Press Release No. 05/94

Press Release: IMF Executive Board Reviews Fund's Income Position and Sets Rate of Charge for FY 2006

April 29, 2005

On April 22, 2005, the Executive Board of the International Monetary Fund (IMF) completed its annual review of the IMF's income position for the fiscal year ending April 30, 2005, and set the rate of charge to borrowers for the fiscal year ending April 30, 2006. ¹

The IMF's Executive Board decided to change the formulation for setting the rate of interest charged to borrowers in the IMF's General Resources Account from a proportion of the Special Drawing Right interest rate to a margin over the SDR interest rate. The SDR interest rate is set weekly on the basis of short-term market rates in major money markets.

In line with the decision, the rate of charge from May 1, 2005 will be set at 108 basis points above the SDR interest rate. In the financial year ending April 30, 2005, the rate of charge was set at 154 percent of the SDR interest rate in the first half of the financial year, and at 136 percent of the SDR interest rate for the remainder of the financial year. The change from a proportion of the SDR interest rate to a margin over the SDR interest rate was made to help simplify and clarify the Fund's financial structure.

The Executive Board also adopted a number of other decisions having a bearing on the IMF's finances in FY 2006, including the maintenance of the system of adding to reserves, burden-sharing for the accumulation of resources in its Special Contingent Account, and continuation of the system of special charges for overdue obligations.

Background

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 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 rate of charge 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. With effect from FY 2006, the rate is set as a margin above the SDR interest rate; previously the rate was set as a proportion of the SDR interest rate. The rate will be 108 basis points above the SDR interest rate for FY 2006. The margin can be adjusted at midyear in light of actual and projected developments in net income.

The 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 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 (SRF) 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 currently total around SDR 5.6 billion (about US$ 8.4 billion).

Resources in the SCA-1 are refundable after all arrears have been cleared but can be refunded earlier by a decision by the IMF. The current balance in the SCA-1 is SDR 1.6 billion (about US$ 2.4 billion), compared to overdue principal of SDR 0.7 billion (about US$1.1 billion).

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, or about US$15 billion).

¹ See Review of the Fund's Income Position for FY 2005 and FY 2006