Loan Agreement between Australia and the International Monetary Fund - Signed 19 December 2016, Canberra
4.1
This chapter reviews the Loan Agreement between Australia and the International Monetary Fund (the proposed Agreement) which was signed in Canberra on 19 December 2016 and in Washington DC on 4 January 2017, and was tabled in the Parliament on 7 February 2017.
4.2
The proposed Agreement will terminate the existing loan agreement between Australia and the International Monetary Fund (IMF) signed on 13 October 2012 (the existing Agreement). The existing Agreement will expire on 17 July 2017.
4.3
This chapter will first provide an overview of the IMF, followed by the particulars of the proposed Agreement. The chapter will then examine the changes incorporated into the proposed Agreement in detail, before presenting the Committee’s conclusions and recommendations.
Background
4.4
The IMF is a global financial institution that works to:
foster global monetary cooperation;
promote financial stability, international trade and sustainable economic growth; and
4.5
The IMF has 189 member countries.
4.6
The IMF makes loans from its permanent resource base. This base comes from quota contributions from members and temporary borrowing arrangements with a subset of member countries and institutions. These temporary borrowing arrangements include bilateral loan agreements and the multilateral New Arrangements to Borrow (NAB). Temporary borrowing arrangements currently comprise approximately half of the IMF’s total USD $1 trillion lending capacity.
4.7
Australia became a member of the IMF in 1947, formalised by the implementation of the International Monetary Agreements Act 1947.
4.8
According to the NIA, global economic instability has created a need to have improved confidence in the IMF; especially in its ability to have financial resources available prior to a crisis like the Global Financial Crisis, rather than attempting to procure it after the fact. The Treasury advised:
These particular loans were set up in the wake of the Global Financial Crisis and the particular issues in Europe, where there was a big draw-down on the IMF’s funds. Example programs include Ireland, Portugal and Greece … It was seen in the wake of that crisis the IMF needed an additional backstop of financial resources for [these] major events.
4.9
Following the Global Financial Crisis, the IMF has begun a series of reforms in recent years to enhance the organisation’s effectiveness including:
a substantial permanent increase in the IMF’s resources;
a realignment of the quota and voting shares among IMF members;
enhancement of the IMF’s lending instruments;
strengthened IMF surveillance of member country economies; and
institutional governance reform.
4.10
As part of its reform agenda, the IMF is undertaking a process to renew bilateral loan agreements with up to 35 member countries, including Australia.
4.11
In correspondence to the Treasurer, the Hon Scott Morrison MP, Managing Director of the IMF, Mrs Christine Lagarde noted in September 2016 that:
Global economic growth continues to face significant headwinds and risks. As we collectively seek stronger, more inclusive and resilient growth… we must ensure an adequate global financial safety net. In this context, I was heartened by the support… to maintain access to bilateral borrowing agreements, in line with the objective of preserving the IMF’s current lending capacity.
4.12
Despite the Managing Director’s forecast, the Treasury advised the Committee that there is a ‘low probability’ of the proposed Agreement being activated.
4.13
According to the Treasury, 16 countries have renewed their existing loan agreements signed in 2012, and three new countries (Brazil, Canada and Chile) have also finalised loan agreements for the first time. Out of the 31 loan agreements currently in effect (including 2012 Agreements that are still in force), Australia’s contribution under the existing Agreement is ranked as the 16th largest. Japan, Germany and China have the highest bilateral borrowing agreements with the IMF, collectively committing to Special Drawing Rights (SDR) 144.5 billion.
The Agreement
Overview
4.14
The proposed Agreement requires Australia to lend the IMF up to SDR 4.61 billion (approximately A$8.3 billion) under specified conditions. This loan amount is the same as the amount Australia is currently obliged to loan the IMF under the existing Agreement. The Treasury confirmed this at a public hearing:
In terms of the amount that Australia currently has committed to the IMF, there will be no change, in that we already have a loan agreement in place, plus new arrangements to borrow, plus our quota. The $8.3 billion was in addition to our quota resources, which is our capital and the [NAB].
4.15
In correspondence made available to the Committee, Mrs Lagarde also stated that ‘bilateral borrowing would remain a third line of defense after quotas and the NAB’. The Treasury confirmed that members’ quotas and the NAB would ‘largely have had to have been drawn down’, before the proposed Agreement could be activated.
4.16
The Treasury also confirmed that the IMF will be required to draw against Australia’s loan agreement on a proportionally ‘equitable basis with other countries holding bilateral loan agreements with the IMF’. Further, Australia will ‘not be directly exposed’ to the compliance of on-lending countries, as the IMF will on-lend any borrowed funds from Australia through a separate process in which the IMF holds the repayment risk.
4.17
The amount provided in the proposed Agreement will be included in the budget papers as a quantifiable liability. The Treasury highlighted that ‘until it is drawn down, there is no effect on the budget’.
4.18
The proposed Agreement will expire on 31 December 2019, with the option of a one year extension by the IMF with the consent of Australia. This reflects the terms of the existing Agreement.
Two-step activation process
4.19
Reflecting the IMF’s reform agenda, the proposed Agreement introduces a two-step process for activating the loan obligation. This is a new procedural requirement and is the central change between the existing and proposed Agreements.
4.20
If, and when, these funds are required, the IMF will seek to ‘activate’ the proposed Agreement through a two-step process. First, the IMF’s capacity to lend to member countries from quotas and the NAB must fall below SDR 100 billion (A$180 billion as at 19 January 2017).
4.21
Second, the IMF must obtain agreement from creditor countries representing 85 per cent of the value of all bilateral loan agreements held by the IMF. Of the 16 renewed bilateral loan agreements that are currently in effect, the nine largest creditor countries comprise 87.5 per cent of the total credit amount. These nine countries include (in order of highest voting percentage): Japan, Germany, China, France, Spain, Korea, Saudi Arabia, United Kingdom and Canada.
4.22
The Treasury provided an explanation of the reason behind the extra safeguard:
Within the IMF’s Executive Board… there was an assessment made that the Fund, in terms of activating these Agreements, should have greater accountability to the countries who are providing the funds. That is the primary reason behind the addition of the new clauses.
4.23
However, the NIA also states that the IMF may seek to activate the proposed Agreement even though its available resourcing is above the SDR 100 billion threshold, ‘if extraordinary circumstances warrant it in order to forestall or cope with an impairment of the international monetary system’. The Treasury clarified how this would occur in practice:
The IMF has advised that the provision is an acknowledgement that the IMF Managing Director may still approach and consult with creditors to find a solution to forestall or cope with an ‘extraordinary circumstance’ that creates the risk of impairment to the international monetary system.
4.24
The Treasury further advised that the IMF has confirmed that it would undertake ‘extensive consultations’ with creditors before taking any action. To the extent that creditors were willing to assist the IMF in such circumstances, ‘the concerned parties would then need to determine how, and under what circumstances, such support could be provided despite the agreed activation threshold not being met’.
Interest and repayment
4.25
The amounts lent will be repaid in full with interest in accordance with the IMF’s SDR interest rate. The SDR interest rate is determined weekly, based on a weighted average of the short term money market interest rates of the representative SDR currencies.
4.26
The Treasury advised that as of 24 March 2017, the SDR interest rate was 0.37 per cent, while the current average borrowing rate the Australian Government has access to is 2.7 per cent.
4.27
At a public hearing, the Committee asked questions about the terms of repayment. The Treasury was not able to answer at the hearing, however provided the following answer on notice, referring to the text of the proposed Agreement:
The terms and conditions for the repayment of funds borrowed by the IMF under the loan agreement are outlined in paragraphs 5, 6 and 8 of the agreement.
Each drawdown of funds by the IMF under the agreement will have an initial maturity date of three months (paragraph 5(a)).
The IMF will have sole discretion to extend the maturity date of a drawing by an additional period of three months, up to the tenth anniversary of the date of the drawing.
Such an extension will automatically be deemed to have occurred, unless the IMF provides a notification that it does not intend to extend the maturity date of the loan (paragraph 5(a)).
The maximum maturity date of the drawing may also be extended by up to an additional five years if:
the IMF Executive Board has determined that exceptional circumstances exist as a result of a shortage of Fund resources in relation to Fund obligations falling due; and
Australia has agreed to the extension (paragraph 5(a)).
The IMF may choose to repay a drawdown of funds prior to its maturity date, following consultation with Australia (paragraph 5(c)).
At Australia’s request, the IMF will provide an early repayment of outstanding drawings if:
Australia represents that its balance of payments and reserve position justifies an early repayment; and
the IMF agrees with this representation (paragraph 8).
The IMF will pay interest on each drawing at the SDR interest rate (paragraph 6).
4.28
The IMF’s ability to seek drawings under the Agreement will also be determined by Australia’s current and prospective balance of payments and reserve position.
4.29
The IMF will repay amounts drawn within three months of the drawing date, extendable at the IMF’s discretion in three month increments to a maximum of ten years. The Agreement also allows that, in exceptional circumstances as a result of a shortage of IMF resources, the IMF may extend the maximum maturity of drawings by up to a further five years. This can only occur with Australia’s consent.
4.30
The Treasury agreed that, 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.
4.31
The NIA notes that if the proposed Agreement were activated by the IMF, there would be an ‘indirect impact on the underlying cash balance’. This would materialise if Australia’s own borrowing requirement had to be increased as a result of the IMF activating the proposed Agreement, and where the interest payable on any money borrowed by Australia to be able to meet the IMF drawing requirement, exceeds the interest paid by the IMF.
4.32
The Committee expressed concern regarding the imbalance between the IMF interest repayment rate, and Australia’s average borrowing rate. The Treasury advised that these terms were standard across the 35 bilateral loan agreements, and the repayment timeframe replicate the terms of Australia’s existing Agreement.
4.33
The Treasury provided advice on how the loans are secured:
The IMF will on-lend any borrowed funds from Australia through a separate process in which the IMF holds the repayment risk. The IMF’s debt to Australia will be backed by the funds full balance sheet and ultimately the resources of its member countries, ensuring that the probability of Australia not being repaid our loan is extremely low.
Reasons for taking proposed treaty actions
4.34
The NIA asserts that the proposed Agreement supports Australia’s interests by advancing international economic stability, and ensuring that the IMF is equipped to respond to a crisis.
4.35
The NIA notes that any default risk to Australia ‘will be minimal’ as the IMF borrows from its creditor members ‘with the backing of its full balance sheet and ultimately the resources of its global membership’.
Implementation
4.36
The proposed Agreement will enter into force on the date the IMF acknowledges receipt of written communication from Australia confirming that Australia has met all its domestic requirements for implementation. This includes the Committee’s review, and the passage of implementing legislation.
4.37
Amendments to the International Monetary Agreements Act 1947 must be made to allow the Government to make payments to the IMF under the proposed Agreement.
Committee comment
4.38
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.
4.39
The Committee therefore supports the proposed Agreement and recommends that binding treaty action be taken.
4.40
In undertaking its work, the Committee is reliant on the quality of information it receives from government departments, which is usually of a very high standard. However in this circumstance, the Committee was not satisfied with the quality of evidence provided at the public hearing.
4.41
In stating this, the Committee notes the timeliness and improved quality of the Treasury’s answers to questions on notice. If this evidence had been provided at the public hearing, the Committee would have been better informed and equipped to have a more comprehensive discussion about the proposed Agreement with government officials.
4.42
The Committee supports the Loan Agreement between Australia and the International Monetary Fund and recommends that binding treaty action be taken.