Lawrence J. McQuillan

Lawrence J. McQuillan is a research fellow at the Hoover Institution at Stanford University. He is coeditor of The International Monetary Fund--Financial Medic to the World? A Primer on Mission, Operations, and Public Policy Issues, March 1999.

Although the International Monetary Fund has at least $31 billion available for lending (see table below), it is nevertheless seeking a quota increase of 45 percent under its Eleventh General Review of Quotas. The Clinton Administration supports this proposal, which would increase the U.S. quota from $36 billion to $51 billion. The U.S. Senate has approved the $15 billion hike; the House resists. How would this multibillion-dollar quota increase affect the federal budget? Not at all, according to U.S. Treasury Secretary Robert Rubin. "Over the last 50 years, our contribution to the IMF has not cost the taxpayer one dime." How can this be true? The answer is hidden in the arcane procedures of Washington budgeting.

When $15 billion is transferred from the U.S. Treasury to the IMF, the Fund, in return, credits the U.S. Treasury with 11 billion SDRs (Special Drawing Rights), the IMF's own money. Technically, this swap is considered a fair exchange with no federal budget implications. The transfer, however, does impose several real costs on society.

First, the Treasury must acquire $15 billion through taxation or borrowing, both of which reduce the amount of funds available to private citizens and distort market incentives. Second, the U.S. earns interest only on that portion of its quota that has been borrowed by other IMF members from the pool of currencies. Lately, IMF interest rates have been less than 4 percent, well below alternative market rates. Third, the U.S. can withdraw at its discretion only that portion of its cash contribution equivalent to the dollar borrowings of other IMF members (the reserve tranche). Fourth, federal contributions to the IMF come with an opportunity cost -- money retained by the Fund is not available for alternative federal spending programs.

Although many in Washington argue that U.S. contributions to the IMF are costless, there are in fact real costs imposed on U.S. taxpayers. Once again, there is no free lunch.

IMF Financial Position as of July 20, 1998
Currency holdings from members' quotas (billions of U.S. dollars)	$195
Unusable currency holdings due to some members' weak      balance of payments and currency reserve positions	-65
Usable currency holdings	130
Members' currency purchases (outstanding cash)	-70
Available resources	60
Undrawn credit commitments	-17
Uncommitted resources	43
Reserves	-12
Resources available for operations	$31
Additional Resources Available to the IMF
General Arrangements to Borrow (GAB) (Line of credit from 11 industrialized countries)	$22.7
Special arrangement with Saudi Arabia (Line of credit)	$2.0
Gold holdings (IMF controls 9.6 percent of the world's gold holdings)	$32.0
New Arrangements to Borrow (NAB) (Line of credit from 25 countries; NAB has not yet entered into force)	$22.7
Source: Harold J. Johnson, International Monetary Fund: Observations on Its Financial Condition, testimony before the Joint Economic Committee, 23 July 1998 (Washington, D.C.: U.S. General Accounting Office, 1998).