Bills Digest no. 186 2009–10
International Monetary Agreements Amendment Bill (No. 1)
2010
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Contact officer & copyright details
Passage history
International Monetary Agreements Amendment
Bill (No. 1) 2010
Date introduced: 16 June 2010
House: House
of Representatives
Portfolio: Treasury
Commencement: The operative provisions (Schedule 1) commence on
the later of:
- Royal Assent, or
- the date on which amendments to the International Monetary
Fund’s ‘New Arrangements to Borrow’ arrangement
and changes in credit arrangements of existing participants in this
arrangement referred to in Decision No. 14577-(10/35) of the
Executive Board of the International Monetary Fund (dated 12 April
2010) (the IMF decision) becomes effective.
Links: The
links to the Bill, its Explanatory Memorandum and second
reading speech can be found on the Bills page, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
This Bill amends the
International Monetary Agreements Act 1947 (IMA Act) to
allow Australia to accept the changes to the terms and conditions
of the ‘New Arrangements to Borrow’ (NAB) of the
International Monetary Fund (IMF) adopted by the Executive Board of
that agency on 12 April 2010. The proposed amendments will allow
Australia to make larger sized loans to the IMF, under the recently
decided changes to the NAB, in the event that the Fund calls for
additional finance.[1]
To understand what the NAB is, it is necessary to understand how
the IMF operates. The IMF is a specialised agency of the United
Nations and has 186 member countries. Amongst other things, it
provides policy advice and financing (lending) to member states in
economic difficulties. It is the funding of this latter function
that is the special focus of this Bill.
Upon joining, each member of the IMF is assigned a financial
contribution quota,
based broadly on its relative size in the world economy. A member's
quota subscription determines the maximum amount of financial
resources the member is obliged to provide to the IMF. A member
must pay its subscription in full upon joining the organization: up
to 25 per cent must be paid in the IMF's own currency, called
Special
Drawing Rights (SDRs) or widely accepted currencies (such as
the dollar, the euro, the yen, or pound sterling), while the rest
is paid in the member's own currency.[2] Australia’s quota is SDR3.2
billion and the United States, as the largest member, has a quota
of SDR37.1 billion.[3]
The IMF’s second source of funds is its gold holdings. It
was, as at January 2010, the world’s third largest official
gold holder, with just over 3000 tonnes in its possession. However,
in the fourth quarter of 2009 the IMF initiated the first phase of
a program to sell 403 tonnes of gold.[4]
The IMF’s third source of funding is borrowing additional
amounts from its members. While quota subscriptions of member
countries are the IMF's main source of financing, the Fund can
supplement its resources through borrowing if it believes that
resources might fall short of members' needs. Through the General
Arrangements to Borrow (GAB) and the New Arrangements to Borrow
(NAB), a number of member countries and institutions agree to stand
ready to lend additional funds to the IMF.
The NAB is a set of credit arrangements between the IMF and 26
member countries and institutions.[5] In January 1997, the IMF’s Executive Board
adopted a decision
establishing the NAB, which became effective in November 1998.
The NAB has been renewed twice, most recently in November
2007 for a further period of five years from November 2008.
As a key part of efforts to overcome the global financial
crisis, on 2 April 2009, the Group of Twenty industrialized and
emerging market economies (G 20) agreed to increase the resources
available to the IMF by up to an additional US$500 billion. This
new amount represents a trebling of the total pre-crisis lending
resources of about US$250 billion, and is aimed at being supportive
of growth in emerging market and developing countries.
On 24 November 2009, the current 26 NAB participants and
representatives of 13 potential new participants reached agreement
on the key elements of an expanded and more flexible NAB. It was
proposed that the NAB be expanded up to US$600 billion. A formal
decision on the expanded and more flexible NAB was taken by the
Executive Board of the IMF on 12 April 2010.
To make the expanded NAB operational, current NAB participants
need to consent to the proposed amendments to the latest NAB
decision and the increases in credit arrangements, and new
participants need to notify the IMF of their adherence to the NAB.
For many current and future NAB participants this involves domestic
approval procedures, including legislative approval before they can
consent or adhere to the expanded NAB. This Bill contains
legislative provisions that allow Australia to participate in the
expanded NAB.[6]
The Explanatory Memorandum notes that the recent amendments to
the NAB will become effective when existing NAB participants
representing 85 per cent of total credit arrangements have
concurred to these changes, including each participant whose
particular credit arrangement has been changed.[7] Apparently, this level of
agreement has not yet been reached.
A particular feature of this expansion is that for the first
time China, Russia, India, Brazil and nine other countries have
agreed to participate in these expanded arrangements, alongside the
26 other countries (including Australia), that have already
extended additional credit to the IMF.[8]
The IMF is not the only organisation expanding its lending
capacity in the face of the global financial crises. Both the World
Bank and the Asian Development Bank have put new arrangements in
place to respond to this crisis.[9]
Lastly, the IMF implemented a note issuance facility in July,
2009. The IMF can now issue notes (or bonds) to the ‘official
sector’ of member countries, that is, their central banks
and, or monetary authorities.
The notes provide the official sector with a safe investment and
help ensure the IMF can provide timely and effective assistance to
countries in need. To date, three note purchase agreements have
been signed with member countries, with a total a total value of
US$69 billion.
Clearly, the IMF’s ability to fund its activities comes
directly from the strength of the economies of its members.[10]
The proposed amendments were foreshadowed in the
Treasurer’s media release of 12 May 2009.[11]
As at the date of writing this Bill has not been referred to a
parliamentary committee for inquiry.
There has been little Australian comment on this Bill. However,
some international comment suggests that the expanded NAB may lead
to global inflation, if these arrangements are called upon.[12] Another commentator
suggests that the expanded NAB enables IMF members to ‘lend
to themselves’ and so represents a very large government
sanctioned ‘Ponzi Scheme’.[13] Generally, such schemes eventually
collapse.
Still other commentators are wary of the IMF and its role in
offering financial support to struggling governments due to
perceptions of its requirement for overly harsh economic policies
that have in the past accompanied its loans. They are wary of the
expansion of the NAB and the Fund’s ability to provide
additional loans (if called upon) for this reason.[14]
The ability of multilateral institutions, such as the IMF to
provide finance to countries that find themselves in financial
difficulties is a stabilising influence in current circumstances. A
stable international financial environment is very much in
Australia’s interests, enabling higher levels of
international trade and investment to occur than would otherwise be
the case.
However, the proposed amendments represent a potential
additional substantial call on government finances. Currently, the
government is seeking to reduce its outstanding debt. Any
additional call by the IMF on Australia for additional funds would
further complicate this particular task. The risk of this
disadvantage depends on the probability that the IMF will indeed
make such a call. Recently, several of the most indebted European
states have reduced their budget spending, and increased taxes, in
an effort to reduce their outstanding debt levels.[15] Whether these actions will be
enough to avoid the need for the provision of substantial financial
support to heavily indebted nations remains to be seen. Further,
the provision of such support does not necessarily mean that the
additional financial commitments under the NAB will be called
upon.
Another potential problem with the proposed arrangements is that
the overall size of the NAB has been noted as being far larger than
the amount that may be required to be provided as financial support
for heavily indebted nations.[16] It may be the case that the scale of commitments
that Australia is undertaking, is far higher than what is actually
needed to provide the IMF with adequate financial resources for his
task.
The counter argument to this point is that other potential
lenders to heavily indebted countries will consider such activity
less risky (and therefore continue such lending) if they are
assured that their funds will be repaid. One way of achieving this
outcome is to provide a substantially larger pool of potential
funds available to heavily indebted countries to be used as a last
resort. The existence of this pool of potential finance provides
confidence to other lenders to these countries so that such lending
can continue, thereby reducing the chance that the NAB funds will
called upon at all.
As the Bill’s provisions only allow Australia to respond
to any MF call for additional finance for the NAB, and not actually
provide that finance, the proposed amendments do not have a direct
budget impact.
However, the Explanatory Memorandum notes that should the
proposed amendments become law the IMF will be able to call upon
Australia for up to SDR4370.41m, an increase of SDR3569.12m from
the existing commitment level of SDR801.29m (or an increase of
445.42 per cent).[17]
As at 19 June 2010, SDR4370.41 million was $A7393.2m.[18]
The Explanatory Memorandum also notes that in the event of
Australia’s commitment being called upon this loan would be
repaid in full, with interest, within five years.[19]
Clause 2 of the Bill provides that the proposed
amendments to the IMA Act will apply from the later of:
- Royal Assent, or
- when existing NAB participants (including Australia),
representing 85 per cent of total credit arrangements have
concurred to the amendments adopted by the IMF Executive board,
including each participate whose credit arrangement is
changed.
Several important points arise from this
clause:
- the granting of Royal Assent will not automatically allow these
amendments to enter into force. Rather their date of effect depends
on the decisions of the existing NAB participants, in particular
all those whose credit arrangements have been changed (that is,
increased). Unless all such countries agree Australia’s
increased commitment cannot enter into force, and
- the date on which these amendments take effect does not depend
on the decisions of the new NAB participants noted above (that is
China, Russia, India and Brazil etc).
Item 1 amends subsection 3(1) of the IMA Act so
that this Act’s NAB definition is exactly the same as the IMF
decision noted above.
Item 5 repeals the existing Schedule 4 of the
IMA Act and inserts a new Schedule 4 in its
place.
The content of the proposed Schedule 4 is the
text of the IMF decision noted above. In particular Annex I of that
decision increases Australia’s credit arrangements from
SDR801.29m to SDR4370.41m.
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277 2495.
[15]. For example, Spain has
recently announced a substantial tax increases, B Dominguez,
‘Tax hikes in Spain’s 2010 budget’, Baker and
McKenzie website, 2010, viewed 19 June 2010, http://www.bakermckenzie.com/FCSpainTaxHikes2010Budget/.
‘Spain’s deficit to decline in 2010 government
says’, Latin American Herald Tribune, 18 June 2010,
viewed 19 June 2010,
http://laht.com/article.asp?ArticleId=351632&CategoryId=12396
Leslie Nielson
21 June 2010
Bills Digest Service
Parliamentary Library
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