB with a new set of credit lines with 25 member countries, called the
New Arrangements to Borrow (NAB). This effectively doubled—to $46
billion—the total amount of credit potentially available to the IMF. The
IMF activated the NAB for $12.7 billion in December 1998 to finance its
lending to Brazil, of which $4.1 billion was disbursed. As with the GAB,
the NAB borrowing was repaid by the Fund in March 1999 following the payments
for the quota increase noted above.
The IMF can also borrow—and has in the past borrowed—from member governments
or their monetary authorities for specific programs of benefit to its members.
Separately, acting as Trustee, the IMF also manages funds provided partly
through sales of gold in the late 1970s and partly in various forms by
its members for the purpose of helping the poorest developing countries.
These resources are lent out at a concessional interest rate of 0.5 percent
through the Enhanced Structural Adjustment Facility (ESAF).
How Does the IMF Lend?
IMF lending transactions (except for those under the ESAF) are not loans
per se. Rather, IMF transactions are exchanges of one type of monetary
asset for another, i.e., a member with a weak balance of payments position
and in need of hard currencies will exchange some of its own currency for
the currencies of members with strong balances of payments. In IMF parlance,
the country seeking assistance is said to make a "purchase" of the stronger
currencies it needs with an equivalent amount of its own currency. In time
the "borrower" has to buy back ("repurchase") its own currency with hard
currencies. This purchase-repurchase scheme explains why, from an accounting
perspective, the IMF's total resources do not vary as a result of Fund
credit extended or repaid; only the composition of its currency holdings
changes.
Which Currencies are Used in IMF Transactions?
The IMF's Executive Board decides periodically which currencies can be
used when a member makes a purchase or a repurchase, based on an assessment
of the strength of various currencies. The quarterly currency budget identifies
those members with strong balance of payments and reserve positions, and
sets the maximum amounts of each currency that can be used to meet expected
financing by the IMF for the coming quarter. In November 1998, the IMF
changed the method of allocating currencies in the quarterly budget so
that the share of each member is now determined in proportion to its share
in the quotas of the strong currency members. (Previously, shares had been
allocated mainly, but not exclusively, in proportion to members' foreign
exchange reserves.)
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IMF Lending: A Sample Transaction
Assume a country seeks the financial assistance of the IMF and that
the IMF decides to use U.S. dollars to provide the assistance. The IMF's
use of U.S. dollars results in an exchange of the borrowing ("purchasing")
member's own currency for U.S. dollars; to repay the IMF, the purchaser
(borrower) will be obliged to buy back ("repurchase") its own currency
from the IMF. A "purchase" of U.S. dollars is recorded as a debit to the
IMF's U.S. dollar account at the New York Federal Reserve Bank, and as
a credit to the account of the borrowing member. As a result, the IMF's
holdings of U.S. dollars are lower than the U.S.'s quota subscription and
the United States assumes a creditor position with the IMF; the borrower
correspondingly is in a debtor position. |
Where do IMF Funds Go?
The IMF provides general balance of payments assistance. It does not provide
financing for specific projects, which is a typical activity of development
banks. The conditions for IMF assistance are subject to regular reviews
by the IMF's Board. Assistance is typically made available in installments
linked to the observance of specific conditions or "performance criteria"
that must be satisfied before the next installment is released.
When a country purchases foreign exchange from the IMF with its own
currency, it deposits its own currency in an account that the IMF maintains
at the member's central bank. The foreign exchange provided by the IMF
is deposited in an account maintained by the borrowing member in the country
whose currency is being used, and becomes part of the international reserves
of the recipient country, freely available for use by that country in the
same manner as all other international reserves. Therefore, there is no
meaningful way in which the use of IMF resources can be tracked, as might,
for example, lending by a development bank for a specific project.
What Interest Rates does the IMF Charge?
If a member makes a purchase from the IMF, it pays various charges to compensate
the members whose currencies it is borrowing and to cover the IMF's operational
expenses. The interest rate charged is linked to a weighted average of
market interest rates on short-term instruments in the capital markets
of France, Germany, Japan, the United Kingdom, and the United States. This
rate varies from week to week. Presently:
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The borrower pays about 1/4
of 1 percent in a (refundable) commitment fee, 1/2
of 1 percent of the amount borrowed in service charges, and interest charges
at a variable rate, currently around 3.60 percent, for the use of the IMF's
regular (non-concessional) lending facilities. During the first year following
the first drawing of resources under the Supplemental Reserve Facility
and the Contingent Credit Lines (CCL), a member will pay a surcharge of
300 basis points above the rate of charge on regular IMF drawings. The
CCL surcharge increases by 50 basis points every six months thereafter
up to a maximum of 500 basis points.
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An IMF creditor country earns interest whenever other members borrow its
currency from the IMF. The rate of remuneration is equivalent to the SDR
interest rate, which was 3.45 percent as of August 30, 1999.
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