53
The IMF and Danmarks Nationalbank's
Balance Sheet
Louise Mogensen, Financial Markets
The primary objective of the International Monetary Fund (IMF) is to
prevent crises in the international monetary system. The IMF monitors
the economic and financial development in its 184 member countries
and submits recommendations concerning economic policy. The IMF may
also provide temporary financial assistance to member countries to help
ease balance-of-payments adjustments. The IMF has several financial
accounts with Denmark as one of its member countries. Denmark's financial commitment as an IMF member country is called the quota. Via
payment of quota resources Danmarks Nationalbank participates in the
financing of the loans offered by the IMF via its General Resources Account. Danmarks Nationalbank also holds Special Drawing Rights, SDR.
Moreover, Denmark participates in a number of special arrangements to
borrow that are administered by the IMF.
Danmarks Nationalbank's accounts with the IMF are registered on the
liability and asset sides of its balance sheet. The assets less the liabilities
constitute Danmarks Nationalbank's net claim on the IMF, which in accordance with international conventions is part of the foreign-exchange
reserve.
Danmarks Nationalbank's net claim on the IMF amounted to kr. 8.3
billion at end-2002, equivalent to more than 4 per cent of the foreignexchange reserve. The quota is approximately 8 per cent of the foreignexchange reserve. In 1969, when Danmarks Nationalbank took over the
responsibility for accounts with the IMF from the Ministry of Finance,
Denmark's quota was 46 per cent of the foreign-exchange reserve. The
relative significance of Denmark's financial accounts with the IMF has
thus diminished, cf. Chart 1.
This article describes how the IMF influences Danmarks Nationalbank's
balance sheet and how the derived financial risks are managed. It must
be emphasised in the first instance that Danmarks Nationalbank is not
exposed to a credit risk vis-à-vis the individual countries that receive
loans.
12-12-2003 07:35
Antal sider: 8
Oprettet af Louise C. Mogensen
Rev. nr. 2
H:\kvo\ENG\2003\4qtr\tiltryk\053-060.doc
54
DENMARK'S QUOTA AS A RATIO OF THE FOREIGN-EXCHANGE
RESERVE, 1969-2002
Chart 1
Per cent
70
60
50
40
30
20
10
0
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
Note: The foreign-exchange reserve is calculated excluding the gold stock.
Source: IMF, International Financial Statistics.
THE IMF ON DANMARKS NATIONALBANK'S BALANCE SHEET
Danmarks Nationalbank's annual accounts published in its Report and
Accounts include only one IMF-related item on respectively the asset and
the liability sides, cf. Table 1.
The asset item can be broken down, however, so as to determine its
sources and explain why it is subject to ongoing adjustment. Claims on
the IMF consist of the following categories of accounts: the quota, SDR
holdings, and the special arrangements to borrow: Poverty Reduction
and Growth Facility, PRGF, and New Arrangements to Borrow, NAB.
These accounts are all described below. Table 2 presents a breakdown of
the asset item in Table 1.
ACCOUNTS WITH THE IMF AS SHOWN IN REPORT AND ACCOUNTS 2002
Table 1
Kr. billion
Assets
Liabilities
Claims on the International
Monetary Fund (IMF), etc. ......... 8.3
Counterpart of Special Drawing Rights
allocated by the International Monetary Fund (SDR) ..........................................
1.7
Source: Report and Accounts, 2002, Danmarks Nationalbank.
12-12-2003 07:35
Antal sider: 8
Oprettet af Louise C. Mogensen
Rev. nr. 2
H:\kvo\ENG\2003\4qtr\tiltryk\053-060.doc
55
ACCOUNTS WITH THE IMF, BREAKDOWN
Table 2
Balance sheet, end-2002, kr. billion
Assets
Quota (fixed) .............................
Holdings of SDR ........................
PRGF loans .................................
15.8
0.7
0.6
NAB ............................................
0
Liabilities
The Fund's holdings of Danish
kroner .............................................
Counterpart of allocated SDR .......
8.9
1.7
Note:
The counterpart of the allocated SDR on the liabilities side is not set off against the net claims, in accordance
with the principles stipulated in the IMF's Balance of Payments Manual. PRGS stands for Poverty Reduction and
Growth Facility which is a special arrangement to borrow for poor countries. NAB stands for New Arrangements
to Borrow and is currently not in use. Danmarks Nationalbank's reserve position with the IMF is defined as the
quota less the Fund's holdings of Danish kroner on Danmarks Nationalbank. The reserve position thus amounted
to kr. 6.9 billion at end-2002 (kr. 15.8-8.9 billion).
Source: Danmarks Nationalbank.
The net claim on the IMF is included in the foreign-exchange reserve
since it can be made available to Denmark at short notice. The counterpart of allocated SDR is not set off against the holdings of SDR, however. The explanation is that SDR is intended to be a reserve asset that is
independent of gold or the balance-of-payments positions of other
countries. A key aspect of the international agreement on allocation of
SDR in 1969 was and is that the counterpart of allocated SDR should not
be deducted from a country's foreign-exchange reserve.
DANMARKS NATIONALBANK'S QUOTA
Danmarks Nationalbank's membership contribution to the IMF is called
the quota1. Denmark's quota amounts to SDR 1.6 billion, equivalent to
kr. 15.8 billion, at the end of 2002.
In principle, the quota is registered on both the liability and the asset
sides. The liability side shows the Fund's holdings of Danish kroner while
the asset side shows Danmarks Nationalbank's claim on the IMF.
According to the IMF Articles of Agreement, one quarter of the quota
must be paid to the IMF in SDR or in a currency widely used in the international foreign-exchange markets, such as the US dollar. Payment of
dollars reduces the Fund's holdings of Danish kroner. The remaining
three quarters of the quota constitute the Fund's holdings of Danish
kroner before drawing on the quota.
The difference between the quota and the Fund's holdings of Danish
kroner is called Denmark's reserve position with the IMF. The Fund's
holdings of Danish kroner, and thereby also the reserve position, are
1
The cooperation with the IMF is described in further detail at www.imf.org, www.nationalbanken.dk
or in Danmarks Nationalbank's Annual Reports.
12-12-2003 07:35
Antal sider: 8
Oprettet af Louise C. Mogensen
Rev. nr. 2
H:\kvo\ENG\2003\4qtr\tiltryk\053-060.doc
56
EXAMPLE OF LENDING KR. 1 BILLION IN DOLLARS VIA THE IMF
Table 3
Changes in the balance sheet
Assets
Liabilities
Quota, fixed ................................................
Dollar holdings in the foreign-exchange
reserve .........................................................
0
-1
The Fund's holdings of
Danish kroner ..........................
-1
Changes in the foreign-exchange reserve
Quota, fixed ...............................................................................................................
Reserve position .........................................................................................................
Dollar holding ............................................................................................................
0
+1
-1
Foreign-exchange reserve, net .................................................................................
0
Note:
The reserve position increases since the quota is unchanged and the Fund's holding of Danish kroner decreases
(Reserve position=Quota - the Fund's holding of Danish kroner).
adjusted on an ongoing basis when the IMF either draws on or makes
deposits to its account, while the quota, i.e. the IMF's maximum drawing, is fixed.
The IMF's quota resources enable countries with balance-of-payments
problems to raise loans from the IMF. The loans are granted via an exchange system which enables countries needing "hard" currency to buy
currency via the IMF from countries whose foreign-exchange situation is
favourable.
The bookkeeping aspect of an IMF loan is illustrated in Table 3 by an
example where a country purchases "hard" currency from the IMF and
the IMF finances the entire purchase by drawing on Denmark. In practice, the financing of the IMF's lending is distributed among the countries (currently 44) that are eligible for inclusion in the IMF's Financial
Transactions Plan in view of their favourable foreign-exchange and
reserve position.
Denmark's lending to other countries via the IMF under this arrangement does not affect the foreign-exchange reserve, since any drawing
on the foreign-exchange reserve is set off by an increase in the reserve
position, cf. Table 3.
HOLDINGS OF SDR
Danmarks Nationalbank's balance sheet also includes holdings of SDR
(Special Drawing Rights)1. Denmark has been allocated SDR 179 million,
corresponding to kr. 1.7 billion. The counterpart of the allocated SDR is
1
The value of SDR is calculated on the basis of a basket of currencies: euro, yen, pound sterling and
dollar. SDR is potentially a claim on the other IMF countries' currencies, whereby owners of SDR may
exchange amounts into these currencies.
12-12-2003 07:35
Antal sider: 8
Oprettet af Louise C. Mogensen
Rev. nr. 2
H:\kvo\ENG\2003\4qtr\tiltryk\053-060.doc
57
Chart 2
ALLOCATION AND HOLDINGS OF SDR
Million SDR
300
250
200
150
100
50
0
-50
-100
-150
1984
1986
Difference
1988
1990
1992
1994
SDR holdings
1996
1998
2000
2002
SDR allocation
Source: IMF.
a liability which by definition is fixed and is only adjusted when new
SDR are allocated to the IMF member countries that participate in the
SDR system1. The holdings of SDR constitute an asset made available to
Danmarks Nationalbank.
Countries requiring "hard" currency may exchange SDR via countries
with excess international liquidity (or purchase SDR if required). In order
to ensure the liquidity of the SDR system, Denmark like several other
IMF member countries has concluded an agreement with the IMF for the
exchange of SDR within a certain framework. Denmark's SDR exchange
framework is SDR 25-300 million. Danmarks Nationalbank's holdings of
SDR fluctuate within this framework, cf. Chart 2.
In recent years, exchange of SDR has been initiated solely by the IMF's
SDR Department which administers the arrangement. At the end of 2002
Danmarks Nationalbank's holdings of SDR amounted to SDR 76 million,
corresponding to kr. 0.7 billion. This means that by that time Danmarks
Nationalbank had sold SDR worth approximately kr. 1 billion in net
terms out of the original SDR allocation.
This arrangement does not affect the size of the foreign-exchange reserve either, since the holdings of SDR are already included in the
1
SDR were last allocated in 1981. In 1997 the IMF adopted a proposal to double the existing amount
of SDR. The proposal would allocate the same amount of SDR to all IMF member countries as a ratio
of the countries' quotas (29.315788813 per cent). Denmark has approved the proposal, but it has not
yet been accepted by a sufficient number of countries for it to enter into force. The USA among
other countries refuses to approve the proposal.
12-12-2003 07:35
Antal sider: 8
Oprettet af Louise C. Mogensen
Rev. nr. 2
H:\kvo\ENG\2003\4qtr\tiltryk\053-060.doc
58
foreign-exchange reserve. If SDR are exchanged for e.g. dollars, Danmarks Nationalbank's dollar holdings will increase by an amount equivalent to the decrease in the SDR holdings, so that the total foreignexchange reserve remains unchanged.
SPECIAL ARRANGEMENTS TO BORROW
Besides quota resources and holdings of SDR Danmarks Nationalbank's
lending via a special arrangement, the Poverty Reduction and Growth
Facility, PRGF, of kr. 0.6 billion at end-2002 is also stated on the asset
side of the balance sheet. Finally, Danmarks Nationalbank's participation
in the New Arrangements to Borrow, NAB, is stated1. Under NAB it is
possible to draw up to SDR 367 million (approximately kr. 3.5 billion at
end-2002) on Danmarks Nationalbank, but this arrangement is currently
not in use.
The net claims on the IMF totalled kr. 8.3 billion at end-2002, cf. Tables 1
and 2.
DANMARKS NATIONALBANK'S RISK VIS-À-VIS THE IMF
Financial risks vis-à-vis the IMF can be divided into credit risk, currency
risk and interest-rate risk. Danmarks Nationalbank's credit exposure to
the IMF is considerable. However, the IMF has a very high credit standing, so that the credit risk is minimal. Danmarks Nationalbank seeks to
minimise the interest-rate risk and currency risk2.
Danmarks Nationalbank's credit exposure in connection with these
arrangements can be divided into exposure vis-à-vis respectively the IMF,
the PRGF "Trust Fund" and the SDR Department.
Danmarks Nationalbank's credit exposure vis-à-vis the IMF is compiled
as the sum of Danmarks Nationalbank's quota and loan commitments
under the NAB arrangements.
Subject to a government guarantee Danmarks Nationalbank has
made a loan commitment under PRGF for a maximum of SDR 100 million (kr. 962 million at end-2002). The PRGF arrangements are administered by the IMF as a separate "Trust Fund" with its own (very large)
reserves.
1
2
The two arrangements to borrow are described in further detail at www.imf.org.
Danmarks Nationalbank's risk management is described in Ib Hansen and Christian Ølgaard, Danmarks Nationalbank's Risk Management, Danmarks Nationalbank, Monetary Review, 2nd Quarter
2000.
12-12-2003 07:35
Antal sider: 8
Oprettet af Louise C. Mogensen
Rev. nr. 2
H:\kvo\ENG\2003\4qtr\tiltryk\053-060.doc
59
DANMARKS NATIONALBANK'S CREDIT EXPOSURE VIS-À-VIS THE IMF
Table 4
Kr. billion
End-2002
IMF
Quota ................................................................................................
New Arrangements to Borrow, NAB ...............................................
PRGF, Trust fund
Poverty Reduction and Growth Facility ...........................................
15.8
3.5
1.0
SDR Department
SDR (Maximum equivalent to twice the allocated amount) .........
3.4
Total credit exposure ........................................................................
23.7
Note:
Lending under the PRGF arrangement is guaranteed by the Danish central government since it is administered
by the IMF as a separate "Trust Fund".
Danmarks Nationalbank's credit exposure vis-à-vis the SDR Department
is compiled as its commitments to pay for SDR. Danmarks Nationalbank's
maximum commitment is to buy SDR equivalent to twice the value of
the allocated SDR, i.e. kr. 3.4 billion at end-2002.
Table 4 shows the total credit exposure.
Danmarks Nationalbank does not assume credit risk vis-à-vis third
countries in connection with loans or exchange of quota resources or
SDR, since all claims are on the IMF, the SDR Department or the special
arrangements to borrow. Due to the IMF's high credit standing the
credit risk is found to be low. The credit standing is the result of the
international agreements to which the member countries are mutually
committed under the IMF's Articles of Agreement as well as the IMF's
reserves, including considerable gold reserves1.
Danmarks Nationalbank is exposed to an immediate currency risk in
SDR, since accounts with the IMF are settled in SDR. In the management
of Danmarks Nationalbank's currency risk the value of SDR is distributed
on the currencies included in the calculation of SDR, and forward transactions are then concluded so that the risk is solely vis-à-vis the euro,
which is the target of Denmark's fixed-exchange-rate policy. It follows
that purchase and sale of SDR do not affect Danmarks Nationalbank's
currency exposure, making it possible to keep the currency risk vis-à-vis
the IMF at a very low level.
The IMF's remuneration of SDR is a weighted 3-month interest rate
from the USA, Japan, the euro area and the UK. The rate of interest on
the reserve position is reduced by a contribution (in October 2003 ap1
The gold reserve amounts to approximately 3,200 tonnes as of 31 July 2003 and is stated in the IMF's
"Financial Statement" at historical cost price as determined by the IMF's Articles of Agreement. Since
this is considerably less than the market value, the gold holdings constitute a considerable hidden
reserve for the IMF.
12-12-2003 07:35
Antal sider: 8
Oprettet af Louise C. Mogensen
Rev. nr. 2
H:\kvo\ENG\2003\4qtr\tiltryk\053-060.doc
60
proximately 0.1 per cent) to cover the IMF's administration and to build
up reserve funds within the IMF1.
Danmarks Nationalbank seeks to minimise the interest-rate risk vis-àvis the IMF since all transactions in connection with the arrangements to
borrow and the exchange of SDR are kept neutral for the duration of
the foreign-exchange reserve. Transactions solely entail adjustments to
the money-market placements of the foreign-exchange reserve.
1
Danmarks Nationalbank's outstanding loans under the PRGF arrangements are also remunerated at
the SDR interest rate. However, the poor developing countries receiving loans under this arrangement pay interest at only 0.5 per cent per annum. The difference between the market-determined
SDR interest rate and the low lending rate is covered by interest subsidies. It should be emphasised
that these interest subsidies are covered by the industrialised countries and other rich countries via
their development aid budgets (DANIDA in Denmark). Danmarks Nationalbank does not contribute
interest subsidies to this arrangement.
12-12-2003 07:35
Antal sider: 8
Oprettet af Louise C. Mogensen
Rev. nr. 2
H:\kvo\ENG\2003\4qtr\tiltryk\053-060.doc