IMF board agrees to raise target for its precautionary reserves

Washington-based lender attributes the move to higher credit exposure risks compounded by the Covid-19 crisis

The global economy will grow 5.5% in 2021 as countries roll out Covid-19 vaccines, according to the IMF. Reuters

The International Monetary Fund's executive board agreed to raise the indicative medium-term target for its precautionary reserves due to a major increase in financial risks since 2018.

The Washington-based lender will raise the target to Special Drawing Rights 25 billion ($36bn), up from SDR 20bn, following a biennial review of its precautionary balances on October 30, it said in a statement on Saturday. SDRs are the IMF's own currency unit, based on a basket of five currencies—the US dollar, the euro, the renminbi, the yen, and the British pound.

The review was delayed by a few months to allow for an assessment of the impact of the Covid-19 pandemic on the fund's financial risks.

"Directors noted that Fund credit exposure and related risks have increased significantly since the last review in 2018, with trends compounded by the Covid-19 crisis," it said. "Credit outstanding has nearly doubled, including a surge in emergency financing without conditionality and commitments under precautionary arrangements are higher than at the last review."

Credit concentration also increased and scheduled repurchases are larger and more bunched, the IMF said. The current target for precautionary balances of SDR 20bn is likely to fall below the indicative range in this fiscal year and the next.

In light of these developments, the executive board agreed to keep the minimum floor for precautionary balances – comprising the fund’s general and special reserves – at SDR 15bn for now and raise the medium indicative target to SDR 25bn.

Some directors would have preferred setting a higher target, the IMF said.

They agreed to closely monitor the situation as uncertainty due to the pandemic remains high and agreed to reassess the adequacy of precautionary balances before the next regular review in 2022.

“Directors broadly agreed that there is no need for additional measures to accelerate the pace of accumulation at this stage but urged continued close monitoring," the IMF said. "A few directors nevertheless called for consideration of options to speed up reserve accumulation."

In a separate statement on January 8, the IMF said it maintained its lending capacity at around $1 trillion for the coming years, with creditors' support for a doubling of the IMF’s New Arrangements to Borrow and a new round of new bilateral borrowing agreements.

"This is of particular importance in the context of increased demand for IMF resources due to the Covid-19 pandemic and ongoing heightened risks," it said.

Reforms to the IMF’s NAB, the second line of defence after quota resources, took effect on January 1. Some 38 NAB participants contribute an aggregate amount of SDR 361bn ($521bn) to the fund’s resource envelope.

The IMF has accelerated providing financial support to help member countries deal with the economic fallout from the global health crisis.