Bills Digest No. 112, 2016–17
PDF version [551KB]
Liz Wakerly
Economics Section
15 June 2017
Contents
Purpose of the Bill
Structure of the Bill
Background
The role of the IMF
IMF quotas
New Arrangements to
Borrow (NAB)
General Agreements to
Borrow (GAB)
Bilateral borrowing
The 2016 loan agreement
Key differences between the 2012 and
2016 loan agreements
Committee consideration
Joint Standing Committee on Treaties
(JSCOT)
Policy position of non-government
parties/independents
Financial implications
Special appropriations
Statement of Compatibility with Human
Rights
Key issues and provisions
Date introduced: 25
May 2017
House: House of
Representatives
Portfolio: Treasury
Commencement: Sections
1–3 on Royal Assent; Schedule 1 on the later of the day after Royal Assent
and the day the 2016 loan agreement enters into force for Australia. The
Minister is required to announce, by notifiable instrument, the day the 2016
loan agreement enters into force for Australia.
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 June 2017.
Purpose of the Bill
The purpose of the International Monetary Agreements
Amendment Bill 2017 (the Bill) is to amend the International
Monetary Agreements Act 1947 (the IMA Act) to provide for continuation
of the current standing appropriation and authority to borrow for payments to
meet drawings made by the International Monetary Fund (IMF) under a renewed Loan
Agreement between Australia and the IMF (the 2016 loan agreement).
The 2016 loan agreement will terminate the existing loan
agreement between Australia and the IMF signed on 13 October 2012 (the 2012
loan agreement) which expires on 17 July 2017.[1]
Structure
of the Bill
The Bill amends the IMA Act to give force of law in
Australia to the Loan Agreement between Australia and the IMF signed at
Canberra on 19 December 2016 and at Washington D.C. on 4 January 2017 (the 2016
loan agreement).[2]
Background
The role of
the IMF
The IMF is a global financial institution that works to promote
international financial stability and monetary cooperation. It facilitates international
trade, promotes employment and sustainable economic growth, and helps to reduce
global poverty.[3]
A core responsibility of the IMF is the provision of loans
to member countries that are experiencing actual or potential
balance-of-payments problems. Most resources for IMF loans are provided by the
189 member countries, primarily through their payment of quotas.[4]
Multilateral and bilateral borrowings provide temporary supplements to these
quota resources, enabling the IMF to provide exceptional financial support to
its member countries.
IMF quotas
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. The IMF uses a quota formula to help assess a
member’s relative position. Quotas are denominated in Special
Drawing Rights (SDRs), the IMF’s unit of account.[5] 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 (about A$886 billion).[6]
New Arrangements to Borrow (NAB)
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) is a set of credit arrangements between the IMF and 38 member
countries and institutions. The NAB is subject to periodic renewal. On 4
November 2016, the IMF’s Executive Board approved its renewal for an additional
five years starting in November 2017. The IMF’s Managing Director must make a
proposal to activate the NAB. A proposal becomes effective when it is accepted
by participants representing 85 per cent of total credit arrangements and is
approved by the Executive Board. As at 21 April 2017, Australia had provided
SDR2.2 billion (A$4.1 billion) under the NAB out of a total commitment of SDR180.6
billion (A$336 billion).[7]
General Agreements to Borrow (GAB)
The General Agreements to Borrow (GAB)
enable the IMF to borrow specified amounts from 11 advanced countries when a
proposal to activate the NAB is rejected by NAB participants. The total amount
of credit available under the GAB is SDR17 billion.[8] Australia is not part of
the GAB.
Bilateral borrowing
In addition to the NAB and amid concerns
over economic and financial conditions in 2011, the IMF decided to boost its
resources through bilateral borrowing agreements.[9] The 2012 borrowing
agreements had initial two-year terms which were subsequently extended in 2014
and 2015, and began to expire in mid-October 2016. As at 30 September 2016,
these borrowing agreements totaled SDR282 billion (A$524 billion).
As part of these agreements, Australia
signed a bilateral Loan Agreement between Australia and the IMF on 13 October 2012 (the 2012 loan agreement).
This made provision for Australia to lend to the IMF up to the equivalent of
SDR4.61 billion (around A$6.8 billion at the time) for a maximum total term of
four years. The International
Monetary Agreements Amendment Act 2013, which
amended the IMA Act to provide standing appropriation and authority
to borrow for payments to meet drawings made by the International Monetary Fund
(IMF) under the 2012 loan agreement, came into force on 28 June 2013.
The 2012 loan agreement expires on 17 July 2017.
A new framework for bilateral borrowing was
approved by the IMF Executive Board in August 2016. Under this arrangement, any
activation of the IMF’s bilateral borrowing agreements requires the IMF’s
one-year forward commitment capacity (the amount of resources the IMF has
readily available for new non-concessional lending over the next twelve months),
including amounts available under the NAB, to have fallen below SDR100 billion
(A$186 billion).[10]
In addition, any activation of the borrowing
agreements should be approved by creditors representing 85 per cent of the
total credit amount committed under the 2016 bilateral borrowing agreements.[11] The agreements under the
new framework have a common maximum term of end-2020, with an initial term to
end-2019, extendable for a further year through end-2020 with creditors’
consents.
As at 1 June 2017, 33 member countries had
committed a total of about SDR260 billion (A$483 billion) in bilateral borrowed
resources (encompassing both 2012 and 2016 agreements).[12]
On 9 September 2016, the IMF Managing
Director sought a commitment from Australia to renew its 2012 bilateral loan
agreement with the IMF.[13]
On 19 December 2016, the Treasurer formally agreed to renew this
agreement, up to the equivalent of SDR4.61 billion (A$8.6
billion), subject to domestic approval processes.[14] The 2016 loan agreement extends Australia’s existing funding
commitment to December 2019, with the possibility of an additional one-year
extension with Australia’s consent. The IMF signed the 2016 loan agreement on 4 January 2017.
The 2016 loan agreement will come into force on the date
the IMF acknowledges receipt of a written communication from Australia stating
that Australia has met all of its domestic requirements in regards to entry
into force of the agreement. Australia will send this notification following
consideration of the 2016 loan agreement by the Joint Standing Committee on
Treaties and after the necessary legislative amendments have been made.[15]
Amendments to the IMA Act must be
made to allow the Government to make payments to the IMF under the 2016 loan
agreement.[16]
The 2016
loan agreement
The purpose of the 2016 loan agreement is to ‘enhance the
resources available on a temporary basis to the International Monetary Fund (the
Fund) for crisis prevention and resolution through bilateral borrowing’
(paragraph 1).[17]
The Guidelines
for Borrowing by the Fund make it clear that quota subscriptions are and
should remain the basic source of IMF financing. The IMF is authorized to
borrow from IMF members (or other sources if it deems such action appropriate),
to replenish its holdings of any member’s currency in the General Resources
Account.
The terms of the 2016 loan agreement will expire on 31
December 2019, with the possibility of a one-year extension to 31 December
2020, with Australia’s consent (paragraph 2(a)).
The IMF will aim to draw funds under the 2016 loan
agreement with the goal of achieving balanced positions (over time) among
creditors under all bilateral borrowing agreements relative to their
commitments under these agreements (paragraph 2(f)).
Under paragraph 2(b), the 2016 loan agreement may only be
activated:
- when
the Managing Director has notified the Executive Board that the IMF’s capacity
to lend to member countries from quotas and the NAB (the Forward Commitment
Capacity (FCC)) is below the activation threshold of SDR100 billion (A$185
billion) and
- the
IMF has the agreement of creditors representing at least 85 per cent of the
total credit amount committed under the bilateral borrowing agreements by
creditors eligible to vote on such activation. This amendment in particular is
designed to improve the governance and oversight of these agreements by
participating countries.
However:
... [n]othing in this paragraph 2(b) shall preclude the
Managing Director from approaching creditors before the modified FCC is below
the activation threshold, if extraordinary circumstances so warrant in order to
forestall or cope with an impairment of the international monetary system.
Under paragraph 2(c), the bilateral borrowing agreements
will be deactivated if:
- the
NAB is no longer activated (unless there are no available uncommitted resources
under the NAB at the time)
- the
Managing Director has notified the Executive Board that activation is no longer
necessary or
- six
months have elapsed since the Managing Director’s notification and within that
period, the FCC has not fallen below the activation threshold.
Paragraph 2(e) notes that funds available under the
agreement may be used by the IMF to fund the early repayment of claims under
other 2016 borrowing agreements if (i) the balance of payments and reserve
position of the relevant creditors justifies such payment and (ii) the IMF
determines that there is a need for early repayment.
The IMF will provide Australia with its best estimates of
the amounts that it expects it will draw under the agreement at the start of
each Financial Transactions Plan period (unless Australia is not included and
is not being proposed to be included in the list of countries in the Financial
Transactions Plan) (paragraph 3(a)).[18]
The IMF is required to give Australia at least five
business days’ notice of its intention to draw, providing payment instructions
at least two business days prior to the value date of the transaction. In
exceptional circumstances, notification would be made at least three business
days in advance of the value date (paragraph 3(b)).
The IMF will repay amounts drawn within three months of
the drawing date. The IMF has discretion to extend this maturity date by
additional periods of three months (and this is deemed to be the default unless
the IMF notifies Australia otherwise) up to a maximum of ten years (paragraph
5(a)). In exceptional circumstances—and as a result of a shortage of IMF
resources—the IMF, with Australia’s agreement, may extend the maximum maturity
for drawings up to an additional five years (paragraph 5(a)).
In consultation with Australia, the IMF may make early
repayments provided that it notifies Australia at least five business days
before any such repayment (paragraph 5(c)). Repayments of drawings shall
restore the amounts that can be drawn under the agreement.
The rate of interest on drawings shall be the SDR interest
rate established by the IMF (paragraph 6(a)). If, however, the IMF pays a
higher interest rate on outstanding balances from other borrowings on
comparable terms, the IMF will pay this higher rate on drawings under this
agreement. Interest will accrue daily and is payable quarterly (paragraph
6(b)).
The amount of each drawing shall be paid by Australia on
the date specified by the IMF’s notice, by the transfer of the SDR-equivalent
amount of Australian dollars to the IMF’s account (paragraph 7(b)); and the
repayment of the principal shall be made in the currency borrowed wherever
feasible (paragraph 7(d)). Payments of interest would normally be made in SDRs
(paragraph 7(e)).
Paragraph 9 sets out the conditions for Australia to be
able to transfer all or part of any claim on the IMF resulting from outstanding
drawings to any IMF member country. These include the transfer of the same
terms and conditions as the claim was held by Australia (except that the
reference to Australian dollars shall be deemed to refer to the currency of the
relevant member) (paragraph 9(c)).
The relevant exchange rate for all drawings, exchanges and
payments of principal and interest under the agreement is the exchange rate for
the relevant currencies in terms of the SDR for the second business day (of the
IMF) before the value date of the transfer, exchange or payment (paragraph 10).
When the 2016 loan agreement enters into force, the 2012
loan agreement will terminate (paragraph 14(b)). The 2016 loan agreement shall enter
into force on the date the IMF acknowledges receipt of a written communication
from Australia notifying the IMF of the completion of its domestic requirements
for entry into force of the loan agreement (paragraph 14(b)).
Paragraph 14(c) ensures that no drawing made under the
2012 or 2016 loan agreements will be made that would cause total outstanding
drawings under both agreements to exceed SDR4.61 billion (A$ 8.6 billion).
Key
differences between the 2012 and 2016 loan agreements
The general terms and conditions of the 2012 and 2016 loan
agreements, and the maximum borrowing limit for the IMF, are similar.[19]
Most of the differences relate to additional conditions before funds may be
activated or deactivated:
- under
paragraph 1(a), the 2016 loan agreement emphasises that the resources will only
be available on a temporary basis
- paragraphs
2(b) and 2(c) of the 2016 loan agreement introduce the activation threshold,
the requirement for approval from creditors representing 85 per cent of the
total amount credited under the 2016 loan agreements, and conditions governing
deactivation of the loan agreement
- paragraph
3(b) of the 2016 loan agreement clarifies that no drawings will be made under
the agreement if Australia is not included in the list of countries in the IMF
Financial Transactions Plan
- paragraph
5(b) of the 2016 loan agreement adds a condition on the maturity date to fund
early repayments of other creditors’ claims so that the single common maturity
date is either the longest remaining maximum maturity of any clam for which
such early repayment has been requested, or is the tenth anniversary of the
date of the relevant drawing, whichever is earlier (emphasis added)
- unlike
the 2012 loan agreement, the 2016 loan agreement does not contain any provision
relating to the termination of Australia’s commitment to meet drawings under
the agreement (see paragraph 8 of the 2012 agreement)
- the
2012 loan agreement had a term of two years from the date it became effective
with the possibility of two additional one-year extensions (the first in
consultation with Australia, the second with the consent of Australia). The
2016 loan agreement shall end on 31 December 2019 with the possibility of a
one-year extension (with the consent of Australia).
Committee
consideration
Joint
Standing Committee on Treaties (JSCOT)
The Joint Standing Committee on Treaties completed its
inquiry into the Loan Agreement—International Monetary Fund, in May 2017. The
Committee report supported the agreement and recommended that ‘binding treaty
action be taken’:[20]
The Committee strongly supports
Australian involvement in the IMF and notes the bipartisan support of
successive governments to ensuring the IMF’s stability and ability to respond
to global financial volatility. In particular, the
Committee welcomes amendments in the proposed Agreement that strengthen the
accountability of the IMF to its member countries.[21]
With regard to the applicable interest rate and repayment,
the Treasury confirmed:
... under the terms of the proposed Agreement, Australia would
currently borrow funds at 2.7 per cent, but the interest that is payable on the
principle lent to the IMF will be at a much lower rate of 0.37 per cent. The
Treasury confirmed that the IMF can hold the total money borrowed for a total
of 15 years at these reduced rates.[22]
The Committee expressed concern with regard to the
difference in the IMF interest repayment rate and Australia’s average borrowing
rate. The Treasury advised that these terms were standard across the bilateral
loan agreements. The IMF notes that, to date, neither the 2012 nor the 2016
bilateral agreements have been activated or drawn down.[23]
However, they ‘have played a critical role in providing assurance to members
and markets that the IMF has adequate resources to meet potential needs’.[24]
Policy
position of non-government parties/independents
The International Monetary Agreements Amendment Bill 2013
was introduced into the House of Representatives by Labor Assistant Treasurer,
David Bradbury on 14 March 2013.[25]
At the second reading of the International Monetary
Agreements Amendment Bill 2013, Senator Xenophon raised questions about the
ability of Australia to impose any conditions on the loan should the IMF call
it in.[26]
At the time, Senator Cormann noted that the Coalition would not oppose the International
Monetary Agreements Amendment Bill 2013, but raised some concerns about taking
on more debt.[27]
Financial
implications
The Agreement will be included in the budget papers as a
quantifiable contingent liability. The IMF can draw on the agreement only when
additional funds are required to support its lending to member countries, up to
a maximum of SDR4.61 billion (A$8.6 billion):[28]
Any drawings would be financing transactions. The loan
agreement would have an indirect impact on the underlying cash balance if the
agreement is activated and funds are provided. This impact would arise where
the Australian Government’s lending to the IMF increased Australia’s own
borrowing requirement and where the interest payable on any money borrowed by
Australia to meet an IMF drawdown exceeds the interest paid by the IMF in
regard to that drawdown.[29]
Special appropriations
A special appropriation is a provision within an Act that
provides authority to spend money for particular purposes. This Bill
establishes a standing appropriation within the IMA Act for the purpose
of meeting drawings made under a bilateral loan agreement between Australia and
the IMF signed at Canberra on 19 December 2016 and at Washington, D.C. on 4
January 2017.
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 as it does not raise any human
rights issues.[30]
Key issues
and provisions
Item 1 of the Bill repeals the definition of IMF
loan agreement 2012. Item 2 of the Bill inserts the new definition
of IMF loan agreement 2016 into section 3 of the IMA Act.
Item 5 of the Bill amends existing subsection
8CAA(1) of the IMA Act by substituting the reference to the IMF loan
agreement 2012 with a reference to the IMF loan agreement 2016 so that the
Treasurer must be satisfied that payment is required to meet Australia’s
obligations under the 2016 loan agreement before directing the payment to be
made. Once the Treasurer is so satisfied, he or she may direct that payment be
appropriated from the Consolidated Revenue Fund.
Subsection 8CAA(3) of the IMA Act currently
empowers the Treasurer to continue to use the standing appropriation for
payments if the IMF loan agreement 2012 is amended, as long as the amendment
does not affect the maximum amount that Australia may lend to the IMF or the
term of the agreement. In order to do this, the Treasurer must give notice of
any amendment by tabling a legislative instrument. Item 7 repeals the
reference to the IMF loan agreement 2012 and substitutes a reference to the IMF
loan agreement 2016 in subsection 8CAA(3) so that this provision will operate
in an equivalent manner under the new agreement.
Item 9 of the Bill repeals and replaces note 2 to
existing subsection 8CAA(3) of the IMA Act so that the agreement expires
on 31 December 2019 unless Australia consents to the decision of the IMF
Executive Board to extend the agreement for a further year.
Item 10 of the Bill repeals and replaces the
reference to the IMF loan agreement 2012 with a reference to the IMF loan
agreement 2016 in existing subsection 8CAA(5) of the IMA Act so that any
such legislative instrument made will be repealed on the day after the IMF
loan agreement 2016 expires.
Item 11 of the Bill is an application provision
which operates so that, upon the 2016 loan agreement entering into force, the
2012 loan agreement will be terminated. However, the IMF is able to draw funds
from Australia after the expiry or termination of the 2012 loan agreement to
meet funding commitments that were made during the term of that agreement.
[1]. Joint
Standing Committee on Treaties (JSCT), Report
170: treaties tabled on 7 and 8 February 2017, Commonwealth of Australia,
Canberra, May 2017. See also R Dolamore, International
Monetary Agreements Amendment Bill 2013, Bills digest, 104, 2012–13,
Parliamentary Library, Canberra, 30 April 2013.
[2]. Loan
Agreement between Australia and the International Monetary Fund, done
in Canberra, 19 December 2016 and Washington DC, 4 January 2017, [2017] ATNIF
6 (has not yet entered into force).
[3]. International
Monetary Fund (IMF), ‘Factsheet: the IMF
at a glance’, IMF website, 20 April 2017.
[4]. IMF,
‘Factsheet:
where the IMF gets its money’, IMF website, 17 April 2017.
[5]. 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, Japanese yen, pound sterling and the Chinese
renminbi) valued in US dollars, based on exchange rates quoted at noon each day
in the London market. As at 31 May 2017, there were 0.53817 SDR to each
Australian dollar.
[6]. For
this and subsequent SDR amounts, conversion to A$ is using the exchange rate as
at 31 May 2017.
[7]. IMF,
‘Factsheet:
IMF standing borrowing arrangements’, IMF website, 21 April 2017.
[8]. Ibid.
[9]. IMF,
‘Factsheet:
IMF bilateral borrowing’, IMF website, 21 April 2017.
[10]. The
IMF may seek a drawdown of funds from creditor countries even though its
available resourcing is above the SDR100 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).
[11]. This
extra condition reflects an assessment by the IMF Executive Board that there
should be greater accountability to the countries providing the funds (see JSCT,
Report
170: treaties tabled on 7 and 8 February 2017, Parliament of Australia,
Canberra, p. 30, May 2017).
[12]. IMF,
‘IMF financial data
query tool’, IMF website, n.d. and Parliamentary Library calculations.
[13]. The
Treasury, Submission
to the JSCT, Inquiry into the Loan Agreement between Australia and the
International Monetary Fund (Canberra, 19 December 2016 and Washington DC, 4
January 2017), JSCT, Canberra, 27 March 2017.
[14]. Australian
Government, Budget
strategy and outlook: budget paper no. 1: 2017–18, 9 May 2017, pp.
9–35. This loan amount is the same amount (denominated in SDR)
that Australia is currently obliged to loan to the IMF under the 2012
agreement.
[15]. National
Interest Analysis [2017] ATNIA 6, op. cit., paragraph 2.
[16]. Ibid.,
paragraph 19.
[17]. Unless
otherwise stated, references in this section refer to the Loan
Agreement between Australia and the International Monetary Fund, op. cit.
[18]. The
Financial Transactions Plan is the mechanism through which the IMF funds it
lending and repayment operations to its members, in the General Resources
Account (GRA).
[19]. The
2016 loan agreement can be found here;
the 2012 agreement is here.
[20]. JSCT,
Report
170: treaties tabled on 7 and 8 February 2017, op. cit.
[21]. Ibid.,
p. 33–34.
[22]. Ibid.,
p. 32.
[23]. IMF,
‘Q and A
on IMF bilateral borrowing agreements’, IMF website, 21 April 2017.
[24]. Ibid.
[25]. Parliament
of Australia,
International Monetary Agreements Amendment Bill 2013 homepage, Australian
Parliament website.
[26]. N
Xenophon, ‘Second
reading speech: International Monetary Agreements Amendment Bill 2013’,
Senate, Debates, 20 June 2013, p. 3555.
[27]. M
Cormann, ‘Second
reading speech: International Monetary Agreements Amendment Bill 2013’,
Senate, Debates, 20 June 2013, p. 3555.
[28]. National
Interest Analysis [2017] ATNIA 6, op. cit., paragraph 21.
[29]. Ibid.,
paragraph 22.
[30]. The
Statement of Compatibility with Human Rights can be found at page 8 of the Explanatory
Memorandum to the Bill.
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