International Monetary Fund (IMF): Costs and Benefits of U.S. Participation

98-412 E

CRS Report for Congress

Received through the CRS Web

International Monetary Fund (IMF): Costs and

Benefits of U.S. Participation

April 29, 1998

(name redacted)

Specialist in International Trade and Finance

Economics Division

Congressional Research Service ˜ The Library of Congress

ABSTRACT

The International Monetary Fund (IMF) is the international lender-of-last-resort. As Congress

considers major funding proposals for the IMF, the costs sustained and the benefits provided

by U.S. participation in the IMF have become issues. This report examines both the

quantifiable costs and, briefly, the largely unquantifiable benefits. It also summarizes relevant

budgetary conventions, which dictate that U.S. transactions with the IMF have no net impact

on the budgetary position of the United States and do not require a compensatory cut in

domestic spending. In light of new data presented to the Congress by the Department of the

Treasury on April 20, 1998, this report will be udpated again this year.

International Monetary Fund (IMF): Costs and Benefits of

U.S. Participation

Summary

This report examines U.S. costs of participating in the International Monetary

Fund (IMF). Under conventions governing U.S. budgetary treatment of the IMF, any

expenditures (outlays) arising from transactions with the IMF are offset by the

increase in the U.S. reserve position in the IMF and, thus, have no net impact on the

budget. Nevertheless, funds for the IMF are both authorized and appropriated.

Expenditures in connection with U.S. participation in the Fund, however, do give

rise to three other types of financial flows that enter the budget:

! an increase or decrease in the Treasury's interest costs,

! receipts from the IMF, mostly from interest (remuneration) earned on the U.S.

reserve tranche position, and

! foreign exchange gains and losses resulting from exchange rate movements

between the Special Drawing Right (SDR) and the U.S. dollar.

For the period July 1, 1969 through December 31, 1982, the U.S. government

sustained a loss on its transactions with the IMF that amounted to $1.4 billion or an

annual average of $107 million.

For the 18-year period extending from April 30, 1980 to April 30, 1997 (IMF

fiscal year), the United States had a positive return to the U.S. budget of $1.3 billion

or an annual average of $73 million. Within the total financial picture of the U.S.

government, these sums are modest. For 1997 (IMF fiscal year), for example, the

U.S. sustained a loss of $1.6 billion; this was equivalent to about 0.1 percent of total

expenditures or 0.2 percent of discretionary expenditures (U.S. fiscal year).

Gains and losses resulting from transactions with the IMF were largely

attributable to exchange rate movements between the U.S. dollar and the SDR, the

international reserve asset in which all IMF accounts are denominated.

Benefits of the IMF to the United States, like those arising from most

government programs, are difficult to quantify. Perhaps the most important point is

that the U.S. government, with 18.25 percent of total IMF quotas (capital) and 17.78

percent of the voting power, is the largest shareholder. It has a veto over major IMF

policies and a deciding say over much else, including support programs extended by

the IMF within the context of major international financial crises. The IMF is deeply

intertwined with U.S. international economic policy. Given the relatively modest

financial costs of U.S. participation in the IMF, it would appear that the IMF's

performance, policies, and programs are the more critical issue in the current policy

debate over funding for the IMF.

This report will be updated in light of later data provided to the House Banking

General Oversight and Investigations Subcommittee on April 20, 1998.

Contents

Budgetary Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Financial Flows Arising from U.S. Participation in the IMF . . . . . . . . . . . . . . . . 3

Estimated U.S. Treasury Borrowing (Interest) Costs . . . . . . . . . . . . . . . . . 4

Impact on Net U.S. Treasury Debt Outstanding . . . . . . . . . . . . . . . . . . . . . 5

Receipts from the IMF: Interest, "Remuneration," and Refunds . . . . . . . . . 6

Valuation Gains and Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

The "Bottom Line": Net Financial Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Appendix I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Table 1. Estimated U.S. Treasury Borrowing Cost Associated with

IMF Transactions, April 30, 1980-April 30, 1997 . . . . . . . . . . . . . . . 15

Table 2. Cumulative Net Treasury Debt Outstanding Associated with

IMF Transactions, April 30, 1980-January 31, 1991 . . . . . . . . . . . . . 16

Table 3. Remuneration, Interest, and Refunds Received from the IMF,

April 30, 1980-April 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Table 4. Valuation Gains and Losses on the U.S. Reserve Position in

the IMF, April 30, 1980-April 30, 1997 . . . . . . . . . . . . . . . . . . . . . . 18

Table 5. Financial Return from U.S. Participation In the IMF,

April 30, 1980-April 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Appendix II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Appendix III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

International Monetary Fund (IMF): Costs and

Benefits of U.S. Participation

The International Monetary Fund (IMF) is the international lender of last resort.1

It extends financial support to countries experiencing balance-of-payments difficulties,

particularly in the wake of an international financial crisis. Increases in funding for the

IMF — $14.5 billion for an increase in the U.S. capital or quota subscription and $3.5

billion for the "New Arrangements to Borrow" (NAB) — are under consideration

by the U.S. Congress at this writing.2

Within the context of the current congressional debate, the question of financial

costs sustained by the United States in connection with its participation in the IMF has

arisen. This report examines these costs, and to a lesser extent, the largely

unquantifiable benefits growing out of participation in the Fund.

The report is based on data provided by the International Monetary Fund (IMF)

to CRS, updating and supplementing earlier data provided to the U.S. Congress by

the U.S. Department of the Treasury on an ad hoc basis at the time of the 1983 and

1992 quota increases.3

The data are presented in two time series: the first period extends from July 1,

1969 to December 31, 1982; the second, from April 30, 1980 to April 30, 1997. The

first set of data were prepared by the U.S. Treasury on a U.S. fiscal year basis; the

second set, combines U.S. Treasury data and IMF data, both of which were prepared

on an IMF fiscal year basis. Because of the difference in fiscal year definition, the two

1

For an introduction to the IMF, see The International Monetary Fund: A Short Overview,

CRS Report 97-228 E, by (name redacted).

The author would like to acknowledge comments and suggestions offered on this report

during the CRS peer-review process.

2

These are discussed in detail in CRS Issue Brief #97038, The International Monetary

Fund's "New Arrangements to Borrow" (NAB), and CRS Report 98-56 E, The International

Monetary Fund's (IMF) Proposed Quota Increase: Issues For Congress, both by (name er

dacted).

3

U.S. Treasury Data is presented in U.S. Congress. Senate. Committee on Appropriations.

International Monetary Fund Quota Increase. Special Hearing, May 17-18, 1983, 98th

Congress, 1st Session, p. 49-53. U.S. Govt. Off. [Washington] 1983. Senate Hearing 98402, and in U.S. House. Committee on Banking, Finance, and Urban Affairs. Subcommittee

on International Development, Finance, Trade and Monetary Policy. Quota Increase of the

International Monetary Fund. Hearing held July 10, 1991. 102nd Congress, 1st session.

U.S. Govt. Print. Off. [Washington] 1991, p. 65-68. Serial No. 102-53.

CRS-2

data series could not be combined into one series and have, therefore, been presented

separately. Throughout the report, emphasis has been placed on the more recent data.

The data are not routinely compiled or published by either the U.S. Treasury of

the IMF. On April 20, 1998, the U.S. Department of the Treasury provided its

estimates on the net benefits and costs of U.S. participation in the IMF to the

Committee on Banking and Financial Services, General Oversight and Investigations

Subcommittee. In light of this new data, this report will be updated.

Budgetary Treatment

Quota increases are paid to the IMF by transferring 25 percent of the amount

of the increase, the so-called "reserve tranche," to the IMF in the form of international

reserve assets and the balance, equal to 75 percent of the increase, in the form of a

letter of credit.4

The reserve tranche payment to the IMF is made immediately upon acceptance

of the increased quota. Payment is made either in "hard currencies" (currencies that

are generally acceptable for international transactions) other than a country's own

currency or in Special Drawing Rights (SDRs).5

The letter of credit, on the other hand, is considered to be a contingent liability

of the U.S. government. The letter of credit is encashed by the IMF to meet its

requirements for U.S. dollars to be used in making loans to countries that are

borrowing from the it.

Both reserve tranche payments and payments to the IMF under the quota letter

of credit result in a budget expenditure only as cash is actually transferred to the IMF.

When a transfer is made, however, the United States gets an equal and offsetting

receipt — an interest-bearing, liquid international monetary asset, specifically the

increase in the U.S. reserve position in the Fund. Under current budgetary

conventions,6 these offsetting transactions are treated as an exchange of assets. As

a consequence, they do not result in net budget outlays, and they do not affect the net

budgetary position (deficit or surplus) of the federal government. Looked at another

way, any debt (liability) incurred through the sale of securities to make this

expenditure is balanced by an asset — the U.S. reserve position in the Fund.

4

A letter of credit is a non-negotiable document that permits the holder to draw upon it up to

a specified sum of money upon presentation of evidence of satisfaction of prescribed

conditions. Letters of credit are most widely used in international trade.

5

The Special Drawing Right (SDR) is an international reserve asset that is created by the

IMF. For a discussion of the SDR, see CRS Report 97-738 E. The IMF's Proposed Special

Drawing Rights' (SDRs) Allocation: A Background Paper, by (name redacted).

6

For more information on the budgetary treatment of U.S. transactions with the IMF, see

CRS Report 96-279 E,. U.S. Budgetary Treatment of the International Monetary Fund, by

(name redacted).

CRS-3

Under budgetary practices established in consultation with Congress in 1980,

funding for the IMF, nevertheless, requires budgetary authorization and appropriation

in the full amount. This is an historical development that contravenes the governing

accounting convention, but reflects congressional concern regarding the then

burgeoning U.S. fiscal deficit

Funding for the IMF also does not require any compensatory cuts in domestic

spending. Title X of P.L. 105-33, the “Balanced Budget Act of 1997,” provides for

an adjustment to the budget’s discretionary spending limits to allow for U.S.

acceptance of the increased financial commitment that would arise in connection with

the IMF.

Budgetary treatment for the NAB, which are an arrangement of credit lines that

the IMF could tap in the event of a financial crisis, is identical to that of IMF quota

increases: an exchange of assets, having no net effect on the U.S. fiscal position and

requiring no compensatory cuts in domestic spending. A drawing by the IMF under

the NAB would not constitute a contribution to the IMF's capital and would not,

therefore, increase the U.S. reserve position in the IMF. Rather, it would constitute

an interest-bearing loan to the IMF, repayable within five years.

Financial Flows Arising from U.S. Participation in the

IMF

As cash is actually transferred to the IMF, however, a number of financial flows

that are distinct from the exchange of assets that has been described above also occur:

! U.S. government borrowing (interest) costs may be either increased or

decreased,

! the net debt position of the U.S. Treasury is either increased or decreased,

! interest (remuneration) on the U.S. reserve position in the IMF will be

received, and

! valuation gains and losses reflecting exchange rate movements between the

U.S. dollar and the SDR are incurred.

Each of these four types of flows that have been listed above are discussed in further

detail in the balance of this report.

CRS-4

Estimated U.S. Treasury Borrowing (Interest) Costs

U.S. transactions with the IMF give rise to a budget expenditure only as cash

is actually transferred to the IMF. Transfers to the IMF enter the U.S. budget as

interest costs. They increase the Treasury's borrowing requirement, that is,

Treasury's need to sell securities and, thus, they increase interest costs. Conversely,

receipts from the IMF reduce the borrowing requirement. This, in turn, results in a

decrease in the imputed interest costs associated with the effect of the transaction on

the Treasury's borrowing requirement. Estimated interest costs are, however, not just

affected by the amount borrowed, but also, obviously, by U.S. domestic interest rates.

The net effect of U.S. transactions with the IMF on U.S. borrowing costs has

varied over the years. They reflect the pattern of U.S. transactions with the IMF and,

ultimately, the pattern of IMF lending. Thus, for example, when the United States

itself borrowed from the IMF in November 1978, it received an inflow of dollars and,

hence, U.S. borrowing requirements were reduced. On the other hand, this was

somewhat offset, beginning in 1977, by loans that the United States made to the IMF

under the "Supplementary Financing Facility" ((SFF) or the "Witteveen Facility").

Figure 1. U.S. Interest Costs

As shown in figure 1, after the onset

Attributable to Transactions

of the Third World debt crisis in 1982,

with the IMF,

U.S. transfers of dollars to the IMF for

April 30, 1980-April 30, 1997

use in the latter's loan operations

(Million $)

accelerated. Fund credit outstanding

peaked, for the decade, in 1985, a fact

reflected in the increase of U.S.

borrowing costs attributable to the IMF.

In the late 1980s, repayments made by

developing countries that had borrowed

earlier from the IMF reduced transfers of

dollars by the United States to the IMF,

improved the cash position of the U.S.

Treasury, and, correspondingly reduced

associated borrowing costs. Fund credit

outstanding declined until 1990, when it

again accelerated in the wake of the

emergence of market economies in

Eastern Europe and the former republics

of the Soviet Union. IMF lending

increased by nearly one quarter between 1994 and 1995, with the increase more than

accounted for by IMF loans to just two countries — Mexico and Russia.

The data that are available indicate that, from July 1, 1969 through December

31, 1982, the estimated cost of Treasury borrowing attributable to the IMF amounted

to $1,753 million or an annual average of $130 million.7

7

U.S. Treasury data appearing in, U.S. Congress. Senate. Committee on Appropriations.

International Monetary Fund Quota Increase. Special Hearing, May 17-18, 1983. 98th

(continued...)

CRS-5

A second data series, appearing in appendix table 1, shows that the estimated

borrowing cost for the period April 30, 1980 through April 30, 1997 was $7,469

million, or an annual average of $415 million.

The lower estimated borrowing costs during the earlier period undoubtedly

reflect the fact that the U.S. was a borrower from the IMF during the period (19701972 and 1978). In the later period, the U.S. was a lender to the IMF, causing a rise

in the imputed borrowing costs attributable to transaction with the IMF.

Impact on Net U.S. Treasury Debt Outstanding

If the U.S. Treasury borrows (sells

securities) in order to make payments to

the IMF, it increases the level of U.S.

government debt outstanding. In the

past, the U.S. Treasury has estimated the

impact of IMF transactions on the level of

net Treasury debt outstanding.

Figure 2. Cumulative Net Debt

Outstanding Resulting From U.S.

Participation in the IMF,

April 30, 1980-January 31, 1991

(Million $)

During U.S. fiscal year 1982, the net

Treasury debt outstanding attributable to

transactions with the IMF amounted to

$5.3 billion, equivalent to about ½ % of

the total outstanding Treasury debt of

$1.1 trillion at the end of the fiscal year.8

During the first quarter of fiscal 1983

(final quarter of calendar year 1982), the

net debt outstanding attributable to

participation in the IMF was $6.8 billion.9

The annual average net debt

outstanding attributable to transactions with the IMF during the period July 1, 1969

through December 31, 1982 was $1,938 million.

More recent data prepared by the U.S. Treasury were presented not on the basis

of U.S. fiscal years, but, rather on the basis of IMF fiscal years. The latter end on

April 30 of each year. As shown in appendix table 2 and figure 2, cumulative net

debt outstanding attributable to transactions with the IMF amounted to $4.6 billion,

as of January 31, 1991.10 This was equivalent to less than 0.2% of the $2,845 billion

7

(...continued)

Congress, 1st session. U.S. Govt. Print. Off. [Washington] 1983. Senate Hearing 98-402,

p. 51. Herein after referred to as Senate Special Hearing.

8

Ibid., p. 50-51.

9

Ibid., p. 51.

10

Data from the U.S. Treasury, as presented in, U.S. Congress. House. Committee on

Banking, Finance, and Urban Affairs. Subcommittee on International Development, Finance,

(continued...)

CRS-6

in U.S. government debt outstanding. The annual average of net Treasury debt

outstanding attributable to U.S. participation during the period was $4.1 billion.

Data from the two periods lead to the following conclusions:

! cumulative net debt outstanding attributable to transactions with the IMF was

significantly lower at the end of January 1991 than at the end of December

1982, having declined from about $6,772 million to $4,617 million, a decline

of nearly one-third;

! cumulative net debt arising from transactions with the IMF also declined as a

percentage of total U.S. government debt outstanding, from less than 0.5%

during U.S. fiscal year 1982 to less than 0.2% at the end of calendar year

1990; and, finally,

! although the fiscal periods differed, the average annual net debt outstanding

more than doubled between the two periods, from $1,938 million (U.S. fiscal

year basis) to $4,117 million (IMF fiscal year basis).

The impact of U.S. transactions with the IMF on the U.S. net debt position is the

counterpart to U.S. borrowing costs and, thus, likewise, mirrors U.S. transactions

with the Fund. Again, in the earlier period, the United States, as a borrower, was

receiving funds from the IMF; in the later period, it was a lender. By the late 1980s,

the United States was being paid back for IMF use of its quota following the 1982

debt crisis, but the surge of lending to Eastern Europe and the former republics of the

Soviet Union had just begun. It is also not surprising that the average annual net debt

outstanding was higher in the later period, again reflecting the U.S. shift from

borrower to lender.

At the time this report was written, the U.S. Treasury Department had not

provided data for the period since January 1991 to the U.S. Congress.

Receipts from the IMF: Interest, "Remuneration," and Refunds

Interest costs sustained as a result of U.S. Treasury borrowing in connection

with U.S. transactions with the IMF are offset by receipts from the IMF. These arise

from:

! interest that the United States receives on any loans that have been extended

to the IMF, such as under the "General Arrangements to Borrow" (GAB)11

and, potentially, under the proposed NAB,

10

(...continued)

Trade and Monetary Policy. Quota Increase of the International Monetary Fund, Hearing

held July 10, 1991. 102nd Congress, 1st Session, p. 65-68. U.S. Govt. Print. Off.

[Washington] 1991. Serial No. 102-53.

11

For more information on the General Arrangements to Borrow, see CRS Report 97-467 E,

The IMF's "General Arrangements to Borrow" (GAB): A Background Paper, by (name redac

ted).

CRS-7

! "remuneration" (interest) received on the U.S. reserve position in the IMF,

and, finally,

! refunds from burden-sharing.12

Receipts represent a cash inflow into the General Treasury that reduce borrowing

requirements and, hence, interest expense.

The largest source of U.S. receipts from the IMF is "remuneration," that is,

interest paid on the so-called "remunerated reserve position." The remunerated

reserve tranche position is derived from the "reserve tranche." One-fourth of the U.S.

quota or capital contribution to the IMF is paid into the IMF immediately in SDRs

from the Exchange Stabilization Fund (ESF), the fund used by the U.S. Treasury to

stabilize the international value of the U.S. dollar13. This "reserve tranche" is

considered to be part of an IMF member's international reserve assets, hence the

name.

Members may draw upon their reserve tranche immediately and

unconditionally upon representation of balance-of-payments need. The reserve

tranche, therefore, is a liquid asset for IMF members and a liquid liability for the IMF

itself. In 1978, the United States, experiencing substantial pressure on the external

value of the dollar, made a reserve tranche drawing of SDR 2,275 million ($3 billion)

from the IMF.

In addition to immediate payment of the reserve tranche, the United States also

presents the IMF with a non-interest bearing letter of credit on the Treasury general

account for the balance (75%) of the quota contribution (except for a small amount

(1/4 of 1%) that is in the form of a dollar demand deposit). This is also part of the

IMF's capital, but operates much like a credit line. It is activated by the IMF as it

needs dollars in its financial operations. As the letter of credit is drawn upon by the

IMF in order to use U.S. dollars in its loan operations, the Fund's holdings of dollars

(as represented by the unused balance under the letter of credit) decrease and,

concomitantly, the U.S. reserve position in the Fund expands; similarly, as IMF

drawings under the letter of credit are paid back, the U.S. reserve position contracts.

The "remunerated reserve tranche" is not equal to the reserve tranche. The exact

definition of the "remunerated reserve position" is a technical matter. The phrase

refers to the amount by which the Fund's holdings of a member's currency are less

than the member's "norm." The "norm," in turn, is defined as "an amount equal to 75

percent of the member's quota on April 1, 1978, plus the sum of subsequent increases

in the member's quota." In the U.S. case, the U.S. quota on April 1, 1978 was SDR

12

Since May 1986, the financial consequences of overdue obligations to the IMF have been

shared between debtor and creditor member countries. This has been accomplished by

increasing the rate of charge to borrowers and decreasing the rate of remuneration to creditors.

When the overdue charges are paid, equivalent amounts are refunded to the members that bore

the burden. IMF. Treasurer's Department. Financial Organization and Operations of the

IMF. Pamphlet No. 45, 4th ed., p. 117-118.

13

For more information on the Exchange Stabilization Fund, see CRS Report 95-262 E, The

Exchange Stabilization Fund, by Arlene Wilson.

CRS-8

8,405 million. On that date, therefore, the "norm" was SDR 6,303.75 million.

Increases since then have amounted to SDR 18,121.8 million (the current quota of

SDR 26,526.8 million less SDR 8,405 million). The U.S. "norm," therefore, currently

equals SDR 24,425.55 million or about 92.1% of the total U.S. quota in the IMF.

With each successive quota increase, the norm moves closer to 100 percent of quota.

In calculating the level of the Fund's holdings of a member's currency, the IMF

excludes currencies held in working balances (IMF No. 2 Accounts) that it uses to

handle its administrative expenses and receipts in member countries when they are

equal to less than 1/10 of 1% of a member's quota. In the case of the United States,

this threshold for exclusion of working balance is quite high, at SDR 26.5 million

(currently about $34.4 million). It is undoubtedly safe, therefore, to assume that

working balances in the United States constitute excluded currency holdings. The

IMF manages its working balances in such a way as to minimize them, even or,

perhaps, especially, in the case of the United States, where it is headquartered.

Additionally, currency holdings that reflect a member's borrowings from the IMF are

excluded; this does not apply to the United States, which is not a borrower.

Figure 3 provides

Figure 3. Remunerated Reserve Position,

two graphic examples of

Illustrative Examples

the U.S. remunerated

reserve position. In the

Billion

30

SDR 26.5

SDR 26.5

left-side example, the

U.S. reserve position is

25 Reserve

Norm

Position

exactly equal to the

Reserve

Remunerated

20 (SDR

Position

reserve tranche, which is

Reserve

6.6)

(SDR

Position

13.4)

equivalent to 25 percent

15

of the U.S. quota or SDR

Currency

10 Currency

6.6 billion. The quota

Holdings

Holdings

(SDR

letter of credit has not

5(SDR

13.1)

19.9)

been drawn upon by the

0

IMF. Currency holdings

L/C Activated

L/C Not

are SDR 19.9 billion.

(1/31/98)

Activated

With no allowance for

exclusion of working

balances, the remunerated

reserve tranche would be equal to SDR 4.5 billion. Given the importance of the U.S.

dollar in the IMF's operations, the U.S. would virtually never be in this position, that

is, with its quota letter of credit not having been activated.

The example on the right side of figure 3 shows the position of the U.S. accounts

in the IMF on January 31, 1998. The quota letter of credit has been activated. At

that time, the Fund held the equivalent of SDR 13.1 billion in U.S. dollars. The U.S.

reserve position, therefore, was equal to SDR 13.4 billion (that is, the quota of SDR

26.5 billion less the currency holdings.) The remunerated reserve position was SDR

11.3 billion (that is, the "norm" of SDR 24.4 billion less the currency holdings) —

simplified again in this presentation by not allowing for working balances (which

were, in fact, SDR 3.2 million.)

.

CRS-9

Using IMF data,14 for calendar year 1997, CRS estimates that the U.S.

remunerated reserve position in the IMF fluctuated between a high of SDR 11,309.85

million at the end of December (about $15.3 billion) and a low of SDR 7,845.25

million at the end of June (about $10.9 billion). The average U.S. remunerated

reserve position for calendar year 1997 was SDR 8,575.6 million (about $11.8

billion). IMF holdings of U.S. currency ranged from a low of SDR 13,115.7 million

(about $17.7 billion) at the end of December 1997 to a high of SDR 16,580.3 million

(about $23.0 billion) at the end of June 1997. Average currency holdings amounted

to SDR 15,849.9 million (about $21.8 billion). CRS estimates that working balances

ranged from SDR 0.5 million at the end of January (about $0.7 million) to SDR 4.5

million at the end of October (about $$6.2 million), with the average month-end

balance being SDR 2.8 million (about $3.9 million)

Remuneration accrues daily on the remunerated reserve tranche position, which

is calculated daily. It is paid quarterly at the SDR interest rate (adjusted for burden

sharing, which, for example, retroactively for the first quarter of 1998, reduced the

rate of remuneration by 20 basis points). The SDR interest rate is based on the

weighted average of interest rates on the three-month paper of the five countries

whose currencies are included in the SDR basket — the United States, Japan,

Germany, the United Kingdom, and France. Thus, the SDR interest rate is marketbased. Because interest rates on some of the constituent currencies, notably the

Japanese yen, are lower than U.S. interest rates, the SDR interest rate is currently

below U.S. interest rates. The SDR interest rate, for example, during the week

beginning April 6, 1998 was 4.26%.

During the period July 1, 1969

through December 31, 1982, interest and

remuneration received from the IMF

amounted to $905 million, of which $225

million was attributable to U.S. loans to

the IMF and $680 million was attributable

to remuneration on the U.S. reserve

position in the Fund. Annually (U.S.

fiscal year), these averaged $17 million

and $50 million, respectively.15

Figure 4. Receipts from the IMF,

April 30, 1980-April 30, 1997

(Million $)

Receipts from the IMF are shown in

appendix table 3 and figure 4. During

the period April 30, 1980 through April

30, 1997, the United States received

$7,070 million from the IMF. Annually

(IMF fiscal year), receipts averaged $393

million.

14

IMF. International Financial Statistics, monthly, March 1997-February 1998 issues.

15

Senate Special Hearing, p. 51.

CRS-10

Valuation Gains and Losses

Whereas receipts from the IMF reduce the Treasury borrowing requirement, the

impact of the final category of U.S. transactions with the IMF — valuation gains and

losses — varies from year to year according to the movement of the exchange rate

between the U.S. dollar and the SDR.

All IMF accounts are denominated in SDRs. Since July 1, 1974, the IMF has set

the value of the SDR in terms of a basket of currencies. As a result of this method of

SDR valuation, however, the dollar value of the U.S. quota in the IMF fluctuates.

Under the rules and regulations of the Fund, IMF members must maintain the total

value of the Fund's holdings of their currencies constant in terms of the SDR. Stated

another way, the purchasing power of the SDR must be maintained. Settlements to

maintain the dollar value of the U.S. quota result in foreign exchange losses or gains

for the U.S. government.

Valuation settlements, in which the member country either makes a payment to

or receives a payment from the IMF, are made at least annually, at the end of the

IMF's fiscal year, April 30. They are made through a valuation adjustment account

that is part of the IMF's holdings of a member's currency.

Whether or not a valuation

Figure 5. U.S. Dollars Per SDR,

adjustment payment is required is

April 30, 1980-April 30, 1997

determined from the point of view of the

IMF's accounts, whose value in dollar

terms is being maintained. Thus, an

appreciation of the U.S. dollar

internationally means that the SDR is

falling in dollar terms. (or, stated yet

another way, each SDR commands fewer

dollars), decreasing the dollar value of the

U.S. quota in the IMF. Thus, a strong

U.S. dollar results in a valuation

adjustment payment to the IMF, a

budgetary outlay. As shown in figure 5,

for example, in 1985, when the dollar was

strong internationally, the SDR was

correspondingly weak, worth about 99¢.

The United States experienced valuation losses against the SDR amounting to $569

million, as shown in appendix table 4. Conversely, when the dollar is declining

internationally and, thus, also against the SDR, the dollar value of the U.S. quota is

increasing and the U.S. receives a valuation adjustment payment from the IMF. An

example to clarify how currency movements affect the valuation settlement is

presented in Appendix II at the end of this report.

Valuation gains and losses arise out of the market value of the U.S. dollar and

the other constituent currencies of the SDR, the German mark, the Japanese yen, the

British pound, and the French franc. Since the U.S. dollar is the largest component

of the SDR, valuation gains and losses are related, as least in part, to the performance

of the U.S. dollar. In turn, the international value of the U.S. dollar, over the

CRS-11

medium- and long-term, reflects the macroeconomic policies of the U.S. government

and the performance of the U.S. economy relative to the performance of the other

major economies.

During the period July 1, 1969

through December 31, 1982, the U.S.

experienced a valuation loss of $843

million. (Note that before July 1, 1974,

the issue of valuation gains and losses did

not arise because SDR1 equaled $1.)

This was more than accounted for by a

loss of $1,295 million in 1981. Annually,

the United States experienced, on

average, a valuation loss of $62 million.16

As shown in appendix table 4 and

in figure 6 on the preceding page, the

U.S. experienced both valuation gains and

losses during the period April 30, 1980

through April 30, 1997. For the period as

a whole, however, these amounted to a

gain of $1,466 million or an annual

average gain of $81 million.

16

Ibid.

Figure 6. Valuation Gains (+) and

Losses (-) on the U.S. Position in the

IMF, April 30, 1980-April 30, 1997

(Million $)

CRS-12

The "Bottom Line": Net Financial Return

During the period July 1, 1969

through December 31, 1982, the U.S.

government sustained a loss on its

transactions with the IMF.

This

amounted to $1,443 million or an annual

average of $107 million.17

Figure 7. Net Financial Return on

U.S. Participation in the IMF,

April 30, 1980-April 30, 1997

(Million $)

Appendix table 5 and figure 7

show the total net gains or losses accruing

to the United States from its financial

transactions with the IMF for the period

1980 to 1997, taking into consideration

borrowing costs (table 1); interest,

remuneration, and refunds (table 3); and

valuation gains and losses (table 4). In all

but six of the eighteen years, the U.S. had

a positive return on its transactions with

the IMF. Stated another way, the United

States sustained losses only one-third of

the time. For the entire period, April 30, 1980 through April 30, 1997, the return

amounted to $1,307 million or an annual average of $73 million.

Benefits

Perhaps the "beauty" of costs associated with the IMF, or any other public

program, is that they can be quantified. Benefits may not be as easily defined and are

often not susceptible to being quantified. In the current discussion of the proposed

funding for the IMF — $3.5 billion for the NAB and $14.5 billion for a quota

increase — debate over the IMF, its role, and programs has been vigorous. More

importantly, for some, the benefits provided by the IMF have been at issue.

In the post-war world, it is hard to argue that the international monetary system

has been stable; to the contrary, it has frequently been characterized by substantial

volatility. Nevertheless, when compared to the exchange rate turmoil of the 1930s,

the intellectual reference point for the creators of the Bretton Woods system, the

current system has worked relatively well. Perversely, financial crises in the current

system are the "flip" side of what is, perhaps, the system's greatest success — its

liberalization of financial flows, which has made possible the enormous expansion of

international trade, economic growth, and employment that has characterized the

post-World War II era. In the broadest terms, therefore, the purposes of the IMF, as

expressed in Article I of its Articles of Agreement (Appendix III), have, to a great

extent, been fulfilled. Emergency financing provided by the IMF has helped to ease

the impact of the financial crises that have occurred. It has allowed countries to avoid

17

Ibid.

CRS-13

restricting imports and growth to the levels that would otherwise have been required

by the rapid outflow of short-term capital, while at the same time permitting them to

undertake needed economic reforms.

The United States itself is the world largest economy, the world's largest

international trader, and the world's largest debtor, and, thus, has a major stake in the

international monetary system. This dominance is reflected in the structure of the

IMF. The IMF is a creature of the major industrial countries, including the United

States, its largest shareholder. The United States accounts for 18.25% of the quotas

and 17.78% of the votes in the IMF. This position has given it a veto over nearly all

major policy decisions of the IMF, including quota increases, allocation of SDRs, and

sale of gold. And it has also given the United States a major voice in all IMF loan

programs, a deciding one in the support programs that have been developed in the

wake of major financial crises, notably for Latin America in the 1980s, for Mexico in

1995, and for Asia in 1997. U.S. international economic policy and IMF policy have

been deeply intertwined; if the United States has not achieved substantial benefits

from the IMF over its 52-year history, then, to a great extent, it is also U.S. policy

that has failed.

Conclusions

U.S. budgetary conventions governing transactions with the IMF provide that

expenditures (outlays) for the IMF are offset by the increased U.S. reserve position

in the IMF. These are considered to be an exchange of assets. The transactions

themselves, therefore, have no net impact on the budgetary position of the United

States, whether it is in deficit or in surplus.

Expenditures in connection with U.S. participation in the Fund, however, do

bring about three other types of financial flows that enter the budget:

! an increase or decrease in the Treasury's interest costs,

! receipts from the IMF, mostly from interest (remuneration) earned on its

reserve tranche position, and

! foreign exchange gains and losses.

During the 18-year period that has been the primary focus of this report, the

impact of these flows on the U.S. financial picture has been modest. From April 30,

1980 to April 30, 1997, these transactions resulted, cumulatively, in an inflow into the

U.S. budget of $1.3 billion or an annual average of $73 million. In IMF fiscal year

1997, ending April 30, they amounted to a $1.1 billion outflow, the second largest

outflow, after 1996, in the 18-year period. The 1997 outflow was well under 0.1

percent of total U.S. fiscal year expenditures of $1,601 billion, or less than 0.2 percent

of discretionary expenditures of $548 billion.18 More importantly, the bulk of this

18

Data on U.S. budgetary outlays for FY 1997 from A Citizen's Guide to the Federal Budget.

(continued...)

CRS-14

outflow was attributable to foreign exchange losses, which were equivalent to 89

percent of the total outflow. Indeed, in virtually every year during the 18-year period,

the major determinant of the net financial gain or loss arising from U.S. participation

in the IMF was attributable to valuation gains or losses, that is, to exchange rate

movements.

During the 18-year period, the implied interest costs of U.S. Treasury borrowing

exceeded interest (remuneration) and other payments received from the IMF by a

cumulative $227 million, or an annual average of $12.6 million. After contributing

to a reduction of U.S. Treasury borrowing costs in 1980 and 1981, the United States

sustained interests costs in the following 16 years. Both estimated U.S. Treasury

interest costs and receipts from the IMF were at their highest level in 1985, that is, at

the height of the Latin American debt crisis. Implied interest costs in 1997 were at

the second highest level for the period.

U.S. Treasury interest costs are affected both by the amount borrowed and by

U.S. domestic interest rates. They are not fully offset by receipts from the IMF for

three reasons: 1) the composite SDR interest rate is lower than U.S. domestic interest

rates, notably because of particularly low Japanese domestic rates; 2) the reserve

tranche position is not fully remunerated; and 3) there is an adjustment to the IMF's

rate of remuneration for burden-sharing, that is, for countries in arrears to the IMF.

Figures for net debt attributable to transactions with the IMF are available only

for the period up to January 1991. The impact of IMF transactions on the U.S.

government's net debt position varied during the period. Within the context of the

total U.S. debt picture, however, the impact of transactions with the IMF was also

modest, with the $4.6 billion outstanding at the end of calendar year 1990 amounting

to less than 0.2% of total U.S. government debt outstanding.

Given that transactions with the IMF have a limited impact on the total financial

picture of the U.S. government, it would appear that assessments of the role and

programs of the IMF are the more important policy issue.

18

(...continued)

Budget of the United States Government, Fiscal Year 1999, p. 12.

CRS-15

Appendix I

Table 1. Estimated U.S. Treasury Borrowing Cost Associated with IMF

Transactions, April 30, 1980-April 30, 1997*

(Million $)

IMF

Fiscal Year

Ending April 30

Borrowing Cost

(-) or Reduction

IMF

Fiscal Year

Ending April 30

Borrowing Cost

(-) or Reduction

1980

189

1989

-551

1981

125

1990

-521

1982

-246

1991

-460

1983

-370

1992

-315

1984

-621

1993

-254

1985

-782

1994

-304

1986

-609

1995

-501

1987

-493

1996

-633

1988

-482

1997

-641

Total

-3,289

-4,180

Annual Average/

18-Year Period

-415

* Estimated at the average annual rate of interest on 3-month Treasury bills. For

1983-1997, this was applied to the average remunerated reserve tranche position for

the year.

Source: 1980-1982: U.S. Department of the Treasury; 1983-1997: IMF.

CRS-16

Table 2. Cumulative Net Treasury Debt Outstanding

Associated with IMF Transactions,

April 30, 1980-January 31, 1991

(Million $)

IMF Fiscal Year Ending

April 30

Cumulative Net Debt Outstanding

1980

1,418

1981

1,078

1982

-1,817

1983

-5,528

1984

-6,820

1985

-6,557

1986

-8,535

1987

-7,148

1988

-5,464

1989

-2,438

1990

-2,977

1991*

-4,617

Annual Average

-4,117

* Through January 31, 1991 only.

Source: U.S. Department of the Treasury, as presented in U.S. Congress. Committee

on Banking, Finance and Urban Affairs. Subcommittee on International

Development, Finance, Trade, and Monetary Policy. Quota Increase of the

International Monetary Fund. Hearing, July 10, 1991. 102nd Congress, 1st session,

p. 67. Serial No. 102-53.

CRS-17

Table 3. Remuneration, Interest, and Refunds Received from the IMF,

April 30, 1980-April 30, 1997

(Million $)

IMF

Fiscal Year

Ending April

30

Remuneration,

Interest, and

BurdenSharing

Refunds

IMF

Fiscal Year

Ending April

30

Remuneration,

Interest, and

BurdenSharing

Refunds

1980

0

1989

445

1981

16

1990

520

1982

88

1991

498

1983

347

1992

405

1984

510

1993

399

1985

661

1994

380

1986

596

1995

378

1987

477

1996

481

1988

422

1997

447

Total

3,117

Annual

Average/ 18Year Period

3,953

393

Source: 1980-1982: U.S. Department of the Treasury; 1983-1997: IMF.

CRS-18

Table 4. Valuation Gains and Losses on the U.S. Reserve Position in the

IMF, April 30, 1980-April 30, 1997

(Million $)

IMF Fiscal Year

Ending April 30

Valuation Gains (+) or Losses (-)

on U.S. Reserve Position in the IMF

1980

-45

1981

-143

1982

-204

1983

-234

1984

-370

1985

-569

1986

1,797

1987

1,026

1988

712

1989

-629

1990

57

1991

227

1992

192

1993

438

1994

-20

1995

1,292

1996

-1,185

1997

-876

Total

1,466

Annual Average

81

Source: 1980-1982: U.S. Department of the Treasury; 1983-1997: IMF.

CRS-19

Table 5. Financial Return from U.S. Participation In the IMF,

April 30, 1980-April 30, 1997

(Million $)

IMF Fiscal Year Ending

April 30

Total Net Gains (+) or Losses (-) on U.S.

Transactions with the IMF

1980

144

1981

20

1982

-146

1983

-256

1984

-481

1985

-690

1986

1,784

1987

1,010

1988

653

1989

-735

1990

56

1991

265

1992

282

1993

582

1994

56

1995

1,170

1996

-1,337

1997

-1,070

Total

1,307

Annual Average

73

Source: 1980-1982: U.S. Department of the Treasury; 1983-1997: IMF.

CRS-20

Appendix II

The current U.S. quota equals SDR 26.53 billion. The valuation adjustment may

be calculated in two ways.

In order to keep the dollar value of the U.S. quota the same in terms of the SDR

at the end of April 30, 1997 as it was at the end of April 30, 1996, as IMF rules

require, the valuation adjustment is calculated as follows, from the point-of-view of

IMF accounts:

1)

In terms of the SDR:

April 30, 1996 (SDR1=$1.45006)

$38.47 billion

SDR26.53 billion x $1.45006 =

April 30, 1997 (SDR1=$1.36553)

$36.23 billion

SDR26.53 billion x $1.36558 =

As shown in figure 3, the SDR depreciated against the dollar, that is, each SDR

bought fewer dollars on April 30, 1997 (about $1.37) than on April 30, 1996 (about

$1.45). A valuation payment would be made to the IMF to maintain the dollar value

of the U.S. quota, which has fallen in terms of the U.S. dollar.

Looked at from the point-of-view of U.S. government accounts, however, the

dollar appreciated against the SDR. Thus, the valuation adjustment would be

calculated as follows:

2) In terms of the U.S. dollar:

April 30, 1996 ($1=SDR 0.68963) SDR 26.53 billion ÷ SDR 0.68963 =

$38.47 billion

April 30, 1997 ($1=SDR 0.73232) SDR 26.53 billion ÷ SDR 0.73232

= $36.23 billion

The U.S. dollar appreciated against the SDR. Thus, each dollar bought more SDRs

on April 30, 1997 (about SDR 0.73) than on April 30, 1996 (about SDR 0.69). The

dollar value of the U.S. quota in the IMF would, however, have fallen from $38.47

billion to $36.23 billion, a loss.

By either method, the United States, hypothetically, had to pay a valuation

adjustment to the IMF of $2.24 billion in order to maintain the value of its quota

constant between April 30, 1996 and April 30, 1997. In fact, this would not have

been the amount of the adjustment. The dollar value of the U.S. quota has to be kept

constant from the effective date of the last quota increase on November 11, 1991.

The above calculation is for illustrative purposes only. As appendix table 3 shows,

the United States actually had a valuation loss of $876 million during IMF fiscal year

1997, ending April 30.

CRS-21

Appendix III

Articles of Agreement of the International Monetary Fund

Article I

Purposes

The purposes of the International Monetary Fund are:

(i)

To promote international monetary cooperation through a permanent

institution which provides the machinery for consultation and collaboration

on international monetary problems.

(ii) To facilitate the expansion and balanced growth of international trade, and

to contribute thereby to the promotion and maintenance of high levels of

employment and real income and to the development of the productive

resources of all members as primary objectives of economic policy.

(iii) To promote exchange stability, to maintain orderly exchange arrangements

among members, and to avoid competitive exchange depreciation.

(iv) To assist in the establishment of a multilateral system of payments in

respect of current transactions between members and in the elimination of

foreign exchange restrictions which hamper the growth of world trade.

(v) To give confidence to members by making the general resources of the

Fund temporarily available to them under adequate safeguards, thus

providing them with opportunity to correct maladjustments in their balance

of payments without resorting to measures destructive of national or

international prosperity.

(vi) In accordance with the above, to shorten the duration and lessen the degree

of disequilibrium in the international balances of payments of members.

The Fund shall be guided in all its policies and decisions by the purposes set forth in

this Article

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