The Global Financial Crisis: Increasing IMF Resources and the Role of Congress
The Global Financial Crisis: Increasing IMF
Resources and the Role of Congress
Jonathan E. Sanford
Specialist in International Trade and Finance
Martin A. Weiss
Specialist in International Trade and Finance
August 10, 2009
Congressional Research Service
7-5700
www.crs.gov
R40578
CRS Report for Congress
P
repared for Members and Committees of Congress
The Global Financial Crisis: Increasing IMF Resources and the Role of Congress
Summary
At their meeting in London on April 2, 2009, the leaders of the 20 systemically important
industrialized and developing countries (G-20) agreed on several initiatives to bolster the
International Monetary Fund’s (IMF) resources, improving its ability to provide financial
assistance to countries impacted by the ongoing financial crisis. These included increasing the
resources of the IMF and international development banks by $1.1 trillion including $750 billion
more for the IMF, $250 billion to boost global trade, and $100 billion for multilateral
development banks. For the additional IMF resources, $250 billion was to be made available
immediately through bilateral arrangements between the IMF and individual countries, while an
additional $250 billion would become available as additional countries pledged their
participation.
On May 12, 2009, the White House formally requested that Congress consider increasing the U.S.
contribution to the IMF based on commitments made by the Bush Administration in 2008 and by
the Obama Administration at the London meeting of the G-20 countries in April 2009. At the
meeting, G-20 leaders agreed that the IMF’s New Arrangements to Borrow (NAB), a
supplemental fund to bolster IMF resources, should be increased by up to $500 billion from its
present level of $50 billion (“Global plan for recovery and reform: the Communiqué from the
London Summit,” April 2, 2009, available at http://www.londonsummit.gov.uk/en/summit-
aims/summit-communique/). The Obama Administration proposed that the United States
contribute up to $100 billion. The G-20 also agreed that the IMF should create $250 billion in
new Special Drawing Rights (SDR) and allocate them to its members through its SDR
Department.
Already pending at the time of the G-20 meeting was a proposal for a new increase in IMF quota
resources. Negotiations on a package of reforms and a new quota increase were completed in
April 2008, and the proposals were submitted to the House and Senate by the Bush
Administration in November 2008. The U.S. share is about $8 billion. The package includes
reform of IMF governance, finances, and procedures. It also includes a proposal that the IMF sell
403 metric tons of gold to create a facility that would cover the costs of its country and global
surveillance, technical assistance, research, and other non-lending operations.
U.S. participation in the new IMF quota increase and a U.S. subscription of $100 billion for the
NAB required congressional approval. Likewise, amendments to the IMF Articles—including the
prospective Fourth Amendment for a new SDR allocation—required congressional approval. On
the other hand, the proposed $250 billion allocation of SDRs (which is being made under a
different provision of the IMF Articles) was too small to trigger the legal requirement that
Congress give its assent. Any contributions to the IMF, to fund increases in the U.S. quota or to
subscribe new resources to the NAB, must be authorized by Congress.
Despite concerns about the process of authorizing and appropriating contributions to the IMF, and
the impact on the global economy of creating a large of amount of SDRs, U.S. participation in the
funding agreement, and the requisite authorizations for IMF reform efforts, were included in the
FY2009 Spring Supplemental Appropriations for Overseas Contingency Operations (P.L. 111-32).
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The Global Financial Crisis: Increasing IMF Resources and the Role of Congress
Contents
The Financial Crisis and Developing Countries ........................................................................... 1
Impact of the Crisis on the IMF................................................................................................... 4
Increasing Fund Resources.......................................................................................................... 5
New Arrangements to Borrow (NAB) ................................................................................... 5
SDR Allocation..................................................................................................................... 6
IMF Bond Sales .................................................................................................................... 7
IMF Governance Reforms..................................................................................................... 8
Congressional Action .................................................................................................................. 8
Congress and the New Allocations of SDRs .......................................................................... 8
New Allocation of $250 billion of SDRs ......................................................................... 9
Special SDR Allocation for New IMF Members .............................................................. 9
SDRs and Inflation........................................................................................................ 10
Gold Sales .......................................................................................................................... 11
IMF Quota and NAB Contributions..................................................................................... 11
Figures
Figure 1. Impact of the Crisis on Developing Regions ................................................................. 2
Figure 2. GDP Growth in Major Export Markets and World Trade............................................... 3
Figure 3. Private Capital Flows ................................................................................................... 3
Figure 4. General Government Fiscal Balances ........................................................................... 4
Figure 5. Capital Flows to Emerging Economies ......................................................................... 5
Appendixes
Appendix. Past Budgetary Treatment of U.S. Contributions....................................................... 14
Contacts
Author Contact Information ...................................................................................................... 17
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The Global Financial Crisis: Increasing IMF Resources and the Role of Congress
n May 12, 2009, the Obama Administration formally requested that Congress consider
increasing the U.S. contribution to the International Monetary Fund (IMF) based on
O commitments made by the Bush Administration in 2008 and by the Obama
Administration at the London meeting of the G-20 countries in April 2009.1 At the meeting, G-20
leaders agreed that the IMF’s New Arrangements to Borrow (NAB), a supplemental fund to
bolster IMF resources, should be increased by up to $500 billion from its then current level of $50
billion.2 The Obama Administration proposed that the United States contribute up to $100 billion.
Pledges totaling $411.5 billion have since been received from several countries.3 The G-20 also
agreed that the IMF should create $250 billion in new Special Drawing Rights (SDR) and allocate
them to its members through its SDR Department. These new resources would expand world
foreign exchange reserves by about 4%.
Already pending at the time of the G-20 meeting was an IMF reform package comprising a
modest quota increase to boost the relative share of underrepresented developing countries and
several governance reforms. The U.S. share of the quota increase is around $8 billion, the amount
required to maintain the existing 16.77% U.S. voting share, which provides a veto on major IMF
decisions requiring an 85% majority. The reform package also included a proposal to sell 403
metric tons of gold held by the IMF to create an income-generating fund to partially finance the
IMF’s country and global surveillance, technical assistance, research, and other non-lending
operations.4
U.S. participation in the funding agreement, and the requisite authorizations for IMF reform
efforts, were included in the FY2009 Spring Supplemental Appropriations for Overseas
Contingency Operations (P.L. 111-32). This report provides information on (1) the role the IMF
has played in the financial crisis, (2) international agreement to increase the financial resources of
the IMF, and (3) the role of Congress in increasing the Fund’s resources.
The Financial Crisis and Developing Countries5
What began as a bursting of the U.S. housing market bubble and a rise in foreclosures has
ballooned into a global financial and economic crisis. The crisis has exposed fundamental
weaknesses in financial systems worldwide. Despite coordinated easing of monetary policy and
trillions of dollars in intervention by central banks and governments, economies continue to
1 For background on the IMF, see: “Financial Organization and Operations of the IMF,” International Monetary Fund,
2001. The document is available at: http://www.imf.org/external/pubs/ft/pam/pam45/contents.htm.
2 “Global plan for recovery and reform: the Communiqué from the London Summit,” April 2, 2009. The communiqué
is available at: http://www.londonsummit.gov.uk/en/summit-aims/summit-communique/.
3 They include: Japan - $100 billion; European Union - $100 billion; Norway - $4.5 billion; Canada - $10 billion;
Switzerland - $10 billion; Korea - at least $10 billion; Australia - $7 billion; Russia - up to $10 billion; China - up to
$50 billion, and Brazil - up to $10 billion. “Bolstering the IMF’s Lending Capacity,” International Monetary Fund,
July 8, 2009. Webpage is available at: http://www.imf.org/external/np/exr/faq/contribution.htm.
4 Edwin M. Truman, “On What Terms is the IMF Worth Funding,” Peterson Institute for International Economics,
December 2008. The working paper is available at: http://www.piie.com/publications/wp/wp08-11.pdf.
5 CRS Report RL34742, The Global Financial Crisis: Analysis and Policy Implications, coordinated by Dick K. Nanto.
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The Global Financial Crisis: Increasing IMF Resources and the Role of Congress
decline into what is turning out to be the most severe global recession since the Great Depression
of the 1930s.
On April 22, 2009, coinciding with the London G-20 meeting, the IMF forecasted economic
growth of -1.3% for 2009—the lowest since World War II. Lower global growth, weak demand
for exports, a precipitous drop in commodity prices, and increased risk aversion in the developed
markets have all contributed to weak economic growth in developing countries (Figure 1).
Central and Eastern Europe and Latin America have been particularly hard-hit.
Figure 1. Impact of the Crisis on Developing Regions
Annual GDP Growth Rate
Sub-Saharan Africa
Central and eastern Europe
Developing Asia
Middle East
Western Hemisphere
12
10
8
6
4
2
0
-2
-4
-6
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009*
2010*
Source: IMF World Economic Outlook Database, estimates as of July 2009.
The crisis is impacting developing countries through several channels. First, economic slowdown
in the advanced economies is leading to decreased demand for developing country exports
(Figure 2) and a contraction of capital flows (Figure 3). Developing countries also suffer from
the collapse of commodity prices. Rapid economic growth in China and India over the past
decade led to record prices for petroleum, minerals, and other commodities. Between 2003 and
2008, oil prices rose by 320% and food prices by 138%. Since mid-2008, however, weakening
demand for these exports has led to a rapid decline in the price of many of these commodities.
The combination of declining foreign direct investment, portfolio investment, weak export
demand, and a more constrained environment for remittances and foreign aid, has put pressure on
many country’s government fiscal balances (Figure 4).
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Figure 2. GDP Growth in Major Export Markets and World Trade
Annual Percentage Change
World Trade Volume
United States
China, People's Republic of
Japan
Euro area
12
8
4
0
-4
-8
-12
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: International Monetary Fund
Figure 3. Private Capital Flows
Bond, equity, and loan issuances ($ billion)
Sub-Saharan Africa
Emerging Asia
Emerging Europe
Middle East
Latin America
80
70
60
50
40
30
20
10
0
2002
2003
2004
2005
2006
2007
2008
Source: International Monetary Fund
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Figure 4. General Government Fiscal Balances
Percent of GDP
Emerging and developing economies
World
1
0
-1
-2
-3
-4
-5
-6
-7
-8
0
1
2
3
4
5
6
7
8
*
*
*
2*
3*
4*
200
200
200
200
200
200
200
200
200
2009
2010
2011
201
201
201
Impact of the Crisis on the IMF
The severity of the current financial crisis presented a challenge for the IMF, whose financial
resources had not kept pace with the global economy over the past decade. The IMF reported in
early 2009 that its resources would need to grow by 55% to match the level of its resources
(relative to global output) that it held during the Asian financial crisis of 1997-1998.
Demand for IMF resources in late 2008-2009 has been strong. Between October and December
2008, lending almost doubled, from $17.1 billion to $32.54 billion. As of July 2009, IMF lending
commitments are $157 billion, a record high.6 The recent rise in IMF lending, however, was
preceded by historic lows. On August 31, 2008, total IMF lending was $16.65 billion, down from
a peak of $116 billion in September 2003.7 Since the IMF’s main source of income is the interest
paid on its loans, weak demand for IMF loans between 2000 and 2008 resulted in shortfalls in the
IMF’s administrative budget and a roughly 20% reduction in IMF staff during 2007-2008.
Given the IMF’s constrained financial situation, many analysts raised concerns that the institution
did not have the necessary resources should there be widespread demand for IMF financial
support. Total IMF quota, $337.2. billion (as of July 2009) is small compared to the growth of
capital flows to emerging economies, let alone the advanced economies.
6 “A Changing IMF—Responding to the Crisis,” International Monetary Fund, July 2009. Factsheet is available at:
http://www.imf.org/external/np/exr/facts/changing.htm.
7 Total IMF Credit Outstanding for all members from 1984-2008, available at: http://www.imf.org/external/np/fin/tad/
extcred1.aspx.
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Figure 5. Capital Flows to Emerging Economies
Billions of U.S. Dollars
Debt
Equity
100
80
60
40
20
0
-20
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: International Monetary Fund
If the G-20 pledges of $500 billion in new resources are realized, many argue that the IMF will
once again have the financial resources to credibly lend to developing countries impacted by the
crisis.
Increasing Fund Resources
New Arrangements to Borrow (NAB)
The NAB are a set of credit arrangements, created in 1998, between the IMF and 26 developed
country members and institutions to provide supplementary resources that the IMF can use to
help financial crises in countries of major significance to the world financial system.8 The NAB
was activated once, in December 1998, to finance a loan for Brazil.
At the G-20 meeting in April 2009, the major countries agreed that the resources of the NAB
should be expanded by about $500 billion. The G-20 agreed that $250 billion should be made
available immediately to the IMF through bilateral arrangements between the IMF and individual
countries. The G-20 also agreed that the NAB would be expanded by an additional $250 billion
8 An earlier facility, the General Arrangement to Borrow, was created for a similar purpose in 1962.
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as more countries pledged their participation. To date, pledges totaling $411.5 billion have been
received from several countries.9
The NAB are supplemental, emergency mechanisms. They provide temporary financing for the
IMF only when necessary. Thus, they are a non-quota based source of financing for the IMF. The
NAB are not, therefore, intended to substitute for a quota or capital increase. If activated,
participating donor countries make loans to the IMF, and the IMF uses those funds to provide
loans to eligible countries. Repayments flow from the country to the IMF and then from the IMF
to the NAB.
Under current NAB rules, before the IMF can draw against NAB resources, an 85% majority of
the IMF Executive Board and countries representing 80% share of the NAB credit volume must
agree. The IMF must repay the NAB creditors within five years.
SDR Allocation
As noted above, G-20 leaders agreed in April that the IMF create $250 billion worth of new
SDRs and allocate them to its member countries. SDRs are created and allocated solely by the
IMF. Separately, the Obama Administration requested that Congress approve an amendment to
the IMF Articles of Agreement, originally proposed in 1997, that would permit a special
allocation of SDRs to IMF member countries that joined the IMF following the initial allocation.
None of the funds being contributed by the United States or other countries to expand the NAB
will be used to fund the new allocation of SDRs.
The First Amendment to the IMF Articles, which went into effect in 1969, authorized the IMF to
create a new international reserve asset that could be used to supplement its member country’s
foreign exchange reserves. This asset, known as special drawing rights (SDRs), is neither a
currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of
IMF members. SDRs are created by fiat, and are not “paid for” by any foreign contributions or
backed by any national currency.
SDRs are not a global reserve currency. However, they may be exchanged for hard convertible
currency among IMF member nations. Established rules govern how a country may exercise its
claim and convert its share of SDRs into another country’s hard currency. The SDR serves as the
IMF’s standard unit of account.10
9 They include: Japan - $100 billion; European Union - $100 billion; Norway - $4.5 billion; Canada - $10 billion;
Switzerland - $10 billion; Korea - at least $10 billion; Australia - $7 billion; Russia - up to $10 billion; China - up to
$50 billion, and Brazil - up to $10 billion. “Bolstering the IMF’s Lending Capacity,” International Monetary Fund,
July 8, 2009. Webpage is available at: http://www.imf.org/external/np/exr/faq/contribution.htm.
10 The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange
rates, of a basket of major currencies (the U.S. dollar, euro, Japanese yen, and pound sterling). The SDR currency value
is calculated daily and the valuation basket is reviewed and adjusted every five years. For example, on August 4, 2009,
$1.00 equaled SDR 0.637. “Exchange Rate Archives by Month,” International Monetary Fund, accessed August 5,
2009. The Webpage is located at: http://www.imf.org/external/np/fin/data/param_rms_mth.aspx.
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IMF Bond Sales
Several developing countries with considerable foreign exchange reserve holdings have been
approached about contributing to the G-20 pledge to increase IMF resources. Many have
expressed their unwillingness to lend money to the institution until broader governance reform at
the institution is achieved. While some changes in quota share were agreed to at the April 2008
IMF spring meetings that will increase developing country representation, they have been widely
characterized as modest. Many developing countries have thus sought a temporary means to
provide assistance to the IMF, while delaying a more permanent contribution until more
substantial governance reforms give them a larger representation in the institution.11 For countries
with large reserves, these bonds are attractive since they provide an additional vehicle for
diversifying the currency composition of their foreign exchange reserves. (Most foreign exchange
reserves are currently held in only a few currencies including U.S. dollars, euros, and Japanese
yen.)
Article 7 of the IMF’s Articles of Agreement provides the IMF the authority to issue bonds.
Neither U.S. Treasury consent, nor congressional authorization, is needed. The IMF has never
issued bonds in its 60-year history; however, on July 1, 2009, the IMF approved a framework for
issuing bonds to member countries and their central banks.12 These bonds would be sold only to
member countries, who may trade them only among themselves. Countries would not be allowed
to sell the bonds to private firms or individuals on the secondary market. Several members have
already expressed their interest in buying IMF bonds, with China signaling its intention to invest
up to US$50 billion, and Brazil and Russia up to US$10 billion each.13 The notes have a
maximum maturity of five years and will be denominated in SDRs.
The implication for the United States of the proposal would be mixed. If successful, the proposal
could lead to greater international macroeconomic security. One concern, however, about the
bond sales is that if increasing amounts of foreign exchange reserves are transferred out of dollars
into IMF bonds, the future demand for U.S. Treasury bills and agency instruments (traditional
reserve instruments) may decline, thus increasing the yield on low-risk assets. This would raise
the cost to the United States of future debt placements and possibly accentuate a trend of
countries slowly diversifying their reserves out of the dollar. Many analysts have argued that
since the Asian financial crisis (and during the current crisis), foreign demand for U.S. Treasury
assets (largely from central banks) has played a crucial role in depressing U.S. interest rates.
Should demand for U.S. Treasury assets decrease because of asset allocation decisions by foreign
central banks, or because foreign governments need to spend more of the reserves domestically
and have less to invest, there could be upward pressure on U.S. interest rates. However, the
overall demand for U.S. Treasury bonds may also be minimally impacted if they are held instead
by an emerging market country that receives IMF loans rather than by an emerging market
country purchasing IMF bonds.
11 For background, see: CRS Report RL33626, International Monetary Fund: Reforming Country Representation, by
Martin A. Weiss.
12 “IMF Approves Framework for Issuing Notes to the Official Sector,” International Monetary Fund, July 1, 2009.
Press Release is available at: http://www.imf.org/external/np/sec/pr/2009/pr09248.htm.
13 Ibid.
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IMF Governance Reforms
Several IMF proposals were already pending at the time of the G-20 meeting on April 2, 2009.
These proposals are part of an IMF governance reform package negotiated between 2006 and
2008. The George W. Bush Administration submitted proposed legislation regarding these
reforms in November 2008, but it was not taken up by the 110th Congress. The reforms included
plans for a an increase in IMF quotas for selected members and several procedural, policy, and
financial reforms.
The quota increase involved a targeted realignment in the voting shares of member countries in
order to give poor countries and dynamic emerging market countries more say in the
organization. The U.S. voting share in the IMF would remain at its present 16.77% and the
United States would retain the capacity to block the 85% vote that is required to approve most
major initiatives in the Fund. Under this reform of IMF quotas, 54 under-represented countries
would see their combined quota share in the Fund increase by about 5% of the total.
Other reforms included in the governance reform package include: (1) a new formula for
determining country quotas, giving much more weight to GDP and thus better reflecting
countries’ weight in the world economy; (2) a tripling of “basic votes”—equally allocated
votes—thus giving the poor countries an increased voice in the organization; (3) an additional
Alternate Executive Director for the two constituencies of the Executive Board representing
countries in sub-Saharan Africa; and (4) changes in the IMF’s investment and financial
procedures, including the sale of gold to finance the establishment of an income-generating
endowment fund to help pay for the IMF’s activities (research, policy and technical assistance,
etc.) that are not related to its loan operations. Those reforms requiring congressional action, were
authorized in the FY2009 Spring Supplemental Appropriations for Overseas Contingency
Operations (P.L. 111-32), signed by President Obama on June 24, 2009.
Congressional Action
Some of the provisions discussed above required congressional assent and some did not.
Congressional action is required before the United States can vote for amendments to the IMF
Articles, for gold sales, or for quota increases that involve contributions by the United States.
Congress and the New Allocations of SDRs
As noted above, G-20 leaders agreed that IMF create $250 billion worth of new SDRs and
allocate them to its member countries. Separately, the Obama Administration requested that
Congress approve an amendment to the IMF Articles of Agreement, originally proposed in 1997,
that would permit a special allocation of SDRs (around $32 billion) to IMF member countries that
joined the IMF following the initial allocation.
U.S. contributions to the IMF, either for the $8 billion increase in the U.S. quota or the $100
billion increase in the U.S. line of credit to the NAB facility, are not linked to the forthcoming
allocation of $250 billion worth of SDRs. No funds provided by the United States are being used
to facilitate the new allocation of Special Drawing Rights (SDRs).
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New Allocation of $250 billion of SDRs
If an 85% majority of the IMF membership agrees, the IMF can unilaterally create new SDRs and
allocate them to its member countries. Article XXVIII of the Fund’s Articles of Agreement
specifies the procedure that is to be used. The SDR Department handles these operations. The
resources of the SDR Department and the IMF’s General Reserve are not co-mingled, and the two
accounts have different rules. (The IMF uses the resources of its General Reserve to fund its loans
to borrower countries.) SDRs held in the SDR Department belong to the countries holding them
and not to the IMF. Countries may use these SDRs to settle accounts with other IMF member
countries, or they may transfer ownership to other countries in exchange for an equivalent value
of the purchaser country’s currency. The IMF serves as broker for these exchanges. Through the
IMF, countries pay or receive interest when they sell or buy each other’s SDRs.
No congressional action is needed for this allocation to take effect. In the Special Drawing Rights
Act of 1968, Congress gave the Administration authority to vote for the First Amendment to the
IMF’s Articles of Agreement creating the SDR, and set forth the guidelines for U.S. participation
in the SDR Department. Section 6 of the Act says that Congress must give its consent before the
United States can vote for any allocation of SDRs that would be equal to or greater than the
existing U.S. quota in the IMF. However, the Act also says that if the U.S. share of a new
allocation of SDRs is less than the size of the U.S. quota, the United States can support an SDR
allocation as long as the Treasury Department consults with leaders of the House and Senate
authorizing committees at least 90 days in prior to the vote. The 90-day period began on April 13,
2009, when a Treasury official notified Congress that the United States planned to vote in favor of
the proposed new allocation of SDRs.
Special SDR Allocation for New IMF Members
Separately, a proposal was been pending since 1997 to grant SDRs to countries that joined the
IMF since the IMF’s last designation of SDRs in 1979-81. When a country joins the IMF, they do
not automatically receive a share of SDRs since any increase of IMF SDRs that is not
proportional for all members requires an amendment to the IMF’s Articles of Agreement.
Currently, over 1/5th of the IMF’s membership is ineligible to participate in the SDR Department.
Since this allocation is not equi-proportional (all countries receiving a share equal to their quota
share), it requires an Amendment to the IMF’s charter, what has come to be known as the “Fourth
Amendment.” To be enacted, the Fourth Amendment (or any IMF amendment) requires an
affirmative vote of three fifths of the IMF membership with 85% of the total voting power. Prior
to passage of the FY2009 Spring Supplemental Appropriations for Overseas Contingency
Operations (P.L. 111-32), the United States had not voted to accept the amendment. Approval by
the United States in the legislation, with a 16.77% voting share, put the Fourth Amendment into
effect.
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SDRs and Inflation
Some Members of Congress have questioned whether the SDR increase will have an impact on
global inflation.14 The impact of the SDR allocation on global inflation is expected to be modest
for several reasons. First, SDRs represent a small percentage of the amount of global foreign
reserves. Currently, total SDRs allocated by the IMF are worth approximately $33.5 billion or
0.51% of total foreign exchange reserves of $6.5 trillion as of the first quarter of 2009.15 An
increase of SDRs worth $250 billion would increase the ratio of SDRs to total foreign reserves to
4.3% of total foreign reserves, still a relatively small percentage. The $250 billion increase in
potential spending power would be almost indistinguishable compared to the size of the world
economy or the value of world trade.
Second, the SDR increase is small compared to other injections of liquidity in the global economy
taken by global central banks. Since the beginning of the crisis, the United States, European
countries, China and others have injected or are injecting much more spending power into their
economies than the IMF will be creating through this new allocation of SDRs. Stimulus measures
for the G-20 countries are expected to total 2% of global GDP in 2009 and 1.5% of global GDP in
2010.16 These measures are likely to have significantly greater inflationary impact than the SDR
increase.
Third, the IMF’s SDR allocation is to be distributed proportionally among all the IMF member
nations, thus muting any inflationary impact it might have. Furthermore, the impact of the global
economic crisis on the output of goods and services is expected to linger for several years.
However, any additional spending due to an immediate encashment of a country’s SDR allocation
would likely occur now, rather than in the future. (Otherwise, there would be no need to exchange
their SDRs for hard currency.) It is expected that by the time the global economy fully recovers,
any potential inflationary pressure from increased spending resulting from the encashment of
SDRs will have subsided.
Fourth, since the $250 billion SDR increase is distributed according to countries’ quotas, the
majority of it will be allocated to advanced economies, which are unlikely to ever use their
SDRs.17 Advanced economies such as the United States, Japan, and the Eurozone countries will
14 There is an active and ongoing debate among economists over what causes inflation that is beyond the scope of this
report. The assertion that an increase in SDRs will lead to inflation derives from one school of thought, monetarism,
which posits a strong link between an increase in the global money supply (such as an increase in the total amount of
SDRs, which count toward a country’s foreign reserve levels) and the level of prices. For more information, see: CRS
Report RL30344, Inflation: Causes, Costs, and Current Status, by Marc Labonte.
15 “Currency Composition of Official Foreign Exchange Reserves (COFER)” International Monetary Fund, June 30,
2009. Available at: http://www.imf.org/external/np/sta/cofer/eng/cofer.pdf.
16 World Economic Outlook: Crisis and Recovery, International Monetary Fund, April, 2009. Available at:
http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf.
17 While this may beg the question why the SDR increase is necessary in the first place, for emerging and least-
developed countries, the SDR allocation will provide a significant increase in their foreign reserves, may help remove
immediate funding pressures, and may help prevent extensive foreign reserve accumulation, which contributed to
global imbalances over the past several years. “Allocation of Special Drawing Rights for the Ninth Basic Period: Draft
Executive Board Decision and Managing Director Report to the Board of Governors,” International Monetary Fund,
July 16, 2009. The Decision and Report are available at: http://www.imf.org/external/np/pp/eng/2009/071609.pdf.
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receive the majority of the SDRs.18 These countries could buy and sell SDRs among themselves
in order to get useable foreign exchange, but they can do this already—and much more easily—
through central bank swaps and other such devices. Lastly, it is unlikely that the United States
would sell its SDRs to emerging market countries, partly because it cannot use their currencies to
settle obligations to third countries. Moreover, it is unlikely that developing countries willingly
purchase U.S. SDRs, since their interest is in selling their SDRs for U.S. dollars and not acquiring
additional SDRs.
Gold Sales
Another major component of President Obama’s request was for congressional authorization for
the Administration to vote in favor of selling 403 metric tons of IMF gold for the purpose of
increasing the Fund’s liquid reserves. Income earned on these reserves, in turn, would finance a
portion of the IMF budget related to its provision of global public goods, such as economic and
financial surveillance. The gold sales to benefit poor countries, announced by the G-20 leaders,
would be included in this agreed total, as it is expected that the currently high price of gold may
provide some additional income beyond what is expected for budget financing. However, any
additional income would likely be modest since the current price of gold (around $946 per ounce)
is not significantly different from the assumption on which the new income model was based
($850 per ounce). The IMF Articles of Agreement specify that any sale of IMF gold must receive
an 85% affirmative vote by the member countries.
Under Article V, Sec. 12 of the IMF’s Articles of Agreement, approval of gold sales by the IMF
requires an 85% IMF voting majority. The United States has almost a 16.77% vote and could thus
block any sale of IMF gold. Understanding this “virtual” veto, Congress, in 1999, enacted
legislation in the FY 2000 Consolidated Appropriations Act that authorized the United States to
vote at the IMF in favor of a limited sale of IMF gold to fund the IMF’s participation in the
multilateral Debt Relief Initiative for Heavily Indebted Poor Countries (HIPC).19 The act
amending section 5 of the Bretton Woods Agreements Act (22 U.S.C. 286c), requires the explicit
consent of Congress before the executive branch can support future gold sales. However, the law
provides that the United States may support the sale of IMF gold without congressional action if
the Secretary of the Treasury certifies to Congress that the sale of gold is necessary for the Fund
to restitute gold to its members, or to provide liquidity that will enable the Fund to meet member
countries’ claims on it or to meet threats to the systemic stability of the international financial
system.20
IMF Quota and NAB Contributions
When the Obama Administration initially requested that Congress approve increasing U.S.
contributions to the IMF by $108 billion following the April 2009 G-20 Summit, it did not
18 The Eurozone, or Euro Area, consists of the European Union member state that have adopted the Euro is their
currency. To date, 16 countries have adopted the Euro as their sole legal tender: Austria, Belgium, Cyprus, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
19 CRS Report RL34644, Debt Relief for Poor Countries, by Jonathan E. Sanford and Martin A. Weiss.
20 P.L. 106-113, Consolidated Appropriations Act, 2000, Sec. 504(d).
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request new appropriations to cover the cost of U.S. contributions to the IMF. This strategy
contradicted the precedent used since 1980 for budgeting for U.S. contributions to the IMF
(Appendix).
In 2009, there was concern that the procedural aspects of the budget process may have an impact
on congressional consideration of the proposed new U.S. subscriptions to the IMF. The Obama
Administration did not follow the immediate precedent and proposed to increase U.S.
contributions to the IMF through only an authorization, with no corresponding appropriating
legislation. Peter Orszag, director of the Office of Management and Budget (OMB), was quoted
in April 2009 as saying that he cannot see “any analytical rationale for why something would
score zero as an outlay but then score as something in budget authority.”21 Furthermore, the
United States actually profited from its participation in the IMF. The Treasury Department is
required by law to report to Congress quarterly the financial cost of U.S. participation in the IMF.
The most recent report, current through 2007, was submitted in April 2009.22 The Department
reports that, in 2007, the United States earned a net $68 million from its participation in the SDR
Department, and it earned a net $362 million from its transactions with the IMF General
Department (which deals with quota accounts.)
Nonetheless, some Members of Congress raised concerns that the exchange of assets approach,
which led to no budgetary cost to the United States for its IMF contribution, did not correctly
reflect the degree of risk of the IMF defaulting on the U.S. contribution, given the current
economic turmoil. Supporters of the increased U.S. contribution were also concerned that
reverting to the earlier budget procedures, rather than using the one employed since 1980, would
be seen as an effort to change the rules in the face of controversy or a signal that the Obama
Administration feared that it may not have the votes to approve the measure through the
established process.
After several months of negotiations, on May 12, 2009, the White House and Congress reached
an agreement to treat the U.S. subscription to the IMF as a line of credit for budgetary purposes,
after which the President made the formal request to include authorization and appropriations for
the IMF in the FY2010 defense supplemental request. Reminiscent of the method used for the
1966 quota increase, Congress was asked by the Administration to authorize the United States to
extend a line of credit for the U.S. contributions to the IMF, which total $108 billion. Unlike IMF
quota increases since 1967, the U.S. contribution would be scored as a loan for budgetary
purposes under the existing credit reform legislation with a commensurate budgetary impact.
The Federal Credit Reform Act of 1992 (P.L. 101-508) provides that when the U.S. Government
makes a loan, it does not need to include the full face value of the loan in the federal budget.
Rather, Congress must appropriate, as a potential loan loss reserve, an amount equal to the
amount the U.S. Government might lose from these loans as a consequence of defaults. This
procedure is used throughout the Federal budgeting process.
21 David Rogers, “How to spend without ‘spending,’” Politico, April 22, 2009. The article is available at:
http://dyn.politico.com/printstory.cfm?uuid=D05A3346-18FE-70B2-A8BC4C0B6AC3D747.
22 [Department of the Treasury.] Report to Congress on Financial Implications of U.S. Participation in the
International Monetary Fund. Available at: http://www.ustreas.gov/press/releases/reports/imfreportq1q42007.pdf.
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CBO is responsible for determining what the prospective loan loss rate might be for any federal
loan program. When there are several alternative calculations of the probability of loss, CBO
typically uses a average of the possibilities as the figure used to estimate potential loss. This is
what CBO did when it determined that the loan loss risk from these payments to the IMF was $5
billion.23 In the law authorizing U.S. participation in the new IMF funding plans, the FY2009
Spring Supplemental Appropriations for Overseas Contingency Operations (P.L. 111-32),
Congress subsequently appropriated $5 billion as a loan loss reserve to cover the risk associated
with the new U.S. payments to the IMF.
23 “Budget Implications of U.S. Contributions to the International Monetary Fund,” Congressional Budget Office
Director’s Blog, May 19, 2009, from http://cboblog.cbo.gov/?p=270.
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Appendix. Past Budgetary Treatment of U.S.
Contributions
In the past 60 years, Congress has handled the bookkeeping aspects for U.S. participation in the
IMF in a variety of ways. This system was the result of a compromise among the leading figures
on the relevant congressional committees in 1980.
Payments to the IMF were considered to be an exchange of assets because the United States
receives back from the IMF a monetary instrument of equal value which it adds to its foreign
exchange reserves. The United States receives an increased holding of SDRs in the Fund’s SDR
Department whenever it purchases SDRs from another country, and an increased reserve tranch
position whenever the IMF draws on the U.S. quota to finance loans to borrower countries. Both
the SDR and reserve tranche positions are liquid interest bearing assets. SDRs cannot be used to
make purchases in the marketplace, but they can be exchanged with other IMF members for
currencies or used to satisfy international obligations which in most cases involve the Fund. In the
case of loans through the NAB, the United States receives a promissory note from the IMF
pledging to repay the loan with interest at a certain time. Credits provided to the IMF through the
NAB are considered to be monetary assets and are included in countries’ foreign exchange
reserves. The proceeds are considered to be readily available because NAB participants can
obtain immediate early repayment from the IMF if they have a balance of payments need.
The United States has used various methods over the years to account for the cost of its
participation in the IMF. Before 1967, the United States funded its participation in the IMF
through a variety of procedures, including public debt transactions and payments from the
Exchange Stabilization Fund. In the 1966 quota increase, the U.S. payment took the form of a
letter of credit to the IMF which, for technical reasons, the United States mostly borrowed back
during the following years.
In 1967, the U.S. Government adopted a unified Federal budget that consolidated the operating
budget of the government with other previously off-budget accounts. This was intended to
improve clarity and to enhance the government’s management of fiscal policy. In the process, the
President’s Commission on Budget Concepts (PCBC) also examined the procedures by which the
United States managed its payments to the IMF. It recommended that payments to the IMF should
be treated as monetary exchanges akin to bank withdrawals and deposits rather than as
international lending operations. As such, these payments would be handled as an exchange of
assets and would be excluded from budget receipts and expenditures. Congress would be asked to
authorize new U.S. payments to the IMF, but the cost of those payments would not be included in
the Federal budget.
The new budget concept was not fully implemented when the next quota increase was considered
by Congress. In addition to legislation authorizing U.S. participation, the Nixon Administration
sought and Congress approved appropriations to effect U.S. participation in the plan. They
agreed, however, that the exchange of assets concept was sufficient to cover the resulting
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payments, and they would have no net outlay impact on the U.S. budget.24 In 1976, when the
following quota increase was considered, the Ford Administration proposed and Congress agreed
that the transaction would be treated solely as an exchange of assets. Legislation was enacted
authorizing U.S. participation in the plan, but no appropriations were required. The same
procedure was used the following year to approve a loan by the United States to the IMF’s
Supplemental Financing Facility (“Witteveen Facility”).25 CBO found, in a study of the budgetary
scorekeeping issue in 1978, that any procedure – appropriated, exchanged, on-budget, off-budget
– is intrinsically arbitrary and not consistent with similar or comparable programs that are treated
differently from a scorekeeping perspective elsewhere in the U.S. budget process.26
Many Members of Congress, reportedly, were not happy with this arrangement. Some argued,
citing the provision of the U.S. Constitution which says that no money shall be drawn from the
Treasury except through an appropriation by law, that the funding for U.S. participation in the
IMF must be appropriated. Some also said that treating the U.S. payments to the IMF as an off-
budget transaction was inconsistent with the principle of budgetary unity which underlay the
work of the Presidential budget commission in 1967 and a violation of the prohibition against
“backdoor spending” in the Congressional Budget Act of 1974.
The issue came to a head in 1980 during congressional consideration of legislation to approve
U.S. participation in a new quota increase for the IMF. A compromise was ultimately agreed to.
Under this arrangement, the full amount of the U.S. subscription to the IMF would be
appropriated as budget authority.27 This gave Congress control over the size of the U.S. payments
and the amount of contingent liability the United States undertook through its participation in the
IMF. However, consistent with the exchange of assets concept, no outlays would be counted and
the payments to the IMF would be deemed to have no net impact on the U.S. budget. This
procedure remains in effect to this day.
Congress has taken a different approach in its budgetary treatment of the contingent liability
associated with U.S. participation in the multilateral development banks (MDBs). The MDBs
24 P.L. 91-599 and P.L. 91-619, enacted in December 1970, added Sec. 22 to the BWAA and appropriated necessary
funds. The Administration had requested that funds for the quota increase be both authorized and appropriated. U.S.
Bureau of the Budget. The Budget of the United States Government, Fiscal Year 1971, Appendix, p. 105.
25 P.L. 94-564, enacted in October 1976, added Sec. 25 to the BWAA, saying that “the U.S. Governor of the Bank (sic)
is authorized to consent to an increase in the quota of the United States in the Fund equivalent to 1,705 million Special
Drawing Rights.” The next year, P.L. 95-435, enacted in October 1977, added Sec. 28 to the BWAA, saying that “The
Secretary of the Treasury is authorized to make resources available as provided in decision 5509-(77/127) of the Fund,
in amounts not to exceed the equivalent of 1,450 million Special Drawing Rights.” In neither case were appropriations
required. See also Treasury Secretary William E. Simon’s paper, “The Exchange of Assets Concept,” reprinted in U.S.
Congress. Committee on Banking, Currency and Housing. Subcommittee on International Trade, Investment and
Monetary Policy. Hearings on H.R. 13955, June 1 and 3, 1976. USGPO, 1976, p. 31.
26 Congressional Budget Office. U.S. Participation in the Witteveen Facility: The Need for a New Source of
International Finance. March 1978. This paper is available at http://www.cbo.gov/ftpdocs/67xx/doc6727/78-CBO-
027.pdf.
27 P.L. 96-389, enacted in October 1980, added Sec. 32 to the BWAA. This says the Secretary of the Treasury “is
authorized to consent to an increase in the quota of the United States in the Fund equivalent to 4,202.5 million Special
Drawing Rights, limited to such amounts as are appropriated in advance in appropriation Acts.” Congress substituted
the latter language for the original text, which approved participation in the quota increase “to such extent or in such
amounts [as] are provided in appropriation Acts.” The latter language would have required action by the appropriations
committees but would not have required formal appropriations to effect the U.S. increase in the IMF.
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fund their market-rate loan programs with money borrowed in commercial markets. Because they
are backed by substantial reserves and by the callable capital subscriptions of their member
countries, the banks can sell their bonds and notes at favorable interest rates, and they pass these
relatively low rates on to their borrower countries. MDB member countries subscribe some of
their purchases of capital stock in callable capital and some (a fixed ratio, now a very small
percent of the cost for each share) in paid-in capital. Callable capital is a type of full faith and
credit guarantee to the banks’ bondholders from their member countries. Most analysts believe
that it is very unlikely that one of the MDBs would go bankrupt, exhausting all its resources, and
needing to call on the callable capital of its members in order to satisfy its creditors.
Before 1982, Congress appropriated the full amount necessary for the callable portion of U.S.
subscriptions to capital stock in the multilateral development banks (MDB). About $12 billion for
callable capital had been appropriated by that time, roughly $8 billion for the World Bank and $4
billion for the regional development banks. No outlays were associated with this budget authority
and it had no impact on the budget or the budget deficit. During the 1970s, however, cuts were
adopted reducing the appropriations for MDB callable capital. The proponents of these cuts often
claimed that they were saving the taxpayers and reducing the budget deficit by hundreds of
millions of dollars. The cuts in callable capital were not program oriented, since the full paid-in
portion of the subscriptions for MDB capital stock was generally appropriated. The resulting
mismatch in appropriations had a negative effect on U.S. participation in the banks.
Consequently, in 1981, Congress decided that funds would no longer need to be appropriated for
new U.S. subscriptions to callable capital. Instead, as is now the current arrangement, the size of
the annual U.S. subscription is regulated through program limitations in appropriations acts.28 No
formal appropriations are required, though appropriations would be required if there ever were to
be a call on callable capital. In the case of the IMF, neither the Balanced Budget Act of 1977 nor
Sec. 17 of the BWAA require that budget authority must be appropriated to facilitate future
increases in the U.S. quota in the IMF or future loans to the IMF through the NAB. The law is
silent as to the budgetary procedures that Congress should use on such occasions.
The procedures are different for the IMF and the multilateral banks, but the budgeting issue in
both situations is essentially the same. Should the outlay effect of the U.S. commitment to these
institutions be counted as zero or is there a likelihood that the IMF will not pay the United States
back or a possibility that a call might be made on callable capital? Congress has used a variety of
mechanisms to effect the U.S. payments to international financial institutions – in some cases
appropriating the full amount in budget authority, in other cases setting a program limitation on
new liability, and in other cases treating the entire transaction as an off-budget exchange of assets.
None of these arrangements seems to be superior to the others, either in terms of maintaining
congressional control or in reflecting or controlling the liabilities that the United States faces
through its participation in international financial programs.
28 P.L. 97-35, enacted August 1981, adding Sec. 39 to the Bretton Woods Agreement Act. This authorized U.S.
participation in a new capital increase for the World Bank, providing that ‘any subscription to such additional shares
shall be effective only to such extent or in such amounts as are provided in advance in appropriations acts.” This is the
same language Congress had chosen not to enact the previous year in connection with U.S. payments to the IMF.
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In 2004, CBO Director Douglas Holtz-Eakin told the Senate Banking Committee that, “The
current budgetary treatment does not fully reflect the U.S. share of the credit risk associated with
the lending and other transactions of the international financial institutions.” He had no
recommendations for change, however. He said that CBO hoped to discuss these issues further in
a future paper.29 For various reasons, that study was never completed and no paper was released.
It may be difficult, in the present moment, for Congress to determine what the “right” budgeting
procedure might be in this situation. Over the longer term, however, Congress may want to
consider whether an analysis of these budgetary issues might be desirable and whether some
changes in the scorekeeping system for international financial institutions might be appropriate.
Author Contact Information
Jonathan E. Sanford
Martin A. Weiss
Specialist in International Trade and Finance
Specialist in International Trade and Finance
jsanford@crs.loc.gov, 7-7682
mweiss@crs.loc.gov, 7-5407
29 Statement of Douglas Holtz-Eakin, Director. Congressional Budget Office. The Costs and Budgetary Treatment of
Multilateral Financial Institutions’ Activity. Testimony before the Senate Committee on Banking, Housing and Urban
Affairs, May 19, 2004. A copy of this testimony is available at http://www.cbo.gov/ftpdocs/54xx/doc5458/05-19-
MFIs.pdf. CBO’s last scored IMF legislation in 1998 when it considered H.R. 3114, the International Monetary Fund
Reform and Authorization Act of 1998, a bill that was reported by committee but not considered by the House. A copy
of the CBO cost estimate is available http://www.cbo.gov/ftpdocs/3xx/doc385/H.R.3114.pdf.
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