Journal Issue

New arrangements: Borrowing supplements IMF’s ordinary resources

International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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The IMF’s ordinary resources derive from its members’ quota subscriptions. When its resources are low relative to member countries’ demand for their use, the IMF is authorized to borrow to supplement those resources. To date, the IMF has borrowed only from official sources, such as governments, central banks, and the Bank for International Settlements, but it is also authorized to borrow from private sources. The borrowing agreements in place are the General Arrangements to Borrow (GAB), established in 1962, and the New Arrangements to Borrow (NAB), which took effect in November 1998.

Under the GAB, 11 industrial countries or their central banks are prepared to lend to the IMF specified amounts of currencies under special circumstances at market-related rates of interest. Established amid concerns about the adequacy of official sources of international liquidity and the disruptive effects of short-term capital movements, the GAB have been revised and renewed several times, most recently for the five years beginning December 26, 1998. The GAB participants are Belgium, Canada, the Deutsche Bundesbank, France, Italy, Japan, the Netherlands, the Sveriges Riksbank, the Swiss National Bank, the United Kingdom, and the United States. The IMF also has an associated arrangement with Saudi Arabia with similar terms. The potential amount of credit available to the IMF under the GAB currently totals SDR 17 billion, with an additional SDR 1.5 billion available under the arrangement with Saudi Arabia.

Loans are made available to the IMF to help finance purchases by GAB participants when such financing is needed to “forestall or cope with an impairment of the international monetary system.” Stricter criteria are in place for nonparticipants: drawings must be in connection with an IMF-supported adjustment program under a Stand-By or an Extended Arrangement (or an upper credit tranche drawing), and the IMF must be deemed to have inadequate resources to meet actual and expected requests for financing. In July 1998, the GAB participants agreed to lend the IMF SDR 6.3 billion to provide additional support for Russia’s adjustment program. This was the first activation of the GAB in 20 years and the first time it had been used for a nonparticipant.

Following the Mexican financial crisis in December 1994, it became clear that substantially more resources might be needed to prevent or cope with future financial emergencies. By approving the New Arrangements to Borrow, an agreement between the IMF and 25 member countries and institutions, the Executive Board strengthened the IMF’s ability to borrow. The new arrangements do not replace the GAB; all GAB participants are also participants in the NAB. NAB credit lines are available through the IMF to NAB participants and nonparticipants under circumstances similar to those under the GAB. The facility of first and principal recourse is the NAB unless a GAB participant requests the use of IMF resources, in which case either facility may be called upon. The total amount of resources available to the IMF under the two arrangements combined is SDR 34 billion (about $46 billion). In December 1998, the NAB participants agreed to lend the IMF SDR 9.1 billion to help finance a Stand-By Arrangement for Brazil. As of April 30, 1999, the outstanding amounts under the GAB and the NAB had been repaid, and the activations for financing the arrangements for Russia and Brazil were canceled.

Operational budget

The IMF makes its resources available to member countries through its quarterly operational budget, which specifies the amounts of SDRs and currencies the IMF expects to use in its financial operations and transactions during the relevant budget period. The selection of currencies included in the budget is determined by the strength of members’ balance of payments and reserve positions. Thus, “strong” members make foreign exchange available to members with weak balance of payments positions in need of external financing. The IMF may draw on the currencies of a wide range of members—advanced, developing, and transition—which underscores the IMF’s cooperative character and the revolving nature of its resources. In return for the use of their currencies, members receive a liquid claim on the IMF, which earns a market-related rate of return.

The Executive Board establishes guidelines for the preparation and implementation of the operational budget. In November 1998, it reviewed the guidelines governing which currencies would be used in transfers (drawings) and receipts (repayments) under the operational budget. Following the review, the Board decided that currencies should be allocated on the basis of IMF quotas rather than gross international reserves, which had played a central role in the allocation system since the 1960s.

The sharp expansion of IMF credit over the previous 18 months had strained the reserve-based system, leading to wide differences in members’ contributions to the financing of IMF operations. In shifting to a quota-based system, the Board was guided by the need for a criterion that would be objective and uniform across countries. Thus, currencies for transfers would be allocated on the basis of members’ quotas and, for receipts, would be based on the ratio of members’ positions in the IMF to their quotas. The latter change would bring the ratio of each member’s position in the IMF to its quota close to the average ratio for all members included in the operational budget.

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