Press Release No. 21/5

IMF Executive Board Discusses the Adequacy of the Fund’s Precautionary Balances

January 8, 2021

WASHINGTON, DC: The Executive Board of the International Monetary Fund (IMF) on October 30, 2020, reviewed the adequacy of the Fund’s precautionary balances. [1]

Precautionary balances, comprising the Fund’s general and special reserves [2] and the Special Contingent Account (SCA-1), are one element of the IMF’s multi-layered framework for managing financial risks. These balances provide a buffer to protect the Fund against potential losses, resulting from credit, income, and other financial risks. Thereby, they help protect the value of reserve assets represented by member countries’ positions in the Fund and underpin the exchange of assets through which the Fund provides financial assistance to countries with balance of payments needs.

This review of the adequacy of the Fund’s precautionary balances took place on the standard two-year cycle, although it was delayed by a few months to allow for an assessment of the impact of the COVID-19 pandemic on Fund financial risks. In conducting the review, the Executive Board applied the rules-based framework agreed in 2010. The framework includes an indicative range for precautionary balances, linked to a forward-looking measure of total IMF credit, that is used to guide decisions on adjusting the target for precautionary balances over time. The framework also allows for judgement in setting the target, taking into account a broad range of factors affecting the adequacy of precautionary balances.

Executive Board Assessment [3]

“Executive Directors welcomed the opportunity to review the adequacy of the Fund’s precautionary balances for the first time since the onset of the global COVID-19 pandemic. They emphasized the importance of maintaining an adequate level of precautionary balances to mitigate financial risks, safeguard the strength of the Fund’s balance sheet, and protect the value of members’ reserve positions in the Fund. Directors considered that an adequate level of precautionary balances would thus continue to play an integral part of the Fund’s ability to lend in crises such as the current one.

“Directors agreed that the current rules-based framework adopted in 2010 for assessing the adequacy of precautionary balances remains broadly appropriate. They emphasized that judgment and Board discretion remain an important part of the framework. Directors noted that the First Special Contingent Account (SCA-1) has been instrumental in protecting the Fund against potential losses from overdue obligations and ensuring its compliance with international financial reporting standards. In this regard, a number of Directors looked forward to an opportunity to consider options on the role of the SCA-1.

“Directors noted that Fund credit exposure and related risks have increased significantly since the last review in 2018, with trends compounded by the COVID-19 crisis. Credit outstanding has nearly doubled, including a surge in emergency financing without conditionality, and commitments under precautionary arrangements are higher than at the last review . Credit concentration has also increased and scheduled repurchases are larger and more bunched. In addition, the current target for precautionary balances of SDR 20 billion is likely to fall below the indicative range in this and the next fiscal year.

“In light of these developments, Directors broadly agreed to raise the indicative medium-term target for precautionary balances to SDR 25 billion, while a few Directors would have preferred setting a higher target. With uncertainty due to the pandemic still very high, Directors underscored the need for close monitoring. They agreed that the Board should reassess the adequacy of precautionary balances before the next regular review .

“Directors supported keeping the minimum floor for precautionary balances at SDR 15 billion for now and stood ready to revisit the issue, preferably after the FY 2022 review of the Investment Account.

“Directors broadly agreed that there is no need for additional measures to accelerate the pace of reserve accumulation at this stage but urged continued close monitoring. While subject to uncertainty, the increased level of Fund credit is expected to generate sufficient lending income for precautionary balances to reach their new target over the medium term. A few Directors nevertheless called for consideration of options to speed up reserve accumulation.

“Directors noted that precautionary balances are only one element of the Fund’s multi‑layered risk management framework. They emphasized in particular the role of program design, conditionality, lending policies, and the Fund’s preferred creditor status in limiting the Fund’s risk exposure. To help inform the assessment of the adequacy and composition of precautionary balances, some Directors noted the benefits of a more holistic approach that takes account of other related Fund policies. Directors looked forward to considering options to isolate the impact of pension-related adjustments on the Fund’s precautionary balances to reduce their volatility.”