BILLS DIGEST NO. 112, 2016–17              15 June 2017

International Monetary Agreements Amendment Bill 2017

Liz Wakerly
Economics Section

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.

© Commonwealth of Australia

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.

Disclaimer: Bills Digests are prepared to support the work of the Australian Parliament. They are produced under time and resource constraints and aim to be available in time for debate in the Chambers. The views expressed in Bills Digests do not reflect an official position of the Australian Parliamentary Library, nor do they constitute professional legal opinion. Bills Digests reflect the relevant legislation as introduced and do not canvass subsequent amendments or developments. Other sources should be consulted to determine the official status of the Bill.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library’s Central Enquiry Point for referral.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

[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.