Renewal of the New Arrangements to Borrow
Introduction
2.1
The proposed treaty action is the renewal of the International Monetary Fund’s (IMF’s) New Arrangements to Borrow (the borrowing arrangement).
2.2
The IMF is the central institution of a global financial safety net intended to maintain international financial and monetary stability by providing financial support to countries in economic difficulty.
2.3
A Treasury representative noted:
This in turn provides confidence to markets and other economic actors to continue to trade and invest.
2.4
The IMF generally lends money to recipient countries in instalments over a number of years. Instalments are often conditional, and can be delayed if the conditions for the payment have not been met.
2.5
The IMF uses its own currency for financial transactions, called Special Drawing Rights (SDRs). The currency operates using an exchange rate mechanism similar to that which applies to other currencies such as the dollar. At the time of writing (12 September 2017) 1 SDR was worth A$1.77.
2.6
For clarity, sums of money will be expressed in Australian Dollars.
2.7
The IMF derives its resources from a mix of funds obtained through quota based contributions from members and arrangements to temporarily borrow funds from some members. These temporary funds include the borrowing arrangement and bilateral loan agreements.
2.8
These temporary funds currently comprise around half of the IMF’s total lending capacity.
The Agreement
2.9
The New Arrangements to Borrow is intended to help the IMF maintain resources to prevent or resolve crises in the balance of payments and reserve positions of IMF member states.
2.10
A treasury representative described it as:
…a voluntary multilateral credit arrangement that will allow the IMF to borrow up to approximately A$3.9 billion from Australia to support countries facing economic difficulties.
2.11
In total the borrowing arrangement provide the IMF with access to the equivalent of around A$319.67 billion.
2.12
There are 40 participants in the borrowing arrangement, including two new parties. The parties with the largest commitments are Japan, the United States, China, and Germany. Collectively, these countries contribute slightly less than 50 per cent of the funds in the borrowing arrangement.
2.13
According to Treasury:
Australia’s financial support under the [borrowing arrangement] was used to provide IMF assistance that contributed to the stabilisation of advanced economies, including Ireland, Portugal and Greece. Our financial contributions have also supported developing economies facing economic challenges, along with transition economies such as the Ukraine.
Australia’s involvement
Australia benefits from an effective IMF that has the resources available to fulfil its mandate to support global economic and financial stability.
2.15
A Treasury representative told the Committee:
As a successful open trading economy, Australia’s prosperity relies on strong and stable growth in the world economy. Australia therefore has a strong interest in ensuring that the IMF remains an effective and credible institution.
2.16
Australia is a founding member of the borrowing arrangement, providing the IMF with a signed instrument of adherence in 1997.
2.17
In 2010, Australia signed a further instrument consenting to an increase in Australia’s commitment in response to the Global Financial Crisis.
2.18
In 2012, Australia consented to a rollback of Australia’s commitment following an increase in Australia’s IMF quota contribution under the Fund’s 14th General Review of Quotas.
2.19
In November 2016, the IMF Executive Board, which includes an Australian representative, agreed to renew the borrowing arrangement for a period of five years from November 2017 to 2022.
2.20
Apart from the provision extending the borrowing arrangement, the renewal will introduce a number of technical modifications to the broader terms and conditions of the borrowing arrangement.
2.21
The IMF has drawn on Australian funds committed under the borrowing arrangement on 22 occasions. The first drawing occurred in December 1998 and the last in December 2015.
2.22
The sum of Australia’s commitment used by the IMF under the borrowing arrangement peaked at A$998 million in June 2014. This has since fallen to A$674.37 million as at 10 July 2017. This has occurred as a result of repayments by countries that have received IMF assistance.
2.23
The renewed borrowing arrangement has been included in the budget papers as a quantifiable contingent liability, and will continue to be so.
2.24
In order to meet its obligations, Australia must pass amendments to the International Monetary Agreements Act 1947 to extend the government’s statutory authority to make borrowing arrangement payments when required to do so by the IMF. The passage of these amendments will ensure that appropriate provisions are in place before the renewed agreement commences.
Specific provisions
Obtaining funds
2.25
The borrowing arrangement obliges parties to make funds available to the IMF up to the applicable total listed in Annex 1 of the arrangement (as previously stated, up to A$3.93 billion for Australia).
2.26
To activate the borrowing arrangement, the IMF must assess that the resources it has available are not sufficient to forestall or cope with problems in the international monetary system.
2.27
The IMF must also obtain the consent of parties that make up at least 85 per cent of the value of the borrowing arrangement for each activation of the arrangement.
2.28
This arrangement means that any party to the borrowing arrangement with a greater than 15 per cent share of the value of the borrowing rights could prevent the activation of the borrowing arrangement. Two parties to the borrowing arrangement currently have more than a 15 per cent share of the value of the borrowing rights: the United States and Japan.
2.29
The Committee notes that the ability of one of the parties to the borrowing arrangement to prevent activation constitutes a risk. While this is a very unlikely occurrence, the increased support for protectionism internationally makes this risk more significant than it was at the time the borrowing arrangement was negotiated.
2.30
The borrowing arrangement can only be activated for six month periods at a time, but can be activated for consecutive six month periods.
2.31
According to the Treasury, the borrowing arrangement has been activated 15 times since initial ratification in 1997. At the time of writing it was not active.
2.32
To establish an activation period, the IMF must develop a resource mobilisation plan, including:
information on the amount of the funds that are expected to be drawn upon and the amounts expected to be held in reserve;
information on any additional financing the Managing Director of the IMF considers may be necessary during the activation period; and
the maximum amount of a party’s commitments that can be used during an activation period, which is usually based on their proportion of the commitment to the borrowing arrangement.
2.33
During the activation period, the IMF may at any time:
draw on the funds committed by parties to the borrowing arrangement; and
make commitments for which it may need to draw on the funds committed by parties.
2.34
A party may not be included in a resource mobilisation plan when its balance of payments and reserve position are not sufficiently robust. In other words, if Australia is experiencing a problem with balance of payments or its reserve position, its commitments under the borrowing arrangement should not be called upon.
2.35
The Committee notes that, the above exclusion notwithstanding, the borrowing arrangement obliges Australia to make funds available when required. However, Section 8A of the International Monetary Agreements Act 1947, which relates to appropriations for the borrowing arrangements phrases the decision to make the funds available accordingly:
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… (emphasis added)
2.36
In the public hearing, a Treasury representative indicated that:
The act also requires the Treasurer to agree to each payment that Australia makes…
2.37
The Act and the statement by Treasury imply that, contrary to the obligations of the borrowing arrangement, the Treasurer has some discretion in relation to each payment. The Committee suggests the Treasury examine its position, and satisfy itself that there is no apparent contradiction between the obligations in the borrowing arrangement and the procedure for the appropriation of funds contained in the Act.
Repaying funds
2.38
The IMF draws on the funds under the borrowing arrangement in the form of a loan.
2.39
Loans drawn by the IMF under the borrowing arrangement have a maximum maturity date of 10 years, but can be repaid earlier. Repayments are allocated amongst parties to ensure they remain broadly equitable.
2.40
According to the NIA, Australia’s lending to the IMF increases Australia’s own borrowing requirement. This can cost Australia money if there is a difference in the interest rate at which Australia borrows money and the interest it earns from funds used by the IMF.
2.41
The rate of interest applying to a loan under the borrowing arrangement is the standard SDR interest rate. The SDR interest rate is a weighted average of a sample of interest rates applying to leading currencies, including the euro, British pound, United States dollar and the Chinese renminbi. As of 21 August 2017, the interest rate was 0.53 per cent.
2.42
When the Australian Government wishes to borrow money, it does so by issuing Commonwealth Government Securities. There are a range of different types of securities, but all are repaid after a set period of time and all accrue interest for the purchaser.
2.43
To provide some comparison of the interest paid to Australia by the IMF and the interest rate paid by the Australian Government, the Committee used Treasury Indexed Bonds issued on 21 February 2012 with a 10 year maturity period (the same as that applying to IMF loans under the borrowing arrangement). The interest rate applying to these Bonds was 1.25 per cent.
2.44
The Committee is aware that this is a very approximate comparison, but notes that none of the Commonwealth Government Securities examined paid an interest rate less than that applying to IMF loans.
2.45
To date, the IMF has made 35 payments on loans from Australia under the borrowing arrangements.
2.46
According to the NIA, the default risk is minimal as the IMF borrows from parties with the backing of its full balance sheet and ultimately the resources of its global membership. To date, the IMF has made all repayments in accordance with the terms and conditions of the borrowing arrangement.
Issues
2.47
Apart from Australia’s obligations under the borrowing arrangement, the Committee explored three additional issues:
the treaty level status of the borrowing arrangement;
the timeliness of the referral to the Committee; and
the actual extent of Australia’s commitments to the IMF.
Treaty status of borrowing arrangement
2.48
Australia’s entry into the borrowing arrangement in 1997 and subsequent amendments and renewals were not tabled for consideration by the Committee. The Committee was established in 1996.
2.49
According to the NIA, the Treasury has now received advice that the borrowing arrangement constitutes a treaty as it is binding under international law.
2.50
It is not clear from the NIA why the Treasury did not initially consider the borrowing arrangement to be a treaty action. Paragraph 3(c) of the arrangement states:
A member or institution shall adhere to this decision by depositing with the Fund an instrument setting forth that it has adhered in accordance with its law and has taken all steps necessary to enable it to carry out the terms and conditions of this decision…
2.51
On the face of it, this appears to be a legally binding obligation, making the borrowing arrangement a treaty action.
2.52
According to a representative of the Treasury:
The Treasury received formal advice that the [borrowing arrangement] constitutes a treaty, and is binding under international law. The reasons the [borrowing arrangement] has not previously been regarded as a treaty are unclear, and the records over the period are incomplete. However, since receiving that advice the government has moved to undertake the necessary actions to complete domestic treaty-making requirements…
2.53
The Committee was concerned that Treasury may have entered into other internationally binding treaty actions without Committee consideration. In response, Treasury has advised that it is not aware of any internationally binding treaty actions within its portfolio that have not been subject to Committee consideration.
Timeliness of referral
2.54
All parties to the borrowing arrangement are bound by it for five years unless they withdraw six months prior to the renewal of the arrangement. In the case of the current treaty action, renewal occurs in November 2017.
2.55
The treaty action was referred to the Committee on 8 August 2017.
2.56
In other words, Australia is now bound by the borrowing arrangement because the date by which Australia could withdraw from the arrangement passed in May 2017.
2.57
The timing of the referral of the borrowing arrangement to the Committee impacts on the Committee’s consideration in two ways:
the Committee cannot make a useful recommendation regarding binding treaty action as it is too late; and
legislation implementing the arrangement will need to be introduced to Parliament prior to receipt of the Committee’s report so that Australia can meet its obligations when the arrangement comes into force on 17 November 2017.
2.58
This situation has arisen as a result of Treasury only recently becoming aware of the fact that the borrowing arrangement was a binding treaty action. Nonetheless, the Committee is concerned about the lack of parliamentary oversight for an agreement that commits Australia to lend up to several hundred million dollars.
Extent of Australia’s commitments to the IMF
2.59
Australia’s commitments under the borrowing arrangement are in addition to Australia’s quota commitment to the IMF, discussed in the introduction.
2.60
However, this is not the full extent of Australia’s commitment to the IMF. In 2012, the Committee considered the Loan Agreement between Australia and the International Monetary Fund, under which Australia made A$6.8 billion available to the IMF to support the IMF’s resources for crisis prevention.
2.61
Australia’s commitments under the borrowing arrangement, which were in place at the time, were not mentioned during that inquiry, and there is no mention of Australia’s commitment under the Loan Agreement between Australia and the International Monetary Fund in the NIA for the treaty being considered here.
2.62
The Committee questioned Treasury witnesses to clarify Australia’s overall commitments to the IMF. In a submission to the inquiry, Treasury stated Australia’s total commitment to the IMF was A$23.8 billion, broken down in the following manner:
A$11.67 billion in quota payments;
A$3.94 billion available under the borrowing arrangement; and
A$8.19 billion available under the bi-lateral Loan Agreement between Australia and the International Monetary Fund.
2.63
It should be noted that the Committee has previously commented, in relation to the renewal of the bi-lateral Loan Agreement between Australia and the International Monetary Fund, on the quality of information in NIAs provided by Treasury. In Report 170, the Committee noted:
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.
Conclusion
2.64
Due to the fact that Treasury has only recently become aware that the borrowing arrangement is a binding treaty action, the time by which the Committee could make a useful recommendation in relation to this treaty has passed.
2.65
It is unacceptable that Treasury has failed to notice that the borrowing arrangement is manifestly a binding treaty action on at least three occasions, in 1997, 2010 and 2012.
2.66
It is also clear that those in Treasury currently responsible for the borrowing arrangement identified the problem and have acted to resolve it.
2.67
The inquiry has identified a number of matters Committee would like Treasury to note:
the process for activating the borrowing arrangements contains a small risk that a party with more than 15 per cent of the value of the borrowing arrangement can prevent the activation of the arrangement;
there may be an apparent contradiction between the obligations in the borrowing arrangement and the procedure for the appropriation of funds contained in the International Monetary Agreements Act 1947; and
in future, NIAs for treaties that relate to funding international financial institutions should list Australia’s total financial obligations to that organisation, not just the obligation related to the particular treaty in question.