Too many risks, too few rewards
It is astonishing that there has been no public discussion, or debate in congress, about the IMF’s utilizing the private market for the bulk of its funding. This article suggests that it can be done with a minimum of effort and in a manner that does not require the IMF to return to congress and member nations’ legislatures periodically for replenishment.
Before examining the best method of using the private capital markets to supplement the IMF’s resources, it is well to consider present funding procedures and certain problems in the IMF’s articles of agreement. The IMF’s present sources are:
Member states’ contribution of quotas relative to their size and wealth. These quotas are periodically increased but this requires legislative approval from each state, a time-consuming procedure. Perhaps more onerous is the fact that only the convertible or hard currencies of the richer nations are useable for relending, or some 40% of paid-in quotas.
Central bank lending from the surplus or hard-currency nations. This too is time-consuming, unpredictable and many times politically difficult. The question is whether the IMF, under its present articles of agreement (article 7(2) et al) has the borrowing capacity to effect sufficient loans from the private sector over the foreseeable future. Unfortunately, the private markets are very particular, and the IMF has three problems:
Under its present charter, the IMF may be forced to express its borrowings in terms of special drawing rights (SDRs), unless it wants to assume the exchange risk of borrowing in dollars and individual currencies. This exchange risk comes about because an unusual IMF article states that it is to make the borrowed currency available for purchase by its members (loans to its members) on the basis of the SDR’s value at the date of repurchase. This has forced the IMF to borrow (the Wittiveen Facility, etc) in terms of SDRs, which is satisfactory in central bank-IMF transactions but cumbersome and restrictive when the IMF enters the private markets. The IMF will want the flexibility to borrow in any currency without exchange risk, in order to increase the funds available to it.
The Fund has no callable capital – capital that can be called from member governments only to meet default on debt obligations. This is the mechanism used by the World Bank, Asian Development Bank, Inter-American Development Bank and other international institutions to enhance their credit bases. Although these institutions can now borrow substantial amounts without utilizing the support of their callable capital, they generally prefer to have a suitable callable capital back-up for borrowing purposes.
Member nations’ quotas – more-or-less equivalent to capital contributions in other international institutions and private corporations – can be withdrawn by IMF members at their discretion. This poses a formidable problem: sizeable withdrawals or even the threat of withdrawals would materially affect the credit standing of the IMF in private markets.
In view of these difficulties in the present articles of agreement and the facts of the marketplace and the experience of other international institutions, it seems appropriate to consider alternative ways to provide a supplementary credit base for the IMF. The callable-capital approach is a possibility but the time involved to expand it as the need arises is a real deterrent and such increases also would face political difficulties.
There is no question that the IMF could borrow substantial amounts without an additional credit base. But for the reasons delineated above it is thought better that it has a strengthened borrowing base for the private markets and one where it repeatedly does not have to go back to member nations for additional funds.
It is probable that among the international institutions the most effective method of funding – and one that meets the conditions listed above – is that devised by Jean Monnet and utilized by the High Authority of the European Coal & Steel Community and later adopted by the European Economic Community with a slightly different formula. This involves a levy of up to 1% on the annual sales of coal and steel produced. This levy produces a limited income but primarily provides the credit or borrowing base for the Coal & Steel Community. Lenders have the practical protection of the levy being increased by the board of this institution to meet defaults on debt obligations.
The present High Authority levy is about 0.25%. Direct revenues from the levy have approximated to one-tenth of annual borrowings so the levy serves primarily as a borrowing support in the private markets rather than a source of funds.
Given that changes in the IMF articles of agreement might well be effected in stages (ie, first allowing for borrowings in the individual currencies because of the political and practical difficulties involved in materially changing the articles) and that other changes might be considered later, the levy formula might apply to the IMF in the following manner.
The developed countries, as well as certain of the Opec nations, might contribute, as a type of levy, a percentage of their quotas to the IMF (or perhaps a percentage of their exports), the exact percentage to be determined from time to time by the IMF’s executive directors. Direct revenues from the levy, might, for example, be one-tenth of annual borrowings in the private markets, as is the case with the High Authority. When certain developing nations’ currencies reach a necessary degree of convertibility, plus other criteria, they would be asked to contribute as well.
In summary, the primary purpose of the IMF levy would be to provide a better credit base for borrowing in the private markets, as it is for the High Authority and the EEC. The paid-in portion of the levy would be nominal, and the non-paid-in portion might be called only to meet default on a debt obligation. This would be similar to the callable capital of the World Bank, Inter-American Bank, etc., which can only be called to meet default on debt obligations.
This is an important point. It means that the IMF member nations responsible for the levy would require only nominal paid-in contributions from their legislatures and modest back-up increases in the levy up to a fixed amount, to be called in the unlikely case of default in debt obligations. Such IMF defaults, in practical terms, would be unheard of and probably non-existent, so in all probability the use of the full levy would never be called upon.
It is believed this funding procedure would provide a stable, well-financed IMF, and, most important, it would create a well-founded sense of international financial security in a troubled, insecure world. The favourable psychological advantages of a well-funded IMF, which is not required to return to member nations for additional funds, cannot be over-emphasized.
The scale of borrowing should initially be modest. The accumulation of idle resources by the IMF for an indefinite period could be costly and the availability of a large pool of resources could intensify pressure to ease the conditionality of its lending arrangements.
Eugene Black was formerly a partner of Lazard Frères and adviser to the UN Economic Council
