BILLS DIGEST NO. 27, 2017–18              6 September 2017

International Monetary Agreements Amendment (New Arrangements to Borrow) Bill 2017

Liz Wakerly
Economics Section 

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•       Schedule 4 to the IMA Act, which reproduces the text of the NAB, is repealed.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.

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[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.