Budget Implications of U.S. Contributions to the International Monetary Fund

May 19, 2009

The President recently requested that the Congress provide an increase of about $8 billion in the U.S. quota for participation in the International Monetary Fund (IMF) and an increase of additional line of credit for the IMF of approximately $100 billion. Under the budgetary treatment followed by the Congress and the executive branch since 1980, those actions would have been counted for budget scorekeeping purposes as an increase in budget authority (the authority of the federal government to obligate funds) of the full amount provided but no outlays (that is, no estimated increase in the U.S. budget deficit).This treatment was premised on the notion that U.S. financial transactions with the IMF were an exchange of assets of equal value, in which the U.S. provides dollars and receives a liquid claim on the IMF denominated in special drawing rights (SDRs), which is an international reserve asset calculated as a weighted basket of theU.S. dollar, euro, pound sterling, and yen.

However, many observers have come to the conclusion that estimating no cost for such U.S. contributions to the IMF is incorrect because it does not reflect the risk involved.Therefore, legislationincluding this increase in U.S. support to the IMF that was recently approved by the Senate Committee on Appropriations specifies that the cost should be recorded in the budget on an estimated present-value basis, adjusted for market risk.

The treatment of federal loans and loan guarantees is spelled out in the Federal Credit Reform Act of 1990 (FCRA). FCRA requires that federal loans and loan guarantees made by the Departments of Education, Housing and Urban Development, and Veterans Affairs and other agencies be evaluated by estimating all future cash flows for those loans and discounting the projected stream of such cash flows back to the time of loan approval. However, FCRA does not automatically apply to U.S. assistance to the IMF because that assistance takes the form of a membership subscription with an exchange of financial assets and a line of credit, neither of which meet the simple definition of a loan that includes a contract that requires the repayment of such funds. The Senate legislation requires that the new IMF authority be evaluated in accordance with FCRA with an exception that the evaluation of potential discounted cash flows account for market risk (as opposed to the simple discounting of cash flows at the Treasurys cost of borrowing, which ignores market pricing risk).

Historically, the IMF has used several mechanisms to mitigate risk: by holding precautionary balances, by accumulating reserves, and through its de facto preferred creditor status. As a result, no IMF borrower has defaulted on its obligations to the IMF to date, although multiple countries have needed to have their loans rolled over (such as Argentina) or have failed to pay the Fund promptly (currently, Sudan, Somalia, and Zimbabwe are in protracted arrears). A lack of default history, however, does not ensure that in the future the IMF would never sustain significant financial losses that exceeded its reserves. In such a case, the IMF would pass those losses on to its creditor members, either through reduced remuneration (through the IMFs burden-sharing mechanism for protracted arrears) or additional liquidity risk (because the IMF may not be able to meet U.S. requests to draw on its SDR-denominated assets).

CBO estimates that the present-value risk-adjusted cost of the proposed increase in U.S. participation in the IMF is $5 billion. In forming this estimate, CBO envisioned various potential states of the world economy. In the most likely situations, the IMF would draw against only a small portion of the U.S. commitment and, CBO assumes, the likelihood of those funds being promptly repaid would be high. Thus, the cost of the U.S. commitment would be close to zero in those cases. In less likely situations where the IMF would need to loan out most or all of the new $100 billion line of credit, the odds of all funds being repaid are much lower and the cost would therefore be relatively high. CBO combined those different possibilities using standard options-pricing techniques to estimate the market value of the U.S. commitment. The $5 billion estimate captures the small chance that the IMF will experience some significant losses in the future, andan additional amount reflecting the premium that financial market participants demand for bearing losses associated with global economic deterioration.