U.S. Congress authorized, appropriated expansion of its credit arrangement with the IMF by about $100 billion (photo: Newscom)
GLOBAL ECONOMIC CRISIS
Adoption of the legislation provides the U.S. administration with the necessary domestic authority to move ahead in several key areas affecting the International Monetary Fund, including:
• More funding for the IMF to help tackle the global crisis under an expanded borrowing arrangement. The United States has committed to increase its credit line by up to an additional $100 billion to the IMF.
• Reform of country representation at the IMF, including greater representation (quotas) for dynamic emerging markets and enhanced voice and participation for low-income countries.
• Go-ahead for the so-called “fourth amendment,” a one-time allocation of Special Drawing Rights (SDRs), an international reserve asset created by the IMF in 1969 to supplement the official reserves of member countries.
• Providing expanded investment authority to the IMF as a key part of a new income model to finance its activities, making it less dependent on earning revenue from interest paid on loans.
• Vote on a proposal for limited gold sales by the IMF, consistent with the agreed framework for the Fund’s new income model.
The legislation also urges the use of Fund resources to leverage additional concessional assistance to low-income countries.
U.S. action key to implementing IMF reforms
IMF Managing Director Dominique Strauss-Kahn welcomed the approval by the U.S. Congress. “This is a significant step forward that will help the IMF in its efforts to respond to the global financial crisis and also to strengthen the governance and operations of the institution. The decision demonstrates the strong commitment of the United States to a well-governed and well-resourced IMF and, more broadly, to a multilateral approach to resolving global economic and financial challenges,” he said in a statement.
“It represents important progress in implementing the proposals put forward by the G-20 leaders, and the IMF looks forward to continue working with its membership to fulfill its mandate and to assist countries expeditiously and effectively in their efforts to weather the global financial crisis.”
U.S. action is critical for many of the issues related to IMF reform and enhanced funding. For several of these measures to be approved, an 85 percent majority of total voting power is needed; the United States has a voting power of 16.77 percent. In particular, this majority is needed for amendments to the IMF’s Articles of Agreement (acceptance by at least two-thirds of members accounting for at least 85 percent of total voting power) and the decision on gold sales (the IMF’s 24-member Executive Board must approve by at least 85 percent of the total voting power).
The legislation relating to the IMF was included by the U.S. Senate in the Supplemental Appropriations Act for fiscal year 2009. After conference reconciliation on June 4 by House and Senate appropriators, the final Supplemental Appropriations Act 2009, including the package of measures related to the IMF, was passed by the House on June 16 and the Senate on June 18.
Expanding the IMF’s resources to combat crisis
In April, the Fund’s policy steering group, the International Monetary and Financial Committee (IMFC), backed proposals to greatly expand the lendable resources of the institution to help combat the crisis. At its April 2 summit in London, the Group of Twenty (G-20) industrial and emerging market countries had called for a tripling of the Fund’s pre-crisis lending resources to $750 billion, initially through bilateral contributions from members and later through an expanded and more flexible New Arrangements to Borrow (NAB), the institutional framework through which the IMF can rapidly raise money from governments or their central banks, if supplementary resources are needed.
As part of the approved legislation, Congress authorized and appropriated an expansion of the U.S. NAB credit arrangement with the Fund by up to about $100 billion and authorized the U.S. Treasury to instruct its Executive Director at the IMF to consent to amendments of the NAB to expand its membership and make it more flexible to use in managing financial crises. Twenty-six members and their institutions are now particpants of the NAB.
Currently, the IMF can raise about $50 billion through the arrangement, with the U.S. share being about $10 billion. The envisaged increase in the NAB of up to $500 billion will ensure that the Fund has the resources it needs to effectively respond to the financial crisis and fulfill its purpose of providing supplemental resources in case of threats to the international monetary system.
Separately, Japan has already contributed a $100 billion credit line to bolster IMF resources, and agreements with Norway and Canada in the amount of $4.5 billion and $10 billion, respectively, are expected to be effective shortly. A number of other governments have made commitments, including the European Union members pledging €75 billion (about $100 billion) and Switzerland about $10 billion. Furthermore, several countries, including Brazil, China, and Russia, have expressed an intention to invest in notes issued by the IMF that would enable them to contribute to an increase in IMF resources, with their combined interest currently totaling up to $70 billion.
Discussions are being held among NAB participants and potential participants and a formal proposal for an amendment and expansion of the arrangement is expected later this summer, according to Fund officials.
Improving governance at the IMF
In April 2008, the IMF’s Board of Governors approved a Resolution on Reform of Quota and Voice in the Fund that included targeted quota increases for members aiming to increase representation of dynamic economies based on a new quota formula. A country’s quota largely determines its voting power and influences the level of its access to loans, and is also the primary source of the Fund’s lending resources.
Quota reform is part of a larger effort to reform the IMF’s governance structure, by ensuring voting weights better reflect a country’s relative position in the world economy and to take account of recent changes in the global economy. The U.S. Congress authorized the U.S. Governor of the Fund to agree to amendments to the Articles of Agreement relating to voice and participation. The amendments provide for a tripling of basic votes and an additional Alternate Executive Director for large constituencies, which in the current circumstances will benefit the two sub-Saharan chairs on the Executive Board. The effect of an increase in basic votes is to strengthen the representation of smaller economies, and the amendment also protects the share of basic votes going forward.
Congress also authorized the U.S. government to agree to an increase in its quota payment to the Fund by around $8 billion, which will allow it to maintain its current voting share within the organization of 16.77 percent.
The G-20 has pressed for stepped up reform of governance at the Fund, going beyond the April 2008 package. In response, the IMF plans to begin work on the 14th General Review of Quotas before the 2009 Annual Meetings, with a view to completing the work by January 2011, almost two years ahead of schedule.
SDR allocation
Under its Articles of Agreement, the IMF may allocate SDRs—reserve assets issued by the IMF—to members that participate in the SDR Department in proportion to their IMF quotas. However, some members who joined after 1981 have not received an allocation of SDRs as there have been no allocations since then. An amendment to the articles approved in 1997 seeks to correct that through a special one-time allocation. Previously, 132 members with 78 percent of total voting power had accepted the proposed amendment, so acceptance by the U.S. Congress paves the way for this provision to go into effect, as the amendment would have the necessary 85 percent approval. The special allocation provides the equivalent of $33 billion in SDRs across the membership, including about $5 billion for Central and Eastern Europe.
Separately, the IMF is also seeking to implement a general allocation of SDRs before the October IMF Annual Meeting in Istanbul of $250 billion. This would also provide low-income countries an extra $19 billion in international reserves.
Expanded investment authority
With 98 percent of the voting power, the IMF’s Board of Governors in May last year endorsed an amendment to expand the Fund's investment authority, a key element of a proposed new income model for the Fund that will allow the institution to generate revenues from a variety of sources. This will make the IMF less reliant on earning revenue from its lending.
As part of the legislation, the U.S. Congress authorized the acceptance by the United States of the proposed amendment. A key element of the model is to create an endowment through the limited sale of some IMF gold.
Selling a limited portion of IMF gold
Congress authorized the U.S. Treasury to instruct the U.S. Executive Director to vote to approve the sale of up to 12.96 million ounces of the Fund’s gold, which is the gold the Fund has acquired since the second Amendment of the Fund’s Articles of Agreement in April 1978. These sales would be used to create an endowment, as part of the implementation of a new income model that was endorsed by the IMF’s Executive Board last year, together with expenditure reductions, to put the Fund’s finances on a sustainable basis in the medium term.
Congress stipulates that such sales need to be handled according to guidelines agreed by the Executive Board in April 2008 to avoid disrupting the world gold market. The Fund has a total holding of 103.4 million ounces (3,217 metric tons) of gold at designated depositories, and these sales would represent one-eighth of its total holdings.
During the summer, the Executive Board will consider modalities for the gold sales, and could take a decision to sell gold at this time.
Help for world’s poorest
The IMF has been forthright in warning about the impact of the current global economic crisis on the developing world and has called for increased resources so that countries can better respond to the crisis—especially to protect priority sectors such as health and education. The G-20 countries, at their April 2 London summit, called on the Fund to use the additional resources from proposed IMF gold sales, together with surplus income, to provide $6 billion additional concessional and flexible finance for the poorest countries over the next 2 to 3 years, so long as such use was consistent with the new income model.
Managing Director Strauss-Kahn told reporters this month in Italy that while the G-20 had suggested a doubling of concessional lending to around $6 billion over 2-3 years, in fact it could reach some $8 billion. He also backed suggestions to make loans to low-income countries on an even more concessional basis, particularly during the crisis.
Comments on this article should be sent to imfsurvey@imf.org
