Implementing the G20 deal on IMF drawing rights and gold sales and the review of lending facilities for low-income countries

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1 Implementing the G20 deal on IMF drawing rights and gold sales and the review of lending facilities for low-income countries Eurodad briefing, July 2009 In April 2009 the G20 agreed to channel $750 billion through the IMF to combat the financial crisis. Of the $750 billion, $500 billion is supposed to be provided by rich countries on-lending to the IMF through the New Arrangements to Borrow (NBAs) and $250 billion by an issuance of Special Drawing Rights (SDRs) the IMF s reserve asset. Of the promised $500 on-lending by rich countries, over $420 billion have already been committed, though very little has been actually transferred. In July 2009 Fund staff and board members are trying to figure out how to implement the agreements on SDRs and gold sales. The $250 billion issuance of SDRs and the sale of some of IMF gold reserves are proving difficult to implement. The Treaties Department at the IMF is working on technical options for both. The IMF Executive Board is due to discuss the paper by the end of July. On the gold sales, a paper was prepared by the staff before the Spring Meetings this year outlining a number of options which could allow using the proceeds of gold sales to subsidise resources for low-income countries (see summary of this options below). However in April a second paper was requested from IMF staff when the Executive Board could not find an agreement on the issues presented. The Executive Board is aiming to take a final decision on both issues by the Annual Meetings taking place on 6 th and 7 th October in Istanbul (Turkey). Table 1: Status of contributions towards an increase in IMF resources Country Contribution Status Date Japan $100 billion Signed bilateral agreement February 2009 European Union $100 billion Announcement only March 2009 of which: United Kingdom $15 billion Draft bill pending before House of Commons United States $100 billion NAB increase approved by Congress June 2009 China $50 billion Commitment to buy bonds June 2009 Brazil $10 billion Commitment to buy bonds June 2009 Russia $10 billion Commitment to buy bonds May 2009 South Korea $10 billion Commitment to buy bonds May 2009 India $10 billion Commitment to buy bonds May 2009 Canada $10 billion Announcement only April 2009 Switzerland $10 billion Announcement only April 2009 Other $11.5 billion Announcements only various TOTAL $421.5 billion Source: research conducted by Bretton Woods Project. Action alert! The IMF Board will discuss how to proceed with the SDR allocation, the gold sales and the review of lending facilities for low-income countries in the upcoming. Therefore this is a crucial moment to influence IMF Staff and Executive Directors pushing for the options that we would like to see on the table. Find enclosed a template lobby letter spelling out key CSO demands on how the SDRs allocation and the IMF gold sales should be used to provide unconditional finance at reasonable terms for low-income countries. Feel free to translate it and change it as needed, to adapt it to demands in your national constituencies. It is crucial to reach European Executive Directors as soon as possible and before the end of July!

2 Special Drawing Rights A general allocation of IMF SDRs is done according to countries quotas. This means the richest countries get the biggest share of the pie, since they hold the highest quotas. The US, therefore, gets over 16% of the total number of SDRs issued, Japan about 10% and so on. With the $250 billion allocation, only some $81 billion will go to developing countries, and only about $19 billion will go to low-income countries (about $10 billion for Africa less than 5% of the total value of the SDRs being issued). G7 countries, which have many financing options already, are rewarded with over 45% of the SDRs. 1 Eurodad and other civil society groups have been calling for an enhanced used of SDRs to provide additional liquidity for developing countries and particularly for low-income countries. SDRs could be a reasonably good source of finance for developing countries as once allocated they can be converted into a hard currency (through voluntary arrangements with governments issuing hard currencies) and have no conditions attached. Rich countries, which in principle are going to get over $150 billion of the $250 billion agreed by the G20 in London, are not in urgent need of these resources. In fact, officials from the UK and France have said they are open to consider transferring their share of SDRs to developing countries, as long as transactions costs can be kept low. Countries converting SDRs into hard currency have to pay an annual interest charge on the basis of short-term debt interest rates for the four basket currencies (US dollar, euro, pound and Japanese yen). However, low-income countries could get safeguards for example by: - fixing interest rates for SDRs so they do not rise when market interest rates increase. - getting interest charges subsidised either through proceeds from gold sales, or grants from rich countries including by giving up some proceeds from the interest paid by members converting SDRs into hard currencies. IMF staff are now exploring technical options to implement the SDR allocation. According to officials interviewed by Eurodad in Washington at the end of June, all options are still on the table. Apparently the team working on the SDR allocation is facing difficulties as such a big allocation has not been done since the 1970s and there is no institutional memory in the IMF or in central banks about how this was done. The possibilities explored, however, seem to adhere to the explicit discussion of SDRs in the IMF Articles of Agreement. The above safeguards for low-income countries should be considered even if they require a change in the Articles of Agreement. At a time of crisis member governments should be ready to change the Articles of Agreement again if this is needed to deliver finance at reasonable terms for developing countries. Alternatively, however, they can be done with two complementary agreements, one on the SDRs themselves and another on their reallocation. Issues that the Fund staff is attempting to clarify include: - Can SDRs be transferred to developing countries, and if so, on what terms? - Is it possible to charge different interest rates be charged to middle-income and to low-income countries? - Is it possible to pay a fixed interest rate on SDRs converted? Some Executive Directors consulted by Eurodad seem to share a concern on the high demand for hard currency liquidity that could be generated by such SDR allocation. However, the share allocated to industrialised countries is highly unlikely to be converted in the short term. As for the bulk of middleincome and emerging economies which have a good level of reserves, the new SDR allocation could be kept in their accounts as reserves (at no cost). With such an increase in reserves, these countries would be able to spend some of their dollar-denominated reserves (or any other reserves either in hard currency or in gold). This would diminish the pressure on an increased demand on hard currencies. The countries which most need to immediately convert the SDRs are low-income countries. However, the share for low-income countries is initially only $19 billion which could eventually be increased if an agreement is made to transfer SDRs from rich to poor countries. This would not put major pressure on the currency markets. 1 For further details, see ActionAid factsheet on Special Drawing Rights (SDRs) and the Global Reserve System (2009): %20Special%20Drawing%20Rights%20%20the%20Global%20Reserve%20System.pdf 2

3 Gold sales The G-20 Communiqué has a section on gold sales 2 which proposes that the IMF allocate $1 billion of the proceeds from gold sales and other IMF income sources for low income countries. This would be used to leverage up to $6 billion in new concessional loans over the next three years. The remainder of the proceeds from IMF gold sales would be used to cover the IMF s administrative budget. The proposal is ambiguous and the IMFC was expected to come up with further clarification at the Spring Meetings. Following a divisive discussion at the Executive Board few days before the Spring Meetings, the IMFC did not manage to come up with a consensus to use more gold sales for poor countries. 3 In light of the lack of agreement, the Executive Board asked IMF staff to prepare a second paper on the available options (below is a summary of the options presented by IMF staff in their first paper). Movement on gold sales had been stalled for some weeks as the US Congress had to authorise the US representative to the IMF to vote on the gold sale. At the beginning of June, the US Congress passed a bill including $100 billion through the New Arrangements to Borrow (NAB), and the authorisation for the US representative at the IMF to back the sale of 400 tons of the IMF s gold. This decision should have allowed progress towards reaching an agreement on gold sales. However, the IMF staff is still working on the second paper which should be ready soon. A second Board discussion, informed by the second staff paper on available options, is scheduled to take place at the end of August or beginning of September. The aim is to reach a final decision by the Annual Meetings in Istanbul on 6 and 7 October. It is most likely that a modified version of option 3 below will be chosen. Gold sales options in the first IMF paper (April 2009) 1) Use part or all of unforeseen profits for gold sales to subsidise loans for low-income countries. Comment: This is based on the baseline price they expected for their income model of $850 per ounce i.e. not the amount assumed by the Crockett Report (closer to $500), so it is important to push for using the figures and baseline price stated by the Crockett Report. 2) Use of net investment income from gold profits - i.e. retain gold sale profits in the Investment Account (IA), and use part of the investment income from the endowment to provide subsidy resources for lowincome countries. 3) Transfer a pre-determined amount of resources from the IA linked to gold sales for finance to LICs subsidies the paper estimates $0.8 - $1 billion from total projected profits of $6.5billion. This is the option most like the G20 proposal. Many Eurodad member groups have already mobilised on this, but further work is needed to ensure that low-income countries get a clear and rapid allocation of money from these gold sales. 2 From the G-20 communique, April 2, 2009: We have committed, consistent with the new income model, that additional resources from agreed sales of IMF gold will be used, together with surplus income, to provide $6 billion additional concessional and flexible finance for the poorest countries over the next 2 to 3 years. We call on the IMF to come forward with concrete proposals at the Spring Meetings. 3 From the IMFC communiqué, April 23, 2009, To strengthen the global financial safety net in the face of this severe crisis, the Committee supports doubling the Fund s concessional lending capacity for low-income countries, while ensuring debt sustainability, and exploring scope for increased concessionality. Subsidies could be financed through a combination of bilateral contributions possibly by new donors and the Fund s resources and income, including the use of additional resources from agreed gold sales, consistent with the new income model. 3

4 Reform of lending instruments for low-income countries The facilities that have recently been available to low-income countries (LICs): i) PRGF longer term assistance for deep-seated balance of payments need of structural nature with so-called upper credit tranche conditionality which means tight rules on both structural reforms and quantitative targets. ii) ESF rapid assistance for exogenous shocks on the basis of a commitment to appropriate policies. 25% available conditionality free, 75% is a high-access component that must have conditionality similar to the PRGF. iii) PSI Policy support without providing any financing. PSI programmes have conditionality that is essentially identical to PRGF programmes. Summary of IMF Board discussion and agreements, 20 March 2009: The PRGF should be preserved as the main mechanism for medium and long-term engagement with LICs but recognition that the PRGF access limits and norms have declined significantly relative to GDP and trade and therefore that the Fund s concessional financing capacity would need to be raised. Architecture: While retaining the PRGF for protracted balance of payments problems, IMF Executive Directors are looking at adding a concessional Stand-By Arrangement (SBA)-like instrument, and unifying concessional facilities for emergency assistance. Access: The IMF agreed to double access limits in April, making more concessional financing available, but it is unclear how useful this will be due to debt sustainability concerns. Financing terms: Some support to increase the concessionality of PRGF financing and to reduce the concessional funding from the SBA-like instrument (given the limited resources available). There is a proposal on the table to reduce interest rates to 0% temporarily. Conditionality: following a discussion on modernising conditionality, the Executive Board decided to phase-out Structural Performance Criteria, one conditionality type, for all IMF lending instruments including for LICs. The Fund claims to continue its efforts to tailor conditionality to a country s circumstances. No action has been taken on quantitative conditionality which sets deficit and inflation targets for countries. Concessional financing capacity: Additional loan resources will need to be mobilised and the Fund may need additional subsidy which means that European governments are being asked to contribute. In relation to this review of the lending facilities there are several points which NGOs think should be considered in the light of the IMF lending to LICs in recent years. PRGF loans to date have been rife with policy conditionality. This has included enforced wage ceilings on governments, which has prevented a scale up in the numbers employed in social sectors, for example curtailing teacher recruitment. In addition the PRGF has often imposed unnecessarily conservative inflation, fiscal deficit and foreign reserve targets that do not clearly promote poverty reduction and cause aid money to be channelled into foreign reserves rather than into social spending. Policy conditionality relating to PRGF programmes in LICs has been agreed in a way which is not transparent and undermines the parliament and accountability to citizens in a country, by making agreements with finance ministers and/or central bank behind closed doors. The majority of policy advice has not been supported or based upon any systematic analysis of the impacts on the poor. Nor have PRGF programmes been systematically informed by Poverty and Social Impact Assessments (PSIA) conducted by either the Fund or the World Bank. Some NGOs feel that the PRGF is inappropriate as a tool for LICs. Its rationale to assist countries with protracted balance of payments need is very vague and is not relevant as the reason that LICs normally need to access funds is for long term structural provision. The value of resources available through this facility is very small (representing approximately 0.65 of the Rwandan government s external financing in 2005.) The interest rates charged are too high to enable the finance provided to be 4

5 counted as Official Development Assistance (ODA) according to the OECD. The IMF is also poorly integrated into international processes to improve the effectiveness of donor aid, such as the Paris Declaration, meaning the finance provide is likely to be of lower quality than that of other donors and poorly integrated into donor-government coordination mechanisms. The reason that it is still in demand is because it is seen as a signal by other donors giving them confidence that the county is economically sound to give aid money. Recommendations to the board meeting at the end of July: Any conditionality relating to concessional finance for LICs must be decided on through transparent consultation with a country s government with the participation of all relevant stakeholders, such as line ministries, parliament and civil society. It must draw upon the countries poverty reduction strategies and a PSIA. Economic or quantitative policy conditions, such as structural reforms including privatisation and liberalisation, wage ceilings, or stringent fiscal and monetary targets, should not be applied. These rules must be made binding for any agreement made. The IMF s policy advice should also ensure maximum flexibility and domestic policy space. The IMF s policy advice is often ideologically driven in favour of liberalisation and fiscal austerity. Instead, the Fund should look at a range of policy options, and its advice should ensure maximum leeway for countries to decide what mix of subsidies, trade policies, and/or social safety nets, among other policy tools, are necessary to secure both economic and social security. There should be a Flexible Credit Line (FCL)-like, conditionality-free instrument available to low income countries. The ESF, or any combined emergency assistance facility, should be changed so that 100 per cent of finaning is available without conditionality. The ESF s high-access component should not be attached to any policy conditionality, other than normal fiduciary standards, and should focus on providing rapid, short-term, and concessional cash transfers to address the immediate macroeconomic impacts of external shocks. The emergency assistance should be made more concessional than the PRGF in light of the fact that it is being used by countries that are in crisis. The ESF should be available to countries experiencing either balance of payments or budgetary problems, and with open access limits decided by the country authorities requesting the ESF. Access amounts should not be limited to 25% in the rapid-access component and 75% in the high-access component. Country authorities should be able to decide how much access they need specific to their individual country contexts, within the thresholds of their national-level debt sustainability. Transparency in the lending review process should be dramatically improved. The content of the paper prepared by the staff should have been discussed with external stakeholders, such as parliamentarians, civil society, and academics. Transparency policy and participation processes at the Fund must be significantly strengthened in order to ensure the rights of stakeholders to access vital policy information and participate in decision-making in a timely and informed fashion. For more information contact Nuria Molina at the Eurodad office. Nmolina@eurodad.org. 5