Journal Issue

In the News: IMF Sets Up Investment Account, Examines Funding Options

International Monetary Fund. External Relations Dept.
Published Date:
May 2006
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The IMF has taken the first steps toward adapting its financing model—essentially unchanged for the past 25 years—to current circumstances and expected future needs, Finance Department Director Michael Kuhn said in an interview with the IMF Survey. In an initial move, the IMF announced on May 4 the creation of an $8.7 billion investment account expected to boost IMF income over the medium term.

Like other financial institutions, the IMF earns income from interest charges and fees levied on its loans and uses the income to meet funding costs, pay administrative expenses, and build up precautionary balances. But income has fallen short of target recently because of a significant decline in the level of IMF credit outstanding, reflecting the global financial stability of recent years, the pattern of global imbalances, and the easy access of countries to private capital markets.

The Fund’s credit outstanding fell to its lowest level in 25 years, to SDR 19.4 billion ($29 billion) in March this year, following the early repayment of large loans by Argentina and Brazil. Credit outstanding had reached a peak of over SDR 70 billion ($105 billion) in 2003. The SDR, or Special Drawing Right, is the Fund’s unit of account—a basket of four major currencies.

The early repayments have been welcomed by the IMF as a sign of progress in countries recovering from economic crisis. “The recent decline in credit outstanding to the IMF is a very welcome development,” said Kuhn in the interview. “It has given added impetus to ongoing efforts to develop other sources of funding because our primary job should not be lending, and we cannot live off the margin on lending alone,” he added.

Reflecting changes associated with globalization, Managing Director Rodrigo de Rato has outlined a new medium-term strategy for the Fund that gives the 184-member institution a larger watchdog role in the world economy at a time of strong growth but also downside risks related partly to rising oil prices and large global payments imbalances.

Twin strategy

Under its current financing arrangements, the Fund is heavily dependent on its loans outstanding for its income, with the interest rate charged on its lending set each year on a cost-plus basis. This system was adopted in 1981 and has been successful in covering the Fund’s operating costs and—together with the introduction of surcharges in 1997—building up reserves. However, the current system is not sustainable in a low-lending environment.

IMF by the numbers
1842,700$300 billion
Member countriesStaffTotal quotas

paid in by member governments
$985 million$85 million$8.7 billion
IMF’s projected operating

costs in FY2007
IMF’s projected operating

deficit for FY2007
Total IMF reserves

To put the Fund on a stronger long-term financial footing, the IMF’s Executive Board has adopted a two-pronged strategy. For the current financial year ending in April 2007, the Board decided in an April 28 review on a number of immediate measures to address a projected income shortfall and reposition the Fund’s sources of income. It rejected a rise in the interest rate on its loans (known as the rate of charge) to cover the revenue shortfall, keeping the margin on loans outstanding at 108 basis points above the SDR interest rate, currently 3.56 percent. Instead, it suspended the accumulation of reserves and decided to put an amount equivalent to its reserves, valued at SDR 5.9 billion ($8.7 billion), to work in an investment account.

Kuhn said the investment account would invest in government bonds of countries whose currencies are included in the SDR basket—the euro area, Japan, the United Kingdom, and the United States—and in marketable obligations of other international organizations. The portfolio would be externally managed, following a 1-3 year government bond index adjusted to reflect the weights of the four currencies included in the SDR basket.

Authority to set up an investment account was created at the time of the Second Amendment of the IMF’s Articles of Agreement over a quarter-century ago but had remained inactive. “The establishment of the investment account is a historic step that has the potential to contribute to the IMF’s income for many years to come,” Kuhn said. “The Executive Board has taken a big step in modernizing the management of the Fund’s resources in a manner that is prudent.”

Bridging the gap

Despite budget tightening, the IMF will still run an operating deficit of some SDR 59 million ($85 million) in the current financial year, compared with a surplus of SDR 115 million ($167 million) last year (see table).

Even before the projected deficit, the IMF had been considering a number of ways to bridge the gap, in addition to cuts in real spending. Kuhn said these include options that would require a strong consensus among members; some—including an expanded investment authority and a system of annual dues—would require an amendment of the IMF’s Articles of Agreement.

Developing a political consensus

In his medium-term strategy, endorsed by the International Monetary and Financial Committee of the Fund’s Governors in April, de Rato said a new business model was needed to place the institution on a sound financial footing, based on a stable source of long-term income.

Income outlook

The IMF is projected to run operating deficits following a decline in interest earnings from lending to member countries.

(million SDRs, except where indicated1)

A. Income761625581512
Margin for the rate of charge410206157117
Investment income:
Implicit return on reserves2166205242248
Additional income from
investment account303030
B. Expenses (administrative and capital)646684685701
Administrative budget602633645662
Capital budget not capitalized25301715
Depreciation expense19212324
C. Surplus/shortfall (A–B)115-59-104-189
Memorandum Items:
IMF credit outstanding (average)35,60017,30013,50010,700
SDR interest rate path (percent)

Based on a U.S. dollar/SDR rate of 1.45 for FY06 and 1.44 for FY07-FY09.

Assumes gradual increase in global interest rates.

Data: IMF Finance Department.

Based on a U.S. dollar/SDR rate of 1.45 for FY06 and 1.44 for FY07-FY09.

Assumes gradual increase in global interest rates.

Data: IMF Finance Department.

“Although it is true that the current level of reserves could finance budgetary gaps well into the next decade, and it is possible, if by no means certain, that income will pick up with lending, it is incumbent on an institution devoted to financial prudence to aim for a more credible and durable solution,” de Rato stated. “However, developing a political consensus around any particular measure—be it conversion of gold into earning assets or an annual fee linked to quota or anything else—will take time. It is therefore proposed to catalyze this process by establishing an external committee, headed by an eminent person, to make recommendations.” De Rato has not yet announced who would head the committee.

Kuhn said that there was a clear need to fill the income gap. “Running a long-term deficit is not a sensible approach for an institution that preaches fiscal prudence,” he stated. “That said, the Fund has run deficits in the past, but not for the past 25 years. And, although the deficits we are talking about are not huge relative to our financial reserves, we have to run the finances of this institution conservatively and prudently.”

Overall, the financial position of the Fund remains strong. “We don’t face a cash-flow crisis,” Kuhn said. “But we do need to use the time provided by the transitional decisions to reach agreement on a sensible and sustainable arrangement that can last for another quarter-century”

Further information on the investment account and the IMF’s income outlook is available on the IMF’s website ( Documents posted on May 4 include “The Fund’s Medium-Term Income—Outlook and Options,” “Establishment of an Investment Account,” and “Review of the Fund’s Income Position for FY2006 and FY2007.”

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