International Monetary Fund: Legal
Aspects of Membership
XXXIV Course of International Law
Organization of American States
Rio de Janeiro, Brazil
August 13, 2007
Nadia Rendak
Senior Counsel
Legal Department
International Monetary Fund
The views expressed herein are those of the author and should not be attributed to the
IMF, its Executive Board, or its management.
Outline
What is the IMF and what does it do?
What are the legal implications of
membership in the IMF?
1. Purposes
2. Membership and Governance
2. Financial Structure
3. Functions
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Surveillance
Financing
Technical Services
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Introduction
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The IMF is an intergovernmental institution established by an international treaty in 1945
to create a framework for international economic cooperation focusing on balance of
payment problems and the stability of currencies.
IMF is part of the “international architecture”. Division of labor and cooperation among
the IMF and other international organizations, such as the World Bank, the regional
development banks, the WTO, the UN system, the BIS, the OECD and other, has a
crucial impact on the achievement of their respective objectives and on promoting
economic development by facilitating sustained growth.
IMF is an organization with an almost universal membership. Members of the IMF are
States. Original members - countries of the 45 listed in Schedule A to the Articles of
Agreement who accepted membership by December 31, 1945. 2007- 185 members. The
latest admission – the Republic of Montenegro, January 2007.
We will consider the legal implications of membership in the IMF under the following
broad categories:
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Quotas and participation in the decision making process
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Cooperation in the area of exchange arrangements and exchange rate policies aimed
at promoting stability of international monetary and financial system
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Provision of information to the Fund
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Use of Fund resources
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1. Purposes of the IMF are set out in Article I of
the Articles of Agreement:
(i) To promote international monetary cooperation through a
permanent institution which provides the machinery for
consultation and collaboration on international monetary
problems.
(ii) To facilitate the expansion and balanced growth of
international trade...
(iii) To promote exchange stability...
(iv) To assist in the establishment of a multilateral system of
payments in respect of current transactions and in the
elimination of foreign exchange restrictions...
(v) To make the general resources of the Fund temporarily
available to members for balance of payments purposes
under adequate safeguards...
(vi) In accordance with the above, to shorten the duration and
lessen the degree of disequilibrium in the international
balances of payments of members
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2. Membership and Governance
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Article II, Section 2: “Membership shall be open to other countries at
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Membership in the IMF is not conditional on membership in other
organizations (e.g., UN, the World Bank)
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such times and in accordance with such terms as may be prescribed by
the Board of Governors. These terms, including the terms for
subscription, shall be based on principles consistent with those applied
to other countries that are already members.”
Terms of membership – the policy is that new members should not
have permanent rights and obligations that differ from those of original
members
Membership is open to an applicant who: (a) is a “country” within the
attributes of statehood defined by international law, (b) is willing and
able to perform the obligations of membership contained in the
Articles, and (c) accepts the terms of a Membership Resolution of the
Board of Governors.
Domestic legislation is not a valid defense for not observing
membership obligations
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Any member may request an interpretation of the Articles of Agreement
pursuant to the provisions of Article XXIX
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Members can voluntarily withdraw from the Fund. Article XXVI: “Any
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member may withdraw from the Fund at any time by transmitting a
notice in writing to the Fund at its principal office. Withdrawal shall
become effective on the date such notice is received.”
Withdrawal can also be compulsory. Procedures are outlined in Article
XXVI, Section 2:
 Failure to fulfill obligations may result in ineligibility to use Fund
resources;
 Suspension of voting rights;
 Decision by the Board of Governors by a majority having 85 percent
of the total voting power on withdrawal from membership
Upon withdrawal settlements are made between the Fund and the
member upon agreement or as prescribed by the Articles of Agreement
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IMF Organization Chart
International Monetary
and Financial Committee
Board of Governors
Executive Board
Joint IMF-World Bank
Development Committee
Independent
Evaluation Office
Managing Director
Deputy Managing Directors
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Board of Governors
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Highest policy making body of the IMF: All powers “not
conferred directly on the Board of Governors, the Executive
Board or the Managing Director shall be vested in the Board
of Governors” (Article XII, §2(a))
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One governor and one alternate governor appointed
by each member
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May delegate to the Executive Board the exercise of any of its
powers, except those directly conferred to it
Usually finance ministers or central bank heads
Weighted voting--cast the number of votes allotted to the
member appointing him
Governors elect one of the governors as chairman
Not in continuous session; meets once a year—Annual
Meetings
May establish committees (e.g., International Monetary and
Financial Committee (IMFC), joint World Bank-IMF
Development Committee)
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The Executive Board
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Responsible for conducting the business of the IMF and for exercising the
powers delegated to it by the Board of Governors
 Sits in continuous session, meeting as often as the business of the IMF
may require
24 Executive Directors with the Managing Director as the Chairman
 5 appointed by the 5 members with the largest quotas
(currently US, Japan, Germany, UK and France) and 19 elected by
the other members
 The elected Directors serve for two-year terms
 Board of Governors, by an 85 percent majority of the total voting
power, may increase or decrease the number of Executive Directors in
the second category
 Each director shall appoint an alternate
Weighted voting structure - each Executive Director casts the number of
votes allotted to members that he or she represents. Most decisions of the
Executive Board require only a simple majority of the votes cast; some
require either 70% or 85% of the total voting power
Voting is rare - most decisions are taken by consensus. The Chairman
ascertain the sense of the meeting in lieu of a formal vote. Any Executive
Director may require a formal vote.
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The Managing Director, Staff, Independent
Evaluation Office
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Chairman of the Executive Board and chief of the operating
staff
Selected by the Executive Board
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Conducts ordinary business of the IMF under the direction of
the Executive Board
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May not be selected from among the governors or the Executive
Directors
Term of 5 years, but shall cease to hold office when so decided
by the Executive Board
Subject to general control of the Executive Board, responsible for
organization, appointment and dismissal of staff
Staff of the IMF are International civil servants
Independent Evaluation Office (IEO). Conducts objective and
independent evaluations on issues relevant to the Fund’s
mandate.
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3. Financial structure
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Sources of Fund financing:
(a) members’ quota subscriptions (currently about $305 billion);
(b) borrowing to supplement the resources available from quotas (e.g., General
Arrangements to Borrow (GAB) since 1962; New Arrangements to Borrow
(NAB) in 1997);
(c) Income from investments (Article XII, Section 6(f)(i)).
(a) Members’ quotas
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Each member of the Fund is assigned a quota which broadly determined by
its economic position relative to other members (economic considerations
include the member’s GDP, volume of current account transactions, and official
reserves)
Determines a member’s : (i) maximum financial commitment to the IMF, (ii)
voting power in the IMF, (iii) size of its access to financial resources and (iv)
share in any allocation of “Special Drawing Rights” (SDR)
Quotas are reviewed every 5 years to determine whether any adjustments are
needed in light of the growth of the world economy and changes in individual
countries’ economic positions. The Thirteenth general review is to be completed
by January 30, 2008.
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Members must pay subscription equal to their quotas. Up to
25 percent must be paid in reserve assets specified by the
IMF (foreign currencies acceptable to the IMF or SDRs); the
balance may be paid in the member’s own currency
Voting power of each member
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Each member has 250 votes (referred to as “basic votes”) plus
one vote per 100,000 SDRs of quota. Significance of the basic
votes have diminished from their original level of 11 percent of
total votes to approximately 2 percent because of quota
increases
A member’s quota cannot be changed without its consent
(Article III, Section 2(d))
If a member consents to a reduction of its quota, the Fund
shall within 60 days pay to the member an amount equal to
the reduction (Article III, Section 3(c))
Over time some member’s quota’s and representation in the
Fund got out of line with the members’ relative positions in
the world economy. Thus the need for reform of quota and
voice.
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IMF members with largest quota shares
(as of April 2007)
Member
Quota share (%)
Votes (% of
total)
United States
17.14
16.83
Japan
6.14
6.04
Germany
6.00
5.90
France
4.95
4.87
United Kingdom
4.95
4.87
Italy
3.26
3.21
Saudi Arabia
3.22
3.17
China
3.73
3.67
Canada
2.94
2.89
Russia
2.74
2.70
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4. Functions of the IMF
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Purposes stated in Article I translate into three main functions:
(a)
surveillance,
(b)
financial assistance,
(c)
technical assistance
(a) Surveillance
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Legal Basis: Article IV of the Articles of Agreement “Obligations Regarding Exchange
Arrangements”. Article IV focuses on exchange arrangements and exchange rates.
Article IV, Section 1 requires members to “collaborate with the Fund and other
members to assure orderly exchange arrangements and to promote a stable
system of exchange rates” and requires each member to:
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Direct its economic and financial policies toward the objective of fostering orderly
economic growth
Seek to promote stability by fostering orderly underlying economic and financial conditions
and an orderly monetary system
Avoid manipulating exchange rates or the international monetary system in order to
prevent effective balance of payments adjustment or gain an unfair competitive advantage
Follow exchange policies compatible with the undertaking of the above
The purpose of surveillance is to enable the Fund to oversee (i) the international
monetary system to ensure its effective operation (multilateral surveillance, e.g., World
Economic Outlook, Global Financial Stability Report, multilateral consultations) and (ii)
member’s’ compliance with the obligations specified under Article IV, Section 1 (bilateral
surveillance).
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Under Article IV, Section 2 members have the right to have exchange
arrangements of their choice consistent with the purposes of the Fund
and the obligations under Article IV, Section 1. Each members shall
notify the Fund of its exchange arrangements and of any changes in exchange
arrangements.
Under Article IV, Section 3, the Fund must “exercise firm surveillance over the
exchange rate policies of members and shall adopt specific principles for the
guidance of all members with respect to those policies:
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principles provide by the Fund shall respect the domestic social and political
policies of members, and
in applying these principles the Fund shall pay due regard to the circumstances
of members.
Principles for the guidance of members’ policies were adopted by the Board,
Decision - Decision No. 13919-(07/51), adopted on June 15, 2007, on
Bilateral Surveillance Over Member's Policies, replaced the 1977 Decision.
The Fund conducts surveillance on an ongoing basis, including through regular
reviews of member’s economic policies, known as Article IV consultations.
Increasingly, Article IV consultation reports are published.
Members shall provide information to the Fund as required under Article
IV, Section 3 and Article VIII, Section 5. In practice, the Fund has relied on
Article VIII to obtain information.
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(b) Financing
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Article I(v) – “To give confidence to members by making the general resources of
the Fund temporarily available to them under adequate safeguards, thus
providing them with opportunity to correct maladjustments in their balance of
payments...”
IMF financing can only be provided to deal with balance of payments problems; cannot be
provided for other purposes or specific projects. The requested use of the resources must
be consistent with the provisions of the Articles and policies adopted under the Articles.
IMF financing from the GRA does not take the form of loans, but rather the member
receiving assistance “purchases” the currencies of other members that have strong
balances of payments positions or SDRs with its own currency. Fund arrangements are not
international agreements.
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IMF’s resources are only meant for temporary use (“revolving” character) – a member is
required to repurchase its currency within a specified period of time.
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IMF financing is provided under adequate safeguards
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Only if a member is prepared to take the steps necessary to address its balance
of payments difficulties
Achieved through the member implementing a program of economic reform that
deals with problem
Member can purchase the reserve tranche subject to representation of balance of
payments need which cannot be challenged ex-ante by the Fund and free from
conditionality, charges, or repurchase obligations
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IMF financing is subject to access limits – provided on the basis of quota and the
amount of access is normally subject to maximum limits specified by the IMF
IMF makes financial resources available to members in accordance with policies it
adopts. Special policies may be adopted for special balance of payment problems to
assist members to solve their problems in a manner consistent with the provisions of
the Articles of Agreement (Article V, Section 3). Examples of policies: policy on standby arrangements, extended Fund facility, supplemental reserve facility, emergency
natural disaster and emergency post conflict assistance).
A member can walk away from the arrangement/program and repay outstanding Fund
resources at any time.
Conditionality seeks to ensure that IMF resources are provided to assist the member
in resolving its balance of payments problems in a manner that is consistent with the
Articles and establishes adequate safeguards for the temporary use of IMF resources.
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Principle of uniform treatment - the use of IMF resources is based on the uniform and
nondiscriminatory treatment of members.
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Members must provide the Fund with information necessary for it to carry out its
functions (Article VIII, Section 5).
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The Fund also provides concessional financing to qualifying members under the
Poverty Reduction and Growth Facility (PRGF) and Exogenous Shocks Facility (ESF).
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Some other obligations under the Articles of
Agreement
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Article V, Section 3(e): Obligations to ensure exchange of members’
currencies for freely usable currencies
Article VIII, Section 5: Obligation to Furnish Information
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The IMF relies on information provided by members in order to carry out its
mandate and functions effectively. IMF acts “as a centre for the collection and
exchange of information on monetary and financial problems”.
The procedures for obtaining data from members are founded on a cooperative
approach and trust in members to provide the required information accurately.
Information is important for effective surveillance and ensuring that the IMF’s
resources are used for their intended purposes. Section 5(a) requires members
to provide the IMF with the information “necessary” for its activities; thus Article
VIII, Section 5 applies both in the context of use of the IMF resources and
surveillance.
The required minimum of data is listed in Article VIII, Section 5. The list was expanded by
Executive Board Decision No. 13183-(04/10), January 4, 2004 on Strengthening the
Effectiveness of Article VIII, Section 5
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Obligation to provide information is continuous, not just limited to provision
of data at time of Article IV consultations
Obligation is not absolute, must take into account varying abilities of
members to provide information—defense of capacity; “benefit of any
doubt” given to member in assessing its ability to provide information
(Article VIII, Section 5(b)):
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Section 5(b) only calls for information to be furnished “in as detailed
and accurate a manner as is practicable and, so far as possible, to
avoid mere estimates”.
Not in such detail that affairs of individuals or corporations are
disclosed.
International investment position (IIP): so far as it is possible to furnish
this information.
No breach of obligation if failure to provide information/accurate
information is due to lack of capacity.
Whether a member has capacity is determined on a case-by-case basis.
Members have an ongoing obligation to improve their reporting
systems and the accuracy of information provided.
Section 5(c) deals mostly with the IMF’s authority to enter into voluntary
arrangements with members “to obtain further information”.
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Article VIII, Section 2: members shall not, without the approval of the Fund,
impose restrictions on the making of payments and transfers for current
international transactions
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Payments for current transactions means payments which are not for the
purpose of transferring capital (Article XXX)
The Fund may approve exchange restrictions and multiple currency practices
under certain circumstances (e.g., if necessary (imposed for BOP reasons),
temporary and non-discriminatory, if imposed for national security reasons)
Article VIII, Section 3: members shall not, without Fund’s approval, engage, or
permit any of its fiscal agencies to engage in, any discriminatory currency
arrangements or multiple currency practices. Exception – transitional
arrangements under Article XIV.
Article VIII, Section 4: obligation on convertibility of foreign-held balances
Article XIV allows members to avail themselves of transitional arrangements
before accepting obligations of Article VIII, Sections 2,3 and 4. A member may
“maintain and adapt to changing circumstances the exchange restrictions that
were in effect on the date on which it became a member” but should make
efforts to remove those restrictions as soon as they can.
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Article VIII, Section 7: members shall collaborate with the Fund and
with other members to ensure that the members’ policies with
respect to reserve assets shall be consistent with the objectives of
promoting better international surveillance of international liquidity
Article IX: members shall grant certain privileges and immunities to
the Fund, its officers and employees, premises, property, assets and
archives
Article XI: relations with non-members. Members cannot engage in
transactions or cooperate with non-members or with persons in nonmember territories if such transactions or cooperation is contrary to
the provisions of the Articles of Agreement
Article XII, Section 8: the Fund may, by a 70 percent majority of the
total voting power, decide to publish a report made to a member
regarding its monetary or economic conditions and developments
which directly tend to produce a serious disequilibrium in the
international balance of payment of members.
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(c) Technical assistance
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Services provided under Article V, Section 2(b) shall not impose any obligation on a
member without its consent
Administration of the Poverty Reduction and Growth Facility and Exogenous Shocks
Facility (PRGF-ESF) Trust (1987) and PRGF-HIPC Trust are examples of financial
services provided under this Article
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The PRGF is a concessional lending facility for low-income members (annual interest
rate of 0.5 percent, loan maturity stretching from five-and-a-half to 10 years)
Resources from the PRGF-HIPC Trust are used for debt relief operations
Other examples of technical assistance: in fiscal area (drafting of tax or budget
legislation); in statistics (helping to set a framework for collection and analysis of
data); banking sector reform (banking laws, supervision matters, financial sector
restructuring); law reform (judicial reform). Mainly in support of private sector
development.
Reports on Observance of Standards and Codes (ROSCs):
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summarize countries’ observance of certain internationally recognized standards and
codes. The Fund has recognized 12 areas and associated standards: accounting;
auditing; anti-money laundering and countering the financing of terrorism (AML/CFT);
banking supervision; corporate governance; data dissemination; fiscal transparency;
insolvency and creditor rights; insurance supervision; monetary and financial policy
transparency; payments systems; securities regulation; and AML/CFT;
are prepared and published at the request of the member country.
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Financial Sector Assessment Program (FSAP): a joint IMF and World Bank effort
introduced in May 1999 aimed at increasing the effectiveness of efforts to promote
the soundness of financial systems in member countries.
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The FSAP forms the basis of Financial System Stability Assessments (FSSAs),
in which IMF staff address issues of relevance to IMF surveillance, including
risks to macroeconomic stability stemming from the financial sector
Current challenge – better incorporate financial sector work into Fund
surveillance
Technical services are provided by the IMF staff under the authority of the
Managing Director
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Questions? Comments?
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nrendak@imf.org
Tel. +1 (202) 623-4104
Fax: +1 (202) 623-4331
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