A few important concepts need to be explained when discussing IMF finances. Two of these are members’ “quotas” and “currency purchases.” Quotas are the membership dues that countries pay when they join IMF.Up to 25 percent of quotas normally must be paid in reserve assets, which are special drawing rights or currencies that are “freely usable” in the principal foreign exchange markets (U.S. dollars, Japanese yen, Deutsche mark, French francs, or pound sterling), and the balance may be paid either in a country’s domestic currency or with non-interest-bearing promissory notes. The portion paid in freely usable currency or special drawing rights is referred to as the member’s “reserve assets” or “initial reserve tranche position” and can be drawn on by the member as needed without prior IMF approval. If withdrawn, these amounts are replaced with the country’s own currency. Members are not obligated to replenish their reserve tranche positions. When a country needs additional funds other than from its reserve tranche position, IMF does not loan the funds to the country, per se. Rather, the country “purchases” the currency it needs from IMF with an equivalent amount of its own currency and then later “repurchases” its own currency using SDRs or other currency on terms established by IMF. Because IMF’s financial assistance is in the form of currency purchases and repurchases by member countries, the financial assistance does not reduce the combined total of IMF’s currency holdings in terms of SDR equivalents. Instead, the composition of IMF’s currency holdings changes. For example, the composition of IMF’s holdings of member currencies can change when members purchase and repurchase currency. The relationship of IMF’s holding of a member’s own currency to its quota is an important one, because it can illustrate whether the member is a creditor, debtor, or in a neutral position with IMF. In general, currencies of members who are creditors are considered usable by IMF to finance transactions, while currencies of countries in a neutral borrowing or a debtor position are considered unusable by IMF. A brief discussion about the accounting standards that IMF uses is also useful. According to the IMF External Audit Committee’s (EAC) audit opinion, IMF’s financial statements are prepared in accordance with generally accepted accounting principles. However, according to IMF, IMF is not bound by specific legal provisions or accounting principles adopted in the individual member countries. EAC and IMF officials told us that the accounting principles referred to in the EAC’s auditor’s report are neither U.S. generally accepted accounting principles nor international accounting standards, but are described in a note to the financial statements and do not differ materially from these two. You also asked us to provide information on the current amount of outstanding IMF credit, including the share of that credit that was borrowed by developing countries. This information is provided in an attachment to my statement. I would like to emphasize that GAO does not take a position on what action the Congress should take on the executive branch’s request. That is a policy decision beyond the scope of our review. I should also mention that, as you may know, we have no direct audit authority over IMF, as is the case with other international organizations. Nonetheless, working through the Treasury Department and the IMF’s U.S. Executive Director’s office, IMF has cooperated with our inquiry and provided us information not normally made publicly available. IMF has several sources available from which it can potentially obtain funds for use in its operations. The most important of these, according to IMF, are the currency holdings provided through quota subscriptions that underpin most of IMF’s operating funds. Other sources include IMF’s GAB and other bilateral borrowing arrangements with IMF members. In addition, IMF could potentially borrow from private sources or sell some of its gold holdings. Some of these resources are clearly more accessible than others. IMF’s determination of available currency holdings, its primary source of readily available funding for carrying out its operations, is based on its judgment concerning the level of usable currency and the level of reserves needed for contingencies. IMF officials have stated that reserves are necessary for two reasons: (1) to maintain sufficient working balances in various currencies to execute foreign exchange transactions and (2) to have available for use in the event that some currencies become unusable and can no longer be used to finance IMF transactions due to a deterioration in members’ balance of payments and external reserve positions. There are several steps involved in calculating the amount of resources IMF has readily available for operations. First, IMF calculates the amount of currency holdings from quotas, which was estimated to be about $195 billion as of July 20, 1998. However, only the currencies of members with sufficiently strong balance of payments and gross external reserve positions are used or usable by IMF for financing its transactions and are included in its operational budget, which is a nonpublic document. Of the $195 billion of currency holdings, IMF estimates that, before taking into consideration IMF extended credit, about $130 billion, or 67 percent, is usable. The remaining $65 billion is unusable. These currencies cannot be used to finance IMF transactions because IMF has determined that the members providing these currencies may be experiencing balance of payment problems or may have drawn on their reserve assets. (See fig. 1.) Generally, IMF presently considers 30 of its 182 members to have sufficiently strong balance of payments and external reserve positions so that their currencies can be considered usable. As indicated in figure 2, the U.S. share of usable resources is about 27.3 percent. U.K. Currencies provided from quotas are recorded in IMF’s balance sheet as an asset. The distinction between usable and unusable currency is not reported on IMF’s balance sheet, but is discussed in its annual report. As shown in table 1, IMF reduces its total usable currencies of $130 billion by about $70 billion, the amount of its members’ currency purchases outstanding, to determine its available usable resources. IMF further reduces its available and usable resources of $60 billion by the amount of the commitments it has made to countries in need of assistance in their balance of payment positions. Estimated undrawn commitments total about $17 billion. After these deductions, IMF’s usable currency holdings amounted to about $43 billion as of July 20, 1998. (See fig. 3.) However, IMF adjusts this amount to establish a level of reserves it may need for contingencies. There has been some discussion about the appropriate level of IMF reserves, the outcome of which may lead to different estimates of the amount available for IMF operations. Table 2 will assist in understanding the two approaches. The results of both approaches have been cited by IMF and Treasury officials in public discussions and have thus led to some confusion about how much currency holdings are really available. Approach 1 in table 2 is used by IMF to calculate its available resources. Using this method, IMF adjusts its available and uncommitted resources by $12 billion for the establishment of a reserve, as required by the Executive Board. According to IMF documents, this reserve has two components. One component is an adjustment for minimum working balances, which IMF officials stated are needed due to the number and types of currencies it manages to execute its foreign exchange transactions. The second component is a reserve of 10 percent of the quotas of members included in the operational budget for transfers, in case one or more of these countries may encounter balance of payments problems and can no longer provide its currencies as a source of funding for IMF transactions. After this adjustment, IMF would have $31 billion available for operations. The second approach to estimating IMF’s reserve requirements, shown in table 2, is based on the concept of a minimum IMF liquidity ratio. This approach has been used by the U.S. Treasury and endorsed by the IMF’s First Deputy Managing Director. As shown in figure 4, as of July 20, 1998, IMF’s liquidity ratio was about 44 percent, which is lower than at any time during the last 15 years. This approach considers IMF’s historical low liquidity ratio of about 30 percent to be the minimum threshold that could be achieved before it becomes imprudent to lend. In order not to drop below this 30-percent threshold, IMF would have to retain about $30 billion to $35 billion of its $43 billion in usable and uncommitted resources, which would leave only about $8 billion to $13 billion of resources that IMF could use. The $30 billion to $35 billion adjustment represents the possibility that one or more countries providing usable currencies would draw on its reserve tranche position. The amount of IMF resources that should be retained is ultimately a judgment call of IMF’s Executive Board. This decision would pinpoint the level below which the Executive Board would consider it imprudent to continue lending. July 20, 1998) In addition to its permanent, quota-based resources, IMF’s Articles of Agreement permit it to borrow funds for use in its operations and transactions. This borrowing may be from any source, public or private.Since 1962, IMF and 11 industrialized countries have maintained standing lines of credit, known as the General Arrangements to Borrow, for IMF to use in emergencies. Before the recent activation of GAB for Russia, GAB was last used by the United States in 1978 when the United States borrowed funds that IMF had borrowed from GAB participants and used them to intervene in world currency markets on behalf of the U.S. dollar. IMF has had other borrowing arrangements over the years, notably during 1979-86.