2.1
This Chapter concerns three proposed International Monetary Fund (IMF) treaty actions:
the Renewal of the New Arrangements to Borrow;
the Loan Agreement between Australia and the International Monetary Fund; and
the Borrowing Agreement between the Government of Australia and the International Monetary Fund as Trustee of the Poverty Reduction and Growth Trust.
2.2
The Treasurer, the Hon Josh Frydenberg MP, wrote to the Committee Chair on 24 August 2020 requesting expedited consideration of these three treaties.
2.3
The three proposed treaties and the request by the Treasurer for expedited consideration by the Committee are the result of an unusual confluence of circumstances. In January 2020, the IMF set in motion a series of reforms to the mechanisms it uses to obtain loans from member states in the event of a financial crisis. These reforms are due to come into force in January 2021 if a sufficient number of member states agree.
2.4
Since then, the IMF has experienced a significant increase in demand for its services as a result of the economic damage caused by the COVID-19 pandemic. This demand is straining the IMF’s resources, and has resulted in the IMF seeking more funds from some member states, including Australia. Ms Lisa Elliston, Division Head, International Economics and Security Division at the Treasury, advised the Committee that, as of early September 2020:
The IMF has already received 107 requests for assistance since the start of the pandemic. To date, over half of these have been considered by the board, with over US$80 billion in funding approved.
2.5
In addition, in Australia, the relevant legislation, the International Monetary Agreements Act 1947, has been subject to amending legislation which was delayed because of changes to the parliamentary sitting calender.
The IMF
2.6
According to Ms Elliston:
The IMF is an organisation of 189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
2.7
The IMF is a membership based organisation. Each member state contributes an annual subscription. The subscriptions fund temporary borrowing arrangements provided to member states experiencing financial difficulty.
2.8
After the Global Financial Crisis, the IMF began a process to permit it to access funds additional to those raised through membership subscription. The first mechanism adopted was the New Arrangements to Borrow (NAB), a multilateral agreement, to which Australia is a signatory, in which a number of member states agree to loan the IMF sums of money at short notice for specific acute financial crises. The sums are drawn from all signatories to the NAB in quantities that are proportional to each signatory’s IMF subscription. The NAB has been used ten times since its entry into force in 2011.
2.9
In addition to the NAB, the IMF has entered into bilateral loan agreements (referred to as BBAs) with 40 member states. BBAs are activated upon the depletion of funds obtained by the IMF under the NAB. BBA funds are drawn in quantities that are proportional to each signatory’s IMF subscription. Australia is one of the countries with a BBA with the IMF.
2.10
According to Ms Elliston, the IMF’s membership subscription, the NAB and the BBAs are:
…three lines of defence. The first line is the permanent resource base, provided through quota contributions from member countries. Quotas are the building blocks of the IMF’s financial and governance structure, and an individual country’s quota broadly reflects its relative position in the world economy. The second and third lines of defence are temporary borrowing arrangements and are held with either a subset of member countries or are bilateral agreements between one member country and the IMF.
2.11
The IMF also maintains a number of Trusts that rely on bilateral contributions from member states that are used for specific purposes. One of those is the Poverty Reduction and Growth Trust (PRGT), which is being used to provide emergency financing at concessional rates to low income member states to boost their capacity to cope with COVID-19 and its associated economic damage. Australia has agreed to contribute funds to the PRGT for the first time.
New Arrangements to Borrow
2.12
On 16 January 2020, the IMF Executive Board decided to renew the NAB, contingent on agreement of the parties to the NAB, for a five year period from January 2021.
2.13
The proposed renewal of the NAB is significant for two reasons. The first is that the current NAB is not due to expire until September 2022.
2.14
The second is that the proposed NAB doubles the sum of money available to the IMF through the NAB. The additional funds are proposed to be obtained by reducing the sums of money member states that have BBAs with the IMF are obliged to make available to the IMF.
2.15
Consequently, the proposed new NAB and the proposed new BBA, considered together, result in a direct transfer of commitments by member states from one IMF funding mechanism to another. The new NAB and the new BBA will not increase Australia’s commitment to the IMF; it will shift some of Australia’s commitment from the BBA to the NAB.
2.16
Specifically, the adoption of both proposed treaties will increase Australia’s commitment to the NAB from approximately A$4.45b to approximately A$8.71b, while reducing Australia’s commitment to its BBA from approximately A$9.04b to A$3.9b. Combined, Australia’s commitment will reduce by approximately A$0.8b.
2.17
For the proposed new NAB to come into effect, 85 per cent of the signatories to the current NAB will need to consent to the new NAB commitments.
Activation of the NAB
2.18
The IMF accesses the funds available through the NAB by declaring a ‘NAB activation period’ which functions in the following way:
if the IMF assesses that the quota resources available to it are not sufficient to forestall an impairment of the international financial system, the IMF can initiate a NAB activation period, a six month period during which NAB commitments by member states can be accessed;
an activation period can only be initiated with the agreement of the member states that are party to the NAB and the IMF Executive board;
the IMF must provide an estimate of the funds that may be required;
during an activation period, the IMF can either put member states on notice that they may be called on to provide funds, or the IMF can immediately call on those funds;
calls on funds from member states during an activation period should be proportionate to the member state’s IMF subscription;
a member state may not be included in the activation of the NAB if there are concerns about that state’s balance of payments;
calls on funds by the IMF made during an activation period are in the form of loans from the member states to the IMF; and
the IMF must repay the loans made during an activation period within ten years, but can do so earlier with the agreement of the member state funding the loan.
2.19
Ms Elliston advised the Committee that, as of early September 2020, the COVID-19 pandemic had not caused the IMF to activate the NAB, but the Government expected the NAB to be activated sometime in the next 12 months.
2.20
The NAB will continue to be included in the Australian Budget as a quantifiable contingent liability.
Loan Agreement between Australia and the IMF
2.21
The proposed new BBA will replace Australia’s current BBA with the IMF, which is set to expire on 31 December 2020.
2.22
As discussed above, the new BBA should be considered together with the new NAB, as the sums Australia agrees to make available to the IMF under the BBA will change in the event the new NAB comes into force. Specifically, the new BBA will oblige Australia to lend the IMF up to approximately A$9.04b, but if the new NAB comes into force, Australia’s obligation under the BBA would reduce to approximately A$3.9b.
2.23
The loan arrangements come into effect when the loan is activated. Activation is a two-step process:
the sums available to the IMF under the NAB must fall below approximately A$196b; and
85 per cent of member states with IMF BBAs agree that the BBAs be activated.
2.24
Once the BBAs have been activated, the IMF will provide relevant states with an estimation of the sums that might be required, and will repay the loans within ten years of the loans being made.
2.25
The National Interest Analysis (NIA) for the proposed BBA Treaty claims that the BBA is unlikely to be drawn upon over the forward estimates as the current resources available to the IMF are likely to be sufficient to cover projected lending activities.
2.26
The BBA will be included in the Budget as a quantifiable contingent liability.
Poverty Reduction and Growth Trust Agreement
2.27
The IMF is already making use of the PRGT in response to the economic impact of the COVID-19 pandemic. The IMF is using the PRGT to provide emergency financing at concessional rates to low income countries to improve their capacity to respond to the health and economic impact of the pandemic.
2.28
This is the first time Australia is proposing to contribute to the PRGT. Countries have already contributed to the PRGT include Japan, the United Kingdom, France, Spain, the Netherlands and Norway.
2.29
The proposed treaty will come into effect upon ratification by Australia, and will terminate in 2029.
2.30
Australia will contribute approximately A$981m to the PRGT.
2.31
The funds Australia proposes to provide to the PRGT will be contained in the Budget as a measure.
Implementation
2.32
The three proposed treaty actions will be implemented under the International Monetary Agreements Act 1947. The BBA and the PRGT proposed treaties are funded at the authority of the Treasurer. The NAB will require the Treasurer to give notice by legislative instrument of the renewal of the NAB.
Conclusion
2.33
The COVID-19 pandemic and its economic impact is exactly the type of occurrence the IMF exists to mitigate. The Committee concurs with Ms Elliston’s assessment that:
COVID-19 has presented the world with a crisis like no other and serves as a reminder of the vital role the IMF plays at the centre of the global financial safety net.
2.34
At present, the IMF is supporting low income countries with loans to improve their capacity to manage the pandemic. The Committee expects the IMF will transition towards supporting economies at risk of failure as a result of the economic impact of the pandemic as the world moves from containing the pandemic to economic recovery. This work will directly benefit Australia by supporting economic recovery where Australian goods and services are sold.
2.35
The Committee supports and recommends the ratification of:
the Renewal of the New Arrangements to Borrow;
the Loan Agreement between Australia and the International Monetary Fund; and
the Borrowing Agreement between the Government of Australia and the International Monetary Fund as Trustee of the Poverty Reduction and Growth Trust.
2.36
The Committee supports the International Monetary Fund’s Renewal of the New Arrangements to Borrow and recommends that binding treaty action be taken.
2.37
The Committee supports the Loan Agreement between Australia and the International Monetary Fund and recommends that binding treaty action be taken.
2.38
The Committee supports the Borrowing Agreement between the Government of Australia and the International Monetary Fund as Trustee of the Poverty Reduction and Growth Trust and recommends that binding treaty action be taken.