Review Of The Adequacy Of The Fund’s Precautionary Balances

December2022 IMFPOLICYPAPER REVIEWOFTHEADEQUACYOFTHEFUND’S PRECAUTIONARYBALANCES IMFstaffregularlyproducespapersproposingnewIMFpolicies,exploringoptionsforreform,orreviewingexistingIMFpoliciesandoperations.Thefollowingdocumentshavebeenreleasedandareincludedinthispackage: APressReleasesummarizingtheviewsoftheExecutiveBoardasexpressedduringitsDecember12,2022considerationofthestaffreport. TheStaffReport,preparedbyIMFstaffandcompletedonNovember16,2022,for theExecutiveBoard’sconsiderationonDecember12,2022. TheIMF’stransparencypolicyallowsforthedeletionofmarket-sensitiveinformationandprematuredisclosureoftheauthorities’policyintentionsinpublishedstaffreportsandotherdocuments. ElectroniccopiesofIMFPolicyPapersareavailabletothepublicfrom http://www.imf.org/external/pp/ppindex.aspx InternationalMonetaryFundWashington,D.C. ©2022InternationalMonetaryFund PR22/451 IMFExecutiveBoardDiscussestheAdequacyoftheFund’sPrecautionaryBalances FORIMMEDIATERELEASE WASHINGTON,DC–December20,2022TheExecutiveBoardoftheInternationalMonetaryFund(IMF)concludedtheReviewoftheAdequacyoftheFund’sPrecautionaryBalances.1 TheFund’sprecautionarybalances—whichconsistofgeneralandspecialreserves,exceptfortheportionattributedtogoldsalesprofits—areakeyelementoftheIMF’smultilayeredframeworkformanagingfinancialrisks.PrecautionarybalancesprovideabuffertoprotecttheFundagainstpotentiallossesresultingfromcredit,income,andotherfinancialrisks.Forthisreason,theyhelpprotectthevalueofreserveassetsrepresentedbymembercountries’positionsintheFundandunderpintheexchangeofassetsthroughwhichtheFundprovidesfinancialassistancetocountrieswithbalanceofpaymentsneeds. ThisreviewoftheadequacyoftheFund’sprecautionarybalancestookplaceonthestandardtwo-yearcycle,aftertheDecember2021interimreview.Inconductingthereview,theExecutiveBoardappliedtherules-basedframeworkagreedin2010.Theframeworkusesanindicativerangeforprecautionarybalances,linkedtoaforward-lookingmeasureoftotalIMFcredit,toguidedecisionsonadjustingthetargetforprecautionarybalancesovertime.Theframeworkalsoallowsforjudgementinsettingthetarget,consideringabroadrangeoffactorsthataffecttheadequacyofprecautionarybalances. TheBoardalsodiscussedtheroleofsurcharges,whichareprimarilyacomponentoftheFund’sriskmanagementframeworkbutalsocontributetotheaccumulationofprecautionarybalances. ExecutiveBoardAssessment2 ExecutiveDirectorswelcomedtheopportunitytoreviewtheadequacyoftheFund’sprecautionarybalancesonthestandardtwo-yearcycle,afteraninterimreviewinDecember2021.Theyemphasizedtheimportanceofmaintaininganadequatelevelofprecautionarybalancestomitigatefinancialrisks,safeguardthestrengthoftheFund’sbalancesheet,andprotectthevalueofmembers’reservepositionsintheFund.DirectorsunderscoredtheimportanceofadequateprecautionarybalancesfortheFund’sabilitytolendtoitsmembership. Directorsagreedthatthecurrentrules-basedframeworkadoptedin2010forassessingtheadequacyofprecautionarybalancesremainsbroadlyappropriate.TheyemphasizedthatjudgmentandBoarddiscretionremainanimportantpartoftheframework.AgainstthebackgroundoftherecentlyapprovedEnterpriseRiskManagementframework,Directorswelcomedthediscussionofenterpriserisksinthestaffreportandencouragedstafftoworkwith 1ThispressreleasesummarizestheviewsoftheExecutiveBoardasexpressedduringtheDecember12,2022ExecutiveBoarddiscussionbasedonthepaperentitled“ReviewoftheAdequacyoftheFund’sPrecautionaryBalances.” 2Attheconclusionofthediscussion,theManagingDirector,asChairmanoftheBoard,summarizestheviewsofExecutiveDirectors,andthissummaryistransmittedtothecountry'sauthorities.Anexplanationofanyqualifiersusedinsummingsupcanbefoundhere:http://www.IMF.org/external/np/sec/misc/qualifiers.htm. 2 theOfficeofRiskManagementtoensurethatallrelevantrisksareadequatelyincorporatedintheassessmentofprecautionarybalances. Directorsnotedthatprecautionarybalanceshaverisenfurthersincetheinterimreviewandcoverageratioshavestrengthened.Atthesametime,creditandotherfinancialriskshavealsoincreased.Creditoutstandingisclosetohistoricalpeaks,drivenbylendingtosomeoftheFund’slargestborrowers,andisestimatedtoremainonahighertrajectorythanprojectedatthetimeofthe2021interimreview.CreditriskisheightenedbyaprojectedpeakinrepurchasesinFY2023-25,mainlyfromthelargestborrowerandemergencyfinancing.Near-termincomeriskshavemoderatedbutremainsubjecttoconcentrationrisks,whileinvestmentrisksare elevatedamidheightenedvolatilityinfinancialmarkets. Directorsagreedthatdespitethehighertrajectoryofcreditoutstandingthanprojectedattheinterimreview,themedium-termtargetforprecautionarybalancesisexpectedtoremainwithintheindicativerangeoftheforward-lookingcreditmeasureandaboveitsmid-pointinthemostplausibledesk-baseddemandscenario.Moreover,commitmentsunderprecautionaryarrangementshavedeclinedandtheburden-sharingcapacityhasincreasedsignificantlysincetheinterimreview.Againstthisbackdrop,Directorsbroadlyagreedtoretainthecurrentmedium-termtargetofSDR25billion.SomeDirectorsarguedforahighertarget. Directorsagreedthattheevolutionofprecautionarybalancesinrelationtothetargetwillneedto