Untitled-6 [shodhganga.inflibnet.ac.in]shodhganga.inflibnet.ac.in/bitstream/10603/4374/6/06_chapter 5.pdf · 126 growing role of international financial markets. (3) SDR Interest

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CHAPTER - 5

IMF’S ROLE IN MAINTAINING INTERNATIONAL LIQUIDITY

5.1 INTRODUCTION

This fifth Chapter of the Thesis begins with the explanation of the IMF’s financial

operations and relevant policies and then proceeds with the review of the IMF’s role in

maintaining international liquidity during the study period (FYs 2001 to 2007 AD). Most

of the material being presented here has been selectively adopted from the IMF’s annual

reports for the respective years.

The IMF is a cooperative institution that lends money to its member countries

experiencing temporary balance of payments financing problems on the condition that

the borrowers undertake economic adjustment and reform policies to address these diffi-

culties. In the 1990’s decade, for example, the IMF had played a central role in resolving

a series of economic and financial crises in emerging market countries in Asia and Latin

America, and in Russia and Turkey. The IMF is also actively engaged in promoting

economic growth and poverty reduction in its poorer member countries by providing

financing on special terms in support of efforts to stabilize economies, implement structural

reforms, and achieve sustainable external debt positions.

The IMF extends financing to member countries through three channels:

• Regular Operations : The IMF provides loans to member governments from a

revolving pool of funds consisting of members’ capital subscriptions (quotas).

These loans are extended under a variety of policies and facilities designed to

address specific balance of payments problems. Interest is charged on the loans

at market-related rates and with repayment periods that vary depending on the

lending facility.

• Concessional Financing : The IMF lends at a very low interest rate to poor

countries to help them restructure their economies to promote growth and reduce

poverty. The IMF also provides assistance on a grant (no-charge) basis to heavily-

indebted poor countries (HIPCs) to help them achieve sustainable external debt

positions. The principal for concessional loans is mostly funded by bilateral lenders

to the IMF at market-based rates. Resources to subsidize the rate charged to

borrowers, and grants for debt relief, are financed through voluntary bilateral

contributions by members and income from the IMF’s own resources.

• Special Drawing Rights (SDRs) : The IMF can also create international reserve

assets by allocating SDRs to members, which can be used to obtain foreign

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exchange from other members and to make payments to the IMF. The SDR also

serves as the IMF’s unit of account and its value is based on a basket of major

international currencies. The SDR interest rate is based on market interest rates

for the currencies in the valuation basket and serves as the basis for other IMF

interest rates.

As the consolidated financial statements of the IMF are expressed in SDRs, it

would be prudent to briefly discuss this tool of international liquidity at the disposal of

the IMF and its member countries. The SDR is an international type of monetaryreserve

currency, created by the IMF in 1969, which operates as a supplement to the existing

reserves of member countries. The SDR was created in response to conerns about the

limitations of gold and Dollars as the sole means of settling international accounts The

SDRs are designed to augment international liquidity by supplementing the standard

reserve currencies.

The SDRs can be regarded as an artificial currency used by the IMF and described

as a “basket of currencies”. The IMF uses SDRs for internal acounting purposes. The

SDRs are allocated by the IMF to its member countries and are backed by the full faith

in and credit of the member governments’ governments.

Initially, the “basket of currencies” used to determine the value of the SDR included

(a) US Dollar, (b) German Deutsche Mark, (c) Japanese Yen, (d) French Franc, and (e)

British Pound-Sterling.

However, with the launching of Euro in January, 1999, though the basket

currencies for the SDR has remained the same, there has been a slight change in the

nomenclature and the currency amounts to be included to arrive at the value of the SDR

as given in Table 1.2 below.

Table 5.1

Currencies and their amounts included in the SDR Basket

1st January, 1996 31st March, 1999

Currency Amount Currency Amount

Deutsche Mark 0.446 Euro (Germany) 0.2280

French Franc 0.813 Euro (France) 0.1239

Japanese Yen 27.20 Japanese Yen 27.200

Pound-Sterling 0.105 Pound-Sterling 0.1050

US Dollar 0.582 US Dollar 0.5821

Source: IMF’s Annual Reports for the respective years.

Due to the sharp depreciation in the value of the US Dollar, the SDR has now

emerged as a standard of value. It is the unit of accounting for IMF’s transactions. It is

also finding an increasing acceptance as a unit of account for private contracts and

international treaties and for use by many international and regional organizations.

Members designated by the IMF are obliged to accept SDRs up to the point

when their holdings of SDRs increase to three times of their allocation. There is an

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important reason why members are willing to accept SDRs - they earn an interest

determined weekly on the excess of their holdings over their original allocations. The

IMF has prescribed 16 institutions as ‘other holders’ of SDRs. These holders can acquire

and use SDRs in transactions and operations by agreement with participants and other

holders under the same terms and conditions as participants. These holders, however,

cannot receive allocations of SDRs from the IMF.

Countries having a deficit in balance of payments can use their SDRs upto 85

percent of their holdings for: (i) obtaining foreign currency, (ii) to redeem balances of

their own currencies held by other member-countries, and (iii) to meet their obligations

to the IMF, that is, repayment of interest charges. Countries holding less SDRs than

allocated have to pay interest (determined weekly by the IMF).

Until 1997, more than one-fifth member-countries had never received SDR

allocation, because those countries joined the IMF after the last SDR allocations in

1981. The question of fresh allocation of SDRs was very often pressed by the developing

countries on the following grounds:

• International liquidity constraints prevent a general expansion in world trade and

production;

• A new issue of SDRs would provide adequate resources to the countries in debt

to maintain imports and provide further impetus to the growth of world trade,

• Developing countries were not in a position to borrow internationally on

commercial terms.

In response to these demands, the IMF initiated the following steps:

(1) Special One-time Allocation : In September, 1997, the IMF’s Board of Governors

proposed an amendment to the Articles of Agreement to allow a special one-time

allocation of SDRs to correct for the fact that more than one-fifth of the IMF

members had never received an SDR allocation since they joined the IMF after

the last allocation in 1981. The special allocation of SDRs would enable all

members of the IMF to participate in the SDR system on an equitable basis and

would double the cumulative SDR allocation to SDR 42.87 billion. The proposal

would become effective when three-fifths of the IMF members (total 110 members)

having 85 percent of the total voting power have accepted the proposal. As on

30th April, 2001, 107 members having 71 percent of the total voting power had

agreed.

(2) SDR Valuation : The value of the SDR is based on the value of a basket of

currencies. The currency basis is reviewed every five years to ensure that the

currencies included in it are representative of those used in international

transactions and that the weights assigned to the currecies reflect their relative

importance in the world’s trading and financial system. The valuation review was

completed in October, 2000, and the IMF decided on changes in the valuation

basket, effective 1st January, 2001, to take account of the introduction of the

Euro as the common currency for a number of IMF members and to reflect the

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growing role of international financial markets.

(3) SDR Interest Rate : The SDR interest rate is determined weekly, based on a

weighted average of representative interest rates on short-term instruments in

the markets of the currencies included in the SDR valuation basket.

Nature of Operations

The SDR is an international interest bearing reserve asset created by the IMF

following the First Amendment of the Articles of Agreement in 1969. All transactions

and operations involving SDRs conducted through the SDR Department. The SDR may

be allocated by the IMF, as a supplement to existing resrve assets, to members participating

in the SDR Department. Its value as a reserve asset derives, essentially from the

commitments of participants to hold and accept SDRs and to honour various obligations

connected with its proper functioning as a reserve asset.

The resources of the SDR Department are held separately from the assets of al

the other accounts of, or administered by, the IMF. They may not be used to meet the

liability, obligations, or losses of the Fund incurred in the operations of the General

Department or other accounts, except that the SDR Department reimburses the General

Department for expenses incurred in conducting the business of the SDR Department.

The SDR is also used by a number of international and regional organizations as

a unit of account or as the basis for their units of account. Several international conventions

also use the SDR as a unit of account, notably those expressing liability limits for the

international transport of goods and services.

Uses of SDRs

Participants and prescribed holders can use and receive SDRs in transactions and

operations by agreement among themselves. Participants can also use SDRs in operations

and transactions involving the General Resources Account, such as the payment of charges

and repurchases. By designating participants to provide freely usable currency to exchange

for SDRs, the IMF ensures that a participant can use its SDRs to obtain an equivalent

amount of currency if it has a need because of its balance of payments, its reserve position,

or development in its reserves.

General Allocations and Cancellations of SDRs

The IMF has the authority to provide unconditional liquidity through general

allocations of SDRs to participants in the SDR Department in proportion to their quotas

in the IMF. The IMF cannot allocate SDRs to itself or to other holders it prescribes. The

Articles also provide for the cancellation of SDRs, although to date there have been no

cancellations. In its decisions on general allocations of SDRs, the IMF, as prescribed

under its Articles, has sought to meet the long term global need to supplement existing

reserve assets in such a manner as will promote the attainment of the IMF ’s purposes

and avoid economic stagnation and deflation, as well as excess demand and inflation.

127

Table 5.2

Descending Order Rankings of Allocations and Holdings of SDRs of

IMF Member Countries (as of April 30, 2006)

(in thousands of SDRs)

Holdings

Net % of Above

Cumulative Total Cumulative (-) Below

Member Country Allocations Holdings Allocations Allocations

Eritrea - - - -

Marshall Islands - - - -

Palau - - - -

Timor-Leste - - - -

Turkmenistan - - - -

Poland - 56,179 - 56,179

Hungary - 46,002 - 46,002

Switzerland - 14,428 - 14,428

Kyrgyz Republic - 12,071 - 12,071

Brunei Darussalam - 10,483 - 10,483

Ukraine - 9,595 - 9,595

Albania - 9,475 - 9,475

Czech Republic - 9,238 - 9,238

Armenia - 9,034 - 9,034

Russian Federation - 4,433 - 4,433

Bulgaria - 4,160 - 4,160

Tajikistan - 3,851 - 3,851

Belize - 1,798 - 1,798

Georgia - 1,521 - 1,521

Micronesia,Federated States of - 1,257 - 1,257

Vanuatu - 1,011 - 1,011

Slovak Republic - 907 - 907

Kazakhstan - 815 - 815

San Marino - 686 - 686

Moldova - 496 - 496

Azerbaijan - 432 - 432

Bhutan - 304 - 304

Tonga - 296 - 296

Mozambique - 163 - 163

Angola - 151 - 151

Latvia - 102 - 102

Lithuania - 63 - 63

Estonia - 56 - 56

Belarus - 23 - 23

Namibia - 18 - 18

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Mongolia - 14 - 14

Kiribati - 10 - 10

Uzbekistan - 10 - 10

Antigua and Barbuda - 6 - 6

St.Kitts and Nevis - 2 - 2

Somalia 13,697 - - -13,697

Liberia 21,007 - - -21,007

Singapore 16,475 202,090 1226.60 185,615

Libya 58,771 501,034 852.50 442,263

Botswana 4,359 35,888 823.30 31,529

Paraguay 13,697 88,905 649.10 75,208

Lebanon 4,393 22,254 506.60 17,861

Kuwait 26,744 131,270 490.80 104,525

Iraq 68,464 293,105 428.10 224,641

China 236,800 927,840 391.80 691,040

Malta 11,288 32,525 288.10 21,237

Samoa 1,142 2,473 216.60 1,331

St.Lucia 742 1,530 206.20 788

Japan 891,690 1,810,377 203.00 918,687

Saudi Arabia 195,527 396,485 202.80 200,959

Qatar 12,822 25,823 201.40 13,001

Oman 6,262 10,578 168.90 4,316

Grenada 930 1,567 168.50 637

Turkey 112,307 155,317 138.30 43,010

Portugal 53,320 73,051 137.00 19,731

Sierra Leone 17,455 22,010 126.10 4,555

Norway 167,770 201,044 119.80 33,274

United States 4,899,530 5,790,474 118.20 890,944

Mauritius 15,744 18,081 114.80 2,337

Maldives 282 323 114.40 41

Iran,Islamic Republic of 244,056 274,877 112.60 30,821

Germany 1,210,760 1,340,859 110.70 130,099

Rwanda 13,697 15,162 110.70 1,465

Mexico 290,020 314,656 108.50 24,636

Colombia 114,271 122,525 107.20 8,254

Table 5.2 (contd.)


Holdings

Net % of Above



129

Lao People’s Dem.Rep. 9,409 9,859 104.80 450

South Africa 220,360 222,874 101.10 2,514

El Salvador 24,985 24,978 100.00 -7

Syrian Arab Republic 36,564 36,575 100.00 11

Malaysia 139,048 138,796 99.80 -252

Bolivia 26,703 25,917 97.10 -786

Netherlands 530,340 508,542 95.90 -21,798

Pakistan 169,989 150,384 88.50 -19,605

Fiji 6,958 5,666 81.40 -1,292

Canada 779,290 632,766 81.20 -146,524

Nepal 8,105 6,131 75.70 -1,973

Serbia and Montenegro 56,665 41,684 73.60 -14,981

Spain 298,805 216,316 72.40 -82,489

São Tomé and Príncipe 620 447 72.00 -173

Ireland 87,263 62,289 71.40 -24,974

Finland 142,690 98,991 69.40 -43,699

Luxembourg 16,955 11,704 69.00 -5,251

Guyana 14,530 9,504 65.40 -5,026

Haiti 13,697 8,536 62.30 -5,161

Argentina 318,370 192,026 60.30 -126,344

Austria 179,045 103,891 58.00 -75,154

France 1,079,870 622,235 57.60 -457,635

Egypt 135,924 75,056 55.20 -60,868

Morocco 85,689 46,722 54.50 -38,967

Uruguay 49,977 24,070 48.20 -25,907

Korea 72,911 32,287 44.30 -40,625

Sweden 246,525 108,840 44.10 -137,685

Belgium 485,246 210,677 43.40 -274,569

Denmark 178,864 71,687 40.10 -107,177

Swaziland 6,432 2,483 38.60 -3,949

Bahrain 6,200 2,143 34.60 -4,057

Central African Republic 9,325 3,079 33.00 -6,246

Slovenia 25,431 8,259 32.50 -17,172

Guinea-Bissau 1,212 392 32.40 -820

Indonesia 238,956 74,275 31.10 -164,681

Table 5.2 (contd.)


Holdings

Net % of Above



130

Chile 121,924 36,896 30.30 -85,028

Australia 470,545 135,933 28.90 -334,612

Macedonia 8,379 2,247 26.80 -6,132

Italy 702,400 176,077 25.10 -526,323

Djibouti 1,178 265 22.50 -913

Yemen, Republic of 28,743 6,439 22.40 -22,304

Greece 103,544 20,466 19.80 -83,078

United Arab Emirates 38,737 7,301 18.80 -31,436

Guinea 17,604 3,150 17.90 -14,454

New Zealand 141,322 23,990 17.00 -117,332

Ecuador 32,929 5,517 16.80 -27,412

Guatemala 27,678 4,397 15.90 -23,28

Zambia 68,298 10,607 15.50 -57,691

Cyprus 19,438 2,932 15.10 -16,506

Jordan 16,887 2,503 14.80 -14,384

Dominican Republic 31,585 4,140 13.10 -27,445

Suriname 7,750 1,014 13.10 -6,736

Israel 106,360 13,393 12.60 -92,967

United Kingdom 1,913,070 218,733 11.40 -1,694,337

Dominica 592 57 9.70 -535

Kenya 36,990 3,174 8.60 -33,816

Lesotho 3,739 302 8.10 -3,437

Equatorial Guinea 5,812 440 7.60 -5,372

Malawi 10,975 721 6.60 -10,254

Trinidad and Tobago 46,231 2,622 5.70 -43,609

Gabon 14,091 703 5.00 -13,388

Bosnia and Herzegovina 20,481 933 4.60 -19,548

Sri Lanka 70,868 3,114 4.40 -67,754

Brazil 358,670 13,798 3.80 -344,872

Romania 75,950 2,819 3.70 -73,131

Congo,Republic 9,719 312 3.20 -9,407

Philippines 116,595 3,746 3.20 -112,849

Senegal 24,462 781 3.20 -23,681

Cameroon 24,463 750 3.10 -23,713

Tunisia 34,243 942 2.80 -33,301

Table 5.2 (contd.)


Holdings

Net % of Above



131

Chad 9,409 250 2.70 -9,159

Gambia,The 5,121 136 2.70 -4,985

Seychelles 406 11 2.60 -396

Panama 26,322 562 2.10 -25,760

Uganda 29,396 589 2.00 -28,807

Cape Verde 620 12 1.90 -608

Niger 9,409 178 1.90 -9,231

Peru 91,319 1,616 1.80 -89,703

Benin 9,409 148 1.60 -9,261

Solomon Islands 654 10 1.60 -644

Comoros 716 11 1.50 -705

Vietnam 47,658 713 1.50 -46,945

Ethiopia 11,160 144 1.30 -11,016

Ghana 62,983 799 1.30 -62,184

Mauritania 9,719 128 1.30 -9,591

Côte d’Ivoire 37,828 456 1.20 -37,372

Jamaica 40,613 492 1.20 -40,121

Madagascar 19,270 235 1.20 -19,035

Mali 15,912 191 1.20 -15,721

Myanmar 43,474 525 1.20 -42,949

Togo 10,975 129 1.20 -10,846

Croatia 44,205 488 1.10 -43,718

Nicaragua 19,483 216 1.10 -19,267

Nigeria 157,155 1,678 1.10 -155,477

Algeria 128,640 1,273 1.00 -127,367

Bahamas,The 10,230 107 1.00 -10,123

Bangladesh 47,120 448 1.00 -46,672

Burkina Faso 9,409 97 1.00 -9,312

Burundi 13,697 132 1.00 -13,565

Cambodia 15,417 149 1.00 -15,268

Papua New Guinea 9,300 91 1.00 -9,209

Sudan 52,192 547 1.00 -51,645

Tanzania 31,372 303 1.00 -31,069

Zimbabwe 10,200 102 1.00 -10,098

Congo,Dem. Rep. 86,309 809 0.90 -85,500

Table 5.2 (contd.)


Holdings

Net % of Above



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Honduras 19,057 169 0.90 -18,888

St.Vincent and Grenadines 354 3 0.90 -350

Barbados 8,039 67 0.80 -7,972

Venezuela 316,890 2,620 0.80 -314,270

Costa Rica 23,726 172 0.70 -23,554

Thailand 84,652 577 0.70 -84,075

Iceland 16,409 103 0.60 -16,306

India 681,170 3,805 0.60 -677,365

Afghanistan 26,703 23 0.10 -26,680

Above Allocations 8,955,651 13,280,520 148.3 4,324,869

Below Allocations 12,477,679 4,253,303 34.1 (8,224,376)

Total Holdings 21,433,330 17,533,823

General Resources Account 3,640,792

Prescribed holders* 296,388

Overdue charges 37,673

Total 21,471,003 21,471,003

Source: IMF’s Annual Report-2006, pp.197-99.

*These 16 prescribed holders of SDRs are: (1) African Development Bank, (2) African Develop-

ment Fund, (3) Arab Monetary Fund, (4) Asian Development Bank, (5) Bank of Central African

States, (6) Bank for International Settlements, (7) Central Bank of West African States, (8)

East African Development Bank, (9) EasternCaribbean Central Bank, (10) European Central

Bank, (11) International Bank for Reconstruction and Development (the World Bank), (12)

International Development Association, (13) International Fund for Agricultural Development,

(14) Islamic Development Bank, (15) Latin American Reserve Fund, and (16) Nordic Investment

Bank.

Table 5.2 (contd.)


Holdings

Net % of Above



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Regular Financing Activities

The IMF’s regular lending activity is conducted through the General Resources

Account (GRA), which holds the subscriptions of members. The bulk of the financing is

provided under Standby Arrangements, which address members’ balance of payments

difficulties of a short-term cyclical nature, and under the Extended Fund Facility (EFF),

which focuses on external payments difficulties arising from longer-term structural

problems. Loans under Standby and Extended Arrangements can be supplemented with

short-term resources from the Supplemental Reserve Facility (SRF) to assist members

experiencing a sudden and disruptive loss of capital market access. All loans incur interest

charges and can be subject to surcharges based on the type and duration of the loan, and

the amount of IMF credit outstanding. Repayment periods also vary by funding facility.

5.2 IMF’S FINANCIAL OPERATIONS IN FY 2001

International Financial Developments

The key financial developments in FY 2001 included:

• A reduction in the outstanding IMF loans, as improved conditions in the world

economy and financial markets contributed to a moderation of new financial aid

and facilitated the repayment of loans extended during the height of the 1997-99

financial crises;

• Intensifying efforts to assist the IMF’s poorest members with the implementation

of initiatives to reduce the debt burdens of the HIPCs and to focus the IMF’s

concessional lending activities more explicitly on poverty reduction;

• Introducing important changes to the IMF’s loan policies to encourage early

adoption of sound economic policies as a means of preventing crises and to

discourage overly-long and heavy use of IMF resources by member countries;

• Modifying the valuation of the SDRs to take account of the introduction of the

euro as the common currency for a number of IMF members and to reflect changes

in global financial markets.

Lending

Favourable global and economic conditions contributed to a decline in new IMF

commitments in FY 2001. Total commitments fell to SDR 14.5 billion in FY 2001 from

SDR 23.5 billion in FY 2000 (as on April 30, 2001, SDR 1 = US$ 1.26579).

The IMF approved nine new Standby Arrangements involving commitments

totalling SDR 2.1 billion and two commitments under Standby Arrangements already in

place were increased by SDR 11 billion. Only one new EFF arrangement was approved,

for the former Yugoslav Republic of Macedonia, for SDR 24 million. The commitment

under Yemen’s EFF was reduced by SDR 37 million.

The largest IMF commitments during the year reflected additions to existing

Standby Arrangements for Argentina and Turkey, including the provision of shorter-

term financing under the SRF. In December 2000, the arrangement with Turkey was

134

increased by SDR 5.8 billion (all from the SRF) to deal with a loss of market confidence

that threatened progress of macroeconomic stabilization and structural reform under the

programme adopted by Turkey in 1999. In January 2001, Argentina’s Standby

Arrangement was increased by SDR 5.2 billion (of which 2.1 billion involved SRF

resources) as part of an international effort to support the country’s reform programme

and improve its access to international capital markets.

In continuation of prevailing trends, a growing volume of IMF financing

commitments under Standby and Extended Arrangements were being treated as

precautionary, with borrowers indicating that they did not intend to draw on the funds

committed to them by the IMF. Drawings were made under only 16 of the 37 Standby

and Extended Arrangements in place during the year. At the end of April 2001, undrawn

balances under the 25 Standby and Extended Arrangements still in effect amounted to

SDR 22.4 billion, that is, about two-thirds of the total amount committed.

Financing provided under the IMF’s facilities for emergency assistance and

compensatory financing was modest in FY 2001. Emergency post-conflict assistance of

SDR 138 million was provided to three countries (Republic of Congo, Sierra Leone,

Federal Republic of Yugoslavia). No country received assistance under the Compensatory

Financing Facility (CFF).

During FY 2001, the IMF disbursed SDR 9.5 billion in loans from its General

Resources Account. The amount of new credit was more than offset by continued

substantial repayment of loans extended in earlier years. Total repayments were SDR

11.2 billion, including advance repayments by Korea (SDR 2.0 billion) and Mexico (SDR

2.3 billion). Consequently, IMF credit outstanding at the end of FY 2001 amounted to

SDR 42.2 billion, a little lower than a year earlier and some SDR 18 billion below the

peak attained during the recent financial crises.

A review of IMF facilities resulted in a number of other important measures

affecting the duration and size of future IMF financing under Standby and Extended

Arrangements. The new policies on time-based early repurchase expectations and the

level-based interest surcharge apply to drawings made after the date of the decision by

the Executive Board. As of April 30, 2001, financing of SDR 3.7 billion was subject to

early repurchase expectations under these policies; at that time, no outstanding credit

was subject to the level-based surcharge.

Resources and Liquidity

The IMF’s financial position, which improved significantly following the 1999

increase in quotas, remained strong at the close of the financial year. On April 30, 2001,

the IMF had SDR 78.7 billion in usable quota resources available for new lending,

compared with SDR 74.8 billion a year earlier and nearly four times higher than the low

point prior to the quota increase. In addition to the net reflows noted earlier, a number

of Standby and Extended Arrangements with large undrawn balances expired (including

Korea, Mexico and Russia), which made about SDR 7.0 billion in funds available for

new lending. Finally, three new countries were considered sufficiently strong for their

currencies to be included in the IMF’s financial operations (Korea, Oman and Qatar),

135

and an increase in China’s quota provided additional usable funds.

Other Developments

A number of quota-related developments took place during FY 2001:

• China’s quota was increased to reflect the resumption of Chinese sovereignty

over Hong Kong. The increase of SDR 1,682 million raised China’s quota to

SDR 6,369.2 million, or 3.0 per cent of total quotas.

• The Executive Board of the IMF agreed that the quota formulas should be

simplified and updated to reflect developments in the world economy, including

the growing role of financial markets. However, concerns were expressed that

the formula recommended by the panel of experts could contribute to a further

concentration of quotas in the largest IMF members. It was, therefore, agreed to

consider possible alternative formalities following additional analysis.

• In December 2000, the Federal Republic of Yugoslavia (Serbia/Montenegro)

fulfilled the necessary conditions to succeed to membership of the former Socialist

Republic of Yugoslavia and consented to, and paid for, a quota of SDR 467.7

million.

• As of April 30, 2001, 174 member countries accounting for more than 99 percent

of total quotas proposed in 1998 under the 11th General Review of Quotas had

consented to, and paid for, their quota increases. Three member countries eligible

to consent to the proposed increases in their quotas had not done so by the end

of the financial year, and six countries were ineligible to consent to their proposed

increases because they were in arrears to the IMF. On January 16,2001, the

Executive Board approved an extension of the period for consent to, and payment

of, quota increase under Eleventh Review until July 31st, 2001. At the end of the

FY 2001, total quotas amounted to SDR 212.4 billion.

Concessional Financing

The IMF provides concessional assistance to help its poorest members boost

their economic growth and reduce poverty through the Poverty Reduction and Growth

Facility (PRGF) and in the context of the Initiative for Heavily Indebted Poor Countries

(HIPCs). In FY 2001, the financing of the PRGF and HIPC Initiative was largely

completed, with significant progress in obtaining bilateral contributions and in securing

the full use of investment income on the profits from the off-market gold transactions

undertaken in FY 2000. A total 37 member countries received PRGF financing during

FY 2001, and 23 countries had received financial commitments under the HIPC Initiative

by the end of the FY 2001.

Pattern of SDR Holdings

The total level of transfers of SDRs continued to decrease in FY 2001, to SDR

18.7 billion, compared with SDR 22.9 billion the previous year, and the peak of SDR

49.1 billion in FY 1999 when the volume of SDR transactions increased significantly

because of payments for the quota increase.

136

By the end of FY 2001, the IMF’s own holdings of SDRs which had risen sharply

as a result of payments for quota subscriptions in 1999, had fallen to SDR 2.4 billion

from SDR 2.7 billion a year earlier, toward the targeted range of SDR 1.0-1.5 billion, in

which the IMF seeks to maintain SDR holdings. SDRs held by prescribed holders also

decreased, by 0.2 billion. Consequently, the SDR holdings by participants increased to

SDR 18.6 billion from SDR 18.1 billion in FY 2000.

The SDR holdings of the industrial and net creditor countries relative to their net

cumulative allocation increased from a year earlier. This increase was mainly due to

large interest payments made to those members. The SDR holdings of non-industrial

members declined to 54.6 percent of their net cumulative allocations from 62.5 per cent

a year earlier, mainly as a result of repayments and payments of interest charges on loans

from the General Resources Account.

Progress under the Strengthened Cooperative Strategy

The strengthened cooperative strategy on overdue financial obligations to the

IMF, initiated in May 1990 in response to mounting concerns about rising arrears during

the 1980s, consists of three essential elements: prevention, intensified collaboration,

and remedial measures.

In FY 2001, the Executive Board conducted several reviews of member countries’

overdue financial obligations to the IMF during the year. The Board reviewed Liberia’s

overdue obligations on November 15, 2000, and noted a regrettable weakening of policy

implementation. The Board decided to consider the initiation of procedure for the

suspension of Liberia’s voting rights in the IMF. The Board reviewed Sudan’s overdue

obligations twice and noted that Sudan’s payments to the IMF were in line with

commitments and that policy performance was broadly on track under the staff-monitored

programmes for 1999-2001. Under its policy of de-escalation of remedial measures, the

Board terminated its suspension of Sudan’s voting rights in the IMF with effect from

August 1, 2000, following the earlier lifting of the declaration of non-cooperation

regarding Sudan in August 1999. The Board held no reviews of the overdue obligations

of the Democratic Republic of Congo, Somalia, and other protracted arrears cases.

At the end of April 2001, the Democratic Republic of Congo, Liberia, Somalia,

Sudan, Iraq and the Islamic State of Afghanistan remained ineligible under Article XXVI,

Section 2(a), to use the general resources of the IMF. Declarations of non-cooperation,

a further step under the strengthened cooperative arrears strategy, were in effect for the

Democratic Republic of Congo (issued on February 14, 1992) and Liberia (issued on

March 30, 1990). In addition, the voting rights of the Democratic Republic of Congo

remained suspended (effective June 2, 1994).

Protracted arrears to the IMF (defined as obligations overdue six months or more)

declined in FY 2001 to SDR 2.24 billion as of April 30, 2001, from SDR 2.32 billion a

year earlier. These arrears continued to be concentrated among four member countries -

the Democratic Republic of Congo, Liberia, Somalia and Sudan, whose arrears accounted

for almost all overdue obligations to the IMF as of April 30, 2001.

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The Federal Republic of Yugoslavia (Serbia/Montenegro) cleared its arrears of

SDR 101.1 million on December 20, 2002, prior to succeeding to the membership in the

IMF of the former Socialist Federal Republic of Yugoslavia.




• An increase in outstanding IMF loans as the slowdown in the world economy

contributed to a worsening of the balance payments difficulties of several countries

that experienced reduced access to international capital markets;

• Continued efforts to assist the IMF’s poorest members with the implementation

of initiatives to reduce the debt burdens of the heavily indebted poor countries

and to focus the IMF’s concessional lending activities more explicitly on poverty

reduction;

• Commencement by the IMF of a review of the size and distribution of members’

capital subscriptions and consideration of a possible general allocation of SDRs.

Lending

Augmentation of existing arrangements as well as new arrangements for Brazil

and Turkey, all in amounts larger than usual, contributed to a sharp rise in new IMF

commitments in FY 2002. Total commitments increased to SDR 39.4 billion in FY 2002

from SDR 13.1 billion in FY 2001. The IMF approved nine new Standby Arrangements

involving commitments totalling SDR 26.7 billion, and commitments to Argentina and

Turkey under Standby Arrangements already in place were augmented by SDR 12.7

billion. No EFF arrangements were approved in FY 2002.

The largest IMF commitments during the year reflected new Standby Arrange-

ments for Brazil and Turkey, including the provisions of shorter-term financing under

the SRF. In September 2001, a Standby Arrangement of SDR 12.1 billion (SDR 10

billion under the SRF) was approved for Brazil in support of the government’s economic

and financial programme. In February 2002, the IMF approved a 3-year SDR 12.8 billion

Standby Arrangement for Turkey to support the government’s economic programme,

which replaced the previous arrangement approved in December 1999.

Increased use of precautionary Standby Arrangements, as well as other factors

such as uncompleted reviews and interrupted programmes, resulted in drawings being

made under only 16 of the 34 Standby and Extended Arrangements in place during the

year. At the end of April 2002, undrawn balances under the 17 Standby and Extended

Arrangements still in effect amounted to SDR 26.9 billion, about half of the total amount

committed (SDR 51.7 billion). No commitments were made under the IMF’s policy for

emergency assistance, the Compensatory Financing Facility (CFF) or Contingent Credit

Lines (CCLs) during the year.

During FY 2002, the IMF disbursed SDR 29.1 billion in loans from its GRA. The

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amount of new credit exceeded the repayment of loans extended in earlier years. Total

repayments were SDR 19.2 billion, including advance repayments by Brazil (SDR 3.3

billion), Korea (1.9 billion) and Turkey (SDR 4.5 billion). Consequently, IMF credit

outstanding at the end of the FY 2002 amounted to SDR 52.1 billion, SDR 9.9 billion

higher than a year earlier but some SDR 8.5 billion below the peak attained during the

recent financial crises.

A review of IMF facilities completed in FY 2001 resulted in a number of important

measures affecting the duration and size of future IMF financing under Standby and

Extended Arrangements. The new policies on time-based early repurchase expectations

and the level-based interest surcharge apply to drawings made after the date of the decision

of the Executive Board (November 29, 2000). As of April 30, 2002, financing amounting

to SDR 21.9 billion was subject to early repurchase expectations under these policies; at

that time, SDR 11.6 billion was subject to the level-based surcharge.


The IMF’s financial position weakened somewhat during the financial year but

remained comfortable. On April 30, 2002, the IMF had SDR 64.7 billion in net

uncommitted usable resources, compared with SDR 78.7 billon a year earlier. A number

of new, large Standby Arrangements and the augmentation of several existing Arrange-

ments resulted in a decline of available resources. However, this effect was partly offset

by expiration of some arrangements with undrawn balances and by some advance

repayments, both of which increased resources available for new lending. Similarly, the

amount of usable resources increased because two countries (Cyprus and Korea) were

considered sufficiently strong for their currencies to be newly included on the transfer

side of the IMF’s financial transactions plan, which may be described as under:

The IMF extends loans by providing reserve assets from its own holdings and

by calling on financially strong countries to exchange the IMF’s holdings of

their currencies for reserve assets the members that participate in the financing

of IMF transactions in foreign exchange are selected by the Executive Board

based on an assessment of each country’s financial capacity. These assessments

are ultimately a matter of judgment and take into account recent and prospective

developments in the balance of payments and reserves, trends in exchange rates,

and the size and duration of external debt obligations.

The amounts transferred and received by these members are managed to

ensure that their creditor positions in the IMF remain broadly the same in relation

to their quota, the key measure of each member’s rights and obligations in the

IMF. This is achieved in the framework of an indicative quarterly plan for the

quarter ending three months prior to publication. As of April 30, 2002, the 40

members listed below were participating in financing IMF transactions:

Australia Denmark Korea Saudi Arabia

Austria Finland Kuwait Singapore

Belgium France Luxembourg Slovenia

Botswana Germany Netherlands Spain

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Brunei Greece New Zealand Sweden

Canada Hungary Norway Switzerland

Chile Ireland Oman Trinidad and Tobago

China Israel Poland United Arab Emirates

Cyprus Italy Portugal United Kingdom

Czech Rep. Japan Qatar United States

Quota Developments

A number of quota-related developments took place during FY 2002:

• The 12th General Review of Quotas began in December 2001 with the formation

of a Committee of the Whole to consider the possible need to increase quotas. As

part of this process, the IMF’s Executive Board held an informal seminar on

conceptual issues involved in assessing the adequacy of the IMF’s resource base.

It was noted that the 12th Review is being conducted in the context of increased

global economic and financial integration, including access by a growing number

of countries to private capital markets and greater vulnerability to economic shocks

and financial market volatility. At the same time, many countries had improved

economic policy and performance, leading to a decrease in vulnerability. There

was a broad recognition that these diverse factors, as well as the IMF’s efforts to

adapt its policies to deal with the challenges of globalization, would have important

implications for the future demand for IMF financing. However, there was no

converging view in the Executive Board on the extent to which, on balance, the

various developments could affect the required size of the IMF’s resource base.

• The IMF’s Executive Board also held further discussion on possible revisions of

the formulas used in determining members’ quotas. The Directors expressed a

wide range of views on the structure and content of alternative quota formulas.

It was agreed that further work was needed to develop quota formulas that more

fully reflected members’ roles in the world economy, though it was also noted

that this was a difficult task, because quotas performed a variety of roles. It was

mostly agreed that any new quota formula should be simple and transparent, and

it was generally endorsed that the use in quota formulas of variables that had

traditionally been considered to reflect the IMF’s financial functions (that is, GDP,

openness, variability, and possibly, reserves). However, it was noted that these

variables needed to be modernized to take account of changes in the world

economy, in particular, the large and growing role of international capital flows.

Mostly, it was further recognized that the issues related to the governance of the

IMF were unlikely to be resolved solely through revisions of the quota formulas,

although the revised formulas that commanded wide support could contribute to

the gradual adjustment of quotas. At the same time, it was felt that, apart from

the choice of formula, it was important to address without delay the situation of

countries whose actual quotas were significantly below their calculated quotas.

The desirability of ensuring the proper representation of the IMF’s decision-making

of developing countries, especially the IMF’s poorest member countries,

particularly those in Africa was also underscored.

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• As of April 30, 2002, 174 member countries accounting for more than 99 percent

of total quotas proposed in 1998 under the 11th General Review of Quotas had

consented to, and paid for, their quota increases. Three member countries eligible

to consent to the proposed increases in their quotas had not done so by the end

of the FY 2002, and six countries were ineligible to consent to their proposed

increases because they were in arrears to the IMF. On January 31, 2002, the

Executive Board approved an an extension of the period for consent to, and

payment of, quota increases under the 11th Review until July 31, 2002. At the

close of the financial year, total quotas amounted to about SDR 212.4 billion.


A total of 36 member countries received Poverty Reduction and Growth Facility

(PRGF) financing during FY 2002, and 26 countries received financial commitments

under the Heavily Indebted Poor Countries (HIPC) Initiative by the end of FY 2002.

During FY 2002, the Executive Board approved nine new PRGF arrangements

(for Armenia, Azerbaijan, Cape Verde, Côte d’Ivoire, Guinea, the Kyrgyz Repblic,

Mongolia, Pakistan and Sierra Leone) with commitments totalling SDR 1.8 billion; in

addition, augmentations of existing commitments totalling SDR 66 million were approved

for Chad, Ethiopia, Ghana, and Mali. Total PRGF disbursements during FY 2002

amounted to SDR 1.0 billion, compared with SDR 0.6 billion in FY 2001. As of April

30, 2002, 36 member countries’ reform programmes were supported by PRGF

arrangements, with IMF commitments totalling SDR 4.3 billion and undrawn balances

of SDR 2.7 billion.

During FY 2002, 10 lenders (Belgium, China, Egypt, France, Germany, Italy,

Japan, Netherlands, Spain and Switzerland) made SDR 4.4 billion in new loan resources

available to finance future PRGF operations. Consequently, the borrowing limit for loan

resources of the PRGF Trust was increased from SDR 11.5 billion to SDR 16 billion in

September 2001.

The framework for the PRGF envisages that commitment would be financed

through 2005 from external sources. The continuation of concessional lending for the

period after 2005 would need to be reassessed closer to that time, but a substantial

proportion of such lending is expected to be provided from the IMF’s own resources

accumulating in the PRGF Trust Reserve Account. These resources will become available

as PRGF lenders are repaid and the security provided by the Reserve Account is no

longer needed.

Post-Conflict Emergency Assistance

The IMF provides emergency assistance to countries that are emerging from

conflict through loans, subject to the IMF’s basic rate of charge. An administered account

was established on May 4, 2001, to accept contributions by bilateral donors that would

enable the IMF to provide such assistance at a concessional rate of charge of 0.5 percent

for PRGF-eligible members. As of April 30, 2002, Sweden and United Kingdom had

provided grants to the account, and Belgium, the Netherlands, and Switzerland had also

141

committed to providing such resources. Total pledged grant contributions amounted to

about SDR 7 million, of which SDR 1.4 million had been paid. Disbursements totalled

SDR 0.8 million to subsidize the rate of charge on post-conflict emergency assistance

for six countries (Albania, the Republic of Congo, Guinea-Bissau, Rwanda, Sierra leone,

and Tajikistan).

Special Drawing Rights (SDRs)

The total level of transfers of SDRs continued to decrease in FY 2002, to SDR

14 billion, compared with SDR 18.7 billion in the previous year and the peak of SDR

49.1 billion in FY 1999, when the volume of SDR transactions increased significantly

because of payments for the quota increase. By the end of FY 2002, the IMF’s own

holdings of SDRs, which had risen sharply as a result of payments for quota subscriptions

in 1999, had fallen to SDR 1.5 billion from SDR 2.4 billion a year earlier, in the targeted

range of 1.0-1.5 billion, in which the IMF seeks to maintain its SDR holdings. SDRs

held by prescribed holders amounted to SDR 0.4 billion. Consequently, SDR holdings

by participants increased to SDR 19.6 billion from SDR 18.7 billion in FY 2001. SDR

holdings of the industrial and net creditor countries relative to their net cumulative

allocation increased from a year earlier. This increase was mainly due to large interest

payments made to those members. SDR holdings of non-industrial members increased

to 56.9 percent of their net cumulative allocations from 54.6 percent a year earlier.

Arrears to the IMF

In FY 2002, total overdue financial obligations to the IMF increased to SDR

2.36 billion from SDR 2.24 billion a year earlier, mainly reflecting the continued

accumulation of arrears by Zimbabwe, who represents the first new case of significant

arrears to the GRA since 1993 and the first case of arrears to the PRGF Trust.

At the end of April 2002, more than 97 percent of the total arrears to the IMF

were protracted (outstanding for more than six months), about evenly divided between

overdue principal and overdue charges and interest; almost 90 per cent of arrears were

to the GRA.

Five countries with the largest protracted arrears to the IMF, the Democratic

Republic of Congo, Liberia, Somalia, Sudan and Zimbabwe, accounted for almost 98

percent of the overdue financial obligations to the IMF. Under the IMF’s strengthened

cooperative strategy on arrears, remedial measures have been applied against the countries

with protracted arrears to the IMF. However, in cases of Islamic State of Afghanistan,

the Democratic Republic of Congo, Iraq and Somalia, application of remedial measures

has been delayed or suspended because of civil conflicts, the absence of a functioning

government, or international sanctions.

At the end of April 2002, the Democratic Republic of Congo, Liberia, Somalia,

Sudan and Zimbabwe were ineligible under Article XXVI, Section 2(a) to use the general

resources of the IMF, a further step under the strengthened cooperative arrears strategy,

were in effect for the Democratic Republic of Congo and Liberia, and the voting rights

of the Democratic Republic of Congo remained suspended.

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• The IMF completed a review of members’ capital subscriptions (quotas) and

concluded that no general increase in its capital base was necessary for the time

being;

• Outstanding IMF credit to members increased as capital flows to emerging market

countries continued to decline and several members with very large external

financing needs faced reduced access to international capital markets;

• The IMF continued its efforts to assist its poorest members to reduce their debt

burdens and to focus its concessional lending activities more explicitly on poverty

reduction.

Lending

New IMF commitments in FY 2003 were dominated by a large Standby

Arrangement for Brazil. In addition, new large arrangements for Colombia and Argentina,

as well as augmentations of the existing arrangement for Uruguay, kept the level of total

commitments in FY 2003 relatively high, with new commitments amounting to SDR

29.4 billion compared with SDR 39.4 billion in FY 2002. The IMF approved ten new

Standby Arrangements involving commitments totaling SDR 27.1 billion, and the

commitment to Uruguay under the Standby Arrangement already in place was augmented

by SDR 1.5 billion. In addition, two EFF arrangements were approved in FY 2003: SDR

0.7 billion for Serbia and Montenegro and SDR 0.1 billion for Sri Lanka. Burundi,

Grenada, and Malawi made small purchases under the IMF’s policy of emergency

assistance. No commitments were made under the IMF’s Compensatory Financing Facility

(CFF) or Contingent Credit Line (CCL) during the year.

The arrangement for Brazil, the larg`est in the IMF’s history, was approved in

September 2002. This arrangement supports the government’s economic program through

December 2003. The total commitment of SDR 22.8 billion included SDR 7.6 billion

under the SRF. In January 2003, the IMF approved a seven-month, SDR 2.2 billion

Standby Arrangement for Argentina, which replaced the previous arrangement approved

in March 2000. Another large arrangement was also approved in January 2003, a two-

year, SDR 1.5 billion Standby Arrangement for Colombia. Of the current 15 Standby

Arrangements, three are being treated as precautionary, with borrowers having indicated

that they do not intend to draw on the funds committed to them by the IMF. Use of

precautionary Standby Arrangements, as well as other factors such as uncompleted

reviews and interrupted programs, resulted in drawings being made under only 18 of the

29 Standby and Extended Arrangements in place during the year. At the end of April

2003, undrawn balances under the 18 Standby and Extended Arrangements still in effect

amounted to SDR 23.6 billion, about half of the total amount committed under those

arrangements (SDR 47.2 billion).

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During FY 2003, the IMF disbursed SDR 21.8 billion in loans from its GRA. The

amount of new credit exceeded the repayment of loans extended in earlier years. Total

repayments were SDR 7.8 billion, including advance repayments by Croatia (SDR 0.1

billion, which eliminated its outstanding IMF credit), Thailand (SDR 0.1 billion), and

Estonia and Lithuania. Consequently, IMF credit outstanding at the end of the year

amounted to a record high SDR 66.0 billion, SDR 13.9 billion higher than a year earlier.

In February 2003, the repurchase (repayment) expectations introduced at the

time of a review of IMF facilities completed in FY 2001, began to take effect. In FY

2003, repurchase expectations arose for four members: Argentina, Bosnia/Herzegovina,

Pakistan, and Turkey. In February-March 2003, Bosnia and Herzegovina, Pakistan, and

Turkey repurchased SDR 0.1 billion on the expectations schedule. For Argentina,

repurchase expectations arising in FY 2003 (SDR 0.3 billion) and in FY 2004 (SDR 0.4

billion) have been extended by one year in the context of the programme approved in

January 2003. Repurchase expectations arising in FY 2004 have also been extended for

Ecuador, Sri Lanka, and Uruguay. As of April 30,2003, IMF financing amounting to

SDR 32.9 billion was subject to early repurchase expectations under the policies adopted

in November 2000; in addition, SDR 28.7 billion was subject to the new surcharges on

high levels of IMF credit also introduced at that time.


The base of usable resources increased during the financial year because four

additional members (India, Malaysia, Mauritius, and Mexico) were considered sufficiently

strong for their currencies to be included in the IMF’s financial transactions plan. The

IMF’s liquidity position remained adequate throughout the year to meet the needs of its

members. The one-year forward commitment capacity (FCC), a new measure of liquidity

introduced during FY 2003, amounted to SDR 61 billion on April 30, 2003, compared

with SDR 59 billion a year earlier. During the first half of the financial year, the FCC

weakened significantly following the approval of the large arrangement for Brazil, but

recovered thereafter following the expiry and cancellation of two arrangements with

substantial undrawn balances (Colombia and Argentina) and an increase in repayments

projected over the 12-month forecast period.

Quota Developments

A number of quota-related developments took place during the financial year.

The Directors continued their exchange of views on the implications for the size of the

IMF of globalization, the integration of financial markets, and the IMF’s efforts to

strengthen its capacity to prevent and resolve financial crises. There was broad recognition

that greater reliance on private market financing by many countries had contributed to

increased vulnerability to capital account shocks, and that such shocks could be quite

large in absolute amounts and relative to the size of an economy. There was also

recognition that global economic and financial integration might entail the risk of financial

contagion. The Directors generally agreed that the IMF’s crisis prevention efforts will

contribute to a reduction in the frequency and severity of financial crises, through

improved surveillance that promotes sound economic policies and strengthens the

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functioning of domestic international capital markets.

At the same time, the Directors accepted that future crises would occur, and that

the IMF would need to continue to play a central role in crisis resolution and, therefore,

should have adequate resources at hand. However, views differed on the extent to which

the IMF’s response to these developments would or should result in large financing that

could require additional IMF resources. The Board also held further discussions on

various issues involved in revising and updating the quota formulas to reflect changes in

the world economy and measure the countries’ relative positions more adequately.

Progress was made in discussing the development of alternative formulas that, based on

an updating of the traditional variables, are intended to be simpler and more transparent

than the current formulas. The discussions clarified that the selection of weights for the

variables and the distribution of quotas are inextricably linked, and that decisions on

possible changes in quota shares will need to take account of other quota-related issues,

including the financial size of the IMF and access to its resources by borrowers. This

approach would help address concerns about overloading the quota formulas with too

many objectives, including the determination of members’ contributions to the IMF,

access to IMF’s resources, and relative voting power.

As of April 30, 2003, 177 member countries accounting for more than 99 percent

of total quotas proposed in 1998 under the 11th General Review of Quotas had consented

to, and paid for, their then-proposed quota increases. Two member countries eligible to

consent had not done so by the end of the financial year, and four countries were ineligible

to consent to their proposed increases because they were in arrears to the IMF. On

January 23, 2003, the Board approved an extension of the period for consent to, and

payment of, quota increases under the Eleventh Review until July 31, 2003. At the close

of the financial year, total subscribed quotas amounted to about SDR 212.7 billion.

Borrowing Arrangements

The IMF can borrow to supplement its quota-based resources. It maintains two

standing borrowing arrangements with official lenders and can borrow from private

markets, although it has not done so to date. Borrowing has played an important role in

providing temporary supplemental resources to the IMF at critical junctures in the past.

At April 30, 2003, there was no outstanding borrowing. The last outstanding borrowing

was repaid in March 1999, upon receipt by the IMF of the bulk of quota payments under

the 11th General Review.

General Arrangements to Borrow (GAB)

The GAB, which have been in place since 1962, are a set of credit arrangements

under which 11 participants (industrial countries or their central banks) have agreed to

provide resources to the IMF to forestall or cope with an impairment of the international

monetary system. The potential amount of credit available to the IMF under the GAB

totals SDR 17 billion, with an additional SDR 1.5 billion available under an associated

agreement with Saudi Arabia. The GAB have been activated ten times, most recently in

July 1998 for an amount of SDR 6.3 billion (SDR 1.4 billion of which was drawn) in

connection with the financing of an Extended Arrangement for Russia. The activation

145

was canceled and the borrowing was repaid in March 1999. The GAB decision has been

renewed nine times, most recently in November 2002, when the IMF Executive Board

approved its renewal for a further period of five years from December 2003.

New Arrangements to Borrow (NAB)

The NAB, which took effect in November 1998, are a set of credit arrangements

under which 26 participants (member countries and official institutions) have agreed to

provide resources to the IMF to forestall or cope with an impairment of the international

monetary system or to deal with an exceptional situation that poses a threat to the stability

of that system. The potential amount of credit available to the IMF under the NAB totals

SDR 34 billion This is also the total amount of credit potentially available under the

GAB and NAB combined. The NAB is the first and principal recourse in the event of a

need to provide supplementary resources to the IMF, except that: (1) in the event of a

request for a drawing on the IMF by a participating member, or a member whose institution

is a participant, in both the GAB and NAB (all GAB participants are also participants in

the NAB), a proposal for calls may be made under either of the facilities; and (2) in the

event that a proposal for calls under the NAB is not accepted, a proposal for calls may

be made under the GAB. The NAB has been activated once, to finance a Standby

Arrangement for Brazil in December 1998, when the IMF called on funding of SDR 9.1

billion (SDR 2.9 billion of which was drawn). The activation was canceled and borrowing

was repaid in March 1999. In November 2002, the NAB decision was renewed for a

further period of five years from November 2003. The Banco Central de Chile (as an

official institution of Chile) became the twenty-sixth NAB participant, effective February

2003.


The IMF provides concessional assistance to help its poorest members boost

economic growth and reduce poverty under the Poverty Reduction and Growth Facility

(PRGF) and the Initiative for Heavily Indebted Poor Countries (HIPC). As of April 30,

2003, a total of 36 member countries received PRGF financing, and 27 countries had

received financial commitments under the HIPC Initiative by the end of the financial

year.

Poverty Reduction and Growth Facility

In 1999, the objectives of the IMF’s concessional lending were modified to include

an explicit focus on poverty reduction in the context of a growth-oriented economic

strategy. The IMF, along with the World Bank, supports strategies elaborated by the

borrowing country in a Poverty Reduction Strategy Paper (PRSP) prepared with the

participation of civil society and other development partners. Reflecting the new objectives

and procedures, the IMF established the PRGF, which replaced the Enhanced Structural

Adjustment Facility (ESAF), to provide financing under arrangements developed in the

context of PRSPs. During FY 2003, the Executive Board approved 10 new PRGF

arrangements (for Albania, the Democratic Republic of the Congo, the Gambia, Guyana,

Nicaragua, Rwanda, Senegal, Sri Lanka, Tajikistan, and Uganda) with commitments

totaling SDR 1.2 billion; in addition, the amount committed under the existing loan to

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Zambia was increased by SDR 24 million. Total PRGF disbursements amounted to SDR

1.2 billion during FY 2003. As of April 30, 2003, 36 member countries’ reform programs

were supported by PRGF arrangements, with commitments totaling SDR 4.5 billion and

undrawn balances of SDR 2.5 billion. Financing for the PRGF is provided through trust

funds administered by the IMF - the PRGF Trust and PRGF-HIPC Trust - that are separate

from the IMF’s quota-based resources and that are financed from contributions from a

broad spectrum of the IMF’s membership and the IMF itself. The PRGF Trust borrows

resources at market or below-market interest rates from loan providers, central banks,

governments, and government institutions, and lends these funds to PRGF-eligible member

countries at an annual interest rate of 0.5 percent. The PRGF Trust receives contributions

to subsidize the rate of interest on PRGF loans and maintains a Reserve Account as

security for loans to the Trust. The PRGF-HIPC Trust was established to subsidize

PRGF operations during 2002–2005 and also provides resources for HIPC Initiative

assistance.

As of April 30, 2003, the total loan resources that were made available for PRGF

operations amounted to SDR 15.8 billion, of which SDR 12.6 billion had been committed

and SDR 10.1 billion had been disbursed. It is estimated that the remaining uncommitted

PRGF loan resources of SDR 3.2 billion will cover annual commitments of about SDR

1.1 billion under new PRGF arrangements through 2005, in line with the average annual

commitments. The continuation of concessional lending after 2005 will need to be

reassessed closer to that time, but a substantial proportion of such lending is expected to

be provided by the IMF’s own resources accumulating in the Reserve Account of the

PRGF Trust. These resources will become available as lenders to the PRGF Trust are

repaid and the need for security provided by the Reserve Account declines.


As of April 30, 2003, total pledged grant contributions from seven countries

amounted to SDR 11.5 million, including SDR 6.8 million that had been paid in. Thus

far, disbursements have totaled SDR 1.4 million to subsidize the rate of charge on post-

conflict emergency assistance for seven countries (Albania, Burundi, the Republic of

Congo, Guinea-Bissau, Rwanda, Sierra Leone, and Tajikistan).

Precautionary Financial Balances

To safeguard its financial position, the IMF has a policy of accumulating

precautionary financial balances in the General Resources Account. These precautionary

balances consist of reserves and the SCA-1. Reserves provide the IMF with protection

against financial risks, including income losses and losses of a capital nature. The SCA-

1 was established as an additional layer of protection against the adverse financial

consequences of protracted arrears. Existing precautionary financial balances have been

financed through the retention of income and the burden-sharing mechanism. Additions

to reserves are made by placing the net income, including income from surcharges, to

the General and Special Reserves. Under the Articles of Agreement, the resources in the

147

General Reserve may be distributed by the IMF to members on the basis of quota shares.

The IMF may use the Special Reserve for any purpose for which it may use the General

Reserve except for distribution. Total reserves increased to SDR 4.3 billion as of April

30, 2003, from SDR 3.6 billion a year earlier. The balance in the SCA-1 amounted to

SDR 1.4 billion, compared with overdue principal of SDR 0.7 billion. SCA-1 resources

are to be refunded after all arrears have been cleared, but can be refunded earlier by a

decision by the IMF. In November 2002, the Board reviewed the adequacy of the

precautionary financial balances and decided to continue to build up these balances with

the aim of doubling them. The Board also concluded that the present system of accumu-

lating precautionary balances is appropriate and will keep thepace of accumulation under

close review.

Special Drawing Rights (SDR) Developments

The total level of transfers of SDRs increased in FY 2003 to SDR 15.6 billion,

compared with SDR 14.0 billion in the previous year, but was still well below the peak

of SDR 19.1 billion in FY1999, when the volume of SDR transactions increased

significantly because of payments for members’ quota increases. By April 30, 2003, the

IMF’s own holdings of SDRs, which had risen sharply as a result of payments for quota

subscriptions in 1999, had fallen to SDR 1.0 billion from SDR 1.5 billion a year earlier,

at the low end of the targeted range of SDR 1.0-1.5 billion within which the IMF seeks

to maintain its SDR holdings. SDRs held by prescribed holders amounted to SDR 0.6

billion. SDR holdings by participants increased to SDR 19.9 billion from SDR 19.6

billion in FY 2002. SDR holdings of the industrial and net creditor countries relative to

their net cumulative allocations decreased from a year earlier. SDR holdings of

nonindustrial members amounted to 72 percent of their net cumulative allocations

compared with 56.9 percent a year earlier.

Arrears to the IMF

The strengthened cooperative strategy on overdue financial obligations to the

IMF consists of three essential elements: prevention, intensified collaboration, and

remedial measures. Total overdue financial obligations to the IMF decreased to SDR

2.01 billion during FY 2003, from SDR 2.36 billion at the beginning of the financial

year. This reflected mainly the clearance of arrears by the Democratic Republic of Congo

in June 2002 and by the Islamic State of Afghanistan (henceforth Afghanistan) in February

2003. However, the arrears of other countries (with the exception of Sudan) continued

to rise, most notably those of Zimbabwe.

As of April 30, 2003, almost all arrears to the IMF were protracted (outstanding

for more than six months), about evenly divided between overdue principal and overdue

charges and interest. More than four-fifths of arrears were to the GRA and the remainder

to the SDR Department and the PRGF Trust. The two countries with the largest protracted

arrears to the IMF, Sudan and Liberia, account for more than 79 percent of the overdue

financial obligations to the IMF, with Somalia and Zimbabwe accounting for most of the

remainder. Under the IMF’s strengthened cooperative strategy on arrears, remedial

measures have been applied against the countries with protracted arrears to the IMF. No

148

changes were made in the IMF’s strengthened cooperative strategy on arrears during

FY 2003.

During FY 2003, two countries cleared their arrears to the IMF, the Democratic

Republic of Congo and Afghanistan:

• The Democratic Republic of Congo cleared its arrears to the IMF of SDR 404

million ($522 million) on June 12, 2002. Arrears clearance was facilitated by

bridge loans provided by four countries, Belgium, France, South Africa, and

Sweden. Immediately following the clearance of the arrears, the Executive Board

approved a PRGF arrangement for the Democratic Republic of Congo in the

amount of SDR 580 million (109 percent of its quota). Part of the proceeds of

the first PRGF disbursement of SDR 420 million was used to repay in full the

bridge lenders. The Democratic Republic of Congo subsequently cleared its arrears

of SDR 254 million ($338 million) to the World Bank Group. Arrears of SDR

669 million ($860 million) to the African Development Bank Group were handled

in the context of a partial clearance/partial consolidation mechanism.

• On February 26, 2003, Afghanistan settled its overdue financial obligations to

the IMF totaling SDR 8.1 million (about $11.1 million). The settlement of arrears

to the IMF was part of a coordinated plan under which Afghanistan also cleared

arrears to the Asian Development Bank and the International Development

Association. The coordinated arrears-clearance operation was supported by grant

contributions from Italy, Japan, Norway, Sweden, the United Kingdom, and the

Afghanistan Reconstruction Trust Fund.

The Executive Board conducted several reviews of member countries’ overdue

financial obligations to the IMF during FY 2003:

• The Board considered on two occasions the complaint with respect to the

suspension of Liberia’s voting and related rights in the IMF. At its October 9,

2002, meeting, the Board expressed regret at the further accumulation of arrears

to the IMF by Liberia and the limited actions taken by the authorities to improve

economic policy implementation. Nevertheless, the Board decided to defer the

decision on the suspension of voting and related rights by another six months and

to review the matter at the same time it considered the 2002 Article IV consultation

with Liberia. At this second review, on March 5, 2003, the Board found that

Liberia had not adequately strengthened its cooperation with the IMF and decided

to suspend Liberia’s voting and related rights in the IMF.

• The Board reviewed Sudan’s overdue financial obligations twice during FY 2003,

on June 19, 2002, and on December 18, 2002. In June, the Board expressed

regret that Sudan did not make committed payments to the IMF during the last

three months of 2001 but welcomed the corrective action taken in the latter half

of 2001. It noted Sudan’s constrained capacity for debt service and its intention

to maintain a monthly level of payments to the IMF of $2 million. At the December

review, the Board welcomed the policy performance achieved by the Sudanese

authorities under the staff-monitored program for 2002 and noted that Sudan

149

had made payments to the IMF in 2002 in line with its intentions.

• Against the background of mounting arrears and little improvement in economic

policy, the Board imposed further remedial measures on Zimbabwe during FY

2003. On June 13, 2002, it adopted a declaration of noncooperation regarding

Zimbabwe and suspended all technical assistance. At the next review of

Zimbabwe’s arrears on September 11, 2002, the Board decided to initiate promptly

the procedure on the suspension of Zimbabwe’s voting and related rights in the

IMF. On October 25, 2002, the Board noted the Managing Director’s complaint,

dated October 17, 2002, regarding Zimbabwe’s failure to fulfill its obligations to

the IMF. This complaint will be taken up on the occasion of the next review of

Zimbabwe’s arrears to the IMF, at which time the Board will consider whether to

suspend Zimbabwe’s voting and related rights in the IMF.

At the end of April 2003, Liberia, Somalia, Sudan, and Zimbabwe were ineligible

under Article XXVI, Section 2(a) to use the general resources of the IMF. In addition,

Zimbabwe had been removed from the list of PRGF-eligible countries. Declarations of

noncooperation, a further step under the strengthened cooperative arrears strategy, were

in effect for Liberia and Zimbabwe, and the voting and related rights of Liberia in the

IMF were suspended. In two cases (Iraq and Somalia) the application of remedial measures

has been delayed or suspended because of civil conflicts, the absence of a functioning

government, and/or international sanctions.




• Outstanding IMF credit reached an all-time high in late-2003 but, by the end of FY

2004, it had dropped below the level at the end of FY 2003. This was because the

demand for new lending was restrained in the second half of the financial year, owing

partly to the improving world economic environment, and repayments exceeded

disbursements.

• Credit outstanding continued to be concentrated in a small number of large, middle-

income member countries, raising concerns about financial risks facing the IMF. The

Executive Board reviewed the IMF’s risk-management mechanisms and level of

precautionary balances.

• The IMF continued its efforts to assist its poorest members in reducing their debt

burdens, and initial steps were taken to ensure the continued ability of the IMF to

provide adequate financial resources to low-income countries over the medium term.

Lending

Improving global economic and financial conditions, combined with an accumu-

lation of foreign exchange reserves by many emerging market economies, contributed to

a decline in new IMF commitments, from SDR 29.4 billion in FY 2003 to SDR 14.5

150

billion in FY 2004.

The IMF approved five new Standby Arrangements and one augmentation of an

existing Standby Arrangement involving commitments totaling SDR 14.5 billion. In

addition, Burundi made a small purchase (SDR 9.6 million) under the IMF’s policy of

emergency assistance. No Extended Arrangements were approved and no commitments

were made under the IMF’s Compensatory Financing Facility (CFF) during the year.

Two new large IMF commitments were made during the financial year.

In September 2003, a three-year Standby Arrangement of SDR 9.0 billion was

approved for Argentina in support of the government’s economic program, succeeding

the arrangement that expired in August 2003. In December 2003, the IMF approved a

15-month extension and SDR 4.6 billion augmentation of Brazil’s existing Standby

Arrangement, which was originally approved in September 2002. Together, these two

cases accounted for more than 90 percent of the total new commitments in FY 2004.

Thirteen Standby and Extended Arrangements were in effect as of end-FY 2004,

of which five are being treated as precautionary, with borrowers having indicated that

they do not intend to draw on the funds committed to them by the IMF. These include

Brazil’s arrangement, on which the authorities have not drawn since September 2003 in

light of improvements in the country’s balance of payments position. Drawings were

made under 15 of the 23 Standby and Extended Arrangements in place during the year,

reflecting use of precautionary Standby Arrangements as well as reviews that were not

completed. At the end of April 2004, undrawn balances under the arrangements still in

effect amounted to SDR 19.8 billion.

IMF credit outstanding reached an all-time high of SDR 70 billion in September

2003, with disbursements in the first months of the financial year to Argentina, Brazil,

Indonesia, Turkey, and Uruguay, but declined rapidly in the second half of FY 2004.

During FY 2004, total repayments reached SDR 21.6 billion, including large repayments

by Argentina, Brazil, Russia, and Turkey and advance repayments by Thailand (SDR 0.1

billion), which eliminated its outstanding IMF credit, exceeding the SDR 17.8 billion

disbursed by the IMF in loans from the GRA. As a result, IMF credit outstanding amounted

to SDR 62.2 billion at the end of the financial year, SDR 3.5 billion less than a year

earlier.

During the year, five members, Bosnia and Herzegovina, Brazil, Pakistan,

Romania, and Turkey, made repayments on the expectations schedule in the amount of

SDR 10.8 billion, of which SDR 8.4 billion constituted SRF repayments by Brazil. Six

members requested and were granted extensions of repurchase expectations. As of April

30, 2004, IMF outstanding credit amounting to SDR 30.6 billion was subject to time-

based repurchase expectations under the policies adopted in November 2000.


The IMF’s lending is financed primarily from the fully paid-in capital (quotas)

subscribed by member countries in the form of reserve assets and currencies. General

reviews of IMF quotas, during which adjustments may be proposed in the overall size

151

and distribution of quotas to reflect developments in the world economy, are conducted

at five-year intervals. A member’s quota can also be adjusted separately from a general

review to take account of major developments.

The IMF’s base of usable resources increased during FY 2004 because Thailand

was considered sufficiently strong for its currency to be included in the IMF’s financial

transactions plan.

The IMF’s liquidity position remained adequate to meet the needs of its members

throughout the year. Following a strengthening in the first part of FY 2004, the one-year

forward commitment capacity of the IMF declined, primarily because of the IMF’s large

new commitments to Argentina and Brazil. It regained some ground toward the end of

the financial year. Overall, the one-year forward commitment capacity fell slightly in FY

2004, to SDR 58 billion on April 30, 2004, compared with SDR 61 billion a year earlier.

Poverty Reduction and Growth Facility

During FY 2004, the Executive Board approved 10 new PRGF arrangements for

Bangladesh, Burkina Faso, Burundi, Dominica, Ghana, Honduras, Kenya, Mauritania,

Nepal, and Tanzania, with commitments totaling SDR 955 million. In addition, the Board

approved an augmentation of the existing arrangements for Madagascar in the amount

of SDR 12.2 million to help the country recover from the economic impact of a cyclone.

Total PRGF disbursements to these countries and other countries with existing

arrangements amounted to SDR 865 million during FY 2004. As of April 30, 2004, 36

member countries’ reform programs were supported by PRGF arrangements, with total

commitments of SDR 4.4 billion.

As of April 30, 2004, SDR 15.8 billion had been made available for PRGF

operations; of this amount, SDR 13 billion had been committed and SDR 11 billion had

been disbursed. It is estimated that the remaining uncommitted SDR 2.7 billion should

cover the projected annual commitments of about SDR 1.3 billion under new PRGF

arrangements through 2005, slightly above the average annual historical commitments.

During FY 2004, the IMF’s Executive Board held discussions on the IMF’s future role

in low-income member countries and explored various financing options to continue the

IMF’s concessional lending after 2005. Most Executive Directors supported an option

that would allow a self-sustained PRGF to begin in 2006, supplementing its lending

capacity with new bilateral loans.


During FY 2004, one country, Burundi, received SDR 9.6 million in emergency

assistance. As of April 30, 2004, total pledged grant contributions from seven countries

amounted to SDR 11.2 million, of which SDR 9.6 million had been received (Table 7.5).

Thus far, disbursements have totaled SDR 1.9 million to subsidize the rate of charge on

post-conflict emergency assistance for seven countries (Albania, Burundi, the Republic

of Congo, Guinea-Bissau, Rwanda, Sierra Leone, and Tajikistan). Of these, only two

countries, the Republic of Congo and Guinea-Bissau, still have outstanding balances on

post- conflict emergency assistance.

152

In March 2004, the IMF’s Executive Board broadly endorsed a proposal to

subsidize the rate of charge for emergency assistance offered to PRGF-eligible countries

hit by natural disasters, as is currently done for post-conflict PRGF-eligible countries,

provided that resources are available.

Precautionary Balances

Total reserves increased to SDR 5.1 billion as of April 30, 2004, from SDR 4.3

billion a year earlier. The balance in the SCA-1 amounted to SDR 1.5 billion, compared

with overdue principal of SDR 0.7 billion. SCA-1 resources are to be refunded after all

arrears have been cleared but can be refunded earlier by a decision of the Executive

Board. In February 2004, the Executive Board reconfirmed as broadly appropriate the

decision taken in 2002 for a target level of precautionary financial balances of some

SDR 10 billion. It was agreed that the adequacy of the level of precautionary balances

and the pace of accumulation, as well as the application of the burden-sharing mechanism,

will need to be kept under close review.

SDR Developments

Total transfers of SDRs decreased in FY 2004 to SDR 13.8 billion, from SDR

15.6 billion in FY 2003. The largest transfers of SDRs (SDR 49.1 billion) took place in

FY 1999, when the volume of SDR transactions increased significantly because of

members’ payments for quota increases.

By April 30, 2004, the IMF’s own holdings of SDRs, which had risen sharply as

a result of payments for quota subscriptions in 1999, had fallen to SDR 0.5 billion from

about SDR 1.0 billion a year earlier. SDRs held by prescribed holders amounted to SDR

0.4 billion. SDR holdings by participants increased to SDR 20.6 billion from SDR 19.9

billion in FY 2003. SDR holdings of the industrial and net creditor countries relative to

their net cumulative allocation increased from a year earlier. SDR holdings of nonindustrial

members amounted to 76 percent of their net cumulative allocations, compared with 72

percent a year earlier.

Arrears to the IMF

Total overdue financial obligations to the IMF were SDR 2.05 billion at the end

of April 2004, up slightly from SDR 2.01 billion at the beginning of the financial year.

Although Sudan’s arrears to the IMF declined as a result of regular monthly payments in

excess of obligations falling due, overdue financial obligations by the other four countries

with protracted arrears - Iraq, Liberia, Somalia, and Zimbabwe - continued to increase.

As of April 30, 2004, almost all arrears to the IMF were protracted (outstanding for

more than six months), with 45 percent of them representing overdue principal and the

remainder overdue charges and interest. More than four-fifths of arrears were to the

GRA, with the remainder to the SDR Department and the PRGF Trust.

The two countries with the largest protracted arrears - Sudan and Liberia - account

for 77 percent of the overdue financial obligations to the IMF - with Somalia and

Zimbabwe accounting for most of the remainder. Under the IMF’s strengthened

cooperative strategy on arrears, remedial measures have been applied against the countries

153

with protracted arrears to the IMF. No changes were made in the strengthened cooperative

strategy on arrears during FY 2004.

The IMF’s Executive Board reviewed the overall arrears strategy and extended

the rights approach for one more year. (Established in 1990, the rights approach permits

a member to establish a track record on policies and payments to the IMF under a rights

accumulation program and to earn “rights” to obtain IMF resources under successor

arrangements following the completion of the program and settlement of the arrears to

the IMF.) The Board also conducted several reviews of individual member countries’

overdue financial obligations to the IMF during FY 2004.

As of end-April 2004, Liberia, Somalia, Sudan, and Zimbabwe were ineligible


Zimbabwe had been removed from the list of PRGF-eligible countries. Declarations of

noncooperation - a further step under the strengthened cooperative arrears strategy -

were in effect for Liberia and Zimbabwe, and the voting and related rights of Liberia and

Zimbabwe in the IMF were suspended. In addition, a complaint with respect to the

compulsory withdrawal of Zimbabwe from the IMF remained outstanding.




• The IMF initiated a review of its finances and financial structure. This ongoing

review focuses on ways in which the existing financial structure can be

strengthened. In particular, the review is considering measures to enhance, simplify

and increase the transparency of the IMF’s income mechanism and addressing

ways to strengthen the IMF’s financial position through the diversification of

income sources. Measures to modernize the IMF’s internal budgetary procedures

are also ongoing;

• Outstanding IMF credit declined from the previous year’s all-time high, as a

favourable external financing environment for emerging market countries

contributed to a sharp reduction in the demand for IMF credit;

• The IMF continued its efforts to help its poorest members achieve a higher pace

of sustainable economic growth, reduce poverty, and reduce their debt burdens

to sustainable levels. In this context, the IMF considered ways to strengthen its

ability to provide financial resources to low-income countries over the medium

term.

Lending

During FY 2005, IMF credit outstanding declined from its all-time high reached

in FY 2004. At the end of FY 2005, credit outstanding stood at SDR 49.9 billion, down

from SDR 62.2 billion in April 2004. Disbursements during FY 2005 totalled SDR 1.6

billion, the largest disbursements were made to Turkey and Uruguay under their Standby

154

Arrangements. Disbursements totalling SDR 312.9 million were made under Emergency

Post-Conflict Assistance to the Central African Republic, Haiti and Iraq. Disbursements

totalling SDR 110.4 million were made under Emergency Natural Disaster Assistance to

Grenada, Maldives and Sri Lanka.

During FY 2005, total repayments reached SDR 13.9 billion, reflecting large

repayments by Argentina, Brazil, Russia and Turkey. Both Russia and Lithuania repaid

all GRA principal obligations to the IMF; their advance repayments amounted to SDR

2.2 billion in January 2005 and SDR 16 million in February 2005, respectively. Uruguay

also made several advance repayments totalling SDR 438.5 million. As a result, IMF

credit outstanding at the end of FY was SDR 12.3 billion lower than a year earlier.

New IMF commitments declined sharply from SDR 14.5 billion in FY 2004 to

SDR 1.3 billion in FY 2005, in part reflecting favourable financing conditions for emerging

market sovereign borrowers. New IMF commitments made during FY 2005 were small

relative to large commitments made during FY 2004. The largest commitment made

during FY 2005, for the Dominican Republic (SDR 437.8 million), was far less than the

large commitments made during FY 2004 for the Standby Arrangement with Argentina

(SDR 9.0 billion) and for the augmentation of Brazil’s Standby Arrangement (SDR 4.6

billion).


The IMF’s base of usable resources increased during FY 2005 because Russia

was considered sufficiently strong for its currency to be included in the IMF’s financial

transactions plan. The Fund’s liquidity, as measured by the Forward Commitment Capacity

(FCC), rose to SDR 94.3 billion at the end of April 2005 from SDR 58.1 billion at the

end of April 2004. This was due primarily to the expiration of Brazil’s Standby Arrange-

ment, the rise of usable resources as a result of net repurchases by Argentina, Brazil,

Turkey and Russia, and the inclusion of Russia in the financial transactions plan.

Poverty Reduction and Growth Facility (PRGF)

During FY 2005, the IMF’s Executive Board approved eight new PRGF

arrangements (for Chad, the Republic of Congo, Georgia, Kyrgyz Republic, Mali, Niger,

Mozambique and Zambia), with commitments totalling SDR 434.4 million. In addition,

the Board approved augmentations of the existing arrangements for Bangladesh and

Kenya in the amounts of SDR 53.3 million and SDR 50 million, respectively. Bangladesh’s

augmentation was associated with the first approval under the newly created Trade

Integration Mechanism, while Kenya’s augmentation was in response to drought and the

sharp rise in oil prices. The commitment of Azerbaijan’s PRGF disbursements amounted

to SDR 0.8 billion during FY 2005. As of April 30, 2005, 31 member countries’ reform

programmes were supported by PRGF arrangements, with commitments totalling SDR

2.9 billion and undrawn balances of SDR 1.3 billion; total PRGF credit outstanding as of

the end of April 2005 stood at SDR 6.6 billion.


As of the end April 2005, 14 member countries had pledged bilateral contribution

155

totalling SDR 35.1 million for the subsidization of emergency assistance. Of this amount,

SDR 23.9 million are new pledges received after the January 2005 decision. On the

other hand, during FY 2005, six countries borrowed under emergency assistance. Three

borrowings were made under Emergency Natural Disaster Assistance (ENDA) - SDR

2.9 million for Grenada in November 2004, SDR 4.1 million for Maldives in March

2005, and SDR 103.4 million for Sri Lanka in March 2005. Another three borrowings

were made under Emergency Post-Conflict Assistance (EPCA) - SDR 5.6 million for

the Central African Republic in July 2004, SDR 297.1 million for Iraq in October 2004

and SDR 10.2 million for Haiti in January 2005.


As of April 30, 2005, the total reserves increased to SDR 5.7 billion from SDR

5.1 billion a year earlier. The balance in the Special Contingent Account (SCA-1)

amounted to SDR 1.6 billion, compared with overdue principal of SDR 0.7 billion. SCA-

1 resources are to be refunded after all arrears have been cleared, but can be refunded

earlier by a decision of the Executive Board. The IMF has set an eventual target level of

precautionary financial balances of SDR 10 billion. The adequacy of precautionary

balances and the pace of accumulation, as well as the application of the burden-sharing

mechanism, is kept under close review.

SDR Developments

Total transfers of SDRs decreased in FY 2005 to SDR 10.6 billion, from SDR

13.8 billion in FY 2004. The largest transfers of SDRs (49.1 billion) had taken place in

FY 1999, when the volume of SDR transactions increased significantly because of

members’ payments for quota increases.

By end of April 2005, the IMF’s own holdings of SDRs, which had risen sharply

as a result of payments for quota subscriptions in 1999 and subsequently fallen to a low

of SDR 0.5 billion in FY 2004, had risen to SDR 0.6 billion. The SDRs held by prescribed

holders amounted to SDR 0.3 billion. The SDR holdings by participants remained

unchanged from Fy 2004 at SDR 20.6 billion. The SDR holdings of the industrial and

net creditor countries relative to their net cumulative allocations decreased from a year

earlier. The SDR holdings of non-industrial members amounted to 96 percent of their

net cumulative allocations, compared with 76 percent a year earlier.

Arrears to the IMF

Total overdue financial obligations to the IMF were SDR 2.0 billion at the end of

April 2005, a slight decline from SDR 2.1 billion at the beginning of the financial year.

The main reason for the decline was Iraq’s settlement of its protracted arrears to the

IMF of SDR 55.3 million on September 22, 2004. Sudan’s arrears to the IMF also declined

as a result of its regular monthly payments in excess of obligations falling due. At the

end of April 2005, most arrears to the IMF were protracted (outstanding for more than

six months), 44.9 percent of which represented overdue principal, with the remainder

consisting of overdue charges and interest. More than four-fifths of arrears were to the

General Reserves Account (GRA) and the remainder to the SDR Department and the

156

PRGF Trust.

As of the end of April 2005, Liberia, Somalia, Sudan and Zimbabwe were ineligible


Zimbabwe had earlier been removed from the list of PRGF-eligible countries. Declarations

of non-cooperation, a further step under the strengthened cooperative arrears strategy,

were in effect for Liberia and Zimbabwe and their voting and related rights in the IMF

were suspended. In addition, a complaint with respect to the compulsory withdrawal of

Zimbabwe from the IMF remained outstanding.




• Outstanding IMF credit declined to low levels as a favourable external financing

environment for emerging market countries contributed to a sharp reduction in

the demand for IMF credit and to the early repayment of outstanding IMF credit

by a number of large borrowers;

• The decline in credit outstanding led to a corresponding drop in IMF income, the

main source of which is the interest charged on loans. In response, the IMF initiated

steps to develop a stable and diversified income base that is less dependent on its

lending operations. The IMF’s Executive Board established an Investment Account

to enable the IMF to invest its reserves, thereby broadening the sources and

increasing the level of its income. Further steps to strengthen the IMF’s financial

structure and enhance its income-generating capacity are being considered in the

context of an ongoing review of the IMF’s finances.

• Major initiatives were introduced that enhance the ways in which the IMF helps

its low-income members achieve faster economic growth, reduce poverty, decrease

their debt burdens, and address the impact of adverse shocks. These initiatives

include the establishment of the Exogenous Shocks Facility and the Multilateral

Debt Relief Initiative.

Lending

During FY 2006, repayments on loans increased sharply, to SDR 32.8 billion.

Many countries - Algeria, Argentina, Armenia, Brazil, the Republic of Congo, Georgia,

Papua New Guinea, Uzbekistan and Zimbabwe repaid all of their GRA obligations to

the IMF; some ahead of schedule. Advance repayments totalling SDR 21.9 billion were

made by Algeria (SDR 246 million, Argentina (SDR 6.7 billion), Brazil (SDR 14.2 billion),

Bulgaria (SDR 249 million), and Uruguay (SDR 519 million).

Disbursements during the financial year were relatively low, totalling SDR 2.2

billion, the bulk of which was disbursed to Turkey under its Standby Arrangement. In

addition, Emergency Post-Conflict Assistance disbursements totalling SDR 17.2 million

were made to the Central African Republic and Haiti.

157

Reflecting the high level of net repayments, IMF credit outstanding at the end of

FY 2006 stood at SDR 19.2 billion, a 25-year low, compared with SDR 49.9 billion in

April 2005. New IMF commitments rose sharply, from SDR 1.3 billion in FY 2005 to

SDR 8.4 billion in 2006, largely reflecting the Standby Arrangement of SDR 6.7 billion

approved for Turkey in May 2005. The IMF approved a total of five new Standby

Arrangements and one augmentation of an existing Standby arrangement. In addition,

one Extended Arrangement was approved for Albania. Haiti and the Central African

Republic made borrowings under the Emergency Post-Conflict Assistance (EPCA). No

commitments were made under the IMF’s Supplemental Reserve Facility (SRF) and

Compensatory Financing Facility (CFF) during the year.

Eleven Standby and Extended Arrangements were in effect as of the end of FY

2006, of which seven were being treated as precautionary, with borrowers having indicated

that they do not intend to draw on the funds committed to them by the IMF. At the end

of April 2006, undrawn balances under all arrangements still in effect amounted to SDR

7.5 billion.


The IMF’s liquidity, as measured by the Forward Commitment Capacity (FCC),

rose to an all time high of SDR 120.1 billion at the end of April 2006, from SDR 94.3

billion at the end of April 2005.

Poverty Reduction and Growth Facility (PRGF)

During FY 2006, the IMF approved seven new PRGF arrangements (for Albania,

Armenia, Benin, Cameroon, Malawi and Sao Tome and Principe), with commitments

totalling SDR 107.9 million. In addition, it also approved the augmentation of an existing

arrangement for Niger for SDR 19.7 million to help the country recover from the economic

impact of a severe drought and terms of trade deterioration. Total PRGF disbursements

amounted to SDR 0.4 billion during FY 2006. As of April 30, 2006, 27 member countries’

reform programmes were supported by PRGF arrangements, with commitments totalling

SDR 1.8 billion and undrawn balances of SDR 0.7 billion; total PRGF credit outstanding

as of end-April 2006 stood at 3.8 billion.

Emergency Assistance

As of end-April 2006, 17 member countries had pledged bilateral contributions

totalling SDR 40.3 million for the subsidization of emergency assistance. New pledges

received after the January 2005 decision accounted for SDR 29.1 million of this amount.

Of this overall total, SDR 9.7 million for the subsidization of EPCA only, SDR 17.6

million for the subsidization of ENDA only, and SDR 13.0 million can be used for the

subsidization of either kind of emergency assistance.

During FY 2006, two countries borrowed under emergency assistance. Both

borrowings were made under EPCA, SDR 10.2 million for Haiti in October 2005 and

SDR 7 million for the Central African Republic in January, 2006.

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Table 5.3

Global Official Holdings of Reserve Assets by the IMF Members

(in billions of SDRs, end of year figures)

Particulars 2001 2002 2003 2004 2005 2006 2007All countries

Total Reserves, excluding Gold

IMF-related assets1

Reserve positions in IMF 56.9 66.1 66.5 55.8 28.6 17.5 15.6

SDRs 19.6 19.7 19.9 20.3 20.1 18.2 18.3

Subtotal, IMF-related assets 76.4 85.7 86.4 76.1 48.6 35.7 34.0

Foreign Exchange 1,631.3 1,771.7 2,036.2 2,413.8 2,921.0 3,348.0 3,508.4

Total Reserves, excluding Gold 1,707.7 1,857.5 2,122.8 2,490.1 2,969.7 3,384.2 3,542.7

Gold

Quantity (millions of ounces) 943.6 931.7 914.0 897.0 878.4 867.9 864.8

Value at London Market Price 207.6 234.9 256.7 253.0 315.3 366.7 378.9

Total Reserves, including Gold 1,915.3 2,092.4 2,379.4 2,743.1 3,285.0 3,750.9 3,921.7

Industrial Countries


IMF-related assets

Reserve positions in the IMF 47.0 53.7 52.6 43.6 21.0 11.9 10.4

SDRs 16.0 15.8 15.3 15.3 12.4 13.5 13.5

Subtotal, IMF-related assets 62.9 69.5 67.9 58.9 33.4 25.4 23.9

Foreign Exchange 628.2 666.1 754.4 848.9 906.1 927.2 940.4

Total Reserves, excluding Gold 691.2 735.8 822.6 908.0 939.7 953.0 964.7

Gold



Total Reserves, including Gold 863.7 930.0 1,034.5 1,116.9 1,199.6 1,254.2 1,276.1

Developing Countries


IMF-related assets

Reserve positions in the IMF 9.9 12.3 13.9 12.2 7.6 5.6 5.2

SDRs 3.6 3.9 4.6 5.0 7.6 4.8 4.8

Subtotal, IMF-related Assets 13.5 16.2 18.5 17.2 15.2 10.4 10.1

Foreign Exchange 1,003.1 1,105.6 1,281.7 1,564.9 2,014.9 2,420.8 2,568.0

Total Reserves, excluding Gold 1,016.5 1,121.7 1,300.2 1,582.1 2,030.0 2,431.2 2,578.0

Gold2



Total Reserves, including Gold 1,051.7 1,162.5 1,345.0 1,626.1 2,085.4 2,496.7 2,645.6

Source: International Monetary Fund (2007): “International Financial Statistics”.

Note: Components may not sum to totals because of rounding.

1. IMF-related assets compise reserve positions in the IMF and SDR holdings of all IMF members.

Foreign exchange and gold figures represent official holdings of IMF members for which data

are available from the members.

2. One troy ounce equals 31.103 grams. The market price is the afternoon price fixed in London

Metal Exchange on the last business day of each period.

159

Table 5.4

Share of Currencies in Total Identified Official Holdings of Foreign Exchange

by the IMF Members, end of year1

(in percent)

Particulars 2001 2002 2003 2004 2005 2006

All Countries

U.S.dollar 71.5 67.0 65.9 65.8 66.7 64.7

Japanese yen 5.1 4.4 3.9 3.9 3.6 3.2

Pound sterling 2.7 2.8 2.8 3.4 3.6 4.4

Swiss franc 0.3 0.4 0.2 0.2 0.1 0.2

Euro2 19.2 23.8 25.2 24.9 24.2 25.8

Other currencies3 1.3 1.6 2.0 1.9 1.7 1.7

Industrial Countries

U.S.dollar 72.7 68.9 70.5 71.5 73.6 71.9

Japanese yen 5.5 4.3 3.8 3.6 3.4 3.5

Pound sterling 1.9 2.1 1.5 1.9 2.1 2.5

Swiss franc 0.3 0.6 0.2 0.1 0.1 0.2

Euro2 17.9 22.3 21.9 20.8 19.0 20.4


Developing Countries

U.S.dollar 70.2 65.2 61.3 60.2 61.0 59.7

Japanese yen 4.6 4.4 4.0 4.1 3.7 2.9

Pound sterling 3.5 3.5 4.0 4.9 4.9 5.8

Swiss franc 0.2 0.2 0.2 0.2 0.2 0.1

Euro2 20.5 2.3 28.5 29.0 28.5 29.6


Memorandum Items

Unallocated reserves4

All countries 23.6 25.5 26.6 29.5 32.4 33..9

Industrial countries 0.1 0.3 0.2 0.2 0.3 0.3

Developing countries 38.1 40.6 41.9 45.3 46.7 46.6

Source: International Monetary Fund (2007): “International Financial Statistics”.

Note: Components may not sum to total because of rounding. Country coverage changes slightly

every year.

1. Currency shares are calculated for the reserves of member countries that report the currency

composition of their foreign exchange reservs. The data include minimal estimation undertaken

mainly for late reporters. Reserves for which curency composition is not reported are shown

under ‘unallocated reserves’.

2. Not comparable with the combined shre of euro-legacy currencies in previous years because it

excludes the euros received by euro-area members when their previous holdings of other euro-

area members’ legal currencies were converted into euros on January 1, 1999.

3. Foreign exchange reserves of IMF members and the sum of reserves reported to be held in

currencies other than those listed in the Table.

4. Foreign exchange reserves whose currency composition is not submitted to the IMF, in percent

of total official holdings of foreign exchange reserves.

160

Table 5.5

Currency Composition of Official Holdings of Foreign Exchange

by the IMF Members, end of year1

(in million SDRs)

Particulars 2001 2002 2003 2004 2005 2006U.S.dollar

Change in holdings 63,779 -6,614 100,191 134,565 198,696 115,348

Quantity change 33,108 63,318 184,717 184,681 99,524 185,608

Price change 30,671 -69,932 -84,525 -50,115 99,173 -70,260

Year-end value 891,186 884,573 984,764 11,19,329 13,18,025 14,33,373

Japanese yen

Change in holdings -7,658 -5,534 1,476 6,585 5,663 -529

Quantity change -963 -6,411 205 7,637 8,656 3,494

Price change -6,694 877 1m271 -1,052 -2,993 -4,023

Year-end value 63,012 57,478 58,954 65,539 71,202 70,673

Pound sterling

Change in holdings 1,659 3,432 4,289 16,108 13,960 26,606

Quantity change 1,409 2,464 3,775 14,487 16,098 19,487

Price change 249 968 513 1,620 -2,137 7,119

Year-end value 33,737 37,169 41,458 57,565 71,526 98,132

Swiss franc

Change in holdings 342 1,901 -2,005 -530 54 1,015

Quantity change 308 1,400 -2,106 -661 243 938

Price change 34 502 102 131 -189 77

Year-end value 3,479 5,380 3,375 2,845 2,899 3,914

Euro2

Change in holdings 26,423 74,819 62,014 47,411 54,327 93,079

Quantity change 30,133 48,525 28,355 33,956 81,628 62,561

Price change -3,710 26,294 33,659 13,456 -27,300 30,517

Year-end value 2,39,487 3,14,306 3,76,320 4,23,731 4,78,058 5,71,137

Sum of the above3

Change in holdings 84,545 68,005 1,65,965 2,04,139 2,72,701 2,35,518

Quantity change 63,995 1,09,296 2,14,945 2,40,099 2,06,147 2,72,088

Price change 20,550 -41,292 -48,980 -35,960 66,553 -36,570

Year-end value 12,30,901 12,98,906 14,64,871 16,69,010 19,41,711 21,77,228

Other holdings

Change in holdings -1,489 4,570 8,964 2,472 1,025 3,611

Year-end value 15,949 20,519 29,483 31,955 32,980 36,591

Total official holdings4

Change in holdings 1,44,926 1,40,400 2,64,501 3,77,670 5,07,111 4,27,063

Year-end value 16,31,268 17,71,669 20,36,169 24,13,839 29,20,950 33,48,013Source: International Monetary Fund (2007): “International Financial Statistics”.

Note: Components may not sum to total because of rounding. Country coverage changes slightly every year.

1. The currency composition of official foreign exchange reserves as reported by countries, including minimal

estimation undertaken mainly for late reporters. Quantity changes are derived by multiplying the changes in

official holdings of each currency from the end of one quarter to the next by the average of the two SDR

prices of that currency prevailing at the corresponding dates. This procedure converts the change in the

quantity of national currency from own units to SDR units. Subtracting the SDR value of the quantity change

so derived rom the quarterly change in the SDR value of foreign exchange held at the end of two successive

quarters and cumulating these differences yields the effect of price changes over the years shown.

2. Represents change from end-1998 holdings of euro-legacy currencies by official institutions outsideeuro

area.

3. Each item represents the sum of the currencies above.

4. Includes ‘Unallocated reserves’ whose currency composition could not be ascertained.

161


Total reserves increased to SDR 6 billion as of April 30, 2006, from SDR 5.7

billion a year earlier. The balance in the SCA-1 amounted to SDR 1.7 billion, compared

with overdue principal of SDR 0.6 billion.

SDR Operations

The total level of transfers of SDRs increased in FY 2006 to SDR 13 billion,

from SDR 10.6 billion in FY 2005. By April 30, 2006, the IMF’s own holdings of SDRs

had increased to SDR 3.6 billion from SDR 0.6 billion at end-FY 2005, as a result of

advance repayments of financial obligations from several members. SDRs held by

prescribed holders amounted to SDR 0.3 billion. SDR holdings by participants decreased

to SDR 17.5 billion from SDR 20.6 billion in FY 2005.

Arrears to the IMF

Overdue financial obligations to the IMF totalled SDR 1.9 billion at end-April

2006, a slight decline from SDR 2 billion at the beginning of the financial year. The main

reason for the decline was Zimbabwe’s clearance of its arrears to the IMF’s General

Resources Account (GRA) in February 2006. Sudan’s arrears to the IMF also declined

as a result of its regular monthly payment in excess of obligations falling due. At end-

April 2006, virtually all arrears to the IMF were protracted (outstanding for more than

six months), 41 percent of which represented overdue principal, with the remainder

consisting of overdue charges and interest. More than four-fifths of arrears were to the

GRA and the remainder to the SDR Department and the PRGF-ESF Trust.

As of end-April 2006, Liberia, Somalia, Sudan and Zimbabwe were ineligible

under Article XXVI, Section 29(a) to use the General Resources of the IMF. In addition,

Zimbabwe had earlier been removed from the list of PRGF-eligible countries. Declarations

of non-cooperation were in effect for Liberia and Zimbabwe, and the voting and related

rights of those two countries in the IMF were suspended.




• Global economic growth accelerated to 5.4 percent in 2006, up from 4.9 percent

in 2005, marking the fourth successive year of a strong global expansion.

Moreover, the expansion became better balanced, as a slowing in the US economy

was offset by firming of growth elsewhere. Emerging market countries grew

particularly fast, supported by benign international financial conditions and, in

many cases, high commodity prices. Inflation in the advanced economies declined

in the second half of 2006 as oil prices fell from a peak in August.

• Current account imbalances continued to be large. The external deficit of the US

stabilized at 6.5 percent of GDP in 2006, with a marked narrowing toward the

end of the year. The surpluses of the oil-exporting and East Asian countries

162

continued to rise, while deficits grew in both western and emerging Europe and

in rapidly growing emerging market economies such as India.

Lending

The IMF’s credit outstanding at the end of FY 2007 declined to SDR 7.3 billion

from SDR 19.2 billion in April 2006, owing to continued early repayments of outstanding

loans and a low level of new disbursements. During FY 2007, nine members - Bulgaria,

the Central African Republic, Ecuador, Haiti, Indonesia, Malawi, the Philippines, Serbia,

and Uruguay - repaid their outstanding obligations to the IMF ahead of schedule, for a

total of SDR 7.1 billion. The IMF disbursements totalled SDR 2.3 billion, the bulk of

which went to Turkey.

New IMF commitments fell sharply, from SDR 8.3 billion in FY 2006 to SDR

237 million in FY 2007, with two new Standby Arrangements approved for Paraguay

and Peru. Seven Standby and Extended Arrangements were in effect as of the end of FY

2007, of which four were being treated as precautionary since borrowers had indicated

their intention not to draw on them. At the end of April 2007, undrawn balances under

all current Standby and Extended Arrangements amounted to SDR 3.9 billion.

Financial Operations

The IMF’s income in FY 2007 fell SDR 111 million short of expenditures. The

net income shortfall largely reflects a substantial decline in IMF credit outstanding, from

a peak of SDR 70 billion in September 2003 to SDR 7.3 billion at the end of FY 2007,

owing to low demand for new IMF credit and advance repayments by some members in

recent years. The income shortfall will be offset against the Fund’s reserves (retained

earnings), which amount to some SDR 6 billion at the end of FY 2007.

The IMF has taken a number of steps to strengthen its income position. The

Board’s establishment of an Investment Account in April 2006 and its funding with SDR

5.9 billion in June 2006 were the first steps in diversifying the IMF’s resources of income.

Arrears to the IMF

Overdue financial obligations to the IMF totalled SDR 1.88 billion at the end of

April 2007, 83 percent of which was accounted for by Sudan and Liberia; Somalia and

Zimbabwe accounted for the balance. At end-April 2007, all arrears to the IMF were

protracted; 39 percent represented overdue principal, and the rest, overdue charges and

interest. More than four-fifths represented arrears to the GRA, while the remainder

represented arrears to the SDR Department Trust Fun and the PRGF-ESF Trust.

Zimbabwe is the only country with protracted arrears to the PRGF-ESF Trust.

Under the IMF’s strengthened cooperative strategy on arrears, remedial measures

have been applied against countries with protracted arrears. As of the end of financial

year, Liberia, Somalia, Sudan and Zimbabwe remained ineligible to use GRA resources.

Zimbabwe continued to be excluded from the list of PRGF-eligible countries and is

subject to a declaration of non-cooperation. In view of Liberia’s strengthened cooperation

with the Fund, on October 2, 2006, the Executive Board decided to initiate the de-

163

escalation of the remedial measures that had been applied against Liberia and lifted the

declaration of non-cooperation.

5.9 INTERNATIONAL LIQUIDITY (2001-2007)

The three Tables on the following pages present the international liquidity situation during

the study period (2001-2007). Table 5.1 gives the details of the global official holdings

of reserve assets by the IMF members; Table 5.2 shows the shares of currencies in total

identified official holdings of foreign exchange by the IMF members; and Table 5.3

describes the currency composition of official holdings of foreign exchange by the IMF

members. Based on the data presented in these Tables, an interpretation of the year-wise

international liquidity is being offered in the subsequent pages.

5.9.1 International Liquidity in FY 2001

International Reserves

Total international reserves, including gold, increased by 11 percent during 2000

and stood at SDR 1.7 trillion at the end of FY 2001. Total non-gold reserves grew by 12

percent, the result of a 14 percent rise in foreign exchange reserves (the largest component

of official reserve holdings), to SDR 1.5 trillion, and a 10 percent fall in IMF-related

assets, to SDR 66 billion. The market value of gold held by monetary authorities (central

banks, currency boards, exchange stabilization funds and treasuries) declined by 2 percent,

to SDR 200 billion at the end of 2000.

Foreign Exchange Reserves

Ninety-six percent of non-gold assets consisted of foreign exchange reserves at

the end of 2000. Industrial countries increased their foreign exchange reserve holdings

by 13 percent, to SDR 862.1 billion. The foreign exchange reserves of developing

countries rose by 14 per cent during 2000, to SDR 876 billion. Developing countries

have steadily increased their share of foreign exchange holdings; at the end of 2000,

their share represented 60 percent of total foreign exchange reserves.

Oil-exporting developing countries, which hold about 10 percent of all developing

countries’ foreign exchange reserves, increased their foreign exchange reserves by 22

percent in 2000. Foreign exchange reserves of net debtors without debt-servicing problems

increased by 15 per cent, to SDR 558 billion, while those of countries with debt-servicing

problems increased by 8 percent, to SDR 133 billion.

Holdings of IMF-related Assets

During 2000, total holdings of IMF-related assets (that is, reserve positions in

the IMF and SDRs) fell by 10 percent, following a comparable decline in the previous

year. Industrial countries hold a majority of IMF-related assets, 82 percent at the end of

2000. The fall in IMF-related assets was attributable to a 14 percent decline in members’

reserve positions in the IMF, which consist of members’ reserve tranche and creditor

positions, to SDR 47 billion. SDR holdings of IMF members remained virtually unchanged

from end-1999, at SDR 19 billion.

164

Gold Reserves

The market value of old reserves declined by 2 percent during 2000, to SDR

2000 billion. This primarily reflects a decrease in the physical stock of gold, as the SDR

price of gold fell only slightly. The share of gold in officially held reserves declined

gradually to 12 percent at the end of 2000 from about 50 percent at the end of 1980.

Most of the gold constituted 21 percent of these countries’ total reserves at the end of

2000.

Currency Composition of Foreign Exchange Reserves

The currency composition of foreign exchange reserves changed gradually over

the past decade, with holdings of US dollars, the dominant international reserve currency,

rising to 68 percent of foreign exchange reserves at the end of 2000 from 51 percent

nine years earlier. The euro, which replaced 11 European currencies and the European

currency unit (ecu), on January 1, 1999, was the second most important reserve currency.,

accounting for 13 percent of total foreign exchange reserves. The share of the euro

remained nearly unchanged from the end of 1999. Since, at the introduction of the euro,

the Eurosystem’s reserves previously denominated in euro legacy currencies (former

national currencies) became domestic assets of the euro area, the share of the euro in

1999-2000 is not directly comparable with the previous years’ combined share of the

four euro legacy currencies: deutsche mark, French franc, Netherland’s guilder and private

ecu. However, after adjusting, the data take into account only holdings of these currencies

outside the euro area, their combined share in 1998 was virtually identical to the share

of the euro in 1999.

The share of the Japanese yen in total foreign exchange reserves declined steadily

from 9 percent at the end-1991 to 5 percent at the end of 1997, and since then stayed at

about that level. Throughout the past decade, the share of pound sterling has remained

at between 3 and 4 percent and that of the Swiss franc at approximately 1 percent. The

share of unspecified currencies as well as foreign exchange reserves for which no

information on currency composition is available, stood at 9 percent at the end of 2000.

For industrial countries, the share of the US dollar increased throughout the

1990s to peak at 74 percent in 1999; at the end of 2000, its share was 73 percent. The

share of the euro in those countries’ foreign exchange reserves declined by half a

percentage point, to 10 percent, while the shares of Japanese yen, pound sterling, and

Swiss franc were unchanged from the previous year’s levels. The share of unspecified

currencies increased by one percentage point, to 8 percent in 2000.

The share of the US dollar in developing countries’ foreign exchange reserves

was 64 percent in 2000, a level that has remained relatively constant over the last decade.

Since 1999, the share of the euro increased by about 1 percentage point, to 15 percent.

The shares of the Japanese yen, pound sterling and the Swiss franc remained close to

their previous year’s levels at 4 percent, 5 percent and 1 percent, respectively. Unspecified

currencies accounted for 10 percent of developing countries’ foreign exchange reserves

in 2000.

165

Changes in the SDR value of foreign exchange reserves can be decomposed into

quantity and valuation (price) changes. Official reserves held in US dollars increased by

SDR 114 billion in 2000, which reflects an increase of SDR 68 billion in the quantity of

US dollar holdings and a valuation increase of SDR 46 billion. The SDR 27 billion

increase in the quantity of euro holdings was partly offset by a price decline of SDR 3

billion, resulting in a net increase of SDR 24 billion in 2000. Similarly, quantity increases

in both Japanese yen and pound sterling holdings were offset to some extent by valuation

declines, resulting in net increase of SDR 7 billion and SDR 4 billion, respectively. The

SDR 2 billion increase in Swiss franc holdings mostly reflects a quantity change.




and stood at SDR 1.9 trillion at the end of FY 2002. Foreign exchange reserves, which

constitute the largest component of official reserve holdings, grew by 9 percent, to SDR

1.6 trillion. IMF-related assets, which make up the rest of non-gold reserves, increased

by 16 percent, to SDR 76 billion. The market value of gold held by monetary authorities

increased by 2 percent in 2001, to SDR 203 billion at year-end.


Ninety-six percent of non-gold assets consisted of foreign exchange reserves at

the end of 2001. The developing countries, which held 62 percent of all foreign exchange

reserves at the end of 2001, increased their holdings by 13 percent, to SDR 1 trillion,

following comparable increases in the previous two years. During 2001, the foreign

exchange holdings of industrial countries rose by 4 percent, to SDR 617 billion.

In 2001, the oil-exporting developing countries, which hold about 10 percent of

all developing countries’ foreign exchange reserves, increased their foreign exchange

assets by 7 percent, following increases of 15 percent and 28 percent in the two preceding

years. Foreign exchange reserves of the net creditor developing countries rose by 9

percent, to SDR 201 billion, and those of net debtor countries grew by 14 percent to

SDR 799 billion at the end of 2001. Foreign exchange reserves of net debtors without

debt-servicing problems increased by 16 percent, to SDR 659 billion, while those of

countries with debt-servicing problems increased by 6 percent, to SDR 140 billion.


During 2001, total IMF-related assets increased by 16 percent, following declines

of 10 percent in each of the previous two yeas. Industrial countries hold a majority of

IMF-related assets: 82 percent at the end of 2001. The increase in IMF-related assets

was mainly attributable to a 20 percent growth in members’ reserve positions in the

IMF, which consist of members’ reserve tranche and creditor positions, to SDR 57 billion.

SDR holdings of IMF members increased by 6 percent, to SDR 20 billion, reflecting a

decline in holdings by the IMF and other prescribed holders.

Gold Reserves

166

The market value of gold reserves increased by 2 percent, to SDR 203 billion,

reflecting an increase of 3 percent in the SDR price of gold in 2001; the physical stock of

official gold declined by one percent. The share of gold in officially held reserves has

declined gradually to 11 percent at the end of 2001, whereas in the early 1980s, gold

represented about half of all official held reserves. Most of the gold reserves (83 percent)

are held by industrial countries: gold constituted 20 percent of these countries’ total

reserves at the end of 2001. Gold reserves accounted for 3 percent of the total reserves

of the developing countries.


The currency composition of foreign exchange reserves has changed gradually

over the past decade, with the share of US dollar holdings in foreign exchange reserves

rising from 55 percent in 1992 to 68 percent in 1999 and staying at that level through the

end of 2001. The share of the euro has stayed effectively unchanged sine 1999. The

share of the Japanese yen in total foreign exchange reserves declined from 8 percent at

end-1992 to 5 percent at the end of 1997, and has since stayed at about that level through

2001. During the past decade, the share of pound sterling has remained between 3 and 4

percent and that of the Swiss franc at approximately 1 percent. The share of unspecified

currencies as well as foreign exchange reserves for which no information on currency

composition is available, has remained at 9 percent sine the end of 1998.

For industrial countries, the share of US dollar holdings increased throughout

the 1990s to reach 74 percent in 1999, and increased slightly to 75 percent at the end of

2001. The shares of the euro and the Japanese yen in those countries’ foreign exchange

reserves declined by less than one percentage point each from the preceding year, to 10

percent and 6 percent, respectively. Shares of pound sterling and the Swiss franc have

been practically unchanged over the past ten years. The share of unspecified currencies

stood at 8 percent in 2001.


was 64 percent in 2001, a level that has remained relatively constant over the last decade.

Holdings of the euro accounted for 15 percent of those countries’ foreign exchange

reserves, a level unchanged from the previous year and one percentage point higher than

its share in 1999. During the past decade, the share of the Japanese yen has gradually

decreased by about 3 percentage points, to 5 percent at the end of 2001, while the share

of pound sterling has increased by about 2 percentage points, to 6 percent. The share of

the Swiss franc has remained virtually unchanged at 1 percent since 1997. Unspecified

currencies accounted for 10 percent of developing countries’ foreign exchange reserves

in 2001.



SDR 87 billion in 2001, which reflects an increase of SDR 51 billion in the quantity of

US dollar holdings and a valuation increase of SDR 35 billion. The SDR 19 billion

increase in the quantity of euro holdings was partly offset by a price decline of SDR 3

billion, resulting in a net increase of SDR 16 billion in 2001. Similarly, a quantity increase

167

of SDR 9 billion in Japanese yen holdings was offset considerably by a SDR 7 billion

valuation decline, resulting in a net increase of SDR 2 billion. Increases in pound sterling

and Swiss franc holdings of SDR 8 billion and SDR 1 billion, respectively, are to a large

extent, attributable to changes in quantity.




and stood at SDR 2.1 trillion at the end of the year. Foreign exchange reserves, which

constitute the largest component of official reserve holdings, grew by 8 percent, to SDR

1.8 trillion. IMF-related assets, which make up the rest of non-gold reserves, increased

by 12 percent, to SDR 86 billion. The market value of gold held by monetary authorities

increased by 13 percent in 2002, to SDR 235 billion at year-end.


Foreign exchange reserves represented 95 percent of non-gold assets at the end

of 2002. The developing countries, which held 63 percent of all foreign exchange reserves

at the end of 2002, increased their holdings by 10 percent, to SDR 1.1 trillion, following

comparable increases in the previous two years. During 2002, the foreign exchange

holdings of industrial countries rose by 5 percent, to SDR 653 billion. In 2002, the

foreign exchange assets of the oil-exporting developing countries, which amount to about

10 percent of all developing countries’ foreign exchange reserves, declined by 2 percent,

to SDR 103 billion. Foreign exchange reserves of the net creditor developing country

group rose by 11 percent, to SDR 222 billion, and those of net debtor countries grew by

10 percent, to SDR 889 billion at the end of 2002. Foreign exchange reserves of net

debtors without debt-servicing problems increased by 13 percent, to SDR 753 billion,

while those of countries with debt-servicing problems decreased by 4 percent, to SDR

136 billion.

Holdings of IMF-Related Assets

During 2002, total IMF-related assets (that is, reserve positions in the IMF and

SDRs) increased by 12 percent, following an increase of 16 percent in the preceding

year. Industrial countries hold a majority of IMF-related assets: 81 percent at the end of

2002. The increase in IMF-related assets was attributable mainly to a 16 percent growth

in members’ reserve positions in the IMF, which consist of members’ reserve tranche

and creditor positions, to SDR 66 billion. SDR holdings of IMF members have remained

broadly constant at SDR 20 billion.

Gold Reserves

The market value of gold reserves increased by 13 percent, to SDR 235 billion,

reflecting an increase of 14 percent in the SDR price of gold in 2002; the physical stock

of official gold declined by 1 percent. The share of gold in officially held reserves declined

gradually to 11 percent by the end of 2002, whereas in the early 1980s gold comprised

about half of all officially held reserves. Most of the gold reserves (83 percent) are held

168

by industrial countries: gold constituted 21 percent of these countries’ total reserves at

the end of 2002. Gold reserves accounted for 4 percent of the total reserves of the

developing countries.

Developments During the First Quarter of 2003

During the first quarter of 2003, total reserve assets rose by SDR 43 billion,

whereas foreign exchange reserves increased by SDR 50 billion over the same period.

Reflecting a decline in the SDR price of gold since the end of 2002, the market value of

gold reserves declined by SDR 9 billion during the first quarter of 2003, while the physical

stock of official gold declined by SDR 4 billion. Holdings of IMF-related assets increased

by SDR 2 billion.



over the past decade, with the share of U.S. dollar holdings in foreign exchange reserves

rising from 57 percent in 1993 to 68 percent in 1999 and staying at that level through the

end of 2001. In 2002, however, the share of U.S. dollar holdings declined slightly, to 65

percent, with euro holdings gaining share.

The euro accounted for 15 percent of total foreign exchange reserves in 2002,

somewhat higher than its average since 1999. Given that, at the introduction of the euro,

the Eurosystem’s reserves previously denominated in euro legacy currencies, became

domestic assets of the euro area, the share of the euro in 1999–2002 is not directly

comparable with the previous years’ combined share of the four euro legacy currencies.

- deutsche mark, French franc, Netherlands guilder, and private ecu. However, after

adjusting the data to take into account only holdings of these currencies outside the euro

area, their combined share in 1998 was virtually identical to the share of the euro in

1999.

The share of the Japanese yen in total foreign exchange reserves declined from 8

percent at end-1993 to 5 percent at the end of 1997 and stayed at about that level

through 2002. During the past decade, the share of pound sterling has remained around

3 and 4 percent, and that of the Swiss franc approximately 1 percent. The share of

unspecified currencies, which include currencies, as well as foreign exchange reserves

for which no information on currency composition is available, rose to 11 percent in

2002.

For industrial countries, the share of U.S. dollar holdings increased throughout

the 1990s to reach 73 percent in 2001 and declined to 70 percent at the end of 2002. The

shares of the euro in those countries’ foreign exchange reserves rose to 11 percent in

2002, whereas that of the Japanese yen declined by less than 1 percentage point. Shares

of pound sterling and the Swiss franc have been practically unchanged over the past ten

years, but the share of unspecified currencies rose to 11 percent in 2002.

The share of the U.S. dollar in developing countries’ foreign exchange reserves

declined to 61 percent in 2002, at the lower end of historical values over the past decade.

Holdings of the euro rose to 17 percent of those countries’ foreign exchange reserves, 1

169

percentage point higher than its share in 2001. During the past decade, the share of the

Japanese yen has gradually decreased by about 3 percentage points, to 4 percent at the

end of 2002, while the share of pound sterling has increased by about 2 percentage

points, to 6 percent. The share of the Swiss franc has remained virtually unchanged at 1

percent since 1997. Unspecified currencies accounted for 11 percent of developing

countries’ foreign exchange reserves in 2002.

Changes in the SDR value of foreign exchange reserves can be broken down into

quantity and valuation (price) changes. Official reserves held in U.S. dollars increased

by SDR 30 billion in 2002, as an increase of SDR 113 billion in the quantity of U.S.

dollar holdings was offset by a valuation decline of SDR 83 billion. Euro holdings

increased by SDR 38 billion, reflecting a quantity increase of SDR 17 billion and a

valuation increase of SDR 21 billion. Japanese yen holdings remained unchanged, as a

quantity decline offset a valuation increase. Pound sterling and Swiss franc holdings

increased by SDR 11 billion and SDR 2 billion, respectively, reflecting increases in both

quantity and valuation.





constitute the largest component of official reserve holdings, grew by 15 percent, to

SDR 2.0 trillion. IMF-related assets, which make up the rest of non-gold reserves,

remained broadly unchanged at SDR 86 billion. The market value of gold held by monetary

authorities increased by 9 percent to SDR 256 billion in 2003.


Foreign exchange reserves accounted for 96 percent of non-gold assets at the

end of 2003. The developing countries, which held 63 percent of all foreign exchange

reserves at the end of 2003, increased their holdings by 16 percent, to SDR 1.3 trillion,

continuing the trend set in recent years. During 2003, the foreign exchange holdings of

industrial countries rose by 14 percent, to SDR 743 billion. In 2003, the oil-exporting

developing countries’ foreign exchange assets, which amount to nearly 10 percent of all

developing countries’ foreign exchange reserves, increased by 9 percent, to SDR 113

billion. The foreign exchange reserves of the net creditor developing country group rose

by 11 percent, to SDR 246 billion, and those of net debtor countries grew by 17 percent,

to SDR 1.0 trillion. Foreign exchange reserves of net debtors without debt-servicing

problems increased by 18 percent, to SDR 884 billion, while those of countries with

debt-servicing problems increased by 14 percent, to SDR 155 billion.

Holdings of IMF-Related Assets

During 2003, total IMF-related assets (that is, reserve positions in the IMF and

SDRs) increased by less than 1 percent, following increases of more than 10 percent in

the two preceding years. Industrial member countries hold a majority of IMF-related

assets: 79 percent at the end of 2003. Members’ reserve positions in the IMF remained

170

broadly unchanged at SDR 67 billion, with the SDR holdings of IMF members remaining

unchanged at SDR 20 billion.

Gold Reserves

The market value of gold reserves increased by 9 percent in 2003, to SDR 256

billion, reflecting an 11 percent increase in the SDR price of gold and a 2 percent decline

in the physical stock of official gold. The share of gold in officially held reserves has

declined gradually to 11 percent by the end of 2003, whereas, in the early 1980s, gold

made up about half of all officially held reserves. Most of the gold reserves (83 percent)

are held by industrial countries: gold constituted 21 percent of these countries’ total

reserves at the end of 2003. Gold reserves accounted for 3 percent of the total reserves

of the developing countries.




rising from 53 percent in 1994 to 67 percent in 2001. In 2002 and 2003, however, the

share of US dollar holdings declined to 64 percent. Notwithstanding a substantial increase

in official reserves held in US dollars over these two years, the weakening of the US

dollar vis-à-vis other major currencies implied a decline in the share of US dollar holdings

(see the last paragraph for details). The euro, accounted for 20 percent of total foreign

exchange reserves in 2003, higher than its average since 1999.

The share of the Japanese yen in total foreign exchange reserves declined from 8

percent at the end of 1994 to 5 percent at the end of 2003. During the past decade, the

share of pound sterling rose above 4 percent, while that of the Swiss franc remained

below 1 percent. The share of unspecified currencies, which include currencies not

identified as well as foreign exchange reserves for which no information on currency

composition is available, was 7 percent in 2003.


the 1990s, peaking at 73 percent in 2001 and amounting to 71 percent at the end of

2003. In 2003, the shares of the euro and the yen in industrial countries’ foreign exchange

reserves declined slightly to 21 and 4 percent, respectively. Shares of pound sterling and

the Swiss franc have remained broadly constant over the past ten years, but the share of

unspecified currencies fell to 2 percent in recent years.


declined to 59 percent in 2003, close to the historical average over the last decade.

Holdings of the euro rose to 19 percent of those countries’ foreign exchange reserves,

one percentage point higher than in 2002. Over the past decade, the share of the yen has

gradually decreased by about 2 percentage points, to 5 percent at the end of 2003, while

the share of pound sterling has increased by about 2 percentage points, to 6 percent. The

share of the Swiss franc has remained below 1 percent since 1997. Unspecified currencies

accounted for 10 percent of developing countries’ foreign exchange reserves in 2003.


171


SDR 161 billion in 2003, as an increase of SDR 263 billion in the quantity of US dollar

holdings was offset by a valuation decline of SDR 102 billion. Euro holdings increased

by SDR 56 billion, reflecting a quantity increase of SDR 22 billion and a valuation increase

of SDR 34 billion. Japanese yen holdings increased by SDR 5 billion as quantity and

valuation each increased by more than SDR 2 billion. Driven by the quantity effect, in

2003, pound sterling holdings increased by SDR 12 billion, whereas Swiss franc holdings

declined by more than SDR 1 billion.





constitute the largest component of official reserve holdings, grew by 18 percent, to

SDR 2.4 trillion. IMF-related assets, which make up the rest of non-gold reserves, declined

by 12 percent to SDR 76 billion, reflecting the recent decline in outstanding credit to

member countries. The market value of gold held by monetary authorities decreased by

1 percent to SDR 254 billion in 2004.


Foreign exchange reserves comprised 97 percent non-gold assets at the end of

2004. Developing countries held 65 percent of all foreign exchange reserves (SDR 1.6

trillion) at the end of 2004, increasing their holdings by 22 percent. During 2004, foreign

exchange holdings of industrial countries rose by 12 percent to SDR 845 billion.

In 2004, the foreign exchange assets of the oil-exporting developing countries,

which amounts to 8 percent of all developing countries’ foreign exchange reserves,

increased by 18 percent to SDR 133 billion. Foreign exchange reserves of the net creditor

developing countries rose by 15 percent, to SDR 282 billion, and those of net debtor

countries grew by 23 percent to SDR 1.3 trillion. Foreign exchange reserves of net

debtors without debt-servicing problems increased by 25 percent to SDR 1.1 trillion,

while those of countries with debt-servicing problems increased by 15 percent to SDR

178 billion.


During 2004, total IMF-related assets declined by 12 percent, following three

years of increase. Members’ reserve positions in the IMF declined by 16 percent to SDR

56 billion, while the SDR holdings of IMF members remained at SDR 20 billion. The

decline in the reserve positions was attributed mostly to industrial countries, which

account for more than three-fourths of the reserve positions and SDR holdings.

Gold Reserves

The market value of gold reserves declined by 1 percent to SDR 254 billion in

2004, reflecting a 1 percent decline in the physical stock of official gold. The share of

gold in officially held reserves declined gradually to 9 percent by the end of 2004, whereas

172

in the early 1980s, gold represented about half of all officially held reserves. Most of the

gold reserves (82 percent) are held by industrial countries; gold constituted 19 percent

of these countries’ total reserves at the end of 2004. Gold reserves accounted for 3

percent of the total reserves of the developing countries.




rising from 59 percent in 1995 to 71 percent in 1999, and remaining broadly stable in

2000 and 2001. In 2002, however, the share of US dollar holdings sharply declined to 67

percent, driven by the fall in the value of US dollar holdings and a reduced share of US

dollar assets in net purchases of reserves. Over the subsequent two years, the dollar

share remained at a similar level. While the official reserves held in US dollars picked up

strongly over these two years, accounting for more than 80 percent of the quantity

increase in official reserve holdings, this was offset by the weakening of the US dollar

vis-a-vis other major currencies.

The euro accounted for 25 percent of total foreign exchange reserves in 2003

and 2004, higher than its average in preceding years. The share of the Japanese yen in

total foreign exchange reserves declined from 7 percent at end-1995 to 4 percent at the

end of 2004. During the past decade, the share of pound sterling has been in the 2-3

percent range, while that of the Swiss franc has remained below 1 percent. The share of

other currencies, which comprise currencies not identified, has been less than 2 percent

since 1999. The share of unallocated reserves, for which no information on currency

composition is available, rose to more than 30 percent of global reserves in 2004.


the 1990s, peaking at 74 percent in 1999 and amounting to 72 percent at the end of

2004. The share of the euro in industrial countries’ foreign exchange reserves declined

slightly in 2004, to 21 percent, while the share of the yen remained broadly unchanged

over 2003-04. The shares of pound sterling and the Swiss franc have remained broadly

constant over the past 10 years.


declined to 60 percent in 2004, lower than the average in preceding years. Holdings of

the euro rose to 29 percent of those countries’ foreign exchange reserves, nearly 10

percent higher than the euro’s share in its initial years (1999 and 2000). Over the past

decade, the share of the yen has gradually decreased by about 3 percent, to 4 percent at

the end of 2004, while the share of pound sterling has increased by about 3 percent, to 5

percent in 2004. The share of the Swiss franc has remained below 1 percent over the

same period.



SDR 128 billion in 2004, as an increase of SDR 176 billion in the quantity of US dollar

holdings was offset by a valuation decline of SDR 48 billion. Euro holdings increased by

SDR 42 billion, reflecting a quantity increase of SDR 29 billion and a valuation increase

173

of SDR 13 billion. Japanese yen holdings increased by SDR 5 billion as a quantity increase

of SDR 6 billion was offset by a valuation decline of SDR 1 billion. Pound sterling

holdings increased by SDR 16 billion, whereas Swiss franc holdings declined by SDR

0.5 billion.




and stood at SDR 3.3 trillion at the end of the year. Foreign exchange reserves grew by

21 percent, to SDR 2.9 trillion. IMF-related declined by 36 percent to SDR 49 billion,

reflecting the recent decline in outstanding credit to member countries. The market value

of gold held by monetary authorities increased by 25 percent to SDR 317 billion in 2005.

Foreign Exchanges Reserves

Foreign exchange reserves represented 98 percent of non-gold assets at the end

of 2005. Developing countries held 69 percent of all foreign exchange reserves (SDR 2

trillion), having increased their holdings by 29 percent relative to end-2004. During

2005, foreign exchange holdings of industrial countries rose by 7 percent to SDR 904

billion, and the foreign exchange assets of oil-exporting developing countries, which

amounted to 9 percent of all developing countries’ foreign exchange reserves, increased

by 35 percent to SDR 179 billion.


During 2005, total IMF-related assets declined by 36 percent, more sharply than

in the previous year. Members’ reserve positions in the IMF declined by 49 percent to

SDR 29 billion, while the SDR holdings of IMF members remained at SDR 20 billion.

The decline in the reserve positions was mostly attributed to industrial countries, which

account for more than three-fourths of the reserve positions and SDR holdings.

Gold Reserves

The market value of gold reserves increased by 25 percent to SDR 317 billion in

2005, as the strong gold price more than offset the 2 percent decline in the physical

stock of official gold. However, the share of gold in official reserves in 2005 (10 percent)

is much lower than in the early 1980s when gold accounted for about half of all official

reserves. Most of the gold reserves (82) are held by industrial countries, for which gold

constituted 22 percent of their total reserves at the end of 2005. Gold reserves accounted

for 3 percent of the total reserves of developing countries.


In 2005, the share of dollar holdings increased slightly, reflecting the strengthening

of the dollar vis-a-vis other reserve currencies. The share of the euro, increased sharply

between 1999 and 2003 and has since remained broadly stable at around 25 percent of

total foreign exchange reserves. The share of the Japanese yen in total foreign exchange

reserves declined from 7 percent at end-1996 to 4 percent at the end of 2005. The share

174

of pound sterling reached nearly 4 percent at end-2005, while that of the Swiss franc

remained well below 1 percent. The share of other currencies not identified has been less

than 2 percent since 1999. The share of unallocated reserves, for which no information

on currency composition is available, rose to more than 30 percent of global reserves in

2005.

For industrial countries, the share of US dollar holdings rose to 74 percent at the

end of 2005, slightly exceeding the high value of 1999. The share of the euro in industrial

countries’ foreign exchange reserves declined slightly to 19 percent in 2005, while the

share of the yen decreased further slightly over 3 percent in 2005. The shares of pound

sterling and Swiss franc have remained broadly constant.


remained close to 60 percent in 2005, lower than the average in preceding years. Holdings

of the euro remain around 29 percent of those countries’ foreign exchange reserves, 10

percent higher than the euro’s share in its initial years. Over the past decade, the share of

the yen gradually decreased to about 4 percent at the end of 2005, while the share of

pound sterling has increased to 5 percent in 2005. The share of the Swiss franc has

remained below 1 percent over the same period.

Official SDR reserves held in US dollars increased by SDR 190 billion in 2005,

reflecting a quantity increase in US dollar holdings of SDR 90 billion and a valuation

increase of SDR 99 billion. Euro holdings increased by SDR 55 billion, as a quantity

increase of SDR 82 billion was offset by a valuation decline of SDR 27 billion. Japanese

yen holdings increased by SDR 5 billion as a quantity increase of SDR 8 billion was

offset by a valuation decline of SDR 3 billion. Pound sterling holdings increased by SDR

16 billion whereas Swiss franc holdings remained broadly unchanged.




and stood at SDR 3.8 trillion at the end of the year. Foreign exchange reserves grew by

15 percent, to SDR 3.3 trillion. IMF-related assets declined by 27 percent to SDR 36

billion, reflecting the recent decline in outstanding credit to member countries. The market

value of gold held by monetary authorities increased by 16 percent to SDR 367 billion in

2006.

175


Foreign exchange reserves accounted for 99 percent of non-gold international

reserves at the end of 2006. Developing countries held 72 percent of all foreign exchange

reserves (SDR 2.4 trillion), an increase of 20 percent since the end of 2005, and the

holdings of oil-exporting developing countries, which amounted to 10 percent of all

developing countries’ foreign exchange reserves, increased by 26 percent to SDR 228

billion. During 2006, the foreign exchange holdings of industrial countries rose by 2

percent to SDR 927 billion.

IMF-related Assets

During 2006, members’ reserve positions in the IMF declined by 39 percent to

SDR 18 billion, while the SDR holdings of IMF members declined 9 percent to SDR 18

billion. The decline in the reserve positions was attributable mostly to the industrial

countries, which account for two-thirds of the reserve positions and SDR holdings.

Gold Reserves

The market value of gold reserves increased by 16 percent to SDR 367 billion in

2006, as higher gold prices more than offset the 1 percent decline in the physical stock

of official gold. However, the share of gold in official reserves in 2006 (10 percent) is

much lower than in the early 1980s, when gold accounted for about half of all official

reserves. At the end of 2006, gold constituted 24 percent of the total reserves of industrial

countries, which hold 82 percent of the world’s gold reserves, and 3 percent of the total

reserves of developing countries.


In 2006, the share of dollar holdings dropped below 65 percent, as the euro and

the pound gained share owing to appreciating exchange rates vis-a-vis the dollar as well

as net reserve purchases denominated in those two currencies.

The share of the euro increased again in 2006, to nearly 26 percent of total foreign

exchange reserves at year-end. The share of Japanese yen in total foreign exchange

reserves declined from 6 percent in the late 1990s to 3 percent at the end of 2006. The

share of pound sterling rose above 4 percent at end-2006, while that of the Swiss franc

remained well below 1 percent. The share of other currencies has been less than 2 percent

since 1999. No information is available on the currency composition of unallocated

reserves, whose share of global reserves rose to 34 percent in 2006.

The share of US dollar holdings by industrial countries moderated to 72 percent

at the end of 2006, from the high of the previous year that reflected the relative strength

of the dollar at end-2005. In 2006, the share of the euro in industrial countries’ foreign

exchange reserves recovered, reaching 20 percent, while the share of the yen remained

below 4 percent. The shares of pound sterling and Swiss franc have remained broadly

stable.

The share of US dollar in developing countries’ foreign exchange reserves

remained close to 60 percent in 2006, lower than the average in preceding years. Euro

176

holdings rose to nearly 30 percent of those countries’ foreign exchange reserves. Over

the past decade, the share of the yen gradually decreased to 3 percent at the end of 2006,

while the share of pound sterling increased to 6 percent in 2006. The share of the Swiss

franc remained below 1 percent over the same period.

Official reserves held in US dollars increased by SDR 115 billion in 2006, reflecting

a quantity increase in US dollar holdings of SDR 185 billion and a valuation decrease of

SDR 70 billion. Euro holdings increased by SDR 93 billion, as a quantity increase of

SDR 63 billion was boosted by a valuation increase of SDR 30 billion. Japanese yen

holdings declined by SDR 0.5 billion as a quantity increase of SDR 3.5 billion was offset

by a valuation decrease of SDR 4 billion. Pound sterling holdings increased by SDR 27

billion, Swiss franc holdings by SDR 1 billion.

5.10 SUMMARY

5.10.1 Global Official Holdings of Reserve Assets

As seen from Table 5.1 and Graph 5.1 below, the official holdings of reserve

assets (including gold) of the industrial countries rose from SDR 863.7 billion in 2001 to

SDR 1276.1 billion in 2007, recording an increase of 47.75 percent. At the same time,

the official holdings of reserve assets (including gold) of the developing countries have

risen from SDR 1051.7 billion in 2001 to SDR 2645.6 billion, recording an impressive

increase of 251.50 percent.

Obviously, an increasing number of developing countries have reposed their trust

in the IMF’s monetary unit SDR for fulfilling their balance of payment of obligations.

Source: IMF’s Annual Reports for the respective years

As shown in Table 5.1 and Graph 5.1, the global official holdings of reserve

assets of the developing countries have shown a rising trend, registering a growth of

251.50% in the year 2007 over the base year 2001, while the official holdings of reserve

assets of the industrial countries also showed a marginally rising trend registering a

1276.11254.21199.61169.91034.5930863.7

2645.62496.7

2085.4

1626.11345

1162.51051.7

01000

2000

3000

2001 2002 2003 2004 2005 2006 2007 -Years

Bil

lions

of

SD

Rs

Industrial Countries Developing Countries

Graph 5.1

Global Official Holdings of Reserve Assets (including Gold)

177

growth of merely 147.75% in the year 2007 over the base year 2001.

5.10.2 Global Official Holdings of Gold

As seen from Table 5.1 and Graph 5.2 below, the official holdings of gold of the

industrial countries rose from SDR 172.5 billion in 2001 to SDR 311.4 billion in 2007,

recording an increase of 80.50 percent. At the same time, the official holdings of gold of

the developing countries have risen from SDR 35.2 billion to SDR 67.6 billion, recording

an increase of 92 percent.

Evidently, there is a neck-to-neck race between the industrial countries and the

developing countries to acquire gold stocks as a liquid international asset.

As shown in Table 5.1 and Graph 5.2, the global official holdings of gold of the

developing countries have shown a marginally rising trend, registering a growth of

192.00% in the year 2007 over the base year 2001, while the official holdings of gold of

the industrrial countries also showed a marginally rising trend, registering a growth of

180.50% in the year 2007 over the base year 2001. Both these growths may be not be

taken as significant.

5.10.3 Global Official Holdings of US Dollar and Euro

As seen from Table 5.2 and Graph 5.3 below, the share of the US dollar in global

official holdings of foreign exchange declined from 71.5 percent in 2001 to 64.7 percent

in 2006, a fall of 9.5 percent; while the share of the Euro in global official holdings rose

from 19 percent in 2001 to 25.8 percent in 2006, a rise of 35.8 percent.

It thus appears that the Euro is emerging as a new international currency unit by

supplanting the as-yet undisputed reign of US dollar.


172.5 194.2211.9 208.9

259.9

301.2311.4

35.240.8 44.8 44

55.4 65.5 67.6

0200

400

2001 2002 2003 2004 2005 2006 2007 -Years

Bil

lions

of

SD

Rs

Industrial Countries Developing Countries

Graph 5.2

Global Official Holdings of Gold

178

As shown in Table 5.2 and Graph 5.3, the share of US Dollar in the global official

holdings as foreign exchange reserves has decreased by -9.50% in 2007 over the base

year 2001, while the share Euro has increased by 35.80% in 2007 over the base year

2001.

5.10.4 Comparison of US Dollar and Euro in Global Official Holdings

As seen from Table 5.2 and Graph 5.4, the share of the US dollar in official

holdings of foreign exchange reserves in industrial countries declined from 72.7 percent

in 2001 to 71.9 percent in 2007 (1.10 percent decrease); while the share of the US dollar

in official holdings of foreign exchange reserves in developing countries declined from

70 percent in 2001 to 59.7 percent in 2006 (14.75 percent decrease).

On the other hand, the share of Euro in official holdings of foreign exchange

reserves increased from 20.5 percent in 2001 to 29.6 percent in 2007 (44.40 percent

increase); while the share of the Euro in official holdings of foreign exchange reserves in

developing countries increased from 17.9 percent in 2001 to 20.4 percent in 2006 (13.97

percent increase).

This once again confirms that the Euro is emerging as a new international currency

unit for settling the balance of payment between the countries.

64.766.765.865.96771.5

25.824.224.925.223.819

050

100

2001 2002 2003 2004 2005 2006 -Years

% o

f H

old

ings

US Dollar Euro

Graph 5.3

Shares of US Dollar and Euro in Global Official Holdings of Foreign Exchange


179


As shown in Table 5.2 and Graph 5.4, the share of US Dollar in global official

holdings as foreign exchange reserves has gone down by 1.10% in 2007 over the base

year 2001 in the industrial countries and by 14.70% in 2007 over the base year 2001 in

the developing countries.

As shown in Table 5.2 and Graph 5.4, the share of Euro in global official holdings

as foreign exchange reserves has gone down by 44.40% in 2007 over the base year 2001

in the industrial countries and by 13.95% in 2007 over the base year 2001 in the developing

countries.

Thus concludes the analysis and interpretation of the data presented under this

work. The conclusions derived therefrom are being presented in the next Chapter.

qqq

71.973.671.570.568.972.7

59.76160.261.365.270

20.41920.821.917.9

22.3

29.628.52928.525.3

20.5

050

100

2001 2002 2003 2004 2005 2006 -Years

% o

f H

old

ings

US Dollar in Industrial Countries US Dollar in Develop.Countries

Euro in Industrial Countries Euro in Develop.Countries

Graph 5.4

Comparison of Shares of US Dollar and Euro in Global Official Holdings

of Foreign Exchange in Industrial and Developing Countries

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Untitled-6 [shodhganga.inflibnet.ac.in]shodhganga.inflibnet.ac.in/bitstream/10603/4374/6/06_chapter 5.pdf · 126 growing role of international financial markets. (3) SDR Interest