5. The IMF’s Income Model
- International Monetary Fund. Finance Dept.
- Published Date:
- October 2014
This chapter explains the sources of income for the IMF. It elaborates on how the IMF has adapted its financial structure to finance its administrative expenditures. The IMF’s income is generated primarily through its lending and investing activities (Figure 5.1).
Figure 5.1Snapshot of the IMF Income Statement
Source: Finance Department, International Monetary Fund.
Since its inception, the IMF has relied primarily on lending activities to fund its administrative expenses. Lending income is derived from the fees and charges levied on the use of credit from the General Resources Account (interest on loans). In addition to the basic rate of charge, the use of IMF credit is subject to surcharges under certain circumstances, and all IMF credit is subject to service charges and commitment fees on credit lines. A small amount of income is also generated by receipts of interest on the IMF’s holdings of Special Drawing Rights (SDRs).
A number of measures have been taken to allow the IMF to diversify its sources of income, but the most significant changes have occurred during the past 10 years. In 1978, the Second Amendment of the IMF’s Articles of Agreement authorized the IMF to establish an Investment Account (IA), but this account was not activated until after a review of the IMF’s financial structure that began in 2004. In 2006, largely because of a significant deterioration in the IMF’s income position that reflected a steep decline in credit outstanding, the Executive Board agreed on a set of measures to address a near-term projected income shortfall. These measures included activation of the Investment Account,1 a pause in the accumulation of reserves, and the use of the IMF’s existing reserves to meet the remaining income shortfall. In addition, the Executive Board requested an assessment of the full range of available options to place the IMF’s income position on a sustainable footing for the long term. In response, the IMF appointed the external Committee of Eminent Persons (CEP) to study the “sustainable long-term financing of the Fund.” The committee’s final report was submitted to the Executive Board on January 31, 2007.2
A proposal that reflected most of the committee’s recommendations was endorsed by the Executive Board in April 2008. The reforms allowed the IMF to diversify its sources of income through the establishment of an endowment within the Investment Account, to be funded with the profits from a limited sale of the IMF’s gold holdings and income generated under a broadened investment authority. At the same time, the Executive Board endorsed a resumption of the practice of reimbursing the IMF for the expenses incurred in administering concessional lending activities through the Poverty Reduction and Growth Trust (PRGT).3
Broadening the IMF’s investment authority required an amendment to the Articles of Agreement, and in February 2011, that amendment became effective, following ratification by the membership with the required majorities of voting power. Currencies in an amount equivalent to the profits from the limited sale of IMF gold in the amount of SDR 6.85 billion were transferred from the General Resources Account to the Investment Account in March 2011.4 The amendment gave the IMF authority to invest the gold endowment in a broader range of instruments. The new Rules and Regulations for the IA reflecting the expanded investment authority went into effect in January 2013.
The remainder of this chapter discusses the IMF’s income position by elaborating on how income is generated from lending, explaining how the basic rate of charge is set, and describing various charges under the General Resources Account. The chapter then traces the development of the new income model including the creation of an endowment with the profits from the limited gold sale and the IMF’s expanded investment authority. Next it describes the subaccounts of the Investment Account and includes details on portfolio allocation, eligible instruments, and risk controls.
5.1 Lending Income
The IMF’s operational lending income is derived from the marginal return on the rate of charge (the interest rate assessed on IMF financing), services charges, and commitment fees. A multitiered system of charges compensates the IMF for the cost of its financing to members and is an important component of the institution’s risk-mitigation framework. The cost of financing includes remuneration to creditors and administrative costs associated with lending.5 The basic rate of charge comprises the SDR interest rate plus a fixed margin that is set by the Executive Board every 2 years (subject to a midterm review). The margin is expressed in basis points. The margin was adopted under a new rule for setting the basic rate of charge adopted by the Executive Board in December 2011 (Box 5.1). The new rule, effective for FY2013, was an important step in full implementation of the new income model, under which the margin is set to cover the IMF’s lending-related intermediation costs and allow for a buildup of reserves. In addition, the new rule includes a cross-check to ensure that the rate of charge remains reasonably aligned with long-term credit market conditions.6
The rule was designed to move away from a reliance on lending income to finance the IMF’s nonlending activities. However, investment income, which is now the main source of nonlending income, is currently constrained by much lower-than-normal global interest rates amid highly accommodative monetary policies aimed at spurring economic activity in the wake of the global financial crisis. As a result, nonlending income is unlikely to be sufficient to cover short- and medium-term nonlending expenses. Therefore, the margins for FY2013–14 and FY2015–16 were adopted under a clause in the new rule that, in exceptional circumstances, allows a margin for calculating the basic rate of charge higher than is needed to cover the IMF’s estimated intermediation expenses and to generate an amount of net income for placement in reserves. Consistent with the Board-endorsed principle that the margin should be stable and predictable, the margin is set for a period of 2 financial years, subject to a comprehensive review before the end of the first year. For FY2015–16, the Executive Board agreed to keep the margin for the rate of charge unchanged from FY2013–14, at 100 basis points (Figure 5.2).
Figure 5.2Weekly Interest Rates and Margins, 2004–14
Source: Finance Department, International Monetary Fund.
Surcharges are an important component of the IMF’s risk-mitigation framework, and they contribute to net income and create incentives for member countries to avoid large and prolonged access to the IMF’s lending resources. The system of surcharges is based on the level of credit (level-based surcharges) and the length of repayment (time-based surcharges). The current policy on level- and time-based surcharges was introduced in 2009 and replaced the previous Time Based Repurchase Expectation Policy (TBRE) (Box 5.2). A core objective of the 2009 reforms was to simplify the complex system of surcharges that varied across facilities and provide stronger incentives for early repayment. The current surcharge is set at 200 basis points on credit outstanding over 300 percent of quota, rising to 300 basis points when credit exceeds that threshold for more than 3 years. These level- and time-based surcharges are intended to help mitigate credit risk by providing members with incentives to limit their demand for IMF assistance and encourage timely repayments while at the same time allowing the IMF to accumulate precautionary balances. Taken together, level- and time-based surcharges are calibrated to be broadly aligned with the market costs of borrowing for members emerging from balance of payments difficulties. Surcharges are reviewed every 5 years by the Executive Board.
In addition to periodic charges and surcharges, the IMF levies service charges, commitment fees, and special charges. A service charge of 0.5 percent is levied on each drawing from the General Resources Account (GRA). A commitment fee is also charged on amounts available under GRA arrangements, such as Stand-By Arrangements, the Extended Fund Facility, Flexible Credit Line, and Precautionary and Liquidity Line. The fee is refundable if purchases are made under the arrangement during the period covered by the fee. The IMF also levies special charges on overdue principal payments and on charges that are past due by less than 6 months (see Chapter 6).
The rationale for charging a commitment fee for contingent credit is to compensate the IMF for the cost of establishing and processing potential lending arrangements (which may not be actually implemented), including the monitoring of precautionary arrangements as well as for the cost of setting aside resources to be used when a purchase is made. Commitment fees are levied at the beginning of each 12-month period on the amounts available for purchase during that period. The fees are refunded when credit is used, in proportion to the drawings made. The current commitment fee structure has three tiers that rise along with amounts available for purchase as a percent of the member country’s quota. Commitment fees are levied at 15 basis points on amounts available up to 200 percent of a member’s quota, 30 basis points on amounts in excess of 200 percent and up to 1,000 percent of quota, and 60 basis points on amounts in excess of 1,000 percent of quota. This current upward-sloping fee structure was introduced as part of the broader 2009 GRA lending toolkit reform, with the aim of discouraging unnecessarily high precautionary access (Box 5.3).
5.2 The New Income Model
Historically, the IMF has relied almost entirely on income from lending to meet the expenses incurred in conducting its business, including expenses for its nonlending activities. This meant that the IMF’s net income was largely dependent on interest and charges on lending to members, along with surcharge income and other charges. The activities supported by this income, many of which carry significant costs, include multilateral and bilateral surveillance, crisis prevention, research, gathering and reporting statistics, capacity building (including technical assistance and training), and concessional lending to low-income countries. Relying primarily on lending income to support these critical activities was not sustainable when credit outstanding declined, nor was it equitable for the cost of these activities to be borne primarily by those members receiving IMF financing from the General Resources Account.
In March 2006, the IMF’s Executive Board agreed on a two-pronged strategy to adapt the IMF’s financing model to changing circumstances and future needs. The first prong addressed a looming shortfall in income for FY2007. The Board agreed on a package of measures that included the establishment and activation of the Investment Account, a pause in the accumulation of reserves, and the use of the IMF’s existing reserves to meet any remaining income shortfalls. No changes in these income policies were made for FY2008, which was considered a transitional year during which a new income model would be developed.
The second prong of the strategy was to ensure a lasting framework for meeting the institution’s income needs over the long term. The IMF appointed an external Committee of Eminent Persons to study the issue (Box 5.4). The committee’s final report on “Sustainable Long-Term Financing of the IMF” was submitted to the Managing Director on January 31, 2007.
5.2.1 Features of the New Income Model7
Taking into consideration the report by the Committee on Eminent Persons, in April 2008 the Executive Board endorsed a new income model based on more robust and diverse sources of revenue that reflected the IMF’s multiple functions (Figure 5.3). This marked the first major change in the way the IMF generates income since its establishment. The package contained the following income-generating initiatives:
- Create an endowment with the profits from the limited sale of 403.3 metric tons of the IMF’s gold holdings to help diversify the sources of income. This amounted to one eighth of the IMF’s total holdings of gold (see IMF Gold Sales).
- Amend the Articles of Agreement to broaden the IMF’s investment authority to enhance the average expected return on the IMF’s investments and enable the IMF to adapt its investment strategy over time.
- Resume the long-standing practice of reimbursing the IMF’s budget for the cost of administering the trust fund for concessional lending to low-income countries (Poverty Reduction and Growth Trust) without any effect on the IMF’s ability to provide concessional lending to low-income countries.
Figure 5.3The New Income Model
Source: Finance Department, International Monetary Fund.
Note: Green boxes represent new elements.
1As of April 30, 2014, the Dividend policy had not been adopted by the membership.
One element of the new income model is expansion of the IMF’s investment authority, which allows it to generate higher returns. The Fifth Amendment to the Articles of Agreement of the International Monetary Fund to Expand the Fund’s Investment Authority entered into force in February 2011.8 The Board of Governors approved that the Fund’s Articles of Agreement be amended to broaden the range of instruments in which the Fund may invest. Such an expansion of the Fund’s investment authority would enable the Fund to adapt its investment strategy over time without the need of further amendments to the Articles. Given the public nature of the funds to be invested, the implementation of a broader investment authority would be conducted pursuant to investment policies that take into account, among other things, a careful assessment of acceptable levels of risks. It would also include safeguards to ensure that the broadened investment authority did not lead to actual or perceived conflicts of interest. Finally, it was recognized that the evolution of the Fund’s investment policies would need to proceed gradually. To this end, on January 23, 2013, the Executive Board adopted the new Rules and Regulations for the IMF’s Investment Account that provided the legal framework for implementation of the expanded investment authority.9
5.3 Investment Income
The Second Amendment to the IMF’s Articles of Agreement in 1978 authorized the IMF to establish an Investment Account in order to generate income from other sources.
The Investment Account was established by the Executive Board in 2006 in order to broaden the IMF’s income base. It was originally funded through the transfer of currencies from the General Resources Account in an amount equivalent to the total amount of the IMF’s General and Special Reserves at the time of the decision authorizing the transfer (SDR 5.9 billion). This was the maximum transfer allowed by the Articles of Agreement.
The Articles of Agreement also helped define the investment framework by specifying a list of eligible instruments and issuers into which the IMF could invest its own resources; the list was somewhat limited and more restrictive than practices found within other international financial institutions.10 The Rules and Regulations for the administration of the Investment Account defined the investment objective as exceeding the return on the SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over a 12-month horizon—a conservative, reserve-asset-type investment strategy.
Establishment of the Investment Account was an important step toward reducing the IMF’s medium-term financing gaps and diversifying its income, but achieving a sustainable income position for the long-term required additional measures. As discussed in Section 5.2, to address this need, and following the proposals of the Committee of Eminent Persons, the Executive Board endorsed the new income model that included, among other things, the broadening of the investment authority and establishment of an endowment funded by limited gold sales (see Section 2.3) with new Rules and Regulations for the Investment Account.
The new set of Rules and Regulations for the Investment Account specified the objective of the Investment Account and the broad principles governing its operations. They establish various portfolios (subaccounts), define the investment objective of each portfolio, outline potential uses of investment income, and provide guidelines for investing the assets. They also further define the governance framework, including delegating the implementation of the investment policies set out in the new Rules and Regulations to the Managing Director, while ensuring that the Executive Board is provided with regular and ad hoc reports on the operations and investment activities of the Investment Account and consulted on key topics, including conflict of interest policies. Finally, the Rules and Regulations also set out key principles to mitigate the risks of perceived or actual conflicts of interest.
The new Rules and Regulations established three subaccounts within the Investment Account, each with its own investment objectives: the Fixed-Income Subaccount, the Endowment Subaccount, and the Temporary Windfall Profits Subaccount. SDR 6.85 billion from the profit of sale of IMF gold was transferred to the Investment Account. Of that, SDR 4.4 billion was used to fund the Endowment Subaccount. The remaining SDR 2.45 billion was considered windfall profits (that is, profits attributed to an average sales price above that assumed at the time of the approval of the new income model) and were placed to the Temporary Windfall Profits Subaccount. In February and September 2012, the IMF’s Executive Board approved the distribution of SDR 0.7 billion and SDR 1.75 billion, respectively, from the General Reserve to IMF members, to become effective once members provided satisfactory assurances of new subsidy contributions in an amount equivalent to at least 90 percent of the distribution to the Poverty Reduction and Growth Trust (Table 5.1), including through transfers of their share in the distributions directly to the PRGT. Assurances were obtained during 2012 and 2013, and the Temporary Windfall Profits Subaccount was wound down in October 2013, following two reserve distributions in October 2012 and October 2013, respectively. As of April 2014, the IMF’s investment portfolios totaled SDR 15.2 billion, which are divided between the Fixed-Income Subaccount (SDR 10.7 billion) and Endowment Subaccount (SDR 4.5 billion).
|Fixed-Income Subaccount||Endowment Subaccount|
|Funded in June 2006 with SDR 5.9 billion.||Funded in January 2013 with SDR 4.4 billion.|
|Assets under management as of April 2014 totaling SDR 10.7 billion.||Funded with gold profits (other than windfall profits) as part of the new income model aimed at diversifying the IMFs income sources.|
|Funded by transfers of currencies from the General Resources Account (GRA) in amounts equivalent to the IMF’s total reserves as of June 2006, plus subsequent transfers of GRA net income not associated with gold profits.||Investment Objective: to achieve a long-term real return target of 3 percent in U.S. dollar terms. This is consistent with the objective of generating investment returns to contribute to the IMF’s income while preserving the long-term real value of these resources.|
|Investment Objective: to achieve returns that exceed the SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over a 12-month investment horizon.||Once fully funded, assets will be managed against a conservative diversified benchmark with a 65 percent share of global fixed-income instruments and 35 percent share for global equities.|
|Assets are managed against the 1- to 3-year government bond benchmark, weighted to reflect the currency composition of the SDR basket.||3-year phased-in implementation to minimize market risk.|
184.108.40.206 Investment Objectives
Each Subaccount in the Investment Account has different objectives and pursues different investment strategies. The Fixed-Income Subaccount has an investment mandate that is unchanged from that applied to the Investment Account before the investment authority amendment became effective. The Articles of Agreement limit currency transfers from the General Resources Account to the Investment Account to an amount equivalent to the IMF’s general and special reserves.11 The June 2006 transfer of SDR 5.9 billion that initially funded the Investment Account was equivalent to the IMF’s total reserves (both General and Special Reserves) at that time. All Investment Account assets derived from currency transfers equivalent to net income (and not attributed to gold sales profits) were used to fund the Fixed-Income Subaccount. The current investment objective for the Fixed-Income Subaccount is to exceed the SDR interest rate over time while minimizing the frequency and extent of negative returns and underperformance over a 12-month period. This is in line with a conservative, reserve-asset-type investment strategy, but this investment objective will be reviewed in light of the expanded investment authority of the Fund. The Executive Board will review the purpose and objectives of these assets, particularly in the context of the new income model.
In contrast to the Fixed-Income Subaccount, the investment objective of the Endowment Subaccount is to achieve a long-term real return target of 3 percent in U.S. dollar terms. This is consistent with the overall objective for the Investment Account of generating investment returns to provide a meaningful contribution to the IMF’s income while preserving the long-term real value of these resources.
220.127.116.11 Eligible Instruments, Asset Allocation, and Investment Strategy
The eligible instruments for the Fixed-Income Subaccount under the current Rules and Regulations are limited to marketable obligations of members, their official agencies, and international financial organizations. The latter includes deposits with the Bank for International Settlements (BIS) and BIS Medium-Term Instruments. Securities must have a minimum credit rating equivalent to A (based on Standard & Poor’s rating scale). Hedging is prohibited, as is the use of derivative instruments (including forwards, futures, options, and swaps), short selling, or any form of financial leverage. Investments are limited to eligible investments that are denominated in SDRs or in the currencies included in the SDR basket. The portfolio for the Fixed-Income Subaccount is managed against a customized 1- to 3-year government bond index benchmark comprising bonds denominated in dollars, euros, pounds sterling, and Japanese yen, weighted to reflect the composition of the SDR basket. The portfolio is currently invested in medium-term instruments issued by the BIS and managed by IMF staff, and in externally managed sovereign bond portfolios.
With respect to the Endowment Subaccount, at least 90 percent of assets are managed passively under mandates that require the external managers to closely track benchmark indices, pursuant to a strategic asset allocation benchmark that includes 20 percent in developed market sovereign bonds, 20 percent in developed market inflation-linked bonds, 15 percent in developed market corporate bonds, 10 percent in emerging market bonds, 25 percent in developed market equities, 5 percent in emerging market equities, and 5 percent in real estate investment trusts (REITs).
No more than 10 percent of the Endowment Subaccount assets are managed actively. The actively managed portion may be invested only in the same asset classes as the strategic asset allocation benchmark for the passively managed portion, with a 65 percent share of fixed-income instruments and a 35 percent share for equities including REITs but with no specific allocation requirements for each asset class within these two categories.
Short selling and any form of financial leverage as well as direct investments in gold are not permitted for Investment Account assets. Derivative instruments, including options, forwards, futures, and swaps, are allowed for the Endowment Subaccount but only for hedging operations authorized under the Rules and Regulations or to minimize transaction costs in the context of subaccount rebalancing and benchmark replication.
18.104.22.168 Risk Controls
The investment mandates for the Investment Account’s asset managers explicitly set limits based on a range of acceptable risk exposures, including for risks related to interest rates, foreign exchange, liquidity, credit, and operation of the Investment Account itself. Mechanisms are in place to monitor compliance. The following portfolio-specific risk controls apply.
Interest rate risk in this portfolio, which is the risk of fluctuations in a portfolio’s market value due to changes in market interest rates, is controlled by the low-duration portfolio which tracks a 1- to 3-year benchmark index. This level of interest rate exposure has provided an efficient tradeoff between risk and return in the past, resulting in returns that exceeded the SDR interest rate under most market conditions.
There is some, albeit limited, foreign exchange risk in the Fixed-Income Subaccount portfolio because the investments are not made in SDRs but in securities denominated in the currencies comprising the SDR basket. More specifically, exchange rate risk is limited to the portfolio deviations from the SDR basket that occur due to different investment performance in each of the constituent currencies’ investments—in other words, interest rates move differently in each region, leading to relative over- or underperformance of, for example, the euro-denominated bonds compared with dollar-denominated bonds. Any such over- or underperformance carries a residual out of alignment from the relative weight of the investment in a particular currency compared with the currency’s weight in the SDR basket. To control currency risk, the weight of each currency in the portfolio is adjusted to reflect its weight in the SDR basket through a regular rebalancing of the portfolio.
Liquidity risk is small given the low likelihood of a call on the Fixed-Income Subaccount assets and the inherently liquid nature of the investments, which are primarily marketable short- and medium-term government securities.
Credit risk is similarly limited in a portfolio that features BIS deposits and Medium-Term Instruments, the securities of highly rated international financial organizations, and the domestic government bonds of countries whose currencies are included in the SDR basket.
Although the Endowment Subaccount assets are exposed to a wide variety of market risks, these are controlled by the diversification by geography and asset class of the assets involved. To control asset class exposure, the portfolio must be rebalanced to the strategic asset allocation benchmark at least annually or when the weights of any of the asset classes move beyond a certain threshold. The impact of foreign exchange volatility is also controlled through mandatory hedging of part of the assets back to the base currency, the U.S. dollar. Furthermore, the Rules and Regulations set a prohibition on short selling and financial leverage activities and set minimum credit-rating thresholds of BBB– for corporate bonds and BBB+ for sovereign bonds.
Operational Risks in the Investment Account
Operational risk is controlled by carefully structured due diligence reviews of external investment managers and custodians, the checks and balances inherent in the reconciliation of portfolio valuation by managers and the custodian, and stringent performance measurement and reporting requirements.
5.3.2 The Use of Investment Income
The Executive Board normally decides every financial year how the Investment Account income will be used, including whether it may be invested, retained in the Investment Account, or transferred to the General Resources Account to meet the expenses involved in conducting the business of the IMF.
The earnings of the Investment Account and its potential contribution to the IMF’s operating expenses depend on the size of the portfolio and the performance of its investments. Since its inception, the returns have made a visible and positive contribution (Figure 5.4).
Figure 5.4Earnings of the Investment Account
Source: Finance Department, International Monetary Fund.
5.4 Reimbursements to the General Resources Account
The General Resources Account is reimbursed annually for the expenses incurred in conducting the business of the SDR Department and administering Special Disbursement Account resources in the Multilateral Debt Relief Initiative Trust (MDRI-I) and the Post-Catastrophe Debt Relief (PCDR) Trust. Reimbursement to the GRA from the MDRI-I and the PCDR Trusts is for expenses not already attributable to other accounts or trusts administered by the IMF or to the GRA. The framework for the Poverty Reduction and Growth Trust also provides for the reimbursement of the GRA for the expenses of conducting the business of the PRGT, though there have been suspensions in previous years. Starting in FY2013, the practice of reimbursing the GRA for the expenses of conducting the business of the PGRT resumed (Box 5.5). This reimbursement is an important element of the IMF’s new income model, and its resumption was part of the financing strategy for the PRGT that was approved in September 2012, which was directed toward putting concessional lending on a self-sustaining basis over the long term.
Box 5.1Setting the Margin for the Basic Rate of Charge
The basic rate of charge on lending is a key element of the IMF’s financial operations. It is composed of the SDR interest rate, which is also the remuneration paid to creditors, and a margin, to cover the cost of IMF financing to members as well as to help accumulate reserves. In addition, the rate of charge plays an important role, together with surcharges on lending, in creating incentives for timely repayment, thus helping to preserve the revolving nature of IMF resources.
Until FY2007, decisions on the margin were driven primarily by the need to cover the Fund’s administrative expenses and accumulate reserves. The margin was set based on the level of income needed to cover projected expenses and meet a net income target (specified as 5 percent of IMF reserves at the beginning of the financial year from FY1985 to FY2006).1 However, due to the sharp decline in credit outstanding by the mid-2000s, this approach would have implied a margin of over 350 basis points for FY2007—a level that would have made the cost of borrowing from the IMF relatively expensive. In response, a new exceptional circumstances clause was added to Rule I-6(4) in April 2006 to allow the margin for the rate of charge to be set on a basis other than estimated income and expenses.2 In addition, the Executive Board began to take steps to broaden the IMF’s income sources with the establishment of the Investment Account in April 2006.3
In April 2008, the Executive Board adopted decisions to reform the IMF’s income model. The Executive Board endorsed several principles for setting the margin for the rate of charge in the new income model:
- The margin on the rate of charge should be set in a stable and predictable manner.
- The margin on the rate of charge should no longer cover the full range of the IMF’s activities but should instead be set as a margin over the SDR interest rate to cover the IMF’s intermediation costs and allow for a buildup of reserves.
- A mechanism should be developed for checking that the margin is in reasonable alignment with long-term credit market conditions, including ensuring that the cost of borrowing from the IMF does not become too expensive or too low relative to the cost of borrowing from the market.
In line with these principles, in December 2011 the Executive Board adopted a new framework for setting the basic rate of charge.4 This became effective on May 1, 2012, and is determined as follows:
- The rate of charge shall be determined as the SDR interest rate plus a margin expressed in basis points. The margin shall be set at a level that is adequate (a) to cover the estimated intermediation expense of the IMF for the period under (2) below, taking into account income from service charges, and (b) to generate an amount of net income for placement to reserves. The appropriate amount for reserve contribution is assessed by taking into account, in particular, the current level of precautionary balances, any floor or target for precautionary balances, and the expected contribution from surcharges and commitment fees to precautionary balances, provided, however, that the margin shall not be set at a level at which the basic rate of charge would result in the cost of Fund credit becoming too high or too low in relation to long-term credit market conditions as measured by appropriate benchmarks.
- Notwithstanding the above, in exceptional circumstances, the margin may be set at a level other than that which is adequate to cover estimated intermediation expenses incurred by the IMF and to generate an amount of net income for placement to reserves. This exceptional circumstances clause is to provide a safeguard that would allow the Executive Board to set the margin on a basis other than that required to cover intermediation costs and allow for a buildup of reserves, should income from other sources be insufficient to cover the administrative expenses for the nonlending activities of the Fund.
- The margin shall be set for a period of 2 financial years. A comprehensive review of the income position shall be held before the end of the first year of each 2-year period and the margin may be adjusted in the context of such a review, but only if this is warranted in view of fundamental changes in the underlying factors relevant for the establishment of the margin at the start of the 2-year period.
Box 5.2Evolution of Surcharges
Surcharges were introduced in 1997 with the establishment of the Supplemental Reserve Facility (SRF).1,2 Applying only to the SRF, a time-based structure of surcharges and short-term maturities was designed to incentivize early repayment by members with exceptional access that were experiencing capital account crises. In 2000, level-based surcharges were introduced on purchases in the credit tranches and under extended arrangements starting at 200 percent of quota to discourage unduly high access. Considerations were given to thresholds of 300 percent, consistent with the upper limit of “normal” access, and 100 percent to capture more prolonged users of IMF resources and allow for a more graduated charge. In the end, the Executive Board adopted a threshold in between starting at 200 percent of quota with a two-step increase in the rate. A schedule of time-based repurchase expectations was introduced at the same time, from which a member could request an extension to the maximum allowed under the repurchase obligation schedule. This resulted in a complicated system of surcharges and maturities, as illustrated in the following figure and table.
In 2009, surcharges were streamlined and aligned across facilities to simplify the structure of charges and to eliminate sources of misalignment of terms across facilities.3 At the same time, the time-based repurchase expectation policy was eliminated and replaced by applying time-based surcharges on credit outstanding under all General Resources Account facilities, which was deemed more effective and transparent. In conjunction with the new time-based surcharge, the new single level-based threshold was set at the previous upper step of 300 percent of quota. The reform also eliminated the Supplemental Reserve Facility, which had been the only facility on which time-based surcharges had been levied.
|Repayment period (in years)|
|Facility||Expectations basis||Obligation basis1,2|
|SLF||n.a.||3, 6, or 9 months|Box 5.3Commitment Fees
Commitment fees were originally put in place to help manage incentives and compensate the IMF for cases in which commitments were not drawn. They were first introduced in conjunction with the establishment of the Stand-By Arrangement (SBA) in 1952.
Directors emphasized that while the charge should not discourage countries with need, it would serve as a deterrent to those who had no real reason to request IMF assistance. It was decided that a commitment charge of 25 basis points a year would be levied and that, if a member draws under the SBA, this charge would be credited against the service charge on a pro rata basis. In the context of the review of Fund facilities in 2000, a two-tier commitment fee schedule was adopted under which the fee remained at 25 basis points a year for commitments up to 100 percent of quota; a lower 10 basis point fee was levied on amounts in excess of 100 percent of quota that could be purchased over the same period.1 The lower 10 basis point fee for access above 100 percent of quota was adopted mainly to encourage the use of the Contingent Credit Line (CCL) (since discontinued), and the declining schedule was motivated by the lower probability of drawing under the CCL which made refunds less likely. The argument is consistent with the prevailing view at the time that the basic rationale for charging commitment fees for contingent credits was to cover the cost to the IMF of establishing and monitoring such arrangements.
The current commitment fee schedule stems from the 2009 GRA lending toolkit reform and reflects an expanded focus on managing liquidity risks.2 Reforms to the GRA lending toolkit included improvements in the design and availability of precautionary SBAs, including High Access Precautionary Arrangements (HAPA). The reforms also included establishment of the Flexible Credit Line and the Precautionary Credit Line (which was replaced in 2011 by the Precautionary and Liquidity Line), allowing the IMF to provide up-front contingent financing for countries that had very strong or sound fundamentals and policies but could nevertheless potentially be affected by a crisis originating elsewhere. Recognizing that large commitments have costs associated with the finite availability of IMF resources and that such costs are likely to increase at the margin as resources available for other lending decline, the schedule introduced in 2009 increased fees progressively with access. The structure is designed to generally increase incentives against unnecessarily high precautionary access and also to provide income to the IMF to help offset the cost of setting aside substantial financial resources. At the same time, commitment fees would not be set so high as to discourage members from seeking precautionary arrangements.
Source: Finance Department, International Monetary Fund.
Box 5.4Committee of Eminent Persons’ Proposal for Increasing IMF Income
Conceptually, the Committee of Eminent Persons organized its proposals for ensuring the IMF’s income over the long term by linking the sources and uses of the funds.1 To this end, the committee identified three broad categories of IMF activities: credit intermediation, the provision of public goods, and bilateral services.
Credit intermediation: As a general principle, the committee believed that the margin for the basic rate of charge on Fund lending should be stable and should not be linked to credit outstanding or to the IMF’s income needs (that is, the rate of charge should not increase as lending activities decline and vice versa). More specifically, lending should yield enough to cover intermediation costs and build up reserves but should not have the objective of funding the full range of IMF activities.
Provision of public goods: The committee saw a need for the IMF’s income sources to be diversified to reduce the reliance on lending. The committee considered several measures, some of which required amendments to the Articles of Agreement:
- Levies on members: Despite their use by other public international institutions and their various benefits, levies on member countries were considered inconsistent with independent surveillance and were not favored by the committee.
- Investment operations: The committee recommended that the IMF liberalize its investment policies to enhance the benefits of creating additional sources of funds for investment. In particular, it recommended a broadening of the investment mandate for the IMF’s existing reserves. This would include more duration risk, given the absence of refinancing risks on its reserves, and an expansion of the instruments in which the IMF may invest in line with the policy followed by AAA-rated multilateral development banks. To generate income over time, the committee also proposed that the IMF use a part of the quota resources subscribed by members to invest in higher-yielding market securities. These securities would be highly liquid to reflect the potential need to use these resources for lending.
- Creation of an endowment: The committee favored creating an endowment and managing it so as to preserve its long-term real value while generating a sustainable income flow. One of the options proposed for funding such an endowment was through a limited sale of gold. The committee proposed to conduct any such sale in a way that would ensure the continued strength of gold in the IMF’s balance sheet and would avoid disturbance to the functioning of the gold market. The committee cautioned that spending from a gold-financed endowment should not materially weaken the IMF’s financial position, and so the endowment should have a prescribed payout ratio that preserves its real value over time.
Bilateral services: The committee recommended charging member countries for some of the bilateral services provided by the IMF, including most notably technical assistance. It recognized that some of these services incorporate a measure of public good but felt that charging users would help ensure a disciplined approach to the costs and benefits associated with the services and enhance the IMF’s transparency and accountability. The committee raised the possibility of subsidizing such fees for low-income countries. The committee also recommended that the General Resources Account no longer absorb the administrative costs of providing concessional assistance to low-income countries through the Poverty Relief and Growth Fund—Exogenous Shocks Facility (PRGF-ESF) Trust and should end the recent practice of waiving reimbursement of these costs.
Box 5.5Reimbursement to the General Resources Account from the Poverty Reduction and Growth Trust
Since the inception of the first trust fund for concessional lending in 1976, all administrative expenses associated with the cost of administering the IMF’s concessional lending have been accounted for, and these costs have been regularly reimbursed to the General Resources Account (GRA). In 1987, the Executive Board adopted a decision providing for annual reimbursement to the GRA of the expenses incurred in conducting the business of the Enhanced Structural Adjustment Facility (ESAF) Trust, now the Poverty Reduction and Growth Trust (PRGT).
This reimbursement was frequently suspended by the Executive Board in subsequent years, primarily as part of efforts to increase concessional lending capacity or provide debt relief. During FY1998–2004, the Executive Board agreed to suspend reimbursement and redirect SDR 366.2 million of such payments from the GRA to the Poverty Relief and Growth Fund–Heavily Indebted Poor Countries (PRGF-HIPC) Trust to help finance both subsidy needs and debt relief. Similarly, during FY2005–09, SDR 237.3 million was redirected to benefit the Poverty Relief and Growth Fund–Exogenous Shocks Facility (PRGF-ESF) Trust.
Reimbursements were resumed as part of the new income model endorsed by the Executive Board in 2008. However, the new income model provided for an exception, which allowed temporary suspension of the annual reimbursements to the GRA for PRGT expenses if a determination is made that the resources of the trust are likely to be insufficient to support anticipated demand for PRGT assistance and the IMF has been unable to obtain additional subsidy resources to cover the anticipated demand.
As part of the 2009 Reform of Facilities for Low-Income Countries, the Executive Board decided that for a period of 3 years (FY2010–12), an amount equivalent to the expenses of operating the PRGT would be transferred from the PRGT Reserve Account to the General Subsidy Account of the PRGT instead of to the GRA. Suspending PRGT reimbursements during these 3 years generated additional PRGT subsidy resources of SDR 147.9 million.
In September 2012, the Executive Board approved a financing strategy for the PRGT aimed at placing concessional lending on a self-sustaining basis over the longer term. This strategy involves establishing an annual base lending envelope of SDR 1¼ billion by using available resources and contributions from members linked to the windfall profits from the recent gold sales. The financing strategy also allows for the resumption of reimbursements to the GRA for PRGT administrative expenses. However, if demand for PRGT borrowing exceeds the base envelope by a substantial margin for an extended period, the strategy allows the Executive Board to consider a further temporary suspension of reimbursement.
Annex I of Review of Charges and Maturities—Policies Supporting the Revolving Nature of Fund ResourcesIMF Policy Paper (2005): www.imf.org/external/np/pp/eng/2005/052305.pdf
Charges and Maturities—Proposals for ReformIMF Policy Paper (2008): http://www.imf.org/external/np/pp/eng/2008/121208a.pdf
GRA Lending Toolkit and Conditionality—Reform ProposalsIMF Policy Paper (2009): http://www.imf.org/external/np/pp/eng/2009/031309a.pdf
IMF Articles of Agreement—Article XII Section 6(f) (ii): http://www.imf.org/external/pubs/ft/aa/#a12s6
IMF’s Broader Investment Mandate Takes Effect Press Release No. 11/52 February 18 2011: http://www.imf.org/external/np/sec/pr/2011/pr1152.htm
IMF Executive Board Reviews Fund’s Income Position Sets Rate of Charge for FY 2007 and Approves Establishment of an Investment Account Press Release No. 06/90 May 4 2006: www.imf.org/external/np/sec/pr/2006/pr0690.htm
The Report to the Managing Director by the Committee of Eminent Persons on the Sustainable Long-Term Financing of the Fund January 2007: www.imf.org/external/np/oth/2007/013107.pdf
Review of Fund Facilities—Proposed Decisions and Implementation Guidelines IMF Policy Paper (2000): http://www.imf.org/external/np/pdr/fac/2000/02/
Rules and Regulations for the Investment Account IMF Policy Paper: www.imf.org/external/np/pp/eng/2012/122812.pdf
SDR Interest Rate Rate of Remuneration Rate of Charge and Burden Sharing Adjustments 2013: www.imf.org/cgi-shl/create_x.pl?bur