Bills Digest No. 27,
2017–18
PDF version [575KB]
Liz Wakerly
Economics Section
6
September 2017
Contents
Purpose of the Bill
Structure of the Bill
Background
The role of the IMF
Financial transactions plan
Quotas
Multilateral borrowing
Bilateral borrowing
New Arrangements to
Borrow
Operation
Commitments under the
NAB
Renewal
Committee consideration
Senate Selection of Bills Committee
Joint Standing Committee on Treaties
Senate Standing Committee for the
Scrutiny of Bills
Policy position of non-government
parties/independents
Position of major interest groups
Financial implications
Statement of Compatibility with Human
Rights
Key issues and provisions
Date introduced: 10
August 2017
House: House of
Representatives
Portfolio: Treasury
Commencement: On 17
November 2017 or the day after Royal Assent, whichever occurs later.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent,
they become Acts, which can be found at the Federal Register of Legislation
website.
All hyperlinks in this Bills Digest are correct as
at September 2017.
Purpose of
the Bill
The International Monetary Agreements Amendment (New
Arrangements to Borrow) Bill 2017 (the Bill) proposes to amend the International
Monetary Agreements Act 1947 (the IMA Act) to provide a standing
appropriation and authority to borrow for payments to meet drawings made by the
International Monetary Fund (IMF) under the decision to renew the New
Arrangements to Borrow (NAB) for a further five years, from 17 November
2017.
Structure
of the Bill
Schedule 1 of the Bill amends the IMA Act to allow
Australia to continue its obligations under the NAB for a further five years:
- the
definition of New Arrangements to Borrow is amended to include the IMF
Executive Board’s decision on 4 November 2016 to renew the NAB
- Schedule
4 to the IMA Act, which reproduces the text of the NAB, is repealed. The
text is expected to be included in the Australian Treaties Library.
Background
The role of the IMF
The IMF is a global financial institution (conceived at
the Bretton Woods conference in July 1944) that works to promote international
financial stability, exchange rate stability and monetary cooperation. It ensures
confidence by making the general resources of the IMF temporarily available to
members, lessening the duration and severity of balance of payments imbalances.[1]
It facilitates international trade, promotes employment and sustainable
economic growth, and helps to reduce global poverty.[2]
A core responsibility of the IMF is the provision of loans to member countries
that are experiencing actual or potential balance of payments problems.
Financial
transactions plan
The financial
transactions plan (FTP) of the IMF is the mechanism through which the IMF
finances its lending and repayment operations in the General Resources Account
(GRA).[3]
A member country is selected for inclusion in the FTP based on a finding by the
Executive Board that the member’s balance of payments and reserve position is
sufficiently strong.[4]
Financial resources contributed by members in accordance with the FTP are used
for purchases (loan disbursements). As borrowers make repayments, these
resources are returned to FTP members.[5]
A member that provides resources to the IMF in this manner receives a liquid
claim on the IMF (reserve tranche position) that can be converted into cash on
demand to obtain reserve assets to meet a balance of payments financing need.
These claims are considered by members as part of their international reserve
assets and are regarded as ‘equivalent to the most creditworthy government
paper’.[6]
Quotas
Most resources for IMF loans are provided by the 189
member countries, primarily through their payment of quotas.[7]
When a country joins the IMF, it is assigned an initial quota in
the same range as the quotas
of existing members of broadly comparable economic
size and characteristics. Quotas are denominated in Special
Drawing Rights (SDRs), the IMF’s unit of account.[8] The IMF regularly conducts reviews of its quota resources and
allocations. The latest review (the 14th) included an agreement to double quota
resources to SDR477 billion (A$850 billion).[9]
The next review is due to be completed by spring 2019.
Multilateral borrowing
Where the IMF believes its capacity to lend
might fall short of member countries’ requirements, it can supplement quota
resources with multilateral borrowing. The New Arrangements to Borrow (NAB) are a set of
credit arrangements between the IMF and 38 member countries and institutions to
provide supplementary resources to the IMF to ‘forestall or cope with an
impairment of the international monetary system or to deal with an exceptional
situation that poses a threat to the stability of that system’.[10] First entering into effect on 17 November 1998—and renewed
continuously—the NAB can currently provide up to SDR181 billion (A$322 billion)
to the IMF.[11] This Bill addresses the amendment to the IMA Act which is required following the decision by
Australia to renew its commitment to the NAB.
The General Agreements to Borrow (GAB) allow further
IMF borrowing from a more limited number of countries and may only be activated
when a proposal to activate NAB is rejected by NAB participants. A potential
amount of SDR17 billion (A$30 billion) is available to the IMF under the GAB.[12] Australia does not currently participate in the GAB.
Bilateral
borrowing
Since the Global Financial Crisis (GFC) the IMF has entered
into bilateral
borrowing arrangements as a third line of defence to ‘help address the
potential needs of its membership at times of heightened uncertainty in the
global economy’.[13]
A new framework for bilateral borrowing was approved by the IMF Executive Board
in August 2016 which, for any activation of borrowing agreements, requires
the IMF’s one-year forward commitment capacity (including amounts available
under the NAB) to have fallen below SDR100 billion (A$178 billion).[14]
In Australia, the recently enacted International
Monetary Agreements Amendment Act 2017 amends the IMA Act to
give force of law to the 2016 Loan
Agreement between Australia and the International Monetary Fund.[15]
New Arrangements to Borrow
Operation
Under the NAB, a participating member undertakes to
provide resources to the IMF up to the maximum agreed amount.[16]
When the IMF Managing Director, in consultation with the Executive Directors,
considers that the GRA needs to be supplemented, he/she may make a proposal for
the establishment of an activation period during which the IMF may make calls
on participants under the credit arrangements. An activation period may not
exceed six months. Acceptance of the proposal requires an 85 per cent majority
of total credit arrangement participants eligible to vote, with allocations of
commitments usually made in equal proportion relative to credit arrangements.
Interest is payable on any loans to the IMF, ‘at a rate
equal to the combined market interest rate computed by the Fund from time to
time for the purpose of determining the rate at which it pays interest on
holdings of special drawing rights’.[17]
As at 1 September 2017, the special drawing rights (SDR) interest rate was 0.532
per cent.[18]
The IMF is not obliged to repay any funds transferred under the NAB until ten
years after a transfer, unless the borrower repays at an earlier date.[19]
The IMF may make full or part repayment earlier, in consultation with
participants; and participants may request earlier repayment if there is a
balance of payments requirement for the funds.
The NAB is the facility of ‘first and principal recourse’
when the IMF is considering whether to activate the NAB or the GAB.[20]
The available commitment of a participant under the NAB shall be reduced ‘pro
tanto’ (‘to such an extent’) by any outstanding commitments under the GAB.
Similarly, the available commitment of a participant under the GAB shall be
reduced pro tanto by the extent to which its credit arrangement under
the GAB exceeds its available commitment under the NAB. In other words, the
amount committed under the NAB represents the maximum commitment. No drawings can
be made under the NAB until participants representing at least 70 per cent
of the total credit arrangements of participants to the NAB have deposited
funds with the IMF.
Commitments under the NAB
Currently, outstanding drawings and available commitments
under the NAB and the GAB cannot exceed SDR181 billion (A$322 billion) (or
such other amounts that may be in effect).[21]
The NAB was activated for the first time in
December 1998 and has been activated ten times since 1 April 2011, including
for six consecutive periods between November 2012 and 25 February 2016.[22]
The maximum amount of Australia’s lending commitment to
the IMF under the NAB is SDR2.22 billion (A$3.96 billion).[23] The value of Australia’s lending under the NAB peaked at SDR601
million on 3 June 2014 (A$998 million at the prevailing exchange rate) but fell
to SDR341 million (A$600 million at the prevailing exchange rate) on 31 July,
as countries that borrowed from the IMF under this facility made repayments on
those loans.[24]
Renewal
The current five-year NAB expires on 16
November 2017. On 4 November 2016, the IMF’s Executive Board approved the NAB
renewal for an additional five years starting on 17 November 2017 (ceasing on 16 November 2022).[25]
This Bill seeks to amend the IMA Act
to permit Australia to continue its obligations under the NAB. Australia’s current lending commitment will remain unchanged,
at SDR2.22 billion (A$3.96 billion).
Each NAB participant is deemed to continue to adhere to
the NAB unless it withdraws its adherence six months prior to the expiration of
the NAB (16 November 2017). South Africa has notified the IMF that it intends
to withdraw from the NAB as renewed on 17 November 2017. The total credit
committed under the renewed NAB will then reduce to SDR180 billion (A$321 billion).[26]
Participants cannot withdraw their adherence to the
renewed NAB once it comes into effect, except with the agreement of the IMF and
all participants of the NAB.
Committee
consideration
Senate
Selection of Bills Committee
In a report tabled on 17 August 2017, the Senate Selection
of Bills Committee deferred consideration of the Bill until its next meeting.[27]
Joint
Standing Committee on Treaties
The Bill has been referred to the Joint Standing Committee on
Treaties (JSCOT) for inquiry. Submissions were invited from interested persons
and organisations by 25 August 2017. A public hearing was held on 4 September 2017.
Details of the inquiry are at the JSCOT Renewal of the New Arrangements to
Borrow webpage.
The reporting date is 28 November 2017.
Note that Australia’s entry into the NAB, and subsequent
amendments and renewals, have not previously been tabled for consideration by
the JSCOT.[28]
This Renewal
of the New Arrangements to Borrow (4 November 2016) was tabled on 8
August 2017.
Senate
Standing Committee for the Scrutiny of Bills
In its report of 16 August 2017, the Senate Standing
Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) stated:
Due to the impact of standing appropriations on parliamentary
oversight of government expenditure, the committee has consistently drawn
Senators' attention to bills that establish, amend or continue in existence
standing appropriations.[29]
The Scrutiny of Bills Committee notes that, once enacted,
the expenditure involved in standing appropriations does not require regular
parliamentary approval. Concerns may be raised where unspecified amounts of
money could be spent for an indefinite time into the future. In this Bill,
however, a maximum loan commitment (SDR2.22 billion or A$3.96 billion) is
specified, as is a termination date of 16 November 2022.
Policy
position of non-government parties/independents
At the time of writing of this Digest, there was no
publicly available information on the position of non-government parties or
independents.
Position of
major interest groups
At the time of writing of this Digest, there was no
publicly available information on the position of major interest groups.
Financial
implications
The Bill is to provide a standing appropriation and
authority to borrow for payments to the IMF to meet drawings under the renewed
NAB. Under section 8B of the IMA Act:
8B Appropriation
for the purposes of the New Arrangements to Borrow
(1) If the Treasurer is satisfied that
an amount should be paid out of the Consolidated Revenue Fund to enable
Australia to carry out its obligations under the New Arrangements to Borrow, he
or she may direct that that amount be paid out of the Consolidated Revenue
Fund.
(2) The Consolidated Revenue Fund
is appropriated accordingly.
Under section 6 of the IMA Act:
6 Authority
to borrow
(1) The Treasurer may, from time to
time, borrow, under the provisions of the Commonwealth Inscribed Stock Act
1911 or under the provisions of any Act authorizing the issue of Treasury
Bills, such amounts as are required to be paid by Australia (not being amounts
referred to in section 8 of this Act) by reason of:
(a) its membership of the Fund and of the Bank; or
(b) its obligations under the New Arrangements to Borrow;
or
(c) its obligations under the IMF
loan agreement 2016.
The Bill would have an impact on the underlying cash
balance if the NAB is activated and the funds are provided. The impact arises
where the lending to the IMF increases Australia’s borrowing requirements and
where the interest paid on this borrowing differs from the interest received
from the IMF. As noted earlier, the IMF pays interest equal to the SDR market
rate (0.532 per cent at 1 September 2017).[30]
This is considerably lower than the current Australian 10-year Government Bond
yield of 2.75 per cent.[31]
For example, if the IMF sought to draw down the full
SDR2.22 billion (A$3.96 billion) from Australia, Australia would receive approximately
SDR12 million (A$21million) in interest payments per annum. On the other hand,
if the Australian Government is required to borrow the equivalent of SDR2.22
billion (A$3.96 billion) to meet its obligations under the NAB, and, assuming
this was to be fully funded through the issuance of 10-year Treasury bonds, its
annual interest payments (using the 10-year bond value) would total nearly A$109 million.
The renewed NAB agreement will be included in the
Australian Government’s Budget papers as a quantifiable contingent liability.[32]
As at 30 June 2017, the Government expected the fair value of loans outstanding
to Australia under the NAB to be approximately A$707 million.[33]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[34]
The Parliamentary Joint Committee on Human Rights did not
consider the Bill to raise human rights concerns.[35]
Key issues
and provisions
Schedule 1 to the Bill makes a number of amendments to the
IMA Act. The definition of New Arrangements to Borrow in section
3 of the IMA Act is amended to include the IMF decision (Decision
No. 15073-(16/99)) to renew the NAB from 17 November 2017 until 16 November
2022 (item 2).
Item 3 deletes the final sentence of the definition
which refers to Schedule 4 which contains a copy of the original NAB Decision
No. 11428-(96/6), dated 27 January 1997. The Government expects the IMF
Executive Board’s decision and the resulting text of the NAB to be included in
the Australian Treaties
Library (once they have been tabled in Parliament).[36]
Item 4 repeals Schedule 4 which contains the text
of the NAB. As already noted, the text of the NAB is expected to be included in
the Australian Treaties Library.
[1]. International
Monetary Fund (IMF), Articles
of agreement of the International Monetary Fund, IMF website, 2011, p.
2.
[2]. IMF,
‘Factsheet: the
IMF at a glance’, IMF website, 20 April 2017.
[3]. The
GRA is the principal account of the IMF, consisting of a pool of currencies and
reserve assets representing the paid subscriptions of member countries’ quotas.
[4]. The
selection of members to finance IMF transactions is based on principles set out
in the IMF Articles
of agreement.
[5]. IMF,
‘Chapter
2: nonconcessional financial operations’, in IMF, IMF financial
operations 2016, IMF, Washington, D.C., November 2016. FTP members have an
obligation to convert balances of their currency purchased from the IMF by
other members into a ‘freely usable currency’ of their choice (US dollar, euro,
Chinese renminbi, Japanese yen and pound sterling).
[6]. Ibid.,
p. 24.
[7]. IMF,
‘Factsheet:
where the IMF gets its money’, IMF website, 17 April 2017.
[8]. The
value of the SDR in terms of the US dollar is determined daily and posted on
the IMF’s
website. It is calculated as the sum of specific amounts of each basket
currency (US dollar, euro, Chinese renminbi, Japanese yen and pound sterling)
valued in US dollars, based on exchange rates quoted at noon each day in the
London market.
[9]. Unless
otherwise stated, for this and subsequent SDR amounts, conversion to A$ uses
the exchange rate as at 1 September 2017 (A$1 is equivalent to SDR0.5613) as
published on the RBA
website.
[10]. IMF,
IMF
Executive Board approves renewal of New Arrangements to Borrow, press
release, IMF website, 11 November 2016.
[11]. Australia
joined the NAB as a founding member in 1997. A history of Australia’s
contribution to the NAB is contained in the National
Interest Analysis: Renewal of the New Arrangements to Borrow, 4
November 2016, [2017] ATNIA 19, [2017] ATNIF 22.
[12]. IMF,
‘Factsheet:
IMF standing borrowing arrangements’, IMF website, 21 April 2017.
[13]. IMF,
‘Factsheet:
IMF bilateral borrowing’, IMF website, 21 April 2017.
[14]. The
IMF may seek a drawdown of funds from creditor countries even though its
available resourcing is above the SDR100 billion (A$178 billion) threshold,
if ‘extraordinary circumstances warrant it in order to forestall or cope with
an impairment of the international monetary system’ (National
Interest Analysis [2017] ATNIA 6, Loan Agreement between Australia
and the International Monetary Fund [2017] ATNIF 6, paragraph 12).
[15]. See
also L Wakerly, International
Monetary Agreements Amendment Bill 2017, Bills digest, 112, 2016–17,
Parliamentary Library, Canberra, 2017.
[16]. IMF,
New
Arrangements to Borrow (NAB): proposed renewal of and modifications to the NAB decision,
IMF policy paper, IMF, Washington, D.C., 21 October 2016.
[17]. Ibid.,
paragraph 9, p. 19.
[18]. IMF,
‘Exchange
rate archives by month’, IMF website, 3 September 2017.
[19]. IMF,
New
Arrangements to Borrow (NAB): proposed renewal of and modifications to the NAB
decision, op. cit., paragraph 11, p. 19.
[20]. Except
in the event that a proposal for the establishment of an activation period
under the NAB is not accepted, when a proposal for calls may be made under the
GAB. Ibid., paragraph 21, p.25.
[21]. Ibid.,
paragraph 21, p. 25.
[22]. National
Interest Analysis: Renewal of the New Arrangements to Borrow, 4
November 2016, [2017] ATNIA 19, [2017] ATNIF 22.
[23]. Explanatory
Memorandum, International Monetary Agreements Amendment (New Arrangements
to Borrow) Bill 2017, p. 3. The Australian dollar value of A$4.05 billion in
the Explanatory Memorandum reflects the SDR:A$ exchange rate prevailing at the
time of publication.
[24]. Ibid.;
and IMF, ‘Australia:
lending to the fund’, IMF website.
[25]. IMF,
IMF
Executive Board approves renewal of New Arrangements to Borrow, press
release, IMF website, 11 November 2016.
[26]. National
Interest Analysis: Renewal of the New Arrangements to Borrow, 4
November 2016, [2017] ATNIA 19, [2017] ATNIF 22.
[27]. Senate
Selection of Bills Committee, Report,
9, 2017, The Senate, Canberra, 17 August 2017.
[28]. National
Interest Analysis with attachment on consultation, Renewal of the New
Arrangements to Borrow, 4 November 2016, [2017] ATNIA 19,
[2017] ATNIF 22.
[29]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 9, 2017, The Senate, Canberra, 16 August 2017, p. 11.
[30]. IMF,
‘Exchange
rate archives by month’, IMF website, 3 September 2017.
[31]. Australian
Office of Financial Management (AOFM), Term
sheet for 2.75% Treasury Bonds due 21 November 2017, Australian
Government Bonds, Canberra.
[32]. The
disclosure of contingent liabilities arising from contractual obligations that
a country has is recommended or required under internationally accepted public
sector accounting standards. Generally, the legislative requirement for
disclosure is based on the concept of ‘materiality’. This means that a risk of
exposure is disclosed if it is likely to have a material effect on a country’s
financial position. In practice, some countries with liabilities below a
specified threshold, do not require disclosure of those specific liabilities.
Instead, those liabilities are recorded in the general category of ‘other
quantifiable contingent liabilities’. A Cebotari, Contingent
liabilities: issues and practice, Working paper, WP/08/245, IMF,
Washington, D.C., October 2008, p. 36.
[33]. Australian
Government, Budget
strategy and outlook: budget paper no. 1: 2017–18, 2017, pp. 9–43.
[34]. The
Statement of Compatibility with Human Rights can be found at page 8 of the
Explanatory Memorandum to the Bill.
[35]. Parliamentary
Joint Committee on Human Rights, Report,
8, 2017, 15 August 2017, p. 81.
[36]. Explanatory
Memorandum, International Monetary Agreements Amendment (New Arrangements
to Borrow) Bill 2017, p. 7.
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