March 1999
External Relations Department   International Monetary Fund
Washington, D.C. 20431 U.S.A.
Telephone 202-623-7300   Fax 202-623-6278

What are the Sources of IMF Finance?

The IMF is a cooperative institution—in some ways like a credit union—which derives the bulk of its financial resources from its members' contributions (called quotas). Generally speaking, these resources are available for temporary lending to any member that experiences difficulties in paying its import bills and/or servicing its foreign debt, and that agrees to undertake reforms to correct the macroeconomic imbalances that underlie the problem.

Members' quota subscriptions constitute the largest source of funds at the IMF's disposal. Members pay 25 percent of their quota subscriptions in "acceptable" (hard) currencies or in SDRs (a special reserve asset created by the IMF), and the rest in their own domestic currency. A review of quotas is conducted every five years to determine whether they need to be adjusted in light of the growth of the world economy and changes in individual countries' economic positions. The quota increase under the latest General Review became effective in January 1999 and the payments for the bulk of the quota increase were received by the end of February 1999, bringing total quotas to about $300 billion.

In addition to quotas, the IMF can draw on lines of credit that have been established since 1962 with 11 industrialized countries. These credit arrangements, which are called the General Arrangements to Borrow (GAB), currently amount to about $23 billion. An additional $2 billion is available through an associated agreement with Saudi Arabia. In July 1998, the GAB were activated for $8.4 billion, of which only $1.9 billion was drawn. Following the quota increase, the GAB activation was canceled and the borrowed amount was repaid in early March 1999.

In January 1997, the IMF's Executive Board decided to supplement the GAB with a new set of credit lines with 25 member countries, called the New Arrangements to Borrow (NAB). This effectively doubled—to $46 billion—the total amount of credit potentially available to the IMF. The IMF activated the NAB for $12.7 billion in December 1998 to finance its lending to Brazil, of which $4.1 billion was disbursed. As with the GAB, the NAB borrowing was repaid by the Fund in March 1999 following the payments for the quota increase noted above.

The IMF can also borrow—and has in the past borrowed—from member governments or their monetary authorities for specific programs of benefit to its members.

Separately, acting as Trustee, the IMF also manages funds provided partly through sales of gold in the late 1970s and partly in various forms by its members for the purpose of helping the poorest developing countries. These resources are lent out at a concessional interest rate of 0.5 percent through the Enhanced Structural Adjustment Facility (ESAF).

How Does the IMF Lend?

IMF lending transactions (except for those under the ESAF) are not loans per se. Rather, IMF transactions are exchanges of one type of monetary asset for another, i.e., a member with a weak balance of payments position and in need of hard currencies will exchange some of its own currency for the currencies of members with strong balances of payments. In IMF parlance, the country seeking assistance is said to make a "purchase" of the stronger currencies it needs with an equivalent amount of its own currency. In time the "borrower" has to buy back ("repurchase") its own currency with hard currencies. This purchase-repurchase scheme explains why, from an accounting perspective, the IMF's total resources never vary; only the composition of its currency holdings changes.

Which Currencies are Used in IMF Transactions?

The IMF's Executive Board decides periodically which currencies can be used when a member makes a purchase or a repurchase, based on an assessment of the strength of various currencies. The quarterly currency budget identifies those members with strong balance of payments and reserve positions, and sets the maximum amounts of each currency that can be used to meet expected financing by the IMF for the coming quarter. In November 1998, the IMF changed the method of allocating currencies in the quarterly budget so that the share of each member is now determined in proportion to its share in the quotas of the strong currency members. (Previously, shares had been allocated mainly, but not exclusively, in proportion to members' foreign exchange reserves.)

Where do IMF Funds Go?

The IMF provides general balance of payments assistance. It does not provide financing for specific projects, which is a typical activity of development banks. The conditions for IMF assistance are subject to regular reviews by the IMF's Board. Assistance is typically made available in installments linked to the observance of specific conditions or "performance criteria" that must be satisfied before the next installment is released.

When a country purchases foreign exchange from the IMF with its own currency, it deposits its own currency in an account that the IMF maintains at the member's central bank. The foreign exchange provided by the IMF is deposited in an account maintained by the borrowing member in the country whose currency is being used, and becomes part of the international reserves of the recipient country, freely available for use by that country in the same manner as all other international reserves. Therefore, there is no meaningful way in which the use of IMF resources can be tracked, as might, for example, lending by a development bank for a specific project.

What Interest Rates does the IMF Charge?

If a member makes a purchase from the IMF, it pays various charges to cover the IMF's operational expenses and to compensate the members whose currencies it is borrowing. The interest rate charged is linked to a weighted average of market interest rates on short-term instruments in the capital markets of France, Germany, Japan, the United Kingdom, and the United States. This rate varies from week to week. Presently:

• The borrower pays about ¼ of 1 percent in a (refundable) commitment fee, ½ of 1 percent of the amount borrowed in service charges, and interest charges at a variable rate, currently around 3.75 percent, for the use of the IMF's regular (non-concessional) lending facilities. A surcharge of 3 percent, progressing to 5 percent, is levied on amounts borrowed under a special, short-term facility (the Supplemental Reserve Facility).

• An IMF creditor country earns interest whenever other members borrow its currency from the IMF. This "rate of remuneration" varies with the rate of charge; it is currently around 3.50 percent.