Click here to see Graph 1.
Download in PDF format
Introduction
The Joint Economic Committee's (JEC) focus or interest in analyzing the International Monetary Fund (IMF) has not been to examine the specific details of loans or conditional loan programs in Russia, Indonesia, Thailand, Brazil, Korea or any other country. Rather, the JEC has focused on various aspects of the IMF itself.
In particular, we focused on the IMF's financial structure, the way the institution operates, and the costs of U.S. participation of the IMF. In our view, before Congressional policymakers can make sensible decisions about future IMF funding, IMF gold sales, or make constructive recommendations for reform, some essential, yet understandable information about how the IMF functions is required. In other words, information about, and some understanding of the institution is a prerequisite for sensible reform.
One of our goals was to highlight this relevant information; in a sense, to bring more transparency to the IMF. This has occurred in part through a series of JEC hearings, studies, and press releases. The JEC has used these vehicles of communication to highlight the resources available to the IMF, how the IMF's financial structure operates, and what is especially relevant to the Congress and the public, the costs of U.S. participation in the IMF.
On the other hand, we view our efforts as "work in progress" and as outsiders without access to confidential IMF information, do not pretend to have complete knowledge of the workings of the IMF.
With this in mind, I will quickly review IMF available resources (as requested by Chairman Meltzer); summarize some lessons we have learned about the costs of U.S. participation; and make some brief comments about the IMF's financial structure.
I. IMF Available Resources
I have some charts I will be referring to in order to help illustrate my points. As my first chart demonstrates, the total resources available to the IMF are now about $287 billion. These are the total resources in the IMF's General Resources Account (GRA) obtained primarily from quotas.
The United States contributes 17.7% of the total, which is the largest share of all the IMF member countries. This percentage is the oft-cited contribution that importantly determines voting rights.
Of the total $287 billion, the IMF deems a sizable portion ($92 billion) to be unusable, leaving $195 billion as usable. This unusable portion is about 1/3 of the total and consists of the currencies of those contributions not sufficiently strong economically to permit their currencies to be used for IMF operations.
As the next chart illustrates, this leaves $195 billion as usable resources. Of the $195 billion, $81 billion is outstanding credit already extended (leaving $114 billion), $18 billion has been committed to countries needing assistance, and $19 billion is deemed necessary for minimum working balances. This leaves $77 billion available for additional credit to IMF members.
This $77 billion figure does not include three other possible funding sources. First, the IMF can borrow from members. The General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB) currently amount to $46 billion. Second, the IMF can borrow from credit markets which conservative estimates suggest could amount to $70 - $80 billion or more. Third, potential gold sales are an option which over the long term, could amount to about $26-$27 billion. Therefore, depending on how much of these additional resources are deemed (practically) obtainable, current usable IMF resources amount to anywhere from $77 billion to roughly in the neighborhood of $200 billion.
II. Lessons about the Costs of U.S. Participation
As I mentioned earlier, another critical question for Congress and taxpayers relates to the cost of U.S. participation in the IMF. In examining this issue, we learned a number of lessons about these costs that I would like to briefly summarize for you this afternoon. As background, however, the U.S. contributes about 17.7 percent of total IMF quota subscriptions. It is this 17.7 percent figure that importantly determines the voting rights of IMF member countries and is often equated to, or identified as, the member country's official financial contribution.
However, the actual costs of U.S. participation in the IMF differ from this widely-cited 17.7 percent figure. In particular, evidence indicates that the U.S. is shouldering a larger burden than suggested by this figure. These additional costs are often inadvertently obscured by accounting practices and procedures as well as by difficulties in calculating various hidden costs, opportunity costs, subsidies, or risk factors.
Some of the lessons learned about the costs of U.S. participation in the IMF include the following: First, the U.S. contributes about 26 percent of usable financial resources to the IMF. As mentioned earlier, the IMF deems about 1/3 of member currency contributions to be "unusable" for IMF usage. Once you set aside these unusable currencies, the U.S. share of usable IMF quota contributions rises to about 26 percent, i.e., the U.S. contributes 26 percent of usable IMF quotas. Since this figure represents the proportion of those contributions that actually can be used for lending, it is economically more meaningful than the 17.7 percent figure. An implication is that the U.S. is contributing a higher percentage of usable resources than its voting shares would suggest.
The next chart shows the usable resource contributions of key IMF members. Of usable IMF resources, the U.S. contributes 26 percent, by far the largest contributed share. The next largest countries' contributed share are Germany's 9 percent and Japan's 9 percent. In other words, the United States' share is almost triple the size of the next largest member's share. It is also worthy to note that the G-10 countries' contributions to the IMF's usable resources clearly dominate all other sources. (The G-10 total is about 77 percent.) The implication is that IMF lending is largely being financed by a relatively small number of industrialized economies. As far as usable resources, then, the IMF does not have the broad-based support that is often suggested in the literature.
Second, the U.S. share of contributions to the GAB credit line is also significantly higher than its share of quota contributions: the U.S. share of this credit line commitment is about 25 percent. This commitment's share also exceeds the oft-cited quota-based, voting rights share (of 17.7 percent).
Third, the U.S. is remunerated for (part of) its reserve tranche position. This rate of remuneration, however, is at a rate of interest below that of comparable U.S. Treasury rates and therefore involves a subsidy. The current rate of interest remunerated on U.S. funds is about 3.4 percent. In other words, the U.S. government is lending at more favorable rates than the cost of money to the government. This subsidy should be recognized as a cost. In fact, the President's Commission on Budget Concepts defines the budget cost of an "exchange of assets" program as the difference between the Treasury's cost of funds for the term of the provision of resources and its rate of remuneration. (The Treasury rate minus the remuneration rate equals the cost.) Conservative estimates of this cost suggest it is not trivial; it could be as high as hundreds of millions of dollars per year.
The United States also has a non-remunerated portion of its reserve position that (percentage-wise) involves an even larger subsidy. This unremunerated portion of the U.S. reserve position amounts to about $2.3 billion. The cumulative value of lost interest payments (from 1975-1999) may amount to several billion dollars. (A GAO witness estimated it to be $3.5 billion, but some private sources think it is even larger.) In any case, these costs are non-trivial and are not generally recognized by policymakers, the public, or taxpayers.
Fourth, IMF remunerations do not adequately reflect the increased riskiness of IMF lending. IMF lending however, has become riskier over time. Earlier, the IMF made relatively safe, short-term (low-risk) loans to high-grade industrial countries (such as the UK, France, or Italy). Recently, it increasingly has made significantly higher-risk, longer-term loans to lower-rated countries such as Russia, Indonesia, Brazil, Mexico, or Korea.
The next chart shows how IMF lending has changed over time from industrialized to developing country lending. As you can see, in earlier periods, more loans were made to industrial countries than is now the case. Currently, almost all loans are made to developing countries.
The next chart shows the IMF's largest borrowers. At times, the IMF loan portfolio has become highly concentrated with loans to riskier developing countries like Russia, Indonesia, Brazil, Mexico, and Korea. This has occurred as lending limits have been raised substantially. Note that almost 70 percent of current IMF lending goes to only five countries and 1/3 of these loans go to Russia and Indonesia alone.
Note that these loans are not only riskier, lower-rated borrowers and highly concentrated, but also longer-term in nature. Since these higher risks expose the lender, lenders should be compensated for these higher risks. But this risk factor is generally not reflected in interest rates received by lenders to the IMF. This uncompensated risk factor is (in effect) another form of subsidy and cost borne by lenders such as the U.S. (and its taxpayers). This cost is yet another cost that is not generally recognized by Congress, the public, or taxpayers.
Fifth, I will simply mention that unrestituted gold sales can entail substantial costs to U.S. taxpayers.
In short, the sum of these costs can be substantial. There are several dimensions to the costs of U.S. participation in the IMF that policymakers, taxpayers, and the public should understand. These include a substantial shouldering of usable financial contributions and commitments to the IMF that exceed the oft-cited voting rights share, the costs of subsidized interest rates, the cost of the absorption of risk, and aspects of gold sales. Conservative estimates suggest that the costs of U.S. participation in the IMF are substantial, in the neighborhood of half a billion dollar per year. (Notably, the best quantitative estimates can be found in Adam Lerrick's study for the Bretton Woods Committee.)
All of this suggests that the United States is shouldering a significantly higher proportion of the IMF's financial resources than the oft-cited 17.7 percent quota share would suggest. Furthermore, these facts have not been transparent to policymakers, the public, or the taxpayer. These costs to the U.S. taxpayer too often have been understated, or obscured (perhaps inadvertently) by IMF accounting practices and procedures.
III. Some Brief Comments on the IMF's Financial Structure
Finally, in addition to these costs, it is important to highlight the changing nature of the IMF financial structure. I have mentioned earlier about IMF lending and borrowing. IMF lending has become increasingly concentrated with longer-term, riskier borrowing from developing countries than was earlier the case. At the same time, usable resources of the IMF are largely provided by a relatively small group of industrialized countries. In fact, the IMF does not have broad-based financial support as is often reported. As much as 77 percent of IMF usable resources are supplied by the G-10 countries. In short, the IMF is a much different institution than was earlier the case: the IMF is using resources from a small number of industrialized countries and lending this money to a small number of risky developing countries at subsidized interest rates.
Conclusion
In conclusion, there are many dimensions to the costs of U.S. participation in the IMF that policymakers and the taxpaying public should understand. I have tried to summarize several important aspects of these costs this afternoon.
To see part one of the testimony before the Commission by Chris Frenze, please click here.
Return Home