Press Release No. 12/132

Press Release: IMF Executive Board Reviews the Adequacy of Precautionary Balances

April 12, 2012

On April 9, 2012, the Executive Board of the International Monetary Fund (IMF) reviewed the adequacy of the Fund’s precautionary balances.

The Fund conducts regular reviews of the adequacy of precautionary balances about every two years, with the last such review held in September 2010. The timing of this latest review reflects Directors’ request in September 2010 that it take place before the agreed floor for precautionary balances of SDR 10 billion (about US$ 15.5 billion¹) is reached. Precautionary balances have increased to around SDR 9.2 billion as of end-February 2012 from SDR 7.3 billion as of end-July 2010.

Precautionary balances are one element of the IMF’s multi-layered framework for managing financial risks. These balances, comprising the Special Contingent Account (SCA-1) and retained earnings from normal operations held in the Fund’s reserves, are available to absorb possible financial losses, thereby helping protect the value of members’ positions in the IMF and underpinning the IMF financing mechanism.

The Executive Board reviewed the adequacy of the Fund’s precautionary balances applying the more transparent and rules-based framework that was developed in 2010 (See Review of the Adequacy of the Fund’s Precautionary Balances). Under this framework, decisions on the medium-term target for precautionary balances are guided by an indicative range of 20 to 30 percent of total average credit outstanding (measured as a three-year moving average including projections for the next two years). The framework also includes a minimum floor for precautionary balances to address income and credit risks, and allows for flexibility in adjusting the target based on a broad assessment of the financial risks facing the Fund.

Since the last review, total Fund credit outstanding has increased to SDR 88.5 billion at end-February 2012 from SDR 48.6 billion as of end-July 2010, and total commitments have increased to SDR 202 billion from SDR 144 billion.

In light of these developments, Executive Directors considered it prudent to increase the indicative medium-term target for precautionary balances from SDR 15 billion to SDR 20 billion. Directors also supported maintaining the minimum floor for precautionary balances unchanged at SDR 10 billion. Most Directors agreed that the current pace of reserve accumulation is adequate, but should also be kept under close review.

¹ Dollar conversion at April 9, 2012 rate of 1 SDR = $1.53849