International Monetary Fund: Observations on Its Financial Condition
(Testimony, 07/23/98, GAO/T-NSIAD-98-220).

Pursuant to a congressional request, GAO discussed the International
Monetary Fund's (IMF) financial operations and financial reporting,
focusing on: (1) what resources IMF currently has available to carry out
its operations; and (2) whether IMF's financial condition can be
determined from publicly available information. GAO did not take a
position on what action the Congress should take on the executive
branch's request for about $17.5 million for IMF.

GAO noted that: (1) IMF has a total of about $195 billion in currency
holdings in its general resources account that has been provided through
quota subscriptions by its 182 members; (2) however, as of July 20,
1998, IMF estimates that only about $130 billion of these funds
represent resources that could be used; that is, are from members that
are sufficiently strong economically to permit their currencies to be
used for IMF operations; (3) of this amount, about $70 billion has
already been used to finance credit to IMF members and about $17 billion
has been committed for their use; (4) therefore, according to IMF's
estimate, only about $43 billion of its $195 billion in currency
holdings remain for operations, including lending; (5) further, IMF and
Department of the Treasury officials have indicated in public statements
that only about $10 billion to $15 billion of the available $43 billion
could be used for additional credit to IMF members without leaving IMF
seriously short of funds due to IMF's need to maintain certain reserves;
(6) these IMF estimates do not take into account the $11.4 billion IMF
financing arrangement for Russia that was approved by IMF's Executive
Board on July 20, 1998; (7) about $2.9 billion of this $11.4 billion
will come from IMF's remaining general currency holdings, and IMF will
borrow the other $8.5 billion from 11 member governments that
participate in the General Arrangements to Borrow; (8) IMF's available
funds are reported in its annual report; however, the report is released
six months after IMF's fiscal year ends and, according to IMF and
Treasury officials, is of limited use for decisionmaking purposes; and
(9) instead, decisionmaking requires the use of IMF's quarterly
operational budgets, which are nonpublic.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-NSIAD-98-220
     TITLE:  International Monetary Fund: Observations on Its Financial 
             Condition
      DATE:  07/23/98
   SUBJECT:  Financial statement audits
             Foreign currency exchanges
             International economic relations
             Funds management
             Financial analysis
             Bank reserves
             Foreign governments
IDENTIFIER:  International Monetary Fund
             Russia
             Germany
             France
             United Kingdom
             Japan
             
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Cover
================================================================ COVER


Before the Joint Economic Committee

For Release on Delivery
Expected at
10:00 a.m., EDT
Thursday,
July 23, 1998

INTERNATIONAL MONETARY FUND -
OBSERVATIONS ON ITS FINANCIAL
CONDITION

Statement of Harold J.  Johnson, Associate Director, International
Relations and Trade Issues, National Security and International
Affairs Division

GAO/T-NSIAD-98-220

GAO/NSIAD-98-220T


(711357)


Abbreviations
=============================================================== ABBREV

  CPA - Certified public accounting
  EAC - External Audit Committee
  GAB - general arrangements to borrow
  GRB - general resources account
  G-10 - group of ten
  IMF - International Monetary Fund
  NAB - New arrangements to Borrow
  SDR - special drawing rights
  U.S.  -

============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

I am pleased to be here today to discuss the International Monetary
Fund's (IMF) financial operations and financial reporting.  As the
Congress debates the executive branch's request for about $17.5\1
billion for IMF--about $14.2 billion to recapitalize the organization
and about $3.3 billion to expand a credit arrangement from which IMF
can borrow--questions have arisen concerning the current level of IMF
resources to carry out its operations and the extent to which
information is available publicly about IMF's financial condition. 
To help inform the debate on these and other matters, on June 1,
1998, you asked us to evaluate the adequacy of IMF's public reporting
in two areas:  (1) its finances and financial condition and (2) its
"surveillance" or monitoring of member countries' economies.  We have
not yet completed our work on these issues; however, as you requested
we are prepared today to discuss (1) what resources IMF currently has
available to carry out its operations and (2) whether IMF's financial
condition can be determined from publicly available information.  We
expect to report on the other matters addressed in your June 1
request later this fall. 


--------------------
\1 The actual request is for about 13 billion special drawing rights
(SDR), which at the time of the request was equivalent to about $18
billion.  The SDR is a unit of account that IMF uses to denominate
all its transactions.  Its value comprises a weighted average of the
values of five currencies:  Deutsche mark, French franc, Japanese
yen, pound sterling, and U.S.  dollar.  Because the value of the SDR
relative to the U.S.  dollar changes daily, the dollar value of
amounts converted from SDRs also changes daily.  For this statement,
we used the SDR conversion rate of $1.3382. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

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.\2 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.\3 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. 


--------------------
\2 Members pay quotas when they initially join IMF and at other times
when their quotas are increased. 

\3 These promissory notes are made payable to IMF, are denominated in
the member's domestic currency, and are held by the member's
designated central bank or other designated depository.  IMF views
these notes as fully equivalent to its currency holdings because IMF
can cash these notes on demand within 24 hours to receive members'
domestic currency.  According to IMF, 137 of its 182 members have
opted to substitute promissory notes for part of their currency paid
to IMF; these notes comprise about 55 percent of IMF's total currency
holdings. 


   SUMMARY
---------------------------------------------------------- Chapter 0:2

IMF has a total of about $195 billion in currency holdings in its
general resources account\4 that has been provided through quota
subscriptions by its 182 members.  However, as of July 20, 1998, IMF
estimates that only about $130 billion of these funds represent
resources that could be used; that is, are from members that are
sufficiently strong economically to permit their currencies to be
used for IMF operations.  Of this amount, about $70 billion has
already been used to finance credit to IMF members and about $17
billion has been committed for their use.  Therefore, according to
IMF's estimate, only about $43 billion of its $195 billion in
currency holdings remain for operations, including lending.  Further,
IMF and U.S.  Treasury Department officials have indicated in public
statements that only about $10 billion to $15 billion of the
available $43 billion could be used for additional credit to IMF
members without leaving IMF seriously short of funds due to IMF's
need to maintain certain reserves.  These IMF estimates do not take
into account the $11.4 billion IMF financing arrangement for Russia
that was approved by IMF's Executive Board on July 20.  About $2.9
billion of this $11.4 billion will come from IMF's remaining general
currency holdings, and IMF will borrow the other $8.5 billion from 11
member governments that participate in the General Arrangements to
Borrow (GAB).\5

IMF's available funds are reported in its annual report; however, the
report is released 6 months after IMF's fiscal year ends and,
according to IMF and U.S.  Treasury officials, is of limited use for
decisionmaking purposes.  Instead, decisionmaking requires the use of
IMF's quarterly operational budgets, which are nonpublic. 


--------------------
\4 IMF's general resources account handles by far the largest share
of the transactions between IMF and its membership.  The quotas paid
by members are contained in this account. 

\5 GAB is a borrowing arrangement between IMF and the 11
industrialized countries or their central banks that allows IMF to
borrow currencies from these countries under specific conditions and
lend the funds either to other GAB countries or to non-GAB IMF member
countries. 


   AMOUNTS AND POTENTIAL SOURCES
   OF IMF FUNDING
---------------------------------------------------------- Chapter 0:3

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. 


      AVAILABILITY OF IMF'S
      CURRENCY HOLDINGS
-------------------------------------------------------- Chapter 0:3.1

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.)

   Figure 1:  IMF's Breakdown of
   Estimated Usable and Unusable
   Currencies, July 20, 1998

   (See figure in printed
   edition.)

Note:  The rate of $1.3382 was used to convert SDR's into U.S. 
dollars. 

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.\6 As
indicated in figure 2, the U.S.  share of usable resources is about
27.3 percent. 

   Figure 2:  IMF Member's
   Estimated Usable Contributions,
   July 20, 1998

   (See figure in printed
   edition.)

Note:  The rate of $1.3382 was used to convert SDR's into U.S. 
dollars. 

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. 



                                Table 1
                
                IMF Available and Uncommitted Resources

                       (U.S. dollars in billions)

IMF's calculation of available and uncommitted       Projected through
resources                                                July 20, 1998
--------------------------------------------------  ------------------
Total usable resources (before IMF extends credit)                $130
less: currency purchases                                          (70)
Available and usable resources                                     $60
less: commitments                                                 (17)
Available and uncommitted resources                                $43
----------------------------------------------------------------------
Note:  SDR conversion rate = $1.3382. 

Source:  IMF. 

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. 

   Figure 3:  IMF's Breakdown of
   Estimated Usable Currencies,
   July 20, 1998.

   (See figure in printed
   edition.)

Note:  The rate of $1.3382 was used to convert SDR's into U.S. 
dollars. 

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.\7



                                Table 2
                
                 Approaches to Estimating IMF Reserves
                        and Available Resources

                       (U.S. dollars in billions)

                                             Approach 1     Approach 2
----------------------------------------  -------------  -------------
Available and uncommitted resources                 $43            $43
less:Adjustment factor                             (12)          N/A\a
Available, uncommitted, and adjusted                $31          N/A\a
 resources
less:Reserves for creditor countries                 \b        (30-35)
 that
 may need to draw on reserve
 assets
Resources available for operations                $31\c         $8-$13
----------------------------------------------------------------------
Note:  SDR conversion rate = $1.3382. 

\a Not applicable to this methodology for estimating the reserve. 

\b According to a high-level IMF official, IMF reserves 30 percent of
the reserve tranche positions of members with usable currencies in
the event that one or more of these members may--as they have the
right to do without prior IMF approval--draw on these positions. 
This reserve is currently valued at $21 billion.  However, this
reserve is not included in IMF's operational budget or liquidity
reviews, and thus we do not list it in the table. 

\c This does not consider the reserve described in note b. 

Source:  IMF. 

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.\8 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. 

   Figure 4:  Trends in IMF's
   Liquidity Ratio, 1978-98

   (See figure in printed
   edition.)


--------------------
\6 The level of usable currencies will fluctuate as certain
currencies strengthen over time and become part of the operational
budget, or countries that were part of the operational budget
experience difficulties and, thus, are no longer included as part of
the operational budget.  In that instance, the entire stock of that
country's currency would become unusable. 

\7 This confusion about IMF available resources was clearly in
evidence at a July 13, 1998, press briefing by IMF's First Deputy
Managing Director and Treasurer, where the Treasurer, in response to
a question regarding the Fund's liquidity, stated:  "We have net
usable resources of SDR 23.5 billion, say, $31 billion." Question: 
"What does that mean--we have heard the $10 to $15 billion figure
tossed around that currently, the IMF has in lendable resources."
Treasurer:  "I'm giving you what it would be in lendable resources."
Question:  "So what would the $10 to $15 billion be?" Treasurer: 
"That calculation has been made by the U.S.  on a slightly different
basis." First Deputy Managing Director:  "Let me get this straight. 
We have $44 billion?" Treasurer:  "No.  At the moment, we have $31
billion." Question:  "Where does this $10 to $15 billion figure come
from?" Treasurer:  "The U.S.  Treasury did a calculation that if we
came down to 30-percent liquidity ratio, that would leave us with
only $10 to $15 billion .  .  .  ."

\8 IMF's "liquidity ratio" is defined as its available, uncommitted,
and adjusted resources, which total $31 billion, divided by the total
of the member's undrawn reserve assets (about $70 billion) plus
outstanding borrowings ($0). 


      OTHER POTENTIAL RESOURCES
      AVAILABLE TO IMF
-------------------------------------------------------- Chapter 0:3.2

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.\9 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.  The
relative share of borrowed resources used in financing IMF assistance
to member countries over the period 1978 through July 20, 1998, is
shown in figure 5. 

   Figure 5:  Trends in IMF's
   Outstanding Assistance and
   Share Obtained Through
   Borrowing, 1978-98

   (See figure in printed
   edition.)

IMF also has 103.4 million fine ounces of gold that it could
potentially use to fund its operations.  IMF has never borrowed funds
from private sources.  According to IMF officials, IMF last seriously
considered private borrowing in the early 1980s.  Table 3 shows these
different potential resources. 



                                Table 3
                
                    Non-Quota Resources Potentially
                            Available to IMF

                       (U.S. dollars in billions)

                                                      Potential amount
Potential resources                                        available\a
--------------------------------------------------  ------------------
General Arrangements to Borrow                                   $22.7
Special arrangement with Saudi Arabia                              2.0
New Arrangements to Borrow (NAB)                                22.7\b
Other Borrowing Authority                                           \c
Gold                                                             4.8\d
----------------------------------------------------------------------
\a Converted from special drawing rights, the unit of account that
IMF uses to denominate all of its transactions.  The conversion rate
used is SDR 1.3382 per dollar. 

\b Approved by IMF's Board of Governors but not yet entered into
force. 

\c IMF's Articles of Agreement permit IMF to borrow from any other
source, public or private.  The Articles of Agreement do not limit
the amount of such borrowing. 

\d This figure understates the value of the 103.4 million fine ounces
of gold that IMF holds and values at SDR 35 per ounce (about $47 per
ounce).  IMF estimates that the market value of this gold is about
$32 billion.  The current market price of gold is about $300 per
ounce, but if IMF were to sell some of its gold, it is unclear how
much money could be raised because the world price likely would
fluctuate as a result of the sale. 

Source:  IMF. 


--------------------
\9 IMF can borrow funds from nonmembers, but it has no authority to
hold currencies of nonmembers. 


         GENERAL ARRANGEMENTS TO
         BORROW
------------------------------------------------------ Chapter 0:3.2.1

GAB is a borrowing arrangement between IMF and 11 industrialized
countries or their central banks\10 that allows IMF to (1) borrow
currencies from these countries under specific conditions and (2)
provide funds either to other GAB countries or to non-GAB IMF member
countries.  A country receiving funds from IMF under GAB is charged
the same interest rate as that for standard IMF loans made from
regular IMF resources (the SDR interest rate) and is generally
required to repay the loan within 5 years.  The total of GAB
resources is about $22.7 billion, with an additional $2 billion
available under a separate agreement with Saudi Arabia.  The U.S. 
share of GAB is about $5.7 billion, or 25 percent of GAB.\11

Activation of GAB requires approval by IMF's Executive Board and GAB
participants representing three-fifths of the total credit
arrangements and two-thirds of the participants.  Therefore, with its
25-percent share of GAB resources, the United States can block GAB
activation if it obtains the support of other GAB participants that
have credit commitments large enough to reach more than 40 percent of
total resource commitments.  The criteria for activating GAB are
stricter if the funds are for a non-GAB participant than for a GAB
participant.  The criteria for use by GAB participants is a
determination that an "impairment" in the international monetary
system exists and IMF should supplement its resources.  If GAB funds
are to be lent to a non-GAB participant, the criteria are that an
"exceptional situation" exists that could threaten "the stability of"
the international monetary system and IMF lacks sufficient resources
to extend the needed financing.  There are no formal criteria for
determining the existence of a threat to the international monetary
system. 

Under the just-concluded expanded financing program for Russia, IMF
will borrow about $8.5 billion from GAB members.  This decision was
based on the determination that an "exceptional situation" exists in
the region that could threaten the stability of the international
monetary system.  All 11 GAB members will participate; each member
will lend funds to IMF in proportion to its share of GAB.  The United
States, with its 25-percent GAB share, will lend IMF about $2.1
billion.  Germany, the country with the next-largest share of GAB,
will lend IMF about $1.2 billion.\12

Prior to this use of GAB, over the course of the 36 years that GAB
has existed, it has been activated nine times to assist France,
Italy, the United Kingdom, and the United States.  According to a
U.S.  Treasury official, GAB was last used in 1978, when the United
States drew more than $2.9 billion from its own reserve tranche,
including $994 million in funds from loans under GAB and more than
$1.9 billion from IMF currency holdings.  According to the Treasury
official, at that time, the United States needed to purchase yen and
Deutsche marks in quantities greater than IMF possessed in order to
use the currencies to help stabilize the U.S.  dollar's exchange
rate.  Consequently, IMF borrowed the currencies from Japan and
Germany under GAB and sold them to the United States.\13 Prior to GAB
use for Russia, no IMF-member country that was not a GAB participant
had used GAB, although such countries had been eligible to use GAB
since 1983.  GAB was not used to assist Mexico in its 1994-95
financial crisis nor to help Asian countries in their current
financial crises. 


--------------------
\10 The 11 participants in GAB are Belgium, Canada, France, Deutsche
Bundesbank (German central bank), Japan, Italy, the Netherlands,
Switzerland (Swiss National Bank), Sveriges Riksbank (Swedish central
bank), the United Kingdom, and the United States. 

\11 The German central bank's share of GAB is $3.2 billion, or 14
percent; Japan's share is about $2.9 billion, or 12.5 percent; and
the share of France and the United Kingdom is about $2.3 billion, or
10 percent each.  Other country and central bank shares are less. 

\12 The associated arrangement to GAB between IMF and Saudi Arabia
will not be activated for Russia. 

\13 Other funds were also used then to help stabilize the dollar,
including funds from gold sales and special financial instruments
issued in foreign currencies. 


         NEW ARRANGEMENTS TO
         BORROW
------------------------------------------------------ Chapter 0:3.2.2

In January 1997, following an agreement by the Group of Ten (G-10)
countries\14 to expand the size and membership of GAB, IMF's
Executive Board voted to create the New Arrangements to Borrow.  NAB
would not replace GAB, which will remain in force; however, NAB would
be the facility of first recourse in the event of a need to provide
supplementary resources to IMF.  The decision to create NAB grew out
of concern following Mexico's financial crisis of 1994-95 that
substantially more resources might be needed to respond to future
sovereign financial crises.  Under NAB, the number of participating
countries will be increased to 25, and the total amount of credit
available in NAB will be up to about $45.5 billion, which is composed
of the $22.7 billion available under GAB and an additional $22.7
billion for NAB.  NAB could be activated when participants
representing 80 percent of the credit lines' resources determine that
there is a threat to the international financial system.  This could
make it more difficult to use NAB than GAB, since GAB requires only a
60-percent approval for activation.  As you know, NAB has not yet
entered into force. 


--------------------
\14 The G-10 consists of 11 major industrialized countries that
consult on general economic and financial matters.  The 11 countries
are:  Belgium, Canada, France, Germany, Italy, Japan, the
Netherlands, Sweden, Switzerland, the United Kingdom, and the United
States. 


         OTHER BORROWING
         ARRANGEMENTS
------------------------------------------------------ Chapter 0:3.2.3

In the past, IMF has borrowed funds from official sources other than
through GAB.  The largest such borrowing arrangements were in 1979
and 1981.  In 1979 IMF concluded a series of borrowing agreements
with a group of 14 industrial and oil exporting countries to finance
IMF's supplementary financing facility, which was designed to assist
members whose balance of payments deficits were large in relation to
their quotas.  In 1981, due to the continued high demand for IMF
financing, IMF concluded individual borrowing agreements with various
central banks and the Bank for International Settlements.\15 The 1979
and 1981 borrowing arrangements totaled SDR 23.1 billion (roughly $31
billion at today's dollar/SDR exchange rate).  IMF's most recent
bilateral borrowing arrangement was a SDR 3 billion arrangement with
Japan in 1986.  At one point, in 1985, IMF borrowings from member
governments (under all borrowing arrangements) equalled almost 42
percent of outstanding IMF credit (loans). 

According to a U.S.  Treasury official, the option to borrow funds
from private sources was last seriously considered in the early
1980s.  According to an IMF official, the IMF's structure is based on
cooperation with its members, and that is what it considers to be its
source of financing.  According to a U.S.  Treasury Department
official, IMF decided not to borrow from private capital markets in
the early 1980s for a number of reasons.  First, it was believed that
the cooperative nature of the institution might be undermined were
IMF to begin relying on private sources, rather than its membership,
to fund its operations.  Also, there was a concern about the
consequences of having IMF, which seeks to stabilize international
capital markets, rely on those markets for its funding.  And, there
was uncertainty about whether IMF could have borrowed the amount of
funds it needed from private markets quickly enough to employ them as
needed. 


--------------------
\15 BIS is an organization of central banks that is based in Basle,
Switzerland.  It is the principal forum for consultation,
cooperation, and information exchange among central bankers. 


         IMF'S GOLD HOLDINGS
------------------------------------------------------ Chapter 0:3.2.4

IMF also has gold holdings that some have suggested it could
potentially use to fund its operations.  Currently it holds about
103.4 million fine ounces of gold at designated depositories in four
member countries.\16 IMF acquired most of its gold prior to 1978,
when IMF's Articles of Agreement required that in most cases 25
percent of members' quota subscriptions be paid in gold and
transactions between member countries and IMF normally be conducted
in gold. 

IMF values its gold at SDR 35 per ounce (about $47 per ounce),\17 the
original cost at which the gold was acquired.  Therefore, IMF's gold
holdings are valued on IMF's balance sheet at SDR 3.6 billion (about
$4.8 billion).  However, IMF estimates and makes public as a note to
its balance sheet the current market value of its gold holdings based
on the market price.  In April 1998 IMF estimated its gold was worth
about $32 billion.  Were IMF to decide to sell some of its gold, it
is unclear how much money could be raised because the world price
likely would be affected as a result of the sale. 

The regular use of gold in IMF transactions ended in 1978, when IMF's
Articles of Agreement were amended to reflect the end of the fixed
currency exchange rate system that had governed the international
financial system up to that time.  Under its amended articles, IMF
may sell gold outright on the basis of market prices and may accept
gold in the discharge of a member's obligations to IMF at an agreed
price on the basis of market prices at the time of acceptance.  IMF's
General Counsel told us that IMF does not have authority to engage in
any other gold transactions--including loans, leases, or use of gold
as collateral--because these uses are not expressly allowed under IMF
articles. 

Although IMF may sell gold to raise funds, it does not regard gold
holdings to be a liquid asset and, therefore, does not consider gold
to be a liquid resource for lending purposes.  According to IMF
documents and IMF officials, the principal reason for not considering
gold to be a liquid asset is that IMF's Articles of Agreement require
that any sale of gold be approved by IMF's Board of Governors by an
85-percent majority of total voting power.  Thus, any group of
countries that holds more than 15 percent of IMF's voting power could
prevent a gold sale.  For instance, the United States, which has
nearly an 18-percent share of IMF's voting power, could unilaterally
block a gold sale.\18

In 1995, IMF's Executive Board adopted a policy on gold.  The policy
contained these principles: 

  -- As an undervalued asset held by IMF, gold provides a fundamental
     strength to IMF's balance sheet.  Any mobilization of IMF's gold
     should avoid weakening IMF's overall financial position. 

  -- IMF should continue to hold a relatively large amount of gold
     among its assets, not only for prudential reasons, but also to
     meet unforeseen contingencies. 

  -- IMF has a systemic responsibility to avoid causing disruptions
     to the functioning of the gold market. 

  -- The profits from any sales of gold should be retained and only
     the income deriving from the investment of those profits used
     for any operations that might be agreed. 


--------------------
\16 The member countries are France, India, the United States, and
the United Kingdom.  These gold holdings represented about 9.6
percent of world gold holdings in March 1998. 

\17 Except for a small amount (21,396 ounces) that a member
government gave to IMF in December 1992 in partial settlement of an
overdue loan obligation.  IMF values this amount at SDR 5.1 million
(about $6.8 million currently). 

\18 Under U.S.  law, the executive branch may not approve IMF
dispositions of gold over 25 million ounces benefitting individual
IMF member countries or particular segments of IMF membership unless
the Congress by law authorizes the disposition (22 U.S.C.  286c). 
According to a U.S.  Treasury official, because 25 million ounces of
IMF gold were sold between 1976 and 1980 for the benefit of a
particular segment of IMF membership, any further sale of gold for
the benefit of a particular segment of IMF membership requires
statutory approval. 


   EXTENT OF PUBLIC DISCLOSURE OF
   IMF'S FINANCIAL CONDITION
---------------------------------------------------------- Chapter 0:4

As I have already indicated, it is not possible in a timely manner to
determine from publicly available sources what resources IMF has
available for operations.  Information on the availability of and
actual use of IMF's resources is regularly provided to its members,
including the U.S.  Treasury, in quarterly operational budgets and
periodic liquidity reviews prepared by IMF staff.  These documents
provide considerable detail about IMF's financial condition.  For
example, the operational budget specifies the amounts of usable
currencies to be used in purchases, repurchases, and other IMF
financial transactions expected to take place during that period. 
The liquidity reviews provide information on developments affecting
IMF's liquidity, 2-year projections of the use of IMF's resources,
and trends in IMF liquidity estimates.  However, these documents are
not publicly available.  According to IMF, these documents contain
information that could be market sensitive because they include
judgment calls about which members' currencies are strong or weak. 

IMF's publicly available quarterly and annual financial statements do
not disclose the amount of usable currencies, although this is
reported in IMF's annual report.  The amount of usable currencies and
the commitments IMF is likely to make can be determined using
additional nonpublic documents.  The publicly available financial
statements do not show the adjustment factors that IMF uses to
estimate its liquidity. 

IMF and U.S.  Treasury officials told us that few people outside of
IMF use or rely on IMF's public financial statements for information
about IMF's financial condition or liquidity, and IMF and Treasury
officials indicated that most potential users of financial statements
do not consider them to be very useful for decisionmaking purposes. 
Moreover, according to private sector investment analysts we spoke
with, the financial markets are more interested in information IMF
has about individual country programs and information in its
International Financial Statistics. 


      AUDITS OF IMF'S FINANCIAL
      STATEMENTS
-------------------------------------------------------- Chapter 0:4.1

IMF's financial statements are audited annually and, according to IMF
officials, have received "clean," or unqualified audit opinions from
the EAC.  We have not reviewed the audit work supporting the opinions
or assessed the independence of the EAC.  The EAC consists of three
people who are nominated by IMF members and are approved by the
Executive Board to serve 1-year terms.  At least one person has to be
nominated by one of the six largest quota holders of IMF (United
States, Germany, Japan, the United Kingdom, France, and Saudi
Arabia).  Of the three members, a chairman is selected at the end of
the 1 year term to serve an additional year.  The EAC reports to
IMF's Managing Director and to the Executive Board. 

To enable the EAC to express an opinion on whether IMF's financial
statements present fairly the Fund's financial position and results
of operations, the EAC relies on an audit by a certified public
accounting (CPA) firm--which is selected by the Managing Director. 
The CPA firm issues an advisory letter to the EAC that contains the
CPA firm's opinion on the financial statements.  The EAC discusses
the audit with the CPA firm and reviews its work papers, and then the
EAC issues an audit opinion on IMF's financial statements.  If the
EAC has any audit issues or recommendations for improvements, it
issues its views and suggestions to the Managing Director and the
Executive Board.  Again, we have not tested the work of the EAC and
cannot comment on the reasonableness of its audit opinion.  The IMF
has commissioned a study of its internal audit and evaluation
function and how it obtains its external audit, and expects to have a
report on these matters in September 1998. 


-------------------------------------------------------- Chapter 0:4.2

Mr.  Chairman, this concludes my prepared statement.  I will be happy
to answer any questions you or other Members may have. 


THE INTERNATIONAL MONETARY FUND'S
CURRENT LENDING
=========================================================== Appendix I

You asked us to provide information on IMF's current lending.  Figure
I shows members' currency purchases outstanding from IMF's general
resources account (GRA) as of May 31, 1998.\1 As the figure shows,
IMF had about $70 billion in outstanding loans at that time.  About
$48.4 billion, or 70 percent, of these loans went to developing
countries, and the other $20.3 billion, or 30 percent, had been
borrowed by countries in transition.\2 No industrial countries had
outstanding borrowings from IMF at that time.\3 Figure I does not
include about $8.4 billion of outstanding loans from non-GRA IMF
lending facilities.\4

   Figure 1.1:  IMF's Estimated
   Currency Purchases, May 31,
   1998

   (See figure in printed
   edition.)

Note:  Figures include purchases from the general resources account
only.  The May 31, 1998, rate of $1.33536 was used to convert SDR's
into U.S.  dollars. 


--------------------
\1 IMF financing is not transacted in the form of loans.  When a
country borrows from IMF, it "purchases" the currency it needs from
IMF with an equivalent amount of its own currency and then
"repurchases" its own currency later using special drawing rights
(SDR) or other currency on terms established by IMF.  The SDR is a
unit of account that IMF uses to denominate all its transactions. 
Its value comprises a weighted average of the values of five
currencies:  deutsche mark, French franc, Japanese yen, pound
sterling, and U.S.  dollar. 

\2 IMF considers 130 member countries to be developing countries and
28 member countries to be countries in transition (that is, countries
that either comprised the former Soviet Union or Soviet-dominated
Eastern or Central Europe). 

\3 IMF considers 24 members to be industrialized countries: 
Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the
Netherlands, New Zealand, Norway, Portugal, San Marino, Spain,
Sweden, Switzerland, the United Kingdom, and the United States. 

\4 Much of this lending was on concessional (below market interest
rate) terms to the poorest IMF member countries. 


   NORMAL LIMITS TO BORROWING FROM
   IMF
--------------------------------------------------------- Appendix I:1

The amount of funds that a member country may borrow from IMF is
typically limited to a certain percentage of that member's quota.\5
This is true both for individual financing programs and for the total
amount of funds that a member can borrow from IMF.  Current rules
governing use of IMF's general resources account permit an IMF member
to borrow an amount equal to 100 percent of its quota per year, with
a cumulative limit of 300 percent, unless exceptional circumstances
permit.  These limits exclude drawings under "special facilities,"
such as the concessional (below market interest rate) Enhanced
Structural Adjustment Facility.  These limits were last changed in
1994, when the yearly limit on borrowing was increased from 68
percent of quota to 100 percent. 

In the past 3 years, IMF has provided financing to a number of large
developing countries that have experienced financial crises.  IMF's
financial assistance to Mexico in 1995 and its 1997-98 financing
programs for Thailand, Indonesia, and Korea all were well in excess
of the normal limit on cumulative borrowing.  Mexico's 1995
assistance program from IMF amounted to 688 percent of its quota. 
Thailand's July 1997 financing arrangement with IMF was about $3.9
billion, or about 500 percent of its quota.  Indonesia's November
1997 IMF financing arrangement for about $10.1 billion, which was
augmented by an additional $1.3 billion on July 15, 1998, now totals
about 557 percent of its quota.  Korea's December 1997 program of
about $21 billion was equivalent to about 1,940 percent of its quota. 


--------------------
\5 Quotas are the membership dues that countries pay when they join
IMF.  In addition to determining access to IMF resources, a member's
quota determines its voting power in IMF and is the basis for
determining its share in the allocation of SDRs to IMF members. 


   CHARGES ON IMF CURRENCY
   PURCHASES
--------------------------------------------------------- Appendix I:2

A member borrowing funds from IMF pays various charges to cover IMF's
operational expenses, including compensation paid to the member whose
currency it is borrowing.  Presently, a borrower typically pays in
service charges and commitment fees about one-half of 1 percent of
the amount borrowed and in interest charges about 4.6 percent.  This
4.6 percent is the SDR interest rate\6 (about 4.3 percent, as of July
20, 1998) plus an amount that is designed to allow IMF to meet its
annual administrative expenses, cover any overdue finance charges
that members have not yet paid, and compensate members whose
currencies have been purchased by other IMF members. 

--------------------
\6 The SDR interest rate is determined by reference to a combined
market interest rate, which is a weighted average of yields or rates
of short-term instruments in the capital markets of the five members
whose currencies comprise the SDR. 


*** End of document. ***