A global institution

The International Monetary Fund is a specialized agency of the United Nations system set up by treaty in 1945 to help promote the health of the world economy. Headquartered in Washington, D.C., it is governed by its almost global membership of 184 countries.

The IMF is the central institution of the international monetary system—the system of international payments and exchange rates that enables business to take place between countries with different currencies.

The IMF’s statutory purposes include facilitating the balanced expansion of world trade, promoting the stability of exchange rates, avoiding competitive currency devaluations, and helping in the orderly correction of a country’s balance of payments problems.

To achieve these goals, the IMF

Monitors economic and financial developments and policies, in member countries and at the global level, and gives policy advice to its members based on its 60 years of experience.

Lends to member countries with balance of payments problems, to provide temporary financing in support of adjustment and reform policies aimed at correcting the underlying problems.

Provides the governments and central banks of its member countries with technical assistance and training in its areas of expertise.

By working to strengthen the international financial system and to accelerate progress toward reducing poverty, as well as promoting sound economic policies among all its member countries, the IMF is helping to make globalization work for the benefit of all.

This Annual Report of the Executive Board of the IMF reports on the activities of the Board during the financial year May 1, 2005, through April 30, 2006. Most of the Report consists of reviews of Board discussions of the whole range of IMF policy and operations. Further information is provided on the Fund’s website: www.imf.org.

Contents

Message from the Managing Directorand Chair of the Executive Board 4

Executive Board 8

1 | Overview 10

2 | The Medium-Term Strategy 18

3 | Surveillance in action during FY2006 24

4 | Strengthening surveillance and crisis prevention 42

5 | Strengthening IMF program support and crisis resolution 58

6 | The IMF’s role in low-income countries 66

7 | Technical assistance and training 78

8 | Financial operations and policies 88

9 | Governance and management of the IMF 104

Appendixes 124

I N T E R N A T I O N A L M O N E T A R Y F U N D

MAKING THE GLOBAL ECONOMY WORK FOR ALL

2006

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Message from the Managing Director and Chair of the Executive Board 4

Executive Board 8

1. Overview 10The world economy 11Global economic risks 14The work of the Fund 15

2. The Medium-Term Strategy 18Implementing the Medium-Term Strategy: Executive Board Discussion 19

Surveillance • Emerging market countries • Low-income countries • Governance • Capacity building • Streamlining • Medium-term budget

International Monetary and Financial Committee Meeting, April 22, 2006 23

3. Surveillance in action during FY2006 24Global surveillance 25

World Economic Outlook • Global Financial Stability Report • IEO evaluation of multilateral surveillance

Country surveillance 35Regional surveillance 36

ECCU • Euro area • CEMAC • WAEMU

4. Strengthening surveillance and crisis prevention 42Financial sector surveillance 44

Implications of Basel II • IEO report on FSAPFiscal analysis and policy advice 48

Public investment and fiscal policy • Statistical frameworks for strengthening fiscal analysis

Standards and codes, and data provision to the Fund 50Standards and Codes Initiative • Data Standards Initiatives • Guide on Resource Revenue Transparency

Crisis prevention 54IEO report on IMF approach to capital account liberalization • Balance sheet analysis • Impact of an avian flu pandemic

5. Strengthening IMF program support and crisis resolution 58Strengthening IMF program support 59Crisis resolution 62

6. The IMF’s role in low-income countries 66Debt relief and sustainability 68

Enhanced HIPC Initiative • MDRI • Debt sustainability framework

Strengthening instruments for supporting low-income countries 71

PRGF program design • PSI • ESF • Review of Poverty Reduction Strategy approach • Global Monitoring Report

Trade and poverty reduction 75

7. Technical assistance and training 78Technical assistance delivery in FY2006 79Task force on technical assistance 81Review of regional technical assistance centers 83IMF Institute 85

8. Financial operations and policies 88Regular financing activities 89Concessional financing activities 91

PRGF • ESF • MDRI and Enhanced HIPC Initiative •Investments supporting concessional lending and debt relief • Emergency assistance

Income, charges, remuneration, and burden sharing 97Credit risk management in the IMF and the level of precautionary balances 98Quota developments 99SDR developments 100Safeguards assessments 101Arrears to the IMF 101External audit mechanism 103

9. Governance and management of the IMF 104Quotas and voice 105Transparency 107Communications and outreach 109Administrative and capital budgets 112Human resources 114Organization 118

Appendixes 124 I International reserves 127 II Financial operations and transactions 132 III Principal policy decisions of the Executive Board 147 IV Press communiqués of the International Monetary and

Financial Committee and the Development Committee 156 V Executive Directors and voting power, April 30, 2006 164 VI Changes in membership of the Executive Board 168VII Financial statements, April 30, 2006 169

Acronyms and abbreviations 243

Boxes2.1 Key elements of the IMF’s Medium-Term Strategy 203.1 Inflation targeting 293.2 Growth in central and eastern Europe 363.3 Seminar on regional financial integration in Asia 373.4 Regional financial integration in Central America 384.1 Reorganizing the Fund’s financial sector work 444.2 Financial soundness indicators 454.3 Monitoring offshore financial centers 464.4 Update on AML/CFT 474.5 ROSCs and Data Standards Initiatives 51

Contents

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4.6 External debt Web site 535.1 Stand-By Arrangement for Iraq 626.1 Debt relief initiatives 686.2 Workshop and handbook on scaling up aid 736.3 Forum on Poverty Reduction Strategies for the

western Balkans 756.4 Helping Africa’s cotton producers 767.1 Promoting legislation to combat the financing

of terrorism 827.2 Proposals of the Task Force on Technical Assistance 837.3 Feedback from country officials on the IMF

Institute’s curriculum 878.1 The IMF’s financing mechanism 928.2 Expectations versus obligations 938.3 Financial Transactions Plan 938.4 The IMF’s lending capacity 948.5 The IMF’s financial structure for concessional

assistance and debt relief to low-income member countries 94

8.6 Financing of the MDRI 958.7 Medium-term income outlook and options 978.8 General reviews of quotas 998.9 Review of SDR valuation and interest rate 100

8.10 Safeguards assessment policy 1029.1 How the IMF is run 1069.2 Executive Board standing committees 1079.3 Disseminating information: the IMF’s publishing

operations and Web site 1089.4 Risk management in the IMF 1099.5 Enhancing IMF–World Bank cooperation 1109.6 A common approach to fighting corruption 1119.7 The new medium-term budget framework 1149.8 Main changes in the Fund’s budgetary practices 1159.9 Resident representatives 120

Tables3.1 Article IV consultations completed during FY2006 265.1 IMF financial facilities 60

6.1 Countries covered by the MDRI 707.1 Technical assistance program areas, FY2004–06 807.2 IMF technical assistance resources and delivery,

FY2002–06 817.3 Technical assistance evaluation program, FY2006–07 827.4 IMF Institute training programs, FY2002–06 867.5 IMF Institute regional training programs 868.1 Extension of repurchase expectations in FY2006 918.2 IMF regular loans approved in FY2006 918.3 PRGF arrangements approved in FY2006 928.4 Subsidy contributions for the ESF 938.5 Delivery of MDRI debt relief to 20 qualifying

members 958.6 Subsidy contributions for emergency assistance 968.7 Arrears to the IMF of countries with obligations

overdue by six months or more 1039.1 Administrative budgets, FY2004–07 1139.2 Distribution of professional and managerial staff

by nationality 1169.3 IMF staff salary structure 1179.4 Distribution of staff by gender 1189.5 Distribution of staff by developing and industrial

countries 118

Figures1.1 Real GDP growth 111.2 Current account balance 111.3 Equity market performance 131.4 Sovereign spreads 137.1 Technical assistance by region, FY2006 807.2 Technical assistance delivery by department, FY2006 808.1 Regular loans outstanding, 1996–April 30, 2006 908.2 IMF one-year forward commitment capacity,

1996–April 2006 908.3 PRGF credit outstanding 929.1 Indicative share of resources by key output

areas, FY2007 1159.2 IMF organization chart 119

The IMF’s financial year is May 1 through April 30.

The unit of account of the IMF is the SDR; conversions of IMF financial data to U.S. dollars are approximate and provided for convenience. On April 30, 2006, the SDR/U.S. dollar exchange rate was US$1 = SDR 0.67978, and the U.S. dollar/SDR exchange rate was SDR 1 = US$1.47106. The year-earlier rates (April 30, 2005) were US$1 = SDR 0.65929 and SDR 1 = US$1.51678.

“Billion” means a thousand million; “trillion” means a thousand billion; minor discrepancies between constituent figures and totals are due to rounding.

As used in this Annual Report, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

Message from the Managing Director and Chair of the Executive Board

Management team, from left: Rodrigo de Rato, Managing Director and Chair of the Executive Board

Anne O. Krueger, First Deputy Managing Director Agustín Carstens, Deputy Managing Director

Takatoshi Kato, Deputy Managing Director

t he IMF’s financial year that ended on April 30, 2006,

was a year of continuity and progress for the global

economy, and a year of change for the Fund. The global econ-

omy continued to grow at an impressive pace, the expansion

became more broadly spread geographically, and financial

market conditions remained benign. This environment, largely

free of economic crises, was conducive to debate, both within

and outside the Fund, on the future direction of the institution—

a debate that I encouraged when I launched a review of the

Fund’s strategic direction in 2004.

I sought to crystallize the results from this debate in two reports:

a report that I sent to the International Monetary and Financial

Committee (IMFC) in September 2005 outlining a Medium-Term

Strategy for the Fund, and a report to the IMFC in April 2006 on

plans for implementing the strategy. I am pleased that the IMF’s

Executive Board broadly endorsed both reports before they were

submitted to the IMFC, and that the IMFC welcomed both and,

in April, gave me and the Executive Board a mandate to produce

proposals in surveillance, crisis lending, and the Fund’s own

governance—all key areas—in the run-up to the Annual Meetings

to be held in Singapore in September.

The road we need to take in surveillance is already clear: we

need surveillance that is more focused, with more attention to

spillovers between member countries. We also need to deepen

our understanding of financial and capital markets. The new

department that is being created from the merger of the Inter-

national Capital Markets Department and the Monetary and

Financial Systems Department will have an important role to

play in this. Another key element of the Medium-Term Strategy

(MTS) will be a new tool to supplement the Fund’s surveillance

of the global economy: multilateral consultations, in which

particular issues of global or regional significance will be

taken up comprehensively and collectively with the key coun-

tries concerned, as well as with policymaking bodies formed

by groups of members. Our first multilateral consultation is

already under way, focused on the aim of narrowing global

payments imbalances while maintaining robust global growth.

The past year has been one of progress and hope in low-

income countries. Growth in Africa exceeded 5 percent for the

second consecutive year. In July 2005, the leaders of the G–8

countries proposed a write-off of debts owed to international

financial institutions by some of the poorest, most heavily

indebted countries, and the international financial institutions

responded quickly. Indeed, I am proud to say that the IMF

led the way—putting in place by January 2006 mechanisms

to cancel the debts to it of 19 countries. The Fund has risen

to meet the challenges of poverty reduction in low-income

countries in other respects, also: with a new facility to help

members deal with exogenous shocks, with the Policy Support

Instrument to help low-income countries that do not want or

need financial support from the Fund, and with the Guide on

Resource Revenue Transparency, to help countries overcome

“the curse of natural resources.” We also continue to base our

work on giving sound advice on macroeconomic policies—the

Fund’s core function and the best way we can help low-income

countries meet the Millennium Development Goals.

5

Financial year 2006 was a year in which there was little new

regular (nonconcessional) lending by the Fund, and in which

some major borrowers were able to repay the Fund early. This

is a cause for celebration. But I do not believe that demand

for the Fund’s financial assistance to help address balance of

payments problems will remain dormant indefinitely, and the

Fund needs to be ready to meet our members’ needs when

they arise. With this in mind, I have proposed to the Execu-

tive Board, again as part of the MTS, that we develop a new

instrument to provide financing to emerging market countries

that have strong fundamentals but remain vulnerable to

shocks. The instrument would be designed to help members

avoid crises and to respond to crises if they do occur.

The Fund also worked to put its own house in better order

over the past year. In April, we completed the Employment,

Compensation, and Benefits Review. We also presented, for

the first time, a medium-term budget. Work is under way

on other important changes. I have appointed high-level

external committees to advise us on two critical issues—the

division of labor between the Fund and the World Bank, and

new sources of income for the Fund in an era when crisis

prevention may largely supersede crisis response and the

Fund should not be as dependent as it has been on its

income from lending. In addition to consideration of options

to broaden the Fund’s income base, action is being taken

on the expenditure side, where real reductions are proposed

in the medium-term budget. Perhaps most fundamentally, I

am preparing proposals on reform of the representation of

member countries in the Fund. At present, the relative quo-

tas and voting shares of our members do not adequately

reflect the increased economic weight of some countries,

including some of the largest emerging markets. I am also

concerned that the voting power of low-income countries has

been eroded over time. This gives rise to concerns about the

adequacy of voice and representation for a number of coun-

tries that continue to borrow from the Fund but that have only

a limited share in Fund voting. I will be making some specific

proposals on how to take these governance issues forward in

the run-up to this year’s Annual Meetings; they are critical for

the Fund’s effectiveness in the years ahead.

We meet this year in Singapore, and it is appropriate that

the Fund hold its Annual Meetings in Asia, where the pace of

economic growth and change has been so fast in recent years.

Many challenges lie in front of us, but when our members con-

vene in September, they can celebrate a year of great progress

and the prospect of a Fund that is continuing to renew itself

for the benefit of the global community and that will continue

to work unstintingly for them in the years ahead.

6

Letter of Transmittalto the Board of Governors

7

August 3, 2006

Dear Mr. Chairman:

I have the honor to present to the Board of Governors the Annual Report of the Executive Board for the financial

year ended April 30, 2006, in accordance with Article XII, Section 7(a) of the Articles of Agreement of the Inter-

national Monetary Fund and Section 10 of the IMF’s By-Laws. In accordance with Section 20 of the By-Laws,

the administrative and capital budgets of the IMF approved by the Executive Board for the financial year ending

April 30, 2007, are presented in Chapter 9. The audited financial statements for the year ended April 30, 2006, of

the General Department, the SDR Department, and the accounts administered by the IMF, together with reports of

the external audit firm thereon, are presented in Appendix VII.

Rodrigo de RatoManaging Director and

Chair of the Executive Board

88

Executive Board on April 30, 2006(Alternate Executive Directors are indicated in italics.)

Islamic Republic of Afghanistan, Algeria, Ghana, Islamic Republic of Iran, Morocco, Pakistan, Tunisia

Shigeo KashiwagiMichio Kitahara

Nancy P. JacklinMeg Lundsager

Aleksei V. MozhinAndrei Lushin

Jeroen KremersYuriy G. Yakusha

A. Shakour ShaalanSamir El-Khouri

Karlheinz BischofbergerGert Meissner

Hooi Eng PhangMade Sukada

Moisés SchwartzMary Dager

Arrigo SadunMiranda Xafa

Abbas MirakhorMohammed Daïri

Sulaiman M. Al-TurkiAbdallah S. Alazzaz

Eduardo LoyoRoberto Steiner

United States Japan Germany

Armenia, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Georgia, Israel, FYR Macedonia, Moldova, Netherlands, Romania, Ukraine

Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Spain, Venezuela

Albania, Greece, Italy, Malta, Portugal, San Marino, Timor-Leste

Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Maldives, Oman, Qatar, Syrian Arab Republic, United Arab Emirates, Yemen

Saudi Arabia Brunei Darussalam, Cambodia, Fiji, Indonesia, Lao P.D.R., Malaysia, Myanmar, Nepal, Singapore, Thailand, Tonga, Vietnam

Russian Federation Brazil, Colombia, Dominican Republic, Ecuador, Guyana, Haiti, Panama, Suriname, Trinidad and Tobago

99

Willy KiekensJohann Prader

Jonathan FriedPeter Charleton

B.P. MisraAmal Uthum Herat

WANG XiaoyiGE Huayong

Héctor R. TorresJavier Silva-Ruete

Damian Ondo MañeLaurean W. Rutayisire

Pierre DuquesneOlivier Cuny

Tom ScholarAndrew Hauser

Tuomas SaarenheimoJon T. Sigurgeirsson

Fritz ZurbrüggAndrzej Raczko

Jong Nam OhRichard Murray

Peter J. NgumbulluPeter Gakunu

France United Kingdom Austria, Belarus, Belgium, Czech Republic, Hungary, Kazakhstan, Luxembourg, Slovak Republic, Slovenia, Turkey

Antigua and Barbuda, The Bahamas, Barbados, Belize, Canada, Dominica, Grenada, Ireland, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines

Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, Sweden

Australia, Kiribati, Korea, Marshall Islands, Federated States of Micronesia, Mongolia, New Zealand, Palau, Papua New Guinea, Philippines, Samoa, Seychelles, Solomon Islands, Vanuatu

Angola, Botswana, Burundi, Eritrea, Ethiopia, The Gambia, Kenya, Lesotho, Malawi, Mozambique, Namibia, Nigeria, Sierra Leone, South Africa, Sudan, Swaziland, Tanzania, Uganda, Zambia

Azerbaijan, Kyrgyz Republic, Poland, Serbia and Montenegro, Switzerland, Tajikistan, Turkmenistan, Uzbekistan

China

Argentina, Bolivia, Chile, Paraguay, Peru, Uruguay

Benin, Burkina Faso, Cameroon, Cape Verde, Central African Republic, Chad, Comoros, Dem. Rep. of Congo, Rep. of Congo, Côte d’Ivoire, Djibouti, Equatorial Guinea, Gabon, Guinea, Guinea-Bissau, Madagascar, Mali, Mauritania, Mauritius, Niger, Rwanda, São Tomé and Príncipe, Senegal, Togo

Bangladesh, Bhutan, India, Sri Lanka

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Over view

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t he IMF’s 2006 financial year (FY), the period covered by this Annual Report, was significant, as it

marked an important turning point in the way the Fund carries out its mandate. The medium-term strategic review set in motion in 2004 by the Managing Direc-tor, Rodrigo de Rato, was completed and given broad endorsement by the Fund’s Executive Board and subse-quently by the ministerial-level International Monetary and Financial Committee (IMFC), which requested that the Fund move rapidly to implementation. As a result, the IMF embarked on some far-reaching changes in its operations and governance.

The subsequent chapters of this Report set out the Fund’s work during FY2006 in detail. This introductory chap-ter is intended to provide a brief overview and to set the Fund’s work—including the changes that have been taking place—in the context of global economic developments.

The world economy

Global economic growth reached 4.8 percent in 2005, its third successive year above 4 percent (Figure 1.1), in spite

of high oil prices, natural disasters, and continuing geo-political uncertainties. This expansion has been notable for its pace, duration, and increasing breadth—every region experienced rapid growth in the period covered by this Report. Emerging market economies grew partic-ularly rapidly, supported by benign financial conditions, improved policy frameworks and, in many cases, high commodity prices. Developing countries also expanded solidly, with sub-Saharan Africa’s growth rate exceeding 5 percent for the second consecutive year. The volume of global trade continued to expand rapidly. At the same time, current account imbalances in a number of key economies continued to widen (Figure 1.2). The cur-rent account deficit of the United States reached a record 7 percent of GDP in the final quarter of 2005, while oil exporters, Japan, a number of small industrial countries, China, and some other parts of emerging Asia continued to run substantial surpluses.

Growth in the United States remained strong in the second and third quarters of 2005. It slowed tempo-rarily in the fourth quarter because of weak domestic demand—owing, in part, to high gasoline prices after Hurricane Katrina—but rebounded in the first quarter of 2006, with strong consumption and corporate invest-ment compensating for a marked slowdown in residen-tial investment.

Figure 1.2 Current account balance

(In percent of world GDP)

United States

Japan

Euro area

Developing Asia

Fuel exporters

1995 96 97 98 99 2000 01 02 03 04 05–2.0

–1.5

–1.0

–0.5

0

0.5

1.0

Figure 1.1 Real GDP growth

(In percent change from a year earlier)

World UnitedStates

Advancedcountries

(except U.S.)

DevelopingAsia

Africa Emergingmarket

countries(except Asiaand Africa)

2003

2004

2005

0

2

4

6

8

10

IMF ANNUAL REPORT | 2006

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Growth in the euro area remained subdued throughout 2005. High-frequency indicators, however, suggest that an investment-led recovery may have gained traction in early 2006, especially in Germany.

Japan’s economy expanded robustly during 2005. The recovery was increasingly driven by robust domestic demand, underpinned by rising employment, and buoy-ant corporate profits. Importantly, both consumer price inflation and bank credit growth turned positive at the turn of the year after a long period of contraction.

China’s rapid expansion continued unabated; the growth rate was nearly 10 percent in 2005. Recent per-formance looked even more impressive after GDP data were revised, showing an increase in average annual growth of half a percentage point, to almost 10 per-cent, between 1993 and 2004. The expansion remained unbalanced, however, driven primarily by investment and net exports.

While the expansion in Latin America moderated somewhat in 2005 (to 4.3 percent from 5.6 percent), growth remained significantly above the long-term average, which is less than 3 percent. The region’s two largest economies—Brazil and Mexico—accounted for most of the slowdown, owing to subdued investment in Brazil and the weaker performance of the agricul-tural and manufacturing sectors in Mexico. In contrast, growth remained solid or strengthened even further in Argentina, Paraguay, and Uruguay and in the Andean region, notwithstanding political uncertainties in some countries—notably Bolivia and Ecuador.

Growth in emerging Asia excluding China and India eased marginally during the period but remained very strong overall. In the newly industrialized economies (Hong Kong SAR, Korea, Singapore, and Taiwan Prov-ince of China), the slowdown was concentrated in the second quarter of 2005 when the information technol-ogy sector went through the final phase of a correction. Subsequently, growth accelerated again, supported by stronger investment in industrial countries. The ASEAN-4 economies (Indonesia, Malaysia, the Philippines, and Thailand) also recovered, in spite of periods of financial turbulence in Indonesia and political uncertainties in the Philippines and Thailand. Growth in India remained very rapid, with strong momentum in the manufacturing and services sectors. Although exports performed well, the current account moved into deficit in 2005, as strong domestic demand and high oil prices triggered a surge in imports.

Growth has moderated in central and eastern Europe, but there were important differences between subregions. Very rapid growth in the Baltic countries—almost 9 percent in 2005—contrasted with a more moderate pace of expansion in central and southeastern Europe. In spite of appreciating exchange rates, the region’s aver-age current account deficit fell modestly. In the Baltic countries and some southeastern European countries, current account deficits remained very high, however, driven by soaring private domestic demand and rapid credit growth. While a significant part of these deficits was financed by foreign direct investment, the share of debt financing has increased. In the Commonwealth of Independent States, growth decelerated in 2005. A sharp slowdown in Ukraine accounted for most of this, while growth in Russia was supported by high oil prices.

The Middle East benefited from rising oil prices. High receipts from oil exports fueled average growth of almost 6 percent and a current account surplus of almost 20 percent of GDP in the oil-exporting countries. Even though a large portion of the increase in oil revenues has been saved, domestic demand strengthened. Money and credit growth expanded sharply, and property and equity prices surged, although many stock markets in the region experienced significant corrections in the first quarter of 2006.

Economic activity in Africa continued to expand robust-ly, supported by generally higher commodity prices and the positive impact of reforms carried out in the 1990s. Some countries were adversely affected by the modera-tion of prices for food and agricultural raw materials, however, as well as by the removal of textile quotas.

Oil prices remained high and volatile during the period. They reached highs in August 2005 in the wake of hur-ricanes Katrina and Rita, and again in April 2006 because of geopolitical concerns related to Iran and threats to oil production in Nigeria. Nonfuel commodity prices, espe-cially for metals, also rose strongly. The impact of rising commodity prices, as well as of closing output gaps, on global inflation remained surprisingly modest, however. Headline consumer price inflation picked up somewhat but core inflation remained constrained, and inflationary expectations were well under control.

Monetary policies tightened in most industrial countries, starting to dry up some of the abundant global liquidity. The speed and timing of the tightening differed, however, reflecting the countries’ different cyclical positions. In the United States, the Federal Reserve’s tightening cycle con-

Overview | 1

13

tinued, with the federal funds rate rising 175 basis points over the period. The European Central Bank began to raise interest rates at end-2005, and the Bank of Japan ended its longstanding policy of quantitative easing in March 2006, with markets anticipating policy rate hikes later in 2006. Fiscal policies were varied, but little progress was made in industrial countries outside Canada and Japan toward strengthening medium-term fiscal balances (and Japan’s fiscal deficit remains very large).

Despite a growing U.S. current account deficit, the U.S. dollar appreciated somewhat in trade-weighted terms: a depreciation against emerging market currencies was offset by appreciations against the euro and the yen. The dollar remained well supported by continued strong for-eign demand, including from oil exporters, for U.S. dol-lar financial assets (particularly bonds). However, toward the end of the financial year, the dollar began to weaken against other major currencies as it became evident that the yield advantages of dollar-based assets would start to narrow, and as the official sector raised concerns about the need for currency flexibility to help foster adjustment of global imbalances.

Conditions in mature and emerging financial markets remained favorable, supported by sustained and broaden-ing global growth and subdued inflation. High liquidity, in turn, continued to foster a search for yield, notwith-standing the tightening by key central banks and signs that monetary policy would continue to firm. Long-term interest rates rose more modestly, leading to a marked flattening of yield curves, mainly in the United States. Long-term yields were also supported by high insti-

tutional investor demand for long-term fixed-income assets. Against this backdrop, financial market volatility, government bond yields in mature markets, and global credit spreads remained low by historical standards.

Global equity markets rallied as strong corporate prof-itability further strengthened balance sheets globally. In Japan, continuing signs of economic recovery saw the Nikkei index gain 53.6 percent during the financial year. European equities also made steady gains, ris-ing 29.9 percent during the financial year while, in the United States, the S&P 500 rose 13.1 percent (Figure 1.3). Actual market volatility and the expected volatility implied in options prices stayed low. There were signs, particularly toward the end of the period, that the corpo-rate credit cycle had begun to turn. Corporations started to draw down their ample cash balances and increase balance sheet leverage, taking advantage of relatively low long-term yields and spreads. Partly as a result, there was a surge in global mergers and acquisitions.

Emerging market economies continued to enjoy an exceptionally favorable economic and financing environ-ment during the period. Solid global growth boosted export demand and commodity prices. Interest rates and credit spreads remained low, with spreads compressing even as yields in mature markets rose. With abundant liquidity continuing to spur a search for yield, investor appetite for new issues from emerging market borrowers was exceptionally strong. At the same time, the investor base for emerging market assets continued to expand, reflecting past outperformance and the improved credit quality of emerging market borrowers. The market was

Figure 1.3 Equity market performance

(May 2005 = 100)

80

90

100

110

120

130

140

150

160

S&P 500

Nasdaq

Eurofirst 300

Topix

May Jun2005 2006

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Source: Bloomberg LP.

Figure 1.4 Sovereign spreads

(In basis points)

100

200

300

400

500

EMBIG Latin America

EMBI Global

EMBIG non–Latin America

May Jun2005 2006

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Source: JPMorgan Emerging Markets Bond Index Global.

IMF ANNUAL REPORT | 2006

14

also supported by emerging economies’ continuing active debt management aimed at reducing the vulner-ability of their debt structure. The spread on the EMBIG index declined 205 basis points during the Fund’s finan-cial year, ending the period at a record low of 179 basis points (Figure 1.4). Emerging market bond issuance in the primary market reached record levels in 2005 and totaled some $28 billion in January–April 2006. Nearly one-half of total bond issuance during this period was from nonsovereign entities. Primary issuance of equities in emerging markets was also strong during the financial year and continued to be dominated by Asia, in particu-lar, China.

Global economic risks

Although growth remained strong in 2005, risks to global growth continued to be slanted to the downside because of rising oil prices, continuing global payments imbalances, and other issues. The problem of global imbalances that was discussed in the Annual Report 2005continued to raise concerns about the sustainability of global growth. The difficulties in making progress in the Doha Round of multinational trade negotiations raised concerns that the benefits for the world economy of a successful and ambitious outcome to the negotiations would prove elusive. And there was increasing concern about the potential consequences for the global economy of a widespread outbreak of avian flu. These issues were the focus of attention both in the IMF’s discussions with its individual member countries and in the Fund’s multi-lateral surveillance work, as it assessed the possible global implications. The fact that these risks did not undermine global growth during the year did not alleviate concerns about them.

As global payments imbalances continued to widen during FY2006, discussions about ways to resolve them became more intense. Several factors account for the very large imbalances that were a feature of the global econ-omy during the period covered by this report: low con-sumption and rising external current account surpluses in much of Asia; the large and growing U.S. current account deficit; sluggish growth in Europe; and rapidly increasing surpluses in the main oil-exporting countries.

For some years the IMF has argued that these imbal-ances were a global problem and that a multilateral response—a coordinated package of policies across the regions involved—would bring much larger gains than

would be possible from unilateral actions. During FY2006 this view gained increasingly broad support, accompanied by growing consensus on the shape of the multilateral response that was needed. This would include increasing consumption and exchange rate flexibility in a number of countries with current account surpluses in emerging Asia; raising national saving in the United States, with measures to reduce the fiscal deficit and spur private sav-ing; implementing structural reforms to increase flexibility and growth in the euro area and several other countries; undertaking fiscal consolidation and further structural reforms in Japan; and promoting the efficient absorp-tion of higher oil revenues in oil-exporting countries with strong macroeconomic policies.

As the imbalances have grown so has the importance of developing a multilateral approach. Unilateral action by any one country or by one group of countries could have negative consequences for the rest of the world. Promot-ing a multilateral response therefore assumed a high pri-ority for the Fund.

Prospects for a successful and ambitious outcome to the Doha Round also raised concerns, which intensified after the disappointing outcome of the World Trade Organi-zation (WTO) Ministerial Meeting in Hong Kong SAR in December 2005. The Fund continued to support the WTO in its efforts to reach a satisfactory outcome to the negotiations, including through provision of strong sup-port for the Aid for Trade initiative. A successful outcome to the Doha Round would greatly strengthen the multi-lateral trading system and so strengthen the prospects for global growth. Conversely, failure to reach an agreement, or an unambitious outcome, would act as a brake on global growth and could also fuel protectionist pressures that would further undermine growth prospects.

FY2006 saw much contingency planning for an outbreak of avian flu, with increasing concern about the impact on the world economy of such an outbreak. The IMF played an active role in this process (see Chapter 4).

A period of rapid global growth is perhaps naturally accompanied by concern about the factors that might undermine it. But a prolonged, rapid, and widespread global expansion, such as the one that continued in FY2006, also offers policymakers a rare opportunity to make current growth rates sustainable and to put in place the measures necessary to raise potential growth rates in the future. Fiscal policies that cut budget deficits and make possible countercyclical, supportive policy during downturns; measures to reduce public debt bur-

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dens; structural reforms that free up labor and product markets; and trade liberalization: all these are policies that will strengthen growth prospects and benefit indus-trial and developing countries alike.

Such policy actions can be implemented more readily during a period of expansion, when support is easier to marshal and policy measures can be planned more care-fully and coherently. Deferring such actions until the economy is slowing and pressure for adjustment is more urgent can result in hastily implemented reforms that might not command widespread support or achieve their full potential. Moreover, taking preemptive policy action can make economies more resilient and so less vulnera-ble to global downturns in the first place. The greater the number of national economies that have implemented reforms raising their growth potential and reducing their vulnerabilities, the more moderate and short-lived any downturn at the global level, as well as at the country level, is likely to be.

The work of the Fund

This, then, was the global economic environment in which the IMF operated during FY2006: a period of remarkably resilient global expansion but one in which the downside risks to future growth increasingly engaged the attention of policymakers. As such it provided the Fund with an opportunity to sharpen the focus of its work and reorient its role in the modern global economy.

The Fund’s principal duties are set out clearly in its Articles of Agreement: to promote macroeconomic and financial stability at the global and national levels; to promote international monetary cooperation in the interests of all its members; to foster a liberal system of trade and payments; to prevent international crises, as far as possible; and to help resolve balance of payments problems when they occur, including through the provi-sion of temporary financial assistance.

During FY2006, the IMF continued to urge its member countries to adopt policies that would foster macroeco-nomic stability, raise growth and promote higher living standards, and help reduce poverty. Given the global environment, the Fund also made the case for preemp-tive action, to take full advantage of the window of opportunity presented by the expansion.

The Fund continued its efforts to help low-income countries achieve more rapid growth and poverty reduc-

tion, introducing a new facility to help low-income countries deal with exogenous shocks, and also a new Policy Support Instrument designed to help low-income countries that do not want or need financial support enjoy the benefits of IMF endorsement of their policy programs. In July 2005, the leaders of the G-8 countries proposed a Multilateral Debt Reduction Initiative, writ-ing off the debts owed to international financial insti-tutions by some of the poorest, most heavily indebted countries; and the IMF responded quickly, putting in place in January 2006 mechanisms to cancel the debts owed to it by 19 countries. The IMF also sought to play its role in helping low-income countries meet the Mil-lennium Development Goals, particularly through its advice on macroeconomic policies, including policies appropriate in the context of the current scaling-up of aid (see Chapter 6).

With a continued absence of financial crises, enhanc-ing the effectiveness of its surveillance work continued to be the principal challenge for the IMF. The Fund uses its surveillance role to advocate policies that would benefit individual member countries and the global economy. Chapter 3 provides a detailed overview of the Fund’s surveillance work at the global, regional, and national levels. At the global level, the Fund uses channels such as its World Economic Outlook report and the Global Financial Stability Report to examine and highlight risks to continuing world economic growth and spillovers from the policies of individual countries on the rest of the world. At the regional level, the Fund began in September 2005 to publish Regional Economic Outlook reports to help disseminate its analysis of eco-nomic developments and policies in the major regions, including the lessons from experience of neighboring countries in dealing with shared challenges. At the national level, the main focus of surveillance work is usually the annual Article IV consultations with mem-ber countries.

IMF policy advice is based on the analysis of its staff, the institution’s accumulated knowledge, and the lessons of the experience of its membership, all considered by the Executive Board. During FY2006, the focus in some countries was on macroeconomic stability; for others the emphasis was more on the structural reforms needed to strengthen growth and on longer-term issues such as the implications of demographic change. As always with sur-veillance work, the aim was to identify weaknesses and to use the Fund’s unique cross-country expertise to identify and highlight effective reforms.

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Although the Fund’s mandate has remained essentially unchanged over the years, how it discharges its duties has changed over time, to adapt to changing global economic and financial circumstances. The history of the IMF is, in an important sense, one of adaptation, and the Fund needs regularly to review its work to ensure that it con-tinues to be able to serve its purposes and its member countries as effectively as possible.

Recognizing this, in 2004 the Managing Director laun-ched a major review of the Fund’s strategic direction. The aim was to provide a framework for decision mak-ing for the IMF’s medium-term budgetary framework and work program. The conclusions of the first stage of the review were presented in a report by the Managing Director on the Fund’s Medium-Term Strategy (MTS), broadly endorsed by the Executive Board, to the IMFC at the IMF–World Bank Annual Meetings in September 2005. The IMFC endorsed the report, which recognized that the Fund must adapt itself further to the evolving needs of member countries and the international finan-cial system as a whole in an era of rapid globalization.

Following the IMFC endorsement in September 2005, more detailed proposals for implementation of the MTS were developed, and the conclusions were pre-sented in a second report by the Managing Director to the IMFC, at its April 2006 meeting, as endorsed by the Executive Board. The report stated that to achieve its medium-term objectives, the Fund needs to strengthen its surveillance work, adapt its lending instruments to the changing needs of its members, help them build institutional capacity and improve gover-nance, strengthen the governance of the Fund itself, and improve the efficiency of the IMF’s internal operations.

In the area of surveillance, building on a broad con-sensus among the membership about the need for a coordinated, multilateral response to address key global issues (such as current global imbalances), the MTS proposed a system of multilateral consultations to address them. At its Spring Meeting in April 2006, the IMFC not only endorsed this approach but also agreed that the first multilateral consultations should be focused on the issue of global imbalances.1 The Managing Director was charged with reporting on progress on this issue to the September 2006 Annual Meetings in Singapore.

1See Press Release No. 06/118 at www.imf.org/external/np/sec/pr/2006/pr06118.htm.

In the area of IMF governance, the IMFC at its April 2006 meeting also agreed that the Managing Direc-tor should prepare detailed proposals for the reform of country representation in the IMF, including IMF quo-tas, in order that these better reflect the changing struc-ture of the world economy, including the increased role in the world economy of a number of emerging market economies, especially in Asia, that have grown rapidly in recent years. On this issue, too, the Managing Director was called on to report back to the IMFC in September 2006.

The MTS envisages a number of other reforms also, including in the way the Fund conducts its internal business. Key to these changes is a switch to a medium-term budgetary framework on a three-year cycle. The Fund is also examining ways of streamlining its internal work procedures, for example by reducing its paper flow. It completed a fundamental review of its staff employ-ment and compensation framework during FY2006, and the conclusions of that review are presented in Chapter 9 of this Report. The MTS is covered in detail in Chapter 2.

The prolonged global economic expansion brought other challenges for the Fund. The absence of financial crises in recent years is, of course, an unambiguously positive development—attributable partly to policy improve-ments in recent years, at the national and international levels, to which the Fund has contributed. This does not mean that crises will not erupt in the future. But the benign global economic environment, as noted, enables member countries and the Fund itself to press ahead with further measures that can mitigate the impact of any future crises and reduce the vulnerability of the international economy as a whole.

At the same time, the IMF now has fewer borrow-ers and less lending outstanding than it has had for many years. During FY2006 both the Brazilian and the Argentine governments repaid their loan obligations to the Fund ahead of schedule, reflecting the significant progress made in achieving macroeconomic stability and growth. The decline in Fund lending has impor-tant implications for the Fund’s operating income and points to a need to review the IMF’s financing struc-ture, in light of the changed global environment. At the end of FY2006 it was announced that the Fund would undertake such a review, with the help of a committee of eminent persons, to be completed during FY2007 (see Chapter 8).

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The Annual Report 2005 described a year of intense reflection for the Fund on its role and operations. FY2006 was a year of decision on its Medium-Term Strategy, with the Fund beginning to implement the conclusions of its strategic review. As the world economy continues to evolve, the IMF will have to be ready to adapt further, in ways that cannot yet be foreseen. One

aim of the MTS is to put the Fund in a position to iden-tify changing priorities and redeploy resources more effectively in the future. In this way, the IMF can con-tinue to play the central role in maintaining international financial stability and the promotion of global growth that has always been its mission.

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in 2004, the year the IMF marked its 60th anniversary, its Managing Director, Rodrigo de Rato, initiated a

broad strategic review of the organization’s operations. A management-staff Committee on the Strategic Review, chaired by First Deputy Managing Director Anne Krueger, was set up, and discussions were held between staff, man-agement, and the Executive Board, as well as with country authorities and outside observers. In September 2005, the Managing Director presented a report1 outlining proposals for a Medium-Term Strategy (MTS) to the International Monetary and Financial Committee (IMFC), the primary advisory committee of the Fund’s Board of Governors, after it had been broadly endorsed by the Executive Board. This report suggested that a central tenet of the Fund’s work should be to help members meet the challenges of globalization. Using that framework, the report identi-fied the Fund’s key tasks as enhancing the effectiveness of surveillance, adapting to new challenges and needs in dif-ferent member countries, helping member countries build institutions and capacity, addressing the issue of fair quotas and voice, and prioritizing and reorganizing work within a prudent medium-term budget. The IMFC welcomed and supported the broad priorities set forth in the report, and looked forward to specific proposals and timelines on the main tasks identified.

Six months later, after staff working groups had reviewed the IMF’s policies and activities and made recommenda-tions to management on possible improvements, the Man-aging Director presented his “Report on Implementing the Fund’s Medium-Term Strategy”2 to the Executive Board in early April 2006 (Box 2.1).

Implementing the Medium-Term Strategy: Executive Board Discussion

The Executive Board discussed the report on implementing the Medium-Term Strategy on April 3, 2006. It considered the issues that need to be addressed as the institution moves

1“The Managing Director’s Report on the Fund’s Medium-Term Strategy,” www.imf.org/external/np/omd/2005/eng/091505.pdf.

2“The Managing Director’s Report on Implementing the Fund’s Medium-Term Strategy,” www.imf.org/external/np/pp/eng/2006/040506.pdf.

forward from conceptualizing the Medium-Term Strategy to implementing it.

Surveillance

Directors reiterated the importance of making Fund sur-veillance more effective, particularly by focusing both global and country surveillance on essential issues, sharpening the discussion of the context and of spillovers, remaining at the forefront of analysis, safeguarding the IMF’s independence, and strengthening outreach. They agreed that the Fund remains the premier institution for global surveillance and that it should do more to leverage its universal membership and macroeconomic expertise to achieve progress on key multilateral issues.

Directors generally welcomed the further exploration of modalities for a new consultation procedure in a multilat-eral format that would allow the Fund to take up systemic issues collectively with key members as well as with regional entities.3 A number of Directors underscored that the Board and the IMFC must be a key part of this process, as envis-aged in the Managing Director’s proposal, and that this approach must be transparent. Some Directors offered spe-cific suggestions, as well as some qualifications. Directors also supported the intention to develop regional outreach—and, with a view to strengthening the multilateral perspec-tives of country surveillance—to develop new modalities for regional surveillance.

Broad support was also expressed for increased emphasis on the Fund’s original objective of exchange rate surveil-lance, which remains to assess the consistency of exchange rate policies with national and international stability. Direc-tors looked forward to a review of the 1977 Surveillance Decision. In this context, Directors generally welcomed management’s intention to deepen the work of the Con-sultative Group on Exchange Rates, including by extending the scope of existing analyses of multilaterally consistent equilibrium rates to cover major emerging market curren-cies. Many Directors did not support publication of equi-librium exchange rates because of the market sensitivity of

3The first multilateral consultations, focused on the issue of global imbal-ances, were launched in June 2006. See www.imf.org/external/np/sec/pr/ 2006/pr06118.htm.

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the information and the need to further refine analytical methods. There was a constructive exchange of views on whether exchange rate surveillance in the context of capital mobility should focus primarily on exchange rate policies, the exchange rate regime, or the exchange rate level. Direc-tors underlined the importance of Article IV surveillance (see Chapter 3) in assessing the consistency of exchange rate policies, as well as of other macroeconomic policies, with international financial stability and sustainable growth. At the same time, some Directors raised concerns about undue focus on exchange rates at the expense of other policies and their spillovers. The Board will return to these issues when it reviews the 1977 Surveillance Decision.

Directors strongly endorsed strengthening the Fund’s two flagship publications, the World Economic Outlook and the Global Financial Stability Report, and offered suggestions on steps to enhance their coverage and impact. They also welcomed proposals in the Managing Director’s report to make surveillance more effective. This will require raising

the standard of coverage of financial sector issues, clarify-ing and streamlining the focus of consultations through the development of multiyear surveillance agendas, underscor-ing the national context, and bringing to bear the multilat-eral perspective in consultations with individual countries. Directors noted the importance of avoiding a one-size-fits-all approach to financial sector surveillance, given countries’ varying situations and levels of development. In addition, Directors supported simplifying bilateral consultation pro-cedures for a selected number of countries every other year, but in a way that ensures that members are treated fairly and that the effectiveness of the Fund’s advice on core sur-veillance issues is not reduced.

Directors underlined the importance of effective communi-cation to the authorities and the broader public in explaining the policy recommendations developed in the Article IV pro-cess and in gaining wide support for them. In such outreach, the Fund will need to be mindful of its role as confidential advisor to members and to work closely with the concerned authorities and Executive Directors. It will also need to assess further the cost implications of outreach efforts.

Emerging market countries

Directors viewed the placement of financial and capital market issues at the center of the Fund’s work in emerg-ing market countries as a key element of the IMF’s strat-egy. The new department created from the merger of the Monetary and Financial Systems Department and the International Capital Markets Department will play the key analytical and catalytic role in this process, and these efforts will be supported by prioritization of the Financial Sector Assessment Program and the Fund’s work on standards and codes (see Chapter 4).

The role of the Fund in ensuring that adequate financing is available to emerging market countries covers a wide range of complex issues. The Board discussion of the report on the Medium-Term Strategy and the months of debate on the IMF’s role that preceded the discussion provided Direc-tors with a unique opportunity to clarify the framework for Fund financing for emerging market countries. The report’s recommendations include revising the guidelines on excep-tional access to Fund resources outside the context of a capital account crisis, establishing flexible modalities for the duration of large-scale financing, and relying on price-based incentives to encourage early repayment. A variety of views was expressed as to whether to modify the existing framework for exceptional access or to apply the existing framework rigorously to any new cases, with many Direc-tors supporting a review of the guidelines.

Directors expressed broad support for further work on a new instrument for providing high-access contingent

Surveillance. Increasing effectiveness by focusing on the essential, framing and discussing issues in a multilateral context, sharpening exchange rate analysis, and better integrating macroeconomic and financial market analysis. Also, safeguarding independence, staying at the forefront of analysis, and strengthening outreach efforts.

Emerging market economies. Centering work on financial and capi-tal market issues, and ensuring appropriate financing instruments and terms.

Low-income countries. Supporting, in concert with others, the assessment and monitoring of aid flows in the context of the Mil-lennium Development Goals (MDGs); assisting members in the development of medium-term debt strategies; refining the focus on macro-critical issues; reviewing modalities for Fund-Bank collabo-ration; and assessing possibilities for adapting facilities for post-conflict countries.

Fund governance. Reflecting important changes in the weight and role of members in the world economy in a fair distribution of quotas, adopting a transparent procedure for the selection of the Managing Director, and balancing Executive Board oversight with operational involvement at a detailed level.

Capacity building. Better aligning Fund capacity building with mem-ber needs and complementarities with other donors, and prioritizing work on the Financial Sector Assessment Program and on standards and codes.

Streamlining Fund operations. Eliminating extraneous documenta-tion and increasing the efficiency of operations.

The Fund’s medium-term budget. Embedding Medium-Term Strategy priorities in a sustainable medium-term real budget envelope and placing the Fund on a sound financial footing for the long term.

Box 2.1 Key elements of the IMF’s Medium-Term Strategy

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financing for countries that have strong macroeconomic policies, sustainable debt, and transparent reporting but still face balance sheet weaknesses and vulnerabilities, as proposed in the Managing Director’s report. Taking into account Directors’ comments during the discussion, the Fund will continue to explore the modalities of the role it could play in judiciously supporting regional and other arrangements for pooling reserves, including by signaling sound policies.

The discussion also covered the IMF’s role in debt restruc-turing and lending into arrears in emerging market coun-tries. Directors generally agreed that the orderly resolution of arrears should remain an important condition for Fund lending. They broadly endorsed the concept that financing in a debt restructuring case should be based on an agreed medium-term fiscal envelope and a macroeconomic frame-work on which the Fund expresses a clear view. In addition, they agreed that greater clarity is needed on how to define the good faith criterion in light of recent experience and in the absence of a structured debt restructuring framework of the kind that existed in the 1980s. Directors looked forward to the forthcoming staff paper reviewing all aspects of the Fund’s approach to lending into arrears.

Low-income countries

In assessing the role of the IMF in low-income countries, Directors noted that two main considerations will play an important role, namely, the expected increase in aid flows, including debt relief; and the international community’s responsibility for monitoring progress toward the Millen-nium Development Goals (MDGs)—a task in which the Fund will need to be judiciously involved within its areas of core competence.

Directors discussed how the Fund could best participate with others in assessing and monitoring aid flows in the context of the MDGs. They reviewed the principal recom-mendations in the Managing Director’s report, which view Fund staff as making a contribution in its areas of compe-tence by monitoring, advising, and reporting on the aggre-gate resource use of low-income countries, including their macroeconomic absorptive capacity. The Fund staff could perform this role effectively only by relying on other institu-tions—especially the multilateral development banks—with the necessary expertise in making assessments of the costs of meeting the development goals and helping to mobilize the necessary funding. On the basis of such partnerships with these institutions, the Fund could then in principle be well placed to advise donors on the circumstances in which there is scope for more aid to be absorbed or, conversely, in which aid flows could create the risk of macroeconomic instability.

Directors expressed a variety of views on such a role for the Fund on aid flows. Although there was broad agreement that the IMF should assess the macroeconomic impact of aid flows, many Directors expressed reservations about tak-ing the Fund’s role much beyond that—citing the limits of the IMF’s mandate, the risk of mission creep, the resource-intensive nature of this kind of work, and the extremely limited scope for finding additional resources within the Fund’s budget. It was agreed to reflect on these aspects of the discussion, exploring further the feasibility of mobiliz-ing additional external funding for capacity building and for field-based collaboration with donors, and obtaining the necessary support from the multilateral development banks.

Directors also underscored the importance of ensuring that the beneficiaries of debt relief do not again accumulate excessive debt and called upon Fund staff to support these countries’ efforts to develop a medium-term debt strategy, both in the context of IMF-supported programs and for nonprogram countries. In addition, stronger public expen-diture management systems will be needed in many coun-tries to ensure the effective use of resources released by debt relief. Directors agreed that, while the Fund may provide technical assistance in this area, it does not have expertise in sectoral allocation assessments, which remain the responsi-bility of the World Bank and other institutions.

They considered it critical for the effectiveness of the IMF’s work in low-income countries that its policy advice, sup-port for capacity building, and financial assistance be well focused on macro-critical issues, including institutions relevant to financial stability and economic growth. Given that economic development requires an interdisciplinary view and collective actions, clear understandings with other development partners will be crucial. Directors accord-ingly broadly welcomed the proposal for a country-specific division of labor between the Fund and the Bank. Fol-lowing careful identification of the main growth-critical issues and the assistance required by the authorities in each low-income country, Fund and Bank staff, working with development partners and country authorities, would aim to agree on the areas in which they are prepared to take the lead, with Fund staff limiting their responsibility to those areas that fall within their macroeconomic and financial expertise. This will provide a valuable guidepost to the divi-sion of operational responsibilities between the two institu-tions at the country level. Some Directors considered that a clearer delineation should yield cost savings for the Fund.

Directors considered it timely to review the modalities for Fund-Bank collaboration set out in the 1989 Concordat and looked forward to the recommendations of the recently established External Review Committee on Bank-Fund Collaboration and to the work of the joint task force set up by the two managements (see Box 9.5).

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Directors discussed the suggestion that, in some cases, such as post-conflict countries, the standard of upper credit tranche conditionality may be unreasonable. The staff will explore the possibilities for a facility with a more flexible standard and a larger capacity-building component, while bearing in mind the views of a number of Directors that the Fund’s current toolkit might already offer possible ways to address these issues. Most Directors supported the proposal to eliminate Joint Staff Advisory Notes to allow better pri-oritization of staff resources.

Governance

Directors addressed the issues on IMF governance raised in the Managing Director’s report. On quotas and voice, Directors agreed that the Fund’s membership should aim for a significant step toward dealing with these issues by the September Annual Meetings in Singapore. A variety of views was expressed on the best way forward, with most Directors suggesting that a two-stage approach might offer the best hope. Most Directors also agreed that ad hoc quota increases for the members most underrepresented in terms of their weight in the world economy should be the center-piece of the first stage. A broader consensus still needs to be reached, however, on how best to address other elements, including basic votes, the quota formula, and the size and composition of the Executive Board (see Chapter 9). Direc-tors looked forward to the discussion of quotas and voice at the April 2006 meeting of the IMFC, which would provide the basis for making further progress with the aim of reach-ing the broadest possible consensus by the time of the Sin-gapore meetings. Some Directors felt that such a consensus is more likely to be reached if there is a clear understanding on the elements to be included in each stage of the process. Some Directors were opposed to any ad hoc solutions in a two-stage process and preferred that the second stage be taken up immediately.

Directors acknowledged the importance of establishing an agreed transparent procedure for the selection of the Man-aging Director, and agreed to reflect further on the best way forward. Many Directors noted that this proposal should apply to all members of management. Directors also con-curred that the Executive Board must ensure that its over-sight is carried out in the most effective way possible and looked forward to returning to this issue.

Capacity building

Directors agreed that the IMF should continue to work to better align its efforts to build capacity with the evolving needs of members while addressing the constraints stem-ming from the growing pressures on the Fund’s finances. They welcomed the report’s suggestions designed to estab-

lish a coherent and integrated approach combining the objectives of member countries, the expertise of functional departments, and the perspectives of area departments. They also welcomed the proposed leading role of the area departments in producing technical assistance strategy notes that would identify capacity-building priorities for each member and form the basis for allocating the Fund’s resources (see Chapter 7). Directors concurred that the key priorities would include the financial sector, public finances—with a focus on revenue administration and pub-lic expenditure management—and statistics. They called on staff to explore the scope for raising additional external financing, and the feasibility and usefulness of levying charges for technical assistance and training while subsidiz-ing low-income countries. Directors also broadly endorsed the suggestions for prioritization of the Reports on the Observance of Standards and Codes (see Chapter 4).

Streamlining

Directors discussed the wide range of suggestions to streamline procedures and reduce the flow of paper, and generally favored moving forward to implement them, including longer intervals between policy reviews; greater flexibility in ex post assessments; more selective produc-tion of selected economic issues papers and statistical appendixes; greater reliance on lapse-of-time procedures for on-track program/post-program monitoring reviews; streamlined surveillance and program reviews; and reduced rigidities in misreporting procedures. Some Directors noted the importance of not undermining the effectiveness of ex post assessments and misreporting procedures. Staff will come back to the Board with proposed modalities requiring Board endorsement.

With regard to enhancing the effectiveness of Board dis-cussions, some Directors pointed to the role of the Chair in facilitating full and interactive exchanges of views by Directors, and to the contribution that a more active and candid engagement by staff could make. Directors saw merit in reshaping the work program as a vehicle more directly linked to the implementation of the Medium-Term Strategy, with the Board maintaining a key role in shaping the priori-ties and contributing to the smooth implementation of the work program without undermining management oversight.

Medium-term budget

While Directors broadly supported the framework sug-gested in the Medium-Term Strategy, they emphasized that the final decisions on priorities and implementation would have to be taken in the context of the underlying budget-ary envelope. In referring to the decline of Fund income, they stressed the need to address the resulting financing

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gap and urged decisive actions on both the income and the expenditure sides. On the income side, they empha-sized the importance of finding solutions that will place the Fund on a sound financial footing over the long term, based on stable and predictable sources of income. Direc-tors acknowledged the contribution that an external com-mittee, headed by an eminent personality, could make to advance efforts of the Managing Director and the Board to come to a solution that can be sustained.4 They noted that the Board would have a key role in forging a broad consensus in this complex area and that the priorities outlined could be accomplished in a moderately declining medium-term budgetary framework. In this context, and while welcoming the Fund’s efforts to implement the pro-posed strategy in a budget-neutral manner, some Directors believed that a more ambitious stance might be required, especially given the uncertainty of the outcome of the income situation. Such efforts could include the need to revisit the strategic priorities and the implementation framework of the present medium-term proposals.

International Monetary and Financial Committee Meeting, April 22, 2006

At its April 2006 meeting, the IMFC welcomed the Manag-ing Director’s report on implementing the Medium-Term Strategy and called on management and the Executive Board to complete their considerations and move rapidly to implementation. The IMFC reiterated that the IMF’s effec-tiveness and credibility as a cooperative institution must be safeguarded and its governance further enhanced, empha-sizing the importance of fair voice and representation for all members. It underscored the role an ad hoc increase in quotas would play in improving the distribution of quotas to reflect important changes in the weight and role of coun-tries in the world economy and called on the Managing Director to work with the IMFC and the Executive Board to

4An external committee composed of eight eminent persons was estab-lished shortly after the end of the financial year. See Box 8.7 for a discus-sion of the Fund’s medium-term income outlook and options.

come forward with concrete proposals for agreement at the September 2006 Annual Meetings in Singapore.

It also supported a review of the 1977 Surveillance Deci-sion, with a view to making IMF surveillance more effective. In the context of the Managing Director’s Medium-Term Strategy, the IMFC proposed a new focus on multilateral issues, especially the spillovers from one economy on oth-ers; a restatement of the commitments that member coun-tries make to each other under Article IV; implementation of the new multilateral consultations procedure described above, involving the IMFC and the Executive Board; and an annual remit set by the IMFC for country and multilateral surveillance through which the Managing Director, the Executive Board, and the staff are accountable for the qual-ity of surveillance.

The IMFC also welcomed the Fund’s efforts to respond to the new challenges and needs of emerging market mem-bers. It supported further examination of the Managing Director’s proposal on a possible new instrument to pro-vide high-access contingent financing for countries that have strong macroeconomic policies, sustainable debt, and transparent reporting but remain vulnerable to shocks. It encouraged the Fund to explore the role it can play in sup-porting regional arrangements for pooling reserves and supported a review of the operational aspects of the IMF’s policy on lending into arrears.

Stressing the critical role the IMF plays in low-income countries, including in helping to ensure that expected increases in aid flows and debt relief are absorbed effectively and in a manner consistent with macroeconomic stabil-ity, the IMFC called on the Fund to play its part within its areas of core competence in monitoring progress toward the MDGs. It supported efforts to clarify the division of respon-sibilities and accountabilities of the IMF and the World Bank and to improve their collaboration.

It also noted the recent decline in the Fund’s lending, which requires actions on both income and expenditure, and called on the Managing Director to develop proposals for more predictable and stable sources of income.

The full text of the communiqué appears in Appendix IV of this Report.

Sur veillance in action during FY2006

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in accordance with Article IV of its Articles of Agree-ment, the IMF oversees the international monetary

system to ensure its effective operation. The Fund also oversees that each member country complies with its obli-gations under Article IV “to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.” The Fund discharges these responsibilities partly by monitor-ing economic developments and policies in its 184 member countries and the economic policies pursued under regional arrangements or currency unions. The Fund also monitors economic and financial developments at the global level. The Fund’s oversight of policies and economic develop-ments at the global, country, and regional levels is known as surveillance.

In FY2006, IMF global surveillance focused particularly on the risks to world growth posed by global payments imbal-ances, higher oil prices, and rising interest rates in industrial countries and their potential impact on growing household debt. Other questions examined included the economic consequences of a possible avian flu pandemic, innovation in financial markets, growing protectionist sentiment, and the fiscal and macroeconomic effects of population aging. These issues were covered in depth in the IMF’s main global surveillance products, the semiannual World Economic Out-look (WEO), discussed by the Executive Board in August and September 2005 and March 2006, and Global Financial Stability Report (GFSR), discussed by the Board in August 2005 and March 2006.

In April 2006, on the eve of the Spring Meetings of the IMF and the World Bank, the IMF hosted a conference on global imbalances, which was attended by policymakers, senior officials, and a few distinguished academics. The closed-door, informal discussion focused on policy strategies for addressing global imbalances. The International Monetary and Financial Committee (IMFC) communiqué of April 22, 2006, noted that the conference discussion confirmed the validity of the agreed cooperative policy strategy to address imbalances and that—given economic interlinkages—all countries and regions would have a role to play. (For the full text of the communiqué, see Appendix IV.)

The Fund continued efforts to strengthen its surveillance of macroeconomic policies and financial markets, as called

for in its Medium-Term Strategy (see Chapter 2). The role of the management-staff Surveillance Committee, chaired by the Managing Director, has been enhanced. The Inde-pendent Evaluation Office (IEO) completed detailed assess-ments of the IMF’s multilateral surveillance (see page 34) and the Financial Sector Assessment Program (financial sector surveillance is covered in Chapter 4).1

The IMF also continued to give prominence to exchange rate issues, including by broadening and improving its tools for exchange rate analysis. As required by its Articles of Agreement, the Fund publishes the Annual Report on Exchange Arrangements and Exchange Restrictions, which is prepared in consultation with national authorities and contains a comprehensive data set on countries’ exchange arrangements and exchange and trade restrictions.

At the country level, the IMF’s Executive Board conducted 131 Article IV consultations during FY2006 (Table 3.1). At the regional level, it discussed the policies of four currency unions—the Eastern Caribbean Currency Union, the euro area, the Central African Economic and Monetary Com-munity, and the West African Economic and Monetary Union.

Global surveillance

The Fund’s Executive Board conducts global surveillance through its reviews of world economic and financial mar-ket developments and prospects. Twice a year in each case, these reviews are based on the staff ’s WEO reports and issues of the GFSR, which are published, together with a summing up of the Executive Board’s discussion, ahead of the semiannual IMFC meetings. The WEO reports pro-vide analysis of global, regional, and national economic prospects and policies, and the GFSR analyzes develop-ments and risks in international capital markets. Between WEO reports and GFSR issues, the Board also holds more frequent informal discussions of world economic and market developments, and IMF staff continuously moni-tor economic and financial developments in the Fund’s 184 member countries as well as globally. In addition,

1The IEO’s mandate and activities are described in Chapter 9.

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Table 3.1 Article IV consultations completed during FY2006Country Board date PIN issued Staff Report published

Afghanistan, Islamic Republic of March 6, 2006 March 8, 2006 March 16, 2006Algeria February 13, 2006 March 9, 2006 March 9, 2006Antigua and Barbuda December 21, 2005 February 1, 2006 April 22, 2006Argentina June 20, 2005 June 30, 2005 July 18, 2005Aruba May 25, 2005 June 1, 2005 June 15, 2005

Australia August 29, 2005 September 12, 2005 September 12, 2005Austria July 20, 2005 July 25, 2005 July 25, 2005Azerbaijan March 27, 2006 April 25, 2006Bahamas, The June 24, 2005 July 7, 2005 July 7, 2005Bahrain February 17, 2006

Bangladesh June 29, 2005 July 18, 2005 July 22, 2005Barbados August 5, 2005 August 15, 2005 August 15, 2005Belarus June 17, 2005 June 28, 2005 June 28, 2005Belgium February 27, 2006 March 1, 2006 March 1, 2006Belize September 19, 2005 September 30, 2005 September 30, 2005

Bhutan July 11, 2005 July 18, 2005Bosnia and Herzegovina May 27, 2005 June 15, 2005 June 15, 2005Botswana June 22, 2005 February 23, 2006 February 23, 2006Brunei Darussalam July 13, 2005 September 30, 2005Burkina Faso September 7, 2005 September 29, 2005 September 30, 2005

Cape Verde May 25, 2005 August 11, 2005 September 6, 2005Central African Republic October 24, 2005 November 29, 2005 December 2, 2005Chile July 29, 2005 August 5, 2005 September 1, 2005China August 3, 2005 September 12, 2005 November 17, 2005Comoros July 18, 2005 August 12, 2005 August 16, 2005

Congo, Democratic Republic of the August 29, 2005 September 29, 2005 October 20, 2005Czech Republic August 1, 2005 August 9, 2005 August 9, 2005Djibouti September 28, 2005Dominica October 14, 2005 October 25, 2005 October 26, 2005Dominican Republic October 17, 2005 December 7, 2005

Ecuador January 25, 2006 February 9, 2006 March 10, 2006Egypt May 18, 2005 June 7, 2005 June 7, 2005Eritrea March 27, 2006Estonia October 26, 2005 November 4, 2005 November 4, 2005Ethiopia March 17, 2006 May 2, 2006

Finland January 30, 2006 February 1, 2006 February 3, 2006France November 2, 2005 November 7, 2005 November 7, 2005Gambia, The July 18, 2005 September 8, 2005 January 10, 2006Georgia March 31, 2006 April 19, 2006 May 16, 2006Germany January 11, 2006 January 18, 2006 January 18, 2006

Ghana June 20, 2005 August 9, 2005 August 15, 2005Greece December 14, 2005 January 6, 2006 January 6, 2006Grenada July 13, 2005 July 29, 2005 August 12, 2005Guatemala May 16, 2005 July 27, 2005 October 6, 2005Guinea December 23, 2005 January 27, 2006 February 3, 2006

Haiti May 16, 2005 June 17, 2005 June 17, 2005Hong Kong SAR January 23, 2006 February 13, 2006 February 13, 2006Hungary June 15, 2005 June 29, 2005 June 29, 2005Iceland October 3, 2005 October 14, 2005 October 14, 2005India February 6, 2006 February 21, 2006 February 21, 2006

Indonesia July 18, 2005 July 27, 2005 September 9, 2005Iran, Islamic Republic of March 10, 2006 March 27, 2006 April 28, 2006Iraq August 1, 2005 August 16, 2005 August 16, 2005Ireland October 5, 2005 October 17, 2005 October 17, 2005Israel March 22, 2006 March 23, 2006 March 23, 2006

Italy February 6, 2006 February 7, 2006 February 16, 2006Jamaica March 24, 2006 April 25, 2006 May 1, 2006Japan July 29, 2005 August 8, 2005 August 8, 2005Jordan November 21, 2005 January 5, 2006Kazakhstan July 1, 2005 July 13, 2005 July 21, 2005

Kiribati May 4, 2005Kuwait March 10, 2006 March 29, 2006 April 7, 2006Lao People’s Democratic Republic March 8, 2006 March 21, 2006Latvia July 27, 2005 August 10, 2005 August 10, 2005Lesotho September 19, 2005 September 29, 2005 December 28, 2005

Surveillance in action during FY2006 | 3

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Liberia April 26, 2006 May 2, 2006Libya March 17, 2006 April 10, 2006 April 10, 2006Luxembourg April 26, 2006 May 8, 2006 May 8, 2006Madagascar June 1, 2005 September 27, 2005 September 27, 2005Malaysia March 13, 2006 March 20, 2006

Maldives February 22, 2006 February 28, 2006Mali December 19, 2005 March 6, 2006Malta October 14, 2005 October 24, 2005 October 24, 2005Marshall Islands February 15, 2006 March 8, 2006 March 8, 2006Mauritania May 27, 2005 June 2, 2005

Mauritius December 2, 2005 January 3, 2006Mexico November 9, 2005 December 1, 2005 December 9, 2005Mongolia September 21, 2005 October 6, 2005 November 15, 2005Morocco August 29, 2005 September 15, 2005 November 23, 2005Mozambique June 22, 2005 September 6, 2005 September 6, 2005

Namibia March 24, 2006 April 28, 2006 April 28, 2006Nepal January 18, 2006 February 2, 2006 February 7, 2006Netherlands June 29, 2005 July 14, 2005 July 14, 2005Netherlands Antilles March 10, 2006 March 30, 2006 March 31, 2006New Zealand May 2, 2005 May 5, 2005 May 5, 2005

New Zealand April 28, 2006 May 4, 2006 May 4, 2006Nicaragua January 18, 2006Nigeria July 18, 2005 August 10, 2005 August 26, 2005Norway June 3, 2005 June 13, 2005 June 14, 2005Oman November 11, 2005 December 9, 2005

Pakistan November 2, 2005 November 17, 2005 November 17, 2005Palau February 15, 2006 March 2, 2006 March 13, 2006Panama February 15, 2006 March 14, 2006 April 6, 2006Papua New Guinea February 13, 2006 February 24, 2006 March 13, 2006Philippines February 13, 2006 March 6, 2006 March 6, 2006

Poland July 22, 2005 July 22, 2005 August 2, 2005Portugal October 14, 2005 October 19, 2005 October 20, 2005Romania April 26, 2006 May 4, 2006 May 9, 2006Russian Federation September 7, 2005 September 21, 2005 October 20, 2005St. Kitts and Nevis December 21, 2005 February 1, 2006

St. Lucia December 21, 2005 February 9, 2006St. Vincent and the Grenadines July 13, 2005Samoa June 17, 2005 June 27, 2005 June 29, 2005São Tomé and Príncipe March 6, 2006 March 29, 2006Saudi Arabia October 7, 2005 December 5, 2005

Serbia and Montenegro June 29, 2005 July 5, 2005 July 14, 2005Seychelles March 10, 2006Singapore March 17, 2006 May 5, 2006 May 4, 2006Slovak Republic March 20, 2006 March 22, 2006 March 21, 2006Slovenia July 20, 2005 July 28, 2005 July 28, 2005

Solomon Islands September 28, 2005 October 13, 2005 October 13, 2005South Africa September 2, 2005 September 15, 2005 September 19, 2005Sri Lanka July 15, 2005 August 2, 2005 September 13, 2005Suriname February 24, 2006 April 10, 2006 April 10, 2006Swaziland February 8, 2006 February 24, 2006 March 13, 2006

Sweden September 7, 2005 September 15, 2005 September 15, 2005Switzerland June 6, 2005 June 10, 2005 June 10, 2005Syrian Arab Republic August 31, 2005 October 3, 2005 October 3, 2005Thailand September 7, 2005 October 27, 2005Timor-Leste June 15, 2005 July 20, 2005 July 25, 2005

Tonga July 15, 2005 August 31, 2005Trinidad and Tobago November 11, 2005 November 30, 2005 February 1, 2006Turkmenistan January 18, 2006Ukraine November 9, 2005 November 11, 2005 November 28, 2005United Arab Emirates July 1, 2005 July 15, 2005 August 5, 2005

United Kingdom March 1, 2006 March 3, 2006 March 3, 2006United States July 22, 2005 July 29, 2005 July 29, 2005Uzbekistan May 16, 2005 June 10, 2005Vietnam October 7, 2005 January 24, 2006 January 24, 2006Zambia January 11, 2006 February 1, 2006 February 3, 2006Zimbabwe September 9, 2005 October 4, 2005 October 4, 2005

Table 3.1 (concluded)Country Board date PIN issued Staff Report published

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IMF management and staff take part in economic policy discussions with finance ministers, central bank gover-nors, and other officials in a variety of groups, such as the Group of Seven major industrial countries (G-7), the Group of 24 developing countries (G-24), and the Group of 20 (G-20).

World Economic Outlook

World Economic Outlook, September 2005

At their August and September 2005 discussions of the WEO,2 Executive Directors welcomed the continued strong expansion of the global economy. Following the strongest performance seen in three decades in 2004, global economic growth moderated to a more sustainable pace during 2005, while inflationary pressures remained subdued. However, growth divergences remained wide—with the United States and China leading global growth, Japan regaining momen-tum, and the expansion in the euro area remaining sub-dued. Global payments imbalances increased yet again.

Notwithstanding the impact of higher oil prices and global imbalances, Directors expected global economic conditions to remain favorable, but they cautioned that the balance of risks to the outlook was slanted to the downside, with projected growth still unbalanced and heavily dependent on China and the United States. Other short-term risks included the possibility of significant tightening in finan-cial markets, which could contribute to a global weakening of housing markets, and rising protectionist sentiment in some countries.

Directors acknowledged that the limited impact of oil price increases on the global economy was attributable, in part, to the decreasing energy intensity of economic activity as well as to well-anchored inflationary expectations. A number of Directors were nevertheless concerned about the impact of high and volatile oil prices going forward.

Rising global imbalances and their changing distribution remained a central risk to the economic outlook over the medium term. Unusually low investment rates for this stage of the economic cycle have resulted in excess saving at the global level, contributing to low real interest rates and the observed distribution of imbalances across major regions. Directors noted that the continued willingness of foreign investors to hold U.S. dollar assets had enabled the large U.S. current account deficit to be financed without diffi-culty but emphasized that this situation would not continue indefinitely. They welcomed the progress made in imple-

2Available at www.imf.org/external/pubs/ft/weo/2005/02/index.htm; the summary of the Board’s discussion can be found at www.imf.org/external/pubs/ft/weo/2005/02/pdf/annex.pdf.

menting the cooperative policy strategy to address global imbalances agreed at the October 2004 meeting of the IMFC, noting, in particular, the improved fiscal position in the United States, the steps taken toward greater exchange rate flexibility by China and Malaysia, and signs of stronger domestic demand in Japan.

Nevertheless, they emphasized that considerable further efforts would be required and reiterated their concerns about long-standing vulnerabilities in the global economy, such as unsustainable medium-term fiscal positions and rising debt in major industrial countries. They stressed the need for policies that could boost long-term growth, such as product and labor market reforms in the euro area, finan-cial and corporate reforms in Japan and much of emerging Asia, strengthened bank supervision in central and eastern Europe, and improvements in the investment climate in many emerging market countries. Successful completion of the Doha Round, actions by low-income countries to reduce poverty, and the establishment of sound institutions by emerging market and developing countries will be cru-cial. Directors emphasized that the oil-exporting countries, with their rapidly rising current account surpluses, need to take advantage of higher revenues to boost expenditures in areas where social returns are high or to allow some real exchange rate appreciation over the medium term.

The Board also welcomed the staff analysis of inflation tar-geting, which has become an increasingly favored monetary policy strategy in emerging markets (Box 3.1). Many Direc-tors considered that inflation targeting could bring impor-tant benefits for emerging market countries by lowering inflation and better anchoring inflation expectations.

World Economic Outlook, April 2006

At their March 2006 discussion of the WEO,3 Executive Directors welcomed the continued strong expansion of the global economy, which had exceeded expectations at their August 2005 discussion. Despite higher oil prices and a number of natural disasters, economic activity in the second half of 2005 and early 2006 was strong, and inflationary pressures remained subdued. The economic expansion had also become more broadly based. While the United States was still the main engine of growth among industrial coun-tries, it was increasingly supported by the ongoing expansion in Japan and signs of a sustained recovery in the euro area. Growth remained strong in emerging markets and develop-ing countries, with particularly buoyant activity in China, India, and Russia. Directors emphasized that, despite these broadly favorable developments, key vulnerabilities—most

3Available at www.imf.org/external/pubs/ft/weo/2006/01/index.htm; the summary of the Board discussion can be found at www.imf.org/external/pubs/ft/weo/2006/01/pdf/annex.pdf.

Surveillance in action during FY2006 | 3

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notably global current account imbal-ances—still had not been addressed.

Looking ahead, Board members expected that global economic condi-tions would remain favorable, with a gradual pickup in investment helping countries weather high oil prices. On the upside, they acknowledged that the growth outlook could be more positive if growth in some emerging market countries continued to exceed expectations or if the corporate sector in the advanced economies ran down its financial surpluses more rapidly than expected. On the downside, with the oil market remaining vulner-able to shocks, given limited excess production capacity, and with prices increasingly driven by supply-side concerns, many Directors felt that the adverse impact of high oil prices on global growth could well increase. Other risks include an abrupt tight-ening in financial market conditions and a possible avian flu pandemic.

Of most concern to Directors was the further widening of global imbal-ances. The U.S. current account deficit had widened to record lev-els, matched by large surpluses in oil exporters, a number of small industrialized countries, Japan, China, and a number of other emerging Asian countries. Board members generally believed that the probability of a disorderly unwinding of imbalances remained low. However, such an outcome could have sizable negative effects for the global economy and the international financial system, and Directors called for actions aimed at reducing these vulnerabilities. A progres-sive narrowing of imbalances would need to be based both on a significant rebalancing of demand across countries and on adjustments in exchange rates.

Directors emphasized that, while the private sector would play a key role in the resolution of global imbalances, a purely market-driven adjustment carried significant risks, underscoring the importance of more rapid implemen-tation of the agreed policy strategy. They also noted the importance of achieving a better balance between externally and domestically led growth and reforming domestic finan-cial systems to boost domestic demand. Given economic interlinkages, all countries and regions would play a role in the adjustment of imbalances, and countries should there-fore increase the flexibility of their domestic economies to

adapt better to changing global patterns of domestic and external demand.

The IMF continues to have a central role to play in promot-ing a coordinated multilateral medium-term solution for reducing global imbalances, Directors agreed. With consen-sus on the broad strategy, the challenge was to work out the precise modalities and accelerate implementation. Directors also underscored the importance of the IMF’s advice in urging countries to resist protectionist pressures and help-ing them exploit comparative advantages through deeper integration.

Directors reiterated their concerns regarding two other long-standing policy challenges facing the global economy.

Unsustainable medium-term fiscal positions remain a key risk. In the major industrial countries, with the exception of Japan, underlying fiscal positions had improved only modestly since 2003, and little improvement is projected over the next two years.

More ambitious efforts are needed to put in place the preconditions for taking advantage of the opportunities

Inflation targeting is being adopted in a growing number of emerging market and developing countries as an alternative nominal anchor to a fixed exchange rate or monetary targeting. It has generally been associated with positive macroeconomic per-formance, even in countries whose institu-tional and operational arrangements are not well developed until after the introduction of inflation targeting.

However, there are some important caveats related to the potential benefits of inflation targeting relative to other regimes. At a semi-nar in February 2006, the Executive Board pointed to the short experience with inflation targeting and the relatively small sample of countries studied.1 A number of Directors also pointed to possible self-selection in the sample and considered that success with inflation targeting might reflect a broader shift in country preferences toward price stability.

1The discussion was based on a staff paper, “Inflation Targeting and the IMF,” which can be found at www.imf.org/external/np/pp/eng/2006/031606.pdf. A summary of the Board’s discussion is available at www.imf.org/external/np/sec/pn/2006/pn0640.htm.

The positive experience in emerging market countries suggests that the technical and institutional preconditions for inflation target-ing may be less stringent than previously believed and less important than developing capabilities following adoption of inflation targeting. Nevertheless, a number of pre-conditions remain important for success—in particular, an autonomous central bank, fiscal consolidation, and adequate financial market development. Directors also highlighted the importance of a clear ex ante commitment to the inflation targeting framework on the part of both the monetary and the fiscal authori-ties, firm political support, a consistent fiscal policy, and effective communication of policy intentions.

At the same time, adoption of inflation tar-geting should not be seen as a panacea, and substantial operational and capacity constraints need to be overcome in many countries contemplating adoption of inflation targeting, a point noted by many Directors. Moreover, capacity constraints in some coun-tries and other structural features of their economies might make inflation targeting unsuitable for the foreseeable future. While inflation targeting can offer significant bene-fits, it may not be appropriate for all countries.

Box 3.1 Inflation targeting

from globalization and for supporting growth. Directors reiterated the need to resist rising protectionist pressures and ensure an ambitious outcome for the Doha Round. They agreed that advancing the structural reform agenda at the national level remained key to removing impedi-ments to long-term growth.

While emphasizing that the impact of globalization on inflation would be temporary unless it changed the objec-tives of monetary policy, Directors observed that import price declines had had sizable effects on inflation in indus-trial countries over one- to two-year periods and noted that globalization had had a significant impact on relative prices. They agreed, however, that globalization could not be relied upon to prevent a pickup in inflation and that central banks must remain vigilant for signs of inflationary pressures.

Conditions in global financial markets remained very favorable, with unusually low risk premiums and volatility. Directors noted that high corporate saving was one factor contributing to low global interest rates, but most believed that it would decline over the next few years as investment increased, probably putting upward pressure on long-term interest rates.

Industrial countries

Directors welcomed the continued strong expansion in the United States despite the temporary slowdown in the fourth quarter of 2005. With corporate profits expanding robustly, business investment and employment could be stronger than expected. On the downside, the large current account deficit made the United States vulnerable to a swing in investor sentiment, and a sharp weakening of the housing market and higher energy prices could slow consump-tion. With core inflation well contained, financial markets indicated their belief that the tightening cycle in the United States was nearly complete, although Directors emphasized the need for vigilance for signs of inflationary pressures. While welcoming the marked improvement in the federal budget deficit in FY2005, most Directors believed that a much more ambitious fiscal adjustment was needed in FY2006 and beyond, with the aim of achieving broad bud-get balance (excluding Social Security) by 2010, based on further spending discipline and consideration of revenue enhancements. In this context, a few Directors noted that a rapid decline in the U.S. fiscal deficit could slow U.S. and global growth in the absence of increased domestic demand elsewhere.

There were signs of a stronger recovery in the euro area, but Board members cautioned that it remained unduly vulner-able to external factors, particularly oil prices and world demand. Against the background of limited underlying inflationary pressures and still fragile domestic demand, most Directors observed that monetary policy needed to

Since 2001, when the Philippines’ last financing arrangement with the IMF ended, the IMF has been undertaking Post-Program Monitoring (PPM) in the country. The Fund’s policy dialogue with the Philippine authorities has focused on the need for reducing vulnerabilities and lay-ing the foundations for higher investment and growth. With heavy public debt, a large fiscal deficit, and major losses at the national power com-pany, the Philippines has often been subject to major swings in investor sentiment in recent years.

Economic reforms have advanced significantly since late 2004, how-ever. Power tariffs have been raised, substantially reducing the national power company’s losses, and a landmark value-added-tax (VAT) reform has been fully implemented, including an extension of VAT to energy products and an increase in the VAT rate. In the financial sector, the Special Purpose Vehicle framework set up to facilitate the sale of non-performing assets has gained traction. These developments have been received favorably by financial markets: the peso has appreciated and bond spreads have narrowed. This progress has been achieved despite political turbulence blowing the reform process temporarily off course in mid-2005. Several key members of the cabinet resigned, and the Supreme Court issued a temporary restraining order on the VAT package. In early 2006, the president declared a state of emergency in response to a failed coup attempt. Going forward, the challenge is to maintain the reform momentum to increase the low rate of domestic investment.

Throughout this reform process, the Philippine authorities and the IMF have maintained a close policy dialogue. The authorities value this relationship, as evidenced by their choice to continue PPM even though outstanding borrowing has fallen well below the 100 percent of quota threshold at which PPM usually ends. The Philippines has also received technical assistance from the IMF to improve tax and customs adminis-tration and strengthen the statistical base.

Philippines-IMF activities in FY2006

May 2005 Authorities and IMF jointly host Domestic Capital Market Development seminar in Manila

September 2005 Completion of the Philippines’ Post-Program Monitor-ing discussions by the Fund’s Executive Board

February 2006 Conclusion of the Philippines’ Article IV consultation by the Fund’s Executive Board

Philippines

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remain appropriately supportive of the recovery. Directors noted with concern the lack of progress in reducing budget deficits and believed that most countries should aim for a broadly balanced fiscal position by the end of the decade. With rising fiscal pressures from an aging population, Directors attached particular importance to the need to reform Europe’s social systems and reiterated the impor-tance of continued structural reforms for enhancing the region’s low potential growth rate.

Welcoming the economic recovery in Japan, Directors noted that it was being driven by domestic demand and was underpinned by rising employment, buoyant corpo-rate profits, and a turnaround in bank credit growth. They expected the positive growth momentum to continue, with potential risks from stronger-than-anticipated private consumption in response to rising employment and labor income. Although they welcomed the fact that core CPI inflation had turned slightly positive and that the Bank of Japan had been able to move away from its quantitative eas-ing framework, they emphasized that interest rates should be kept at zero until deflation was decisively beaten. Direc-tors acknowledged the reduction in the general government budget deficit but called for faster progress in improving the fiscal position to stabilize public debt and accommodate the budgetary pressures from an aging population. Direc-tors underscored the need to complete structural reforms to boost productivity and to complete financial and corporate restructuring.

Emerging market and developing countries

Directors welcomed the continued rapid growth in emerg-ing Asia and expected it to maintain momentum in 2006, once again led by China and India. Directors emphasized the need for more balanced growth in the region and encouraged policymakers to accelerate structural reforms. Most Directors also considered that exchange rates would need to be allowed to appreciate in surplus countries.

The robust economic expansion in Latin America was expected to continue in 2006, with external demand con-tinuing to remain an important driver of growth. While welcoming the disciplined fiscal policies in much of the region, many Directors called for further progress in debt reduction in a number of countries, which will require a continuation of tight fiscal policies and structural reforms, including steps to improve the business climate.

Board members expected growth in emerging Europe to remain firm, although this will depend on the recovery of demand in the euro area. They saw downside risks to the outlook arising mainly from the region’s large current account deficits and the rapid expansion of credit growth in a number of countries and urged increased fiscal consolida-tion in central Europe to reduce external deficits.

Real GDP growth slowed noticeably in the Commonwealth of Independent States. Directors emphasized that monetary policy would need to play a more active role in containing inflation, including by allowing greater nominal exchange rate appreciation where necessary. While countries benefit-ing from higher oil revenues have scope to raise productive spending, Directors cautioned that such spending should be consistent with broader macroeconomic objectives and cyclical considerations. They stressed the need for structural reforms to strengthen the role of the private sector and deepen market institutions.

Directors welcomed the robust economic expansion in sub-Saharan Africa and expected that the growth rate in the region in 2006 would be the highest in three decades, underpinned by high commodity prices, improved macro-economic policies, and structural reforms. They stressed that maintaining high long-term growth rates will be crucial to reducing the incidence of poverty and making progress toward the Millennium Development Goals. The Board underscored the importance of continued reforms to improve the institutional environment, along with struc-tural reforms to encourage greater private investment and to make economies less dependent on global commodity cycles. Directors also called on the international community to support Africa’s reform efforts, including by following through on commitments for greater resource flows and improved market access.

In the Middle East, growth remained robust, led by sub-stantially higher export earnings in oil-exporting countries. Despite stronger domestic demand, inflation remained sub-dued as countries saved a larger proportion of the increase in oil revenues compared with previous oil cycles. Directors emphasized that, with a significant proportion of higher oil revenues expected to be permanent, consideration should be given to carefully planned expenditures to raise growth in both the oil and the non-oil economy and increase employment opportunities for the growing working-age population.

Global Financial Stability Report

Global Financial Stability Report, September 2005

At its August 2005 GFSR discussion,4 the Executive Board observed that the configuration of solid growth, low infla-tion, low bond yields, flat yield curves, and tight credit spreads was contributing to the resilience of the global financial system. Furthermore, the much-improved bal-ance sheets of the sovereign, corporate, and household

4The Report is available at www.imf.org/external/pubs/ft/GFSR/2005/02/index.htm; the summary of the Board discussion can be found at www.imf.org/external/pubs/ft/GFSR/2005/02/pdf/annex.pdf.

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sectors, together with structural changes such as the grow-ing importance and diversity of institutional investors, were providing an important cushion to financial markets. How-ever, although near-term risk had been reduced, potential vulnerabilities—mainly in the form of larger global imbal-ances and higher debt levels, particularly in the household sector—had been stored up for the medium term.

Long-term interest rates in mature markets remained low for a number of reasons, including low levels of investment resulting in excess global saving, a reduction in inflation risk premiums because of greater central bank credibility, reserve accumulation by Asian central banks, and an ongo-ing shift in institutional investor portfolio preferences from equities to bonds. The search for yield remained a dominant theme in financial markets.

Directors noted that the dollar rebounded against major international currencies despite the widening U.S. current account deficit, as investors focused on interest rate and growth differentials in favor of the United States. The global appetite for U.S. assets thus remained strong. However, the risk of increased exchange rate volatility and the possibility of a related spike in U.S. bond yields caused by a reduc-tion of capital flows to the United States, although unlikely, could not be dismissed. The Board welcomed moves by China and Malaysia to make their currencies more flexible.

Many Directors expressed concern that low mortgage-financing costs had induced substantial increases in house-hold debt, particularly in the United States. Relaxation of credit standards and products such as interest-only and negative amortization mortgages might add to risks in mortgage markets, allowing households to take on larger levels of debt and giving increased access to marginal bor-rowers. However, increases in asset prices, particularly in the housing sector, had also raised household net worth.

Emerging financial markets had become increasingly resil-ient, Directors said, but they cautioned that the positive global economic environment might be masking underlying vulnerabilities in some countries. The Board took note of the ongoing broadening of the investor base for emerging markets and the extension of investor interest into local instruments. They also welcomed improvements in the balance sheets of key sectors in mature market economies. Indicators of market and credit risk and financial strength underscored the resilience of the banking and insurance sectors in both mature and emerging markets. A number of Directors, however, stressed the need to guard against the potentially destabilizing effects of hedge fund operations and the growing use of structured products.

While considering policy measures to mitigate risks, Directors stressed that ongoing risk management by indi-vidual financial institutions and supervisory scrutiny by

regulators were the most important lines of defense. In particular, given the risk of corrections in credit-derivative and CDO (collateralized debt obligations) markets, regula-tors must ensure that financial institutions maintain robust counterparty-risk-management practices. The Board also stressed the importance of disclosure and transparency, of work on standards and codes, and—especially for individ-ual investors—of financial education. For the medium term, the risk of growing global imbalances must be addressed by a cooperative effort by the major countries.

Aspects of global asset allocation

Directors noted that a better understanding of the investment patterns of pension funds, insurance companies, mutual funds, and hedge funds would help anticipate the potential for abrupt changes in capital flows across borders and asset classes. Most Directors agreed that the increasing dominance of strategic asset allocations driven more by long-term eco-nomic fundamentals was a positive development.

Directors noted the sustained decline in “home bias” on the part of institutional investors in mature economies over the past 15 years. By raising average returns while reduc-ing portfolio volatility, the shift toward internationalized portfolios has bolstered financial stability, but it has also increased cross-border capital flows and probably led to greater cross-border correlations among asset markets.

Directors also discussed the implications for financial sta-bility of proposals and potential changes in accounting policy. In particular, they recognized the importance of international efforts to improve accounting principles to enhance the comparability and transparency of accounts and to strengthen market discipline.

Corporate bond markets in emerging market countries

Since a number of emerging market countries had achieved macroeconomic stability, the time might be right for the development of corporate bond markets. The Board called for continued efforts by emerging markets to facilitate the growth of institutional investors and noted that small and medium-sized corporations should adopt high standards of transparency and corporate governance. Directors stressed that, for the effective functioning of securities markets, the authorities should adopt a regulatory framework ensur-ing investor protection and market integrity and contain-ing systemic risks. Emerging market countries should also reduce the approval time for, and cost of, issuance.

Directors stressed the importance of a well-developed sec-ondary market in improving price discovery and liquidity while acknowledging that only a few industrial countries were able to achieve this goal. They also noted the comple-mentary role of the development of a government bond

market. Regional cooperation could help promote develop-ment of bond markets for countries lacking the minimum efficient scale for a deep and liquid bond market.

Global Financial Stability Report, April 2006

Meeting in March 2006 to discuss the GFSR,5 Directors wel-comed the continued resilience of the international finan-cial system. They considered that financial conditions would likely remain benign, with continued growth, contained inflation, and stable inflationary expectations. Although the global system faced a number of challenges—in particular, rising interest rates and a turn in the credit cycle for both the corporate and the household sectors—most Directors considered that financial markets should be able to deal well with the expected cyclical risks. A number of Directors, however, cautioned that medium-term risks to financial sta-bility might have increased somewhat in the face of grow-ing global imbalances, higher household debt, and possible underpricing of risk in certain asset classes. Directors urged national authorities to pursue macroeconomic policies aim-ing for solid and well-balanced growth while strengthening supervisory and regulatory oversight.

Although the turn in the corporate credit cycle increased the chances that idiosyncratic risks could lead to a widening of credit spreads for specific firms, overall corporate sector balance sheets remained healthy. Moderate changes in the broad corporate spreads should enable self-correcting forces to operate.

Directors commented that housing and mortgage markets also pointed to a turn in the credit cycle, especially in the United States, where housing activity had moderated. In particular, higher interest rates could raise the already large debt-servicing burdens of households, worsening the credit quality of mortgage markets and causing losses to lend-ing institutions. Since the majority of U.S. mortgages are at long-term fixed rates, however, these risks are mitigated. The main area of concern may lie in the sub-prime segment of the housing and mortgage market, where marginal bor-rowers are exposed to the risks of rising interest rates and a stagnation or decline in house prices.

Despite the rise in U.S. policy rates, spreads for emerging market external bonds were at record low levels, under-pinned by fundamental improvements such as current account surpluses, strong capital inflows, strengthened debt structures, and large reserve cushions, in addition to strong macroeconomic policies and performance. Although emerging markets will likely be tested by less favorable

5Available at www.imf.org/external/pubs/ft/GFSR/2006/01/index.htm; the summary of the Board discussion can be found at www.imf.org/external/pubs/ft/GFSR/2006/01/pdf/annex.pdf.

The Slovak Republic’s economic performance has strengthened progres-sively since 2000, in response to sound macroeconomic management, fundamental structural reforms, and large inflows of foreign direct invest-ment. Real GDP growth has been rising, reaching 6.1 percent in 2005, underpinned by buoyant investment and exports. The country’s export market share in the EU–15 countries has increased rapidly. However, the Slovak Republic’s external current account deficit averaged 5 percent of GDP during 2000-05, reflecting high levels of investment-related imports. Average inflation declined to 2 percent in 2005 from 14 percent in 2000. The fiscal deficit fell to 2.9 percent of GDP in 2005 from 12 percent of GDP in 2000, largely because of expenditure restraint and strong revenue performance, the result of brisk economic growth. A wide array of reforms have been implemented to reduce eco-nomic distortions, stimulate investment and job creation, improve labor market flexibility, and increase incentives to seek work.

The Slovak Republic joined the European Union on May 1, 2004, entered the ERM II on November 28, 2005, and is well positioned for euro adop-tion. However, an important challenge ahead is to bring down inflation, which has risen above 4 percent in 2006 owing, in part, to regulated price hikes and high oil prices, in a manner that does not undermine exchange rate stability and competitiveness.

The country received technical assistance from the Fund in various areas prior to EU accession, and its financial sector has been assessed under the Financial Sector Assessment Program (FSAP). The assessment will be updated during FY2007.

Slovak Republic-IMF activities during FY2006

May 2005 Publication of the data ROSC (Report on Observance of Standards and Codes)

July 2005 Staff visit

November–December 2005 Discussions on 2005 Article IV consultation

March 2006 Completion of 2005 Article IV consultation

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external conditions as liquidity conditions tighten, they will probably continue to be resilient.

Directors noted that a disorderly unwinding of global imbalances posed a risk for financial stability. So far, struc-tural and cyclical factors have allowed financial markets to intermediate smoothly between surplus and deficit coun-tries. Looking ahead, Directors remarked that the prospect of a smooth adjustment in the pattern of accumulation of U.S. dollar assets will be facilitated by the willingness of key countries to take cooperative policy measures aimed at reducing global imbalances over the medium term.

While cyclical changes could well expose weaker segments and pockets of financial markets, the Board considered that these were unlikely to pose systemic risks. Many Directors urged regulators to pursue a firm “no-bail-out” policy to contain risks of investor complacency. Broadly, regulators should place greater reliance on the self-correcting forces of financial markets, while focusing attention on ensuring robust market infrastructures, particularly for credit deriva-tive markets. In particular, Directors emphasized that finan-cial regulators should require rigorous risk-management practices. They also urged regulators to provide guidance on the content of business continuity plans to address possible vulnerabilities related to event risks, such as an avian flu pandemic.

Credit derivative and structured credit markets

Directors noted that the rapid growth in recent years of credit derivative and structured credit markets had facili-tated the dispersion of credit risk by banks to a broader, more diverse group of investors, making the financial sys-tem more resilient and stable. However, Directors observed that these markets had grown rapidly in a relatively benign environment and had not been fully tested and that a pau-city of information to monitor effectively the destination of risks posed a major challenge for policymakers and super-visors. They noted that credit derivative and structured credit markets presented new vulnerabilities that needed to be understood and carefully monitored, particularly with regard to market liquidity, and that policymakers should strengthen the institutional, legal, and regulatory infra-structures needed to attract a diverse and dedicated investor base as a key element of more liquid and robust markets. Industry representatives, regulators, and supervisors should push ahead with efforts to mitigate operational risks in credit derivative markets and continue to seek resolution on a generalized settlement protocol. Supervisors should also require that financial institutions have in place the risk-management systems and skills needed to manage their exposure in credit derivative markets, and enhanced moni-toring of counterparty risk should become a higher priority for market participants and supervisors in all jurisdictions.

Directors noted that credit derivative markets provide use-ful information for supervisors to monitor credit quality across sectors and credit risks within institutions, and they encouraged supervisors to use this information to enhance financial sector surveillance. Directors encouraged national authorities and relevant international agencies to improve and coordinate their collection of credit derivative data—focusing on obtaining and reporting better, rather than simply more, information. Finally, Directors encouraged further research on how financial innovations may influ-ence credit cycles and the provision of credit, as well as the transmission of monetary policy.

Emerging sovereign debt

Directors discussed the implications of recent improve-ments in debt management, debt structure, and diversifica-tion of the investor base in key emerging market countries. They noted the significant improvement in the macroeco-nomic performance of many emerging market countries since the Asian crisis.

Board members generally expected continued positive developments in emerging market countries’ economic performance and debt management. The large current account surpluses and reserves buildup of emerging mar-ket countries as a group, including most of the systemically important countries, should reduce the need for external borrowing and provide a cushion against an expected moderate deterioration in external financing condi-tions. At the same time, Directors cautioned that a sharp rise in global interest rates could have a negative impact on emerging market countries and that several of these remained vulnerable, especially those with weaker fiscal positions, high debt and debt-service burdens, large cur-rent account deficits, or heavy dependence on a few key commodities. They also noted that many countries whose external positions had improved because of increases in commodity prices had postponed needed structural reforms and stressed that emerging market countries must continue to build on recent successes and the gen-erally positive external scenario to mitigate remaining vulnerabilities.

IEO evaluation of the IMF’s multilateral surveillance

This report by the IEO, discussed by the Board in March 2006,6 was broadly positive, finding that the IMF’s surveil-lance products had been largely successful in identifying relevant issues and related risks in a timely manner.

6Available at www.imf.org/external/np/ieo/2006/ms/eng/index.htm; the summary of the Board discussion can be found at www.imf.org/external/np/ieo/2006/ms/eng/pdf/sumup.pdf.

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However, the IEO report identified scope for improvement. In particular, Directors took note of the IEO’s recom-mendation that less weight should be given to descriptive information on developments and prospects and more to analysis of economic policy linkages and the modalities of collective action. Directors also concurred with the report’s finding that it remained a significant challenge to effectively integrate macroeconomic analyses with financial sector and capital markets work and effectively integrate multilateral analysis with country surveillance. Complementary to these efforts, the scope of regional surveillance should be clarified.

Directors discussed ways to improve the effectiveness of multilateral surveillance, based on the IEO’s four recommendations.

Most Directors concurred that, while the Executive Board and the IMFC remain the most appropriate forums for discussions of policy spillovers and possible responses, the IMF should also enhance the effectiveness of its par-ticipation in other forums, including the G-7 and the G-20. The IMF should provide leadership to the global economic community in promoting cooperative solu-tions, drawing on its unique strengths of near-universal membership and access to policymakers of all systemi-cally and regionally important countries, in a transparent manner and without departing from its core mandate.

Most Directors welcomed the report’s recommenda-tion to enhance the roles of the Executive Board and the IMFC in multilateral surveillance but considered that the IEO’s characterization of formal WEO and GFSR sessions failed to do justice to the usefulness of these exchanges. Many Directors saw merit in having the Board identify and agree on key issues for ministers to discuss during the IMFC meetings, focusing on matters related to policy spillovers and scenarios for collective action.

Directors observed that, to heighten the impact of mul-tilateral surveillance outputs on the global policy debate, they could be better targeted to their core audiences, streamlined, and focused on key issues. They saw merit in focusing regional surveillance efforts on regional eco-nomic interlinkages and policy spillovers and in better integrating them with multilateral surveillance.

Directors took note of the report’s recommendations on strengthening the structure of multilateral surveillance by defining organizational strategies and accountabilities within the IMF. They agreed that it would be beneficial to clarify the operational goals of multilateral surveillance but were not persuaded about the need for broad organi-zational changes. Directors agreed that priority should be given to strengthening the integration between multilat-eral and bilateral surveillance, particularly of systemically important countries.

Country surveillance

Under Article IV of the IMF’s Articles of Agreement, each member country makes commitments to endeavor to pur-sue economic and financial policies that are conducive to orderly economic growth with reasonable price stability, to seek to promote stability by fostering orderly underlying economic and financial conditions, to avoid manipulating exchange rates to prevent balance of payments adjustment or to gain unfair competitive advantage, and to provide the IMF with the information necessary for surveillance. To ensure that members are fulfilling these obligations, the IMF conducts regular “Article IV” consultations, usu-ally once a year but less often in some countries. (Informal staff visits often take place between formal consultations.) Through these consultations, the IMF seeks to identify policy strengths and weaknesses, indicate potential vulner-abilities, and advise countries on appropriate corrective actions if needed. Article IV consultations also examine the cross-border effects of countries’ economic conditions and policies, particularly for systemically or regionally impor-tant member countries.

During an Article IV consultation, a staff team visits the member country to collect economic and financial data and discuss with government and central bank officials economic developments since the previous consultation, as well as the country’s exchange rate and monetary, fis-cal, financial sector, and structural policies. The team may also meet with nonofficial groups such as legislators, trade unions, academics, and financial market participants to solicit their views on the economic situation. Toward the end of the visit, the team prepares a summary of its findings and policy advice, which it leaves with the national authori-ties, who have the option of publishing it. On return to IMF headquarters, the team prepares a report describing the economic situation and the talks with the authorities and evaluating the country’s policies. The report is discussed by the Executive Board and a summary of the discussion pro-duced. If the member country agrees, a Public Information Notice (PIN), which provides background and a summary of the Board discussion, is published, with or without the full Article IV consultation report. All PINs are posted on the IMF’s Web site, as are Article IV reports approved for release.

Supplementing these systematic and regular Board reviews of individual member countries are Executive Board assess-ments of economic developments and policies of member countries borrowing from the IMF, as well as frequent and informal sessions to discuss developments in individual countries. The IMF’s country surveillance is also informed by voluntary assessments under the Financial Sector Assess-ment Program (see Chapter 4).

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Academy of Social Sciences, and the Stanford University Center for International Development organized a high-level conference in Beijing on the domestic and regional implica-tions of China’s and India’s changing economic structures.

The IMF also increased its outreach efforts and dialogue with civil society in Central America and the Eastern Carib-bean Currency Union. For example, in December 2005, IMF Deputy Managing Director Agustín Carstens held a press conference in Basseterre, St. Kitts and Nevis, to discuss the economic challenges facing the region.8 In February 2006, the IMF participated in the first regional meeting of the Caribbean Congress of Labor, the World Bank, and the Inter-American Development Bank. The meeting, which was held in Trinidad and Tobago, provided participants with the opportunity to discuss strategies for achieving poverty reduc-tion, equitable growth, employment creation, and regional integration, among other things. The IMF and the World Bank jointly carried out a study of financial sectors in six countries in Central America, as cross-border financial inter-mediation in the region has increased (Box 3.4). The Fund also provided technical assistance to the countries of the Cen-

8Press Release No. 05/268, “IMF Presents Regional Outlook at a Press Con-ference at the Eastern Caribbean Central Bank,” www.imf.org/external/np/sec/pr/2005/pr05268.htm.

Regional surveillanceThe IMF has recently been putting more emphasis on the regional context of surveillance to draw common policy les-sons and capture cross-country spillovers. During FY2006, in addition to Executive Board discussions of the policies of four currency unions—the Eastern Caribbean Currency Union, the euro area, the Central African Economic and Monetary Community, and the West African Economic and Monetary Union—the IMF area departments produced Regional Economic Outlook reports for sub-Saharan Africa, Asia and the Pacific, Europe, the Middle East and Central Asia, and Latin America and the Caribbean. The Executive Board also held a seminar on the common challenges facing the central and eastern European countries that are members of the European Union (Box 3.2), and the IMF, the National Bank of Poland, and the Joint Vienna Institute organized a high-level conference in January 2006 on labor and capital flows in Europe following EU enlargement.7 In September 2005, the Monetary Authority of Singapore and the IMF jointly hosted a high-level seminar on Asian regional finan-cial integration (Box 3.3). In October, the IMF, the Chinese

7Press Release No. 06/28, “IMF, National Bank of Poland, and Joint Vienna Institute High-Level Conference on Labor and Capital Flows in Europe Following EU Enlargement,” www.imf.org/external/np/sec/pr/2006/pr0628.htm. The conference papers are available at www.jvi.org/index.php?id=4447.

Box 3.2 Growth in central and eastern Europe

At a seminar in February 2006, the IMF’s Executive Board discussed the challenges fac-ing the central and eastern European coun-tries (CEECs) of the EU as they raise living standards to western European levels.

Directors recognized the difficulty of disen-tangling the unique forces that shaped the CEECs’ growth over the past 15 years, includ-ing the steep post-transition drop in output, the macroeconomic and institutional reforms related to EU accession, and, more recently, benign global conditions. While the CEECs’ per capita output growth in the past five years had put them in the upper half of the emerg-ing market comparator group—with the Baltics among the top five performers—Directors cautioned that the continuation of these rapid growth rates cannot be taken for granted.

Directors noted important differences in the pattern of growth in the CEECs vis-à-vis other emerging markets, particularly the lack of employment growth and the heavy contribu-tion of total factor productivity (TFP) gains. They acknowledged that the convergence experience of other EU members, such as Greece, Ireland, Portugal, and Spain, demon-strated the viability of sustained periods of

high productivity growth. Nevertheless, they pointed out that the CEECs’ recent TFP growth might have been heavily influenced by the elimination of the inefficiencies of central planning—implying the possibility of some trailing off in the absence of strong efforts to improve the business environment.

Prospects for the CEECs will depend on how well they do in establishing macroeconomic and structural conditions conducive to sus-tained growth, which is expected to be based on greater labor use and higher investment rates. Directors noted that certain environ-mental features and conditions more subject to policy influence played important roles in supporting growth. The former include initial income gaps, population growth and aging, and historical trade relationships; the latter, the quality of legal and economic institutions, government size, real cost of investment, edu-cational attainment and labor market perfor-mance, openness to trade, and inflation.

Directors agreed that European integration would play a critical role in supporting a rapid catch-up in the CEECs. Substantial transfers from the EU to the new member states were one obvious benefit, but poten-

tially more important would be the benefits from closer institutional, trade, and financial integration with western Europe. In this regard, Directors were encouraged by indica-tions that foreign savings had contributed significantly to growth in most CEECs and that even the large current account deficits of some countries had been in line with their growth rates. Directors observed, however, that increased reliance on foreign savings would generate significant vulnerabilities in the CEECs and that this trend there-fore needed to be watched. Large current account deficits were a potential source of increased indebtedness, and their composi-tion deserved careful assessment.

Directors identified a number of policy priorities for CEEC governments, including establishing cushions against shocks, using fiscal surpluses to build up domestic sav-ings, avoiding disincentives to private saving, strengthening financial supervision and cor-porate governance, improving the efficiency of bankruptcy procedures, and making all economic activities more transparent. Direc-tors also encouraged authorities to enact pol-icies that would enable early euro adoption.

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tral American–Dominican Republic–United States Free Trade Agreement (CAFTA-DR) on coordinating their tax systems (see Chapter 7).

Currency unions

In December 2005, IMF staff issued a paper on surveillance over mem-bers of currency unions, and the Executive Board discussions of the common policies of three monetary unions—the Eastern Caribbean Cur-rency Union, the Central African Economic and Monetary Commu-nity, and the West African Economic and Monetary Union—were formal-ized within the process for Article IV consultations with individual coun-tries of those monetary unions.9

Eastern Caribbean Currency Union (ECCU)

The challenges confronting the ECCU’s members10 since the early 1990s contributed to a sharp decline in economic growth—including the erosion of trade preferences for bananas and sugar, a decline in offi-cial development assistance, natural disasters, and a drop in tourism after the September 11, 2001, attacks. This decline, combined with a relaxation of fiscal stances, has considerably weak-ened economic conditions and led to a rapid buildup of public debt. In their July 2005 discussion,11 Directors noted that, while growth and fiscal outcomes have improved since 2004, economic policies have not strength-ened sufficiently to place debt on a clearly downward path and ensure sustainable growth, and many structural rigidities and vulnerabilities remain.

9See “Fund Surveillance over Members of Currency Unions,” a staff paper issued in December 2005, at www.imf.org/external/np/pp/eng/ 2005/122105.pdf

10 The ECCU is composed of six Fund members—Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines—and two dependent territories of the United Kingdom—Anguilla and Montserrat.

11The Board’s discussion is summarized in Public Information Notice No. 05/118, available at www.imf.org/external/np/sec/pn/2005/pn05118.htm.

Directors noted the authorities’ increasing determination to tackle the region’s difficult economic situation and welcomed their outreach efforts. However, the easing of fiscal policies in some countries in anticipation of elections and the 2007 Cricket World Cup was a setback. Directors stressed that the authorities should take advantage of the favorable global growth outlook to step up the pace of fiscal reform.

The importance of ensuring consistency between national fiscal policies and the regional quasi-currency-board arrangement was underscored by Directors. They noted that protracted fiscal weaknesses could adversely affect confidence in the currency board arrangement and macro-economic stability. In this regard, Directors urged that

The Monetary Authority of Singapore and the IMF jointly hosted a high-level seminar in Singapore on Asian regional financial integra-tion in September 2005, which was attended by delegates from 14 Asian economies. The seminar brought together ministers, central bank governors, and other senior officials from Asia, as well as officials from the IMF and the Asian Development Bank, to discuss the opportunities and challenges of Asian financial integration and potential avenues for enhancing regional surveillance and monetary cooperation.

Participants agreed that deep, efficient, and well-regulated capital markets are essential for effective allocation of the region’s savings and for strengthening the region’s resilience to exter-nal shocks in a more open and globalized envi-ronment. They recognized the steps taken since the Asian financial crisis to enhance regional financial cooperation and integration. These include the Chiang Mai Initiative1 and measures to diversify, broaden, and deepen regional bond markets and link regional capital markets.

In this regard, delegates noted the importance of keeping up the momentum of strengthening these linkages. They discussed putting in place the necessary financial market infrastructure,

1The Chiang Mai Initiative, announced in 2000, expanded swap arrangements among the Asso-ciation of Southeast Asian Nations (ASEAN) and called for a network of bilateral swap and repurchase agreement facilities among the ASEAN countries and China, Japan, and Korea. The goal was to strengthen existing regional frameworks for economic cooperation by establishing a regional financing agreement that would supplement exist-ing international facilities.

such as clearing and settlement systems and credit-rating systems. They also noted that, in enhancing intra-Asia integration, their econo-mies had to remain outward-looking and con-nected to the multilateral global system.

The key building blocks for Asian financial integration include continuing economic and financial sector reforms, the building of insti-tutional capacity, and maintaining outward-oriented policies. Delegates exchanged views on ways for Asian countries to further promote financial integration while taking into account the diverse states of development of the Asian economies. They also explored the scope for greater cooperation in capital market develop-ment and agreed on the importance of pursu-ing a multipronged approach. This includes the harmonization of financial regulatory and supervisory standards in Asia, consistent with international standards.

Delegates noted that the Chiang Mai Initiative had helped provide a useful additional safety net to complement international financing arrangements. Participants also discussed the links between trade integration, financial integration, and monetary and exchange rate collaboration. On monetary and exchange rate cooperation, there was a broad consensus that developments would be evolutionary. Partici-pants noted that there would be greater poten-tial for collaboration as they forged common perspectives on fiscal and monetary issues and further integrated the real economy.

Delegates also agreed to further their efforts in regional financial sector surveillance to moni-tor potential vulnerabilities in the financial sys-tem, thereby complementing the surveillance work of international financial institutions such as the IMF and the Asian Development Bank.

Box 3.3 Seminar on regional financial integration in Asia

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efforts be made by regional governments to achieve the fis-cal benchmarks approved by the Eastern Caribbean Central Bank’s (ECCB) Monetary Council.

The Board noted that financial contagion risks were likely to rise as regional financial markets deepened, pointing to a need for continued efforts to strengthen financial sector supervision. It urged the implementation of key measures identified by the regional Financial Sector Assessment Pro-gram, including an increase in the frequency of on-site bank inspections and the approval of amendments to the Uniform Banking Act at the national level. The regulatory and super-visory frameworks for the nonbank and insurance sectors

should also be strengthened. Further, Directors underscored the importance of developing contingency plans, in coordination with the ECCB, to prepare for unanticipated shocks and crises.

The region’s high public debt levels limit the ability of ECCU govern-ments to use fiscal policy to respond to external shocks, underscoring the need for measures to reduce the region’s vulnerabilities. Direc-tors urged the authorities to further enhance disaster mitigation and pre-paredness activities and to undertake greater investment in insurance of public assets and infrastructure, pos-sibly through participation in regional insurance pooling arrangements.

Directors stressed the importance of boosting the competitiveness and growth potential of the region. They urged the public sector to shift from serving as the employer of last resort and main engine of growth to provid-ing a supportive business environ-ment. Directors recommended that the investment climate be improved by deepening regional integration, removing labor market rigidities, revamping the regulatory framework, and attaining greater efficiencies through consolidation and provision of collective government services. Directors also emphasized that the region’s distortionary, nontranspar-ent, and costly tax concessions should be reformed, and that a coordinated regional approach should be adopted to avoid costly tax competition

between islands. Also, in light of the high emigration rates of skilled labor from the region, Directors saw scope for tapping the Caribbean diaspora to support domestic private investment. They also recommended that distortions in financial markets be gradually phased out to stimulate private sector credit and investment.

The emphasis placed by the ECCB on strengthening the availability and quality of statistics in the region was wel-comed by Directors. They stressed that improvements in the coverage, quality, and timeliness of statistical data in all areas would facilitate better assessment of economic, social, and financial conditions and would enhance the quality of policymaking and public debate at all levels.

A distinctive feature of the financial landscape in Central America is its high level of integra-tion. Cross-border flows are significant, and regional financial groups—local conglomer-ates operating in more than one country in the region—account for an important share of regional intermediation. Financial integra-tion holds promise for supporting economic development in Central America but presents increased vulnerabilities and risks. Central American countries also share key challenges in terms of modernizing their financial infra-structure and developing nonbank financial intermediaries.

The IMF, with input from the World Bank, carried out a regional financial sector study in 2005 covering the six Spanish-speaking countries of Central America—Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama.1 The study, which was discussed in an informal Executive Board Seminar in June 2005, explores the countries’ achievements in the path toward regional financial integra-tion and development and makes recom-mendations on ways to address the remaining challenges:

On cross-border banking, governments in the region need to increase the independence of financial oversight agencies and provide adequate legal protection for their staff, along with full accountability. A regional approach is needed to consolidate supervi-sion of regional banking groups, including

1The study, by a staff team led by Patricia Brenner, was published by the IMF in 2006 as CentralAmerica: Structural Foundations for Regional Financial Integration and can be ordered from IMF Publication Services.

adequate reporting and exchange of infor-mation among relevant regulators.

A stronger legal and regulatory framework and greater harmonization of regulations in the insurance sector would help unleash the sector’s potential, in terms of both financial deepening and greater access by consumers.

National payments and securities settle-ment systems, in which Central American central banks have played a very active role, need to be brought into line with inter-national standards and best practices to create the basis for further regional harmo-nization and integration.

There is a need to reduce the costs associ-ated with workers’ remittances—a large and stable source of external financing in the region and an important component of cross-border payments—notably through increased transparency and competition among providers and steps to upgrade the remittance payments infrastructure.

In carrying out this project, IMF staff liaised with the regional financial bodies that are members of the Central American Monetary Council and the Central American Council of Superintendents of Banks, Insurance, and Other Financial Institutions. The project was formally launched following discussions with the Council of Superintendents in Tegucigalpa in November 2004. Subsequent work was carried out at IMF headquarters and during visits to the countries. The IMF is undertaking outreach to disseminate the study’s findings to policymakers, relevant nongovernmental organizations, and financial institutions and markets.

Box 3.4 Regional financial integration in Central America

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Euro area

At their July 2005 discussion of policies in the euro area,12

Directors expressed disappointment with the struggling recovery and continuing high unemployment but noted that the economic fundamentals in the euro area have continued to strengthen, reflecting significant structural reforms in several member states. At the same time, Direc-tors observed that the burden of accumulated rigidities and aging continued to weigh heavily on the euro area, and that fiscal policies fell well short of the area’s fiscal consolidation requirements. Furthermore, business and consumer con-fidence remained low. Against this background, Directors called for a more decisive and consistent pursuit of forward-looking policies aimed at strengthening fiscal adjustment and structural reform.

Directors considered that the fundamentals remained in place for the modest recovery to resume in the second half of 2005, but the outlook was uncertain and the risks lay mainly on the downside. They included further sharp increases in oil prices, multilateral euro appreciation in the context of unwinding global imbalances, a reversal in the benign global financial conditions, and a potentially sluggish investment recovery in the face of weak business confidence.

Directors agreed that the monetary policy stance of the European Central Bank (ECB) remained broadly appro-priate. While headline inflation was still hovering around 2 percent, underlying inflation pressures remained sub-dued. However, many Directors stressed that, absent new information on prices or wages, a cut in interest rates would be appropriate if evidence of a fading recovery continued to accumulate over the coming months. These Directors felt that a rate cut would also be warranted if the euro appreciated significantly on a multilateral basis. Some Directors, however, questioned the case for a rate cut. Given the considerable uncertainty surround-ing the economic outlook, Directors encouraged the ECB’s authorities to remain vigilant and to stand ready to respond flexibly, as warranted.

The need to prepare the euro area’s public finances for the looming demographic shock was underscored by Directors. It would require steady progress toward achieving underly-ing fiscal balance by 2010, when population aging was set to accelerate. Many Directors advocated policies that con-sistently correct current and intertemporal fiscal deficits to anchor consumer confidence. Fiscal adjustment was also needed to achieve adequate safety margins below the 3 per-

12Members of the euro area are Austria, Belgium, Finland, France, Ger-many, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. The summary of the Board’s discussion can be found at www.imf.org/external/np/sec/pn/2005/pn05103.htm.

cent Maastricht deficit ceiling and restore the credibility of the Stability and Growth Pact.

Actions to boost potential growth and employment were deemed crucial. Directors called for particular attention to the appropriate sequencing of product, service, labor, and financial market reforms. Key actions included reforming entitlement systems, boosting labor utilization, deregulat-ing and strengthening competition, completing the inter-nal market, and integrating national financial systems. In this regard, the new integrated guidelines under the revamped Lisbon Strategy were welcomed, as they should aid in the formulation of consistent National Action Plans. Directors observed, however, that with the agenda-setting shifting away from the center, the prospects for reform would hinge on the leadership and determination of national governments. Many Directors considered that growth-enhancing structural reforms would be helpful in underpinning an orderly unwinding of global current account imbalances.

Directors welcomed the progress that had been made through the Financial Services Action Plan and the so-called Lamfalussy process in laying the foundation for fur-ther integration of financial markets and convergence of supervisory practices in Europe. The onus now was on all member states to take a pan-European view to make this process work effectively and on the European Commission to enforce existing rules. Directors agreed that the growing cross-border activities of major, complex financial groups were placing an increasing burden on national supervi-sors. Many Directors also thought that a more integrated approach to supervision deserved consideration.

On trade policy, Directors welcomed the continued com-mitment of the EU to play a leading role in forging agree-ment on the Doha Development Agenda. They underscored the importance of and the multilateral benefits from greater access to the EU’s agricultural markets. Many Directors regretted the recent moves to limit imports of textiles, clothing, and footwear.

Directors stressed that effective area-wide surveillance called for improvements in the quality, availability, and timeliness of statistics, and strengthened statistical institutes. While the availability of statistics was broadly adequate, better fiscal data should remain a key priority for a number of countries.

Central African Economic and Monetary Community (CEMAC)

At their June 2005 discussion, Directors welcomed the posi-tive macroeconomic developments in 2004 in the Central African Economic and Monetary Community, while noting that the situation varied across the six member countries,

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five of which are oil producers that benefited from the effects of oil windfalls.13 The strong growth performance of the region was due mainly to sharp increases in oil output in Chad and Equatorial Guinea. Oil accounts for nearly 80 percent of the region’s exports, and oil prices increased by over 30 percent during the year. Higher oil output and prices led to a growth rate for the region of 8.3 percent, the highest in 10 years. There was a marked improvement in the balance of payments and fiscal accounts and an accu-mulation of international reserves. In addition, inflation remained low as a result of the peg of the CFA franc to the euro, improved fiscal performance, and positive agricultural developments in most member countries.

However, non-oil growth in the region slowed from 3.6 percent in 2003 to 3.2 percent in 2004. Directors observed that, while CEMAC shares many of the growth challenges facing other sub-Saharan African countries, its task is more complex given the exchange rate regime, the volatility of oil receipts, and the expected depletion of oil reserves in several member countries over the medium term. They therefore stressed the importance of steady progress on structural reforms to strengthen non-oil growth, diversify exports, and advance toward the Millen-nium Development Goals. In this regard, they welcomed the broad-based structural measures proposed under ongoing trade initiatives, such as the Economic Partnership Agreement with the European Union.

The importance of fiscal discipline in CEMAC countries was underscored by Directors. They welcomed the prudent management of the increased oil revenue, most of which had been saved in the form of higher foreign exchange reserves. However, as oil prices were expected to remain high in the medium term, and given the overall favorable fiscal and external positions, Directors acknowledged that there could now be scope for additional spending on infra-structure and poverty reduction programs provided that such spending was consistent with the medium-term fiscal and debt sustainability of individual members and their absorptive capacity.

The Board noted that international reserves might need to increase further in view of CEMAC’s fixed exchange rate regime and the underlying economic vulnerabilities. They supported the creation of country-owned oil stabilization funds and “funds for future generations” under the manage-ment of the regional central bank, provided that this did not weaken the external position of the Bank of Central African States (BEAC) and that the funds were managed

13The five oil-producing members are Cameroon, Chad, the Republic of Congo, Equatorial Guinea, and Gabon; the sixth member is the Central African Republic. The summary of the Board’s discussion can be found at www.imf.org/external/np/sec/pn/2005/pn05151.htm.

efficiently and with full transparency. They stressed that changes in the institutional arrangements for managing oil receipts must take into account the need to maintain adequate levels of reserves. Since oil was by far the predomi-nant export, Directors recommended that part of the oil export receipts continue to be placed in the common pool of reserves.

Monetary policy had been broadly successful in keeping liquidity and inflationary pressures under control. Direc-tors commended the recent measures by the regional central bank to strengthen its monetary policy framework and the progress made toward the establishment of a regional payments platform. They stressed the impor-tance of gradually shifting toward the use of market-based instruments in the conduct of monetary policy but noted the lack of such instruments given the region’s shallow and segmented money markets. Directors therefore urged faster progress in finalizing the abolition of statutory advances to member countries and their replacement with treasury bills.

The region’s banking sector continued to show weakness, including a high level of nonperforming loans and the failure of some banks to comply with capital adequacy stan-dards. Directors stressed the importance of strengthening the regional supervisory agency and also noted the very low level of bank credit to the private sector. They encouraged the authorities to step up their efforts to develop a sound and competitive financial sector and supported the use of a regional Financial Sector Assessment Program to help guide a comprehensive reform.

Directors expressed concern that continued obstacles to trade and financial market integration had resulted in low levels of intraregional trade and capital flows and pre-vented CEMAC from reaping the full benefits of regional integration. They regretted, in particular, the persistent lack of implementation of agreed regional policies. They stressed that commitment to, and compliance with, the convergence criteria were crucial to the integration process and to strengthening investor confidence and the business environment.

Authorities should increase the effectiveness of existing regional institutions and agreements before pursuing addi-tional regional integration efforts, Directors said. They cautioned that prematurely integrating CEMAC with a broader group of countries could hamper the necessary deepening of common policies and stressed that changes to the regional integration pattern would need to be consistent with efforts to further trade liberalization.

Directors commended the regional authorities for im-provements in the regional surveillance process, in par-ticular the more nuanced review of member countries’

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fiscal stance. Further changes should aim at strengthening the effectiveness of the regional surveillance framework, including the introduction of appropriate incentives and sanctions and the strengthening and harmonization of the legal and institutional framework. Directors supported the formalization of the IMF’s regional surveillance of CEMAC and its integration with the Article IV consultations with individual countries. Directors emphasized, however, that the lack of resources in CEMAC for continuous regional surveillance and adequate follow-up on findings needed to be addressed.

West African Economic and Monetary Union (WAEMU)

In March 2006, the Executive Board discussed the staff appraisal of economic developments and policy issues in WAEMU.14 Economic performance in 2004–05 had been affected by difficult external and, in some cases, internal environments in WAEMU members. Economic growth was moderate, inflation rose, and the pace of structural reform and regional integration was slow. Directors noted that pros-pects for strengthened economic performance depend on developments in the external environment, the strength of macroeconomic and structural policy implementation, and the resolution of sociopolitical difficulties in Côte d’Ivoire. They called on member authorities to make progress on agreed regional policies, particularly in the area of trade.

The fixed exchange rate regime has provided a useful anchor for regional policy, and the regional central bank’s ability to maintain adequate international reserves has added to the arrangement’s credibility. The real effective exchange rate has appreciated, but it remained broadly in line with fundamentals. Directors stressed that future exchange rate and terms of trade developments should be monitored carefully and called for increased domestic price

14WAEMU has eight members: Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. The summary of the Board’s discussion can be found at www.imf.org/external/np/sec/pn/2006/pn0653.htm.

and wage flexibility to help alleviate past losses in price competitiveness. They also underscored the importance of prudent fiscal policies.

Directors observed that structural and regulatory impedi-ments to private sector activity might be more damag-ing to export growth than price factors and called for a broad-based liberalization of WAEMU members’ business environments.

Rapid credit and monetary expansion was a source of con-cern. Directors considered that, with increasing regional financial integration, the use of differentiated reserve requirements would become less effective. They called on the Central Bank of West African States (BCEAO) to reacti-vate its market-based instruments.

The failure of the region to reach macroeconomic conver-gence within the agreed time frame reflects both underlying economic policies and shortcomings in the design of the convergence criteria, and Directors welcomed efforts to redefine the latter. They urged a renewed commitment of members to adhere to common macroeconomic targets and to promote more integrated regional markets.

Directors also urged the authorities to step up efforts to improve financial sector soundness and enforce prudential regulations. In particular, they underscored the importance of preserving confidence in the regional banking system and welcomed the actions already taken to address systemic banking problems in Togo. Directors also welcomed the development of the microfinance sector.

WAEMU should place a renewed focus on trade issues. Directors pointed to the need to abolish nontariff barriers and the desirability of a pre-announced, phased reduction of external tariffs over the medium term. They stressed the importance of strengthening domestic revenue mobiliza-tion to offset any adverse impact on fiscal revenue of fur-ther trade liberalization. They also recommended that the regional authorities focus on growth-supporting policies relating to infrastructure, trade facilitation, and improve-ments in energy supply.

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during the financial year, the IMF made progress with a range of reforms that followed up on the

2004 Biennial Surveillance Review.1 It sharpened the focus of surveillance, deepened its coverage of exchange rate and financial sector issues, improved its analysis of debt sustain-ability and balance sheet vulnerabilities, paid greater atten-tion to the possibility of regional and global spillovers (see Chapter 3), and enhanced surveillance in low-income coun-tries (Chapter 6). Many of these steps were given added impetus by the Fund’s Medium-Term Strategy (Chapter 2), which was discussed by the International Monetary and Financial Committee (IMFC) at its April 2006 meeting. In its communiqué of April 22, 2006, the IMFC reiterated the importance of making IMF surveillance more effective (see Appendix IV for the full text of the communiqué).

The Fund took steps to improve the effectiveness and orga-nizational structure of its financial sector work:

An external working group reviewed the Fund’s financial and capital markets work. Based on the working group’s report, the Managing Director initiated a major opera-tional reorganization aimed at putting financial issues at the center of the Fund’s work and at ensuring that such financial expertise better serves its 184 members (Box 4.1).

Additional resources were devoted to monitoring finan-cial systems, especially in supporting the compilation of financial soundness indicators (Box 4.2).

The Board considered a report by the Independent Evalu-ation Office on the Financial Sector Assessment Program (FSAP).

All of the Fund’s anti-money-laundering and combating-the-financing-of-terrorism (AML/CFT) work was unified in its Legal Department. This is expected to strengthen work in this area.

With many countries facing important fiscal challenges, the Fund continued to advance its analysis of, and policy advice on, public investment and fiscal policy and related issues. In a pilot project, a new framework for looking at

1The review and the Public Information Notice summarizing the Board’s discussion of the review can be found at www.imf.org/external/np/pdr/surv/2004/082404.htm.

public investment issues was applied in eight countries; experience with the pilot has helped define directions for further work, which will be coordinated with the World Bank. Another staff study focused on the contingent liabilities created by government guarantees and reviewed related disclosure and fiscal accounting issues. The Board discussed several of these issues in May and November 2005.

As oil prices rose during the year, Fund advice focused partly on the need for improved data quality and transpar-ency in the oil sector. The Fund encouraged Special Data Dissemination Standard (SDDS) and General Data Dis-semination System (GDDS) participants to provide more information on oil and gas activities and to improve the quality and transparency of oil market data. In this connec-tion, the Fund’s Guide to Resource Revenue Transparency wasfinalized. In addition, the Board carried out major reviews of the Fund’s work on standards and codes, including data standards.

The IMF continued to work closely with standard-setting bodies such as the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors, the International Organization of Securities Commissions, the Committee on Payments and Settlement Systems, the Inter-national Accounting Standards Board, and the Financial Action Task Force on Money Laundering. IMF staff partici-pated in public commentary on proposals for a new capital adequacy framework for banks issued by the Basel Commit-tee in 2004, and the Board discussed the implications of the framework for the Fund’s work in October 2005.

In the area of crisis prevention, the Fund participates in the Financial Stability Forum (FSF), reporting regularly on various issues related to financial stability. In FY2006, the IMF contributed to the FSF agenda on a range of issues related to risk transfer and global asset allocation in finan-cial systems, as well as on strategies (such as business con-tinuity planning) to mitigate risks from a possible avian flu pandemic, the robustness of international standard-setting processes, and financial institutions’ funding liquidity risk management practices. The IMF’s Board also discussed a report by the IEO on the Fund’s approach to capital account liberalization, and Fund staff applied balance sheet analysis in their surveillance work.

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Financial sector surveillance

During the year, the IMF completed 16 assessments2 under the FSAP, of which 4 were updates (another 43, of which 16 are updates, are either under way or agreed and being planned). Work continued on the Offshore Financial Centers and AML/CFT programs (Boxes 4.3 and 4.4).

Implications of Basel II for the Fund

In June 2004, the Basel Committee on Banking Supervision issued a new capital adequacy framework for banks, Inter-national Convergence of Capital Measurement and Capital Standards—A Revised Framework (“Basel II”), for imple-mentation in the Group of Ten countries3 beginning in January 2007. This new framework, which is far more com-plex than the 1988 Accord (“Basel I”), consists of three pil-lars. Pillar 1 introduces a menu of options for assessing the capital adequacy of banks; Pillar 2 requires an upgrading of supervisory practices to review banks’ international capital adequacy assessments; and Pillar 3 requires public disclo-

2 These numbers refer to financial sector assessments discussed by the Board during FY2006.

3 The Group of Ten (G-10) refers to the group of countries that have agreed to participate in the IMF’s General Arrangements to Borrow, a supple-mentary borrowing arrangement established in 1962 that can be invoked if the IMF’s resources are estimated to be below members’ needs.

sure of more information on banks’ risk profile and risk-management systems.

In October 2005, the IMF’s Executive Board met to discuss the implica-tions for the IMF of the new frame-work,4 which Directors considered an important step toward addressing weaknesses in the existing Basel I framework, especially in improving risk management in financial institu-tions. For many countries, however, the new framework—in particular, Pillar 1—might be too complex and resource-intensive to become an immediate priority. Some coun-tries have not yet fully implemented Basel I. The Board emphasized that premature adoption of Basel II in countries with limited capacity could divert resources from more urgent needs.

Under these circumstances, Direc-tors generally considered that many countries might benefit more in the

short term from a strengthening of supervisory practices as set out under Pillar 2 and from an enhancement of banks’ disclosure practices under Pillar 3 to facilitate the exercise of market discipline. Countries should give priority to devel-oping their financial sector infrastructure and, over time, move toward Basel II implementation. Directors stressed that road maps for Basel II implementation should be comprehensive and realistic and give appropriate attention to necessary preconditions, such as adequate credit data systems. In countries where banks implement the advanced approaches under Basel II, financial sector surveillance should include an assessment of the adequacy of Basel II implementation.

Directors cautioned that Fund staff should avoid conveying the impression that countries would be criticized for not moving to adopt the Basel II framework. They urged staff to be completely candid when asked to assess countries’ readi-ness to move to Basel II and to indicate clearly the risks of moving too quickly and too ambitiously.

Directors voiced concerns that increased risk sensitivity would result in higher capital requirements for loans to emerging market and developing countries as well as higher risk-related capital charges, resulting in reduced capital flows

4 See Public Information Notice No. 05/154, “IMF Executive Board Dis-cusses Implications of the New Basel Capital Adequacy Framework for Banks,” www.imf.org/external/np/sec/pn/2005/pn05154.htm.

In a globalized world where capital moves almost instantaneously across borders, the distinction between domestic and international financial markets is increasingly blurred. In recognition of this, the IMF is shifting the emphasis in its surveillance from real to finan-cial developments and their interactions, with a greater focus on balance sheet linkages and the sources of financing.

To improve its financial sector surveillance, in June 2005, the IMF commissioned a study by an external working group chaired by William J. McDonough, U.S. Public Company Account-ing Oversight Board Chairman.1 Based on the group’s recommendations, the IMF decided to strengthen the Fund’s financial and capital markets work by creating a new department in early FY2007 to serve as the center of all

1 See Press Release No. 05/132, at www.imf.org/external/np/sec/pr/2005/pr05132.htm.

aspects of financial, capital markets, and mon-etary work in the IMF.2 The new department merges the functions and staff of the former International Capital Markets Department (ICM) and the Monetary and Financial Systems Department (MFD).

A new Financial Sector Steering Committee chaired by the Managing Director is over-seeing the merger and will be responsible for coordinating financial sector work and ensuring the close involvement of Fund management in financial sector issues. A task force assisted by outside experts and policymakers has been set up to upgrade the analytical framework for covering financial sector issues in the IMF’s surveillance over individual member countries’ policies (“Article IV consultations”).

2 See Press Release No. 06/21, at www.imf.org/external/np/sec/pr/2006/pr0621.htm.

Box 4.1 Reorganizing the Fund’s financial sector work

to these countries. Also, bank lend-ing to these countries during an economic downturn would become more costly, resulting in reduced bank lending and increased procy-clicality. On the other hand, it was noted that bank lending rates to emerging market and developing countries may already incorporate the risk premium, and that the greater risk sensitivity under Basel II could mitigate “herd behavior” by banks, which makes this outcome less likely.

Many Directors considered it appropriate for Fund staff, together with other relevant institutions, to develop guidance materials to support assessments of countries choosing to adopt Basel II, tak-ing into account each country’s specific circumstances. Technical assistance should focus on putting in place the prerequisites for coun-tries seeking to adopt the Basel II framework—namely, strengthen-ing financial sector infrastructure, core supervisory functions, and the conditions allowing for the exer-cise of market discipline. Direc-tors called for a clear division of labor between the IMF and the World Bank, with the Fund bearing primary responsibility for financial stability issues and the supervisory framework and practices, and the Bank for financial sector infrastructure and institutional development.

To conduct financial sector surveillance effectively in the Basel II environment, the Fund will need to build its expertise, although resources will be scarce in the coming years. The Fund will need to use external funding where possible and to recruit outside experts for both the short and the long terms.

IEO report on the Financial Sector Assessment Program

The Financial Sector Assessment Program (FSAP) was introduced in May 1999 by the IMF and the World Bank to strengthen the monitoring of member countries’ financial systems. It is designed to help countries prevent and increase their resilience to crises and cross-border contagion and to foster sustainable growth by promoting financial system soundness and financial sector diversity.

Assessments of financial systems undertaken under the FSAP

identify the strengths, risks, and vulnerabilities in the financial system and the two-way linkages between financial sector performance and the macroeconomy;

ascertain the financial sector’s development needs; and

help country authorities design appropriate policy responses.

The comprehensive nature of financial sector assessments requires a wide range of analytical tools and techniques. These include financial stability analysis, stress testing and scenario analysis, and assessments of countries’ observance of relevant international financial sector standards, codes, and good practices. In implementing the FSAP, the IMF and the World Bank draw on feedback received from the Execu-tive Boards of both institutions, from countries that have participated in the program, and from various international groups. They also draw on the knowledge of experts from a range of cooperating central banks, supervisory agencies, standard-setting bodies, and other international institu-tions, and outside experts augment the expertise in the IMF

The IMF, in consultation with the international community, has developed indicators to monitor the soundness of the financial sector. Financial soundness indicators (FSIs) have also been developed for the markets in which the financial institutions operate, for the corpo-rate and household sectors, and for real estate markets. The new methodology is contained in the IMF’s Compilation Guide on Financial Soundness Indicators.1

As part of its efforts to enhance finan-cial system surveillance, in 2004 the IMF launched a coordinated compilation exercise for FSIs. The terms of reference required that the 62 participating countries compile and submit to the IMF end-2005 data for at least the core set of 12 indicators, along with detailed metadata. Countries were also encouraged to compile and submit data and metadata for any of 28 encouraged FSIs (see Table 2.1 in the IMF’s 2004 Annual Report). These data and metadata will be made public by the IMF by end-2006. Participating countries are encouraged to follow the IMF Compilation Guide’s recommendations to the

1 Available at www.imf.org/external/np/sta/fsi/eng/2004/guide/index.htm.

extent possible to foster comparability of data across countries.

To support the compilation of FSIs, the IMF conducted four regional meetings during May–July 2005 (in Brasilia, Frankfurt, Sin-gapore, and Vienna), which were attended both by representatives from the participating countries and by observers from international and regional agencies. The meetings provided an opportunity to discuss the methodology of the Compilation Guide and the implications of evolving supervisory and accounting stan-dards, and to consult with countries on their FSI compilation issues, as well as on their first draft FSI metadata.

Later in the year, participating countries pro-vided a second draft of FSI metadata to IMF staff. In December 2005, representatives from eight international and regional agencies that are members of a reference group for the exercise met in Washington, D.C., to receive updates on the progress made on the exercise and to discuss remaining issues.2

2 “Progress on the Financial Soundness Indicators Work Program” is available at www.imf.org/external/np/sta/fsi/eng/2005/061405.htm.

Box 4.2 Financial soundness indicators

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and the World Bank. In September 2005, the institutions jointly pub-lished a Financial Sector Assessment Handbook.5

Executive Directors met in January 2006 to discuss the IEO’s evaluation of the FSAP.6 They agreed with the key IEO conclusion that the FSAP represented a distinct improvement in the Fund’s ability to conduct financial sector surveillance and to understand linkages between finan-cial sector vulnerabilities and mac-roeconomic stability. Directors were encouraged by the IEO’s assessment that FSAPs and FSAP updates con-tributed to the articulation of policy recommendations, prompted better discussions with authorities, and supported policy and institutional changes.

At the same time, Directors consid-ered that the IEO report provided a balanced and candid assessment of areas for improvement—in par-ticular, making financial stability assessments an integral part of the Fund’s bilateral and mul-tilateral surveillance and ensuring participation by coun-tries most in need of stronger financial sector surveillance. Directors recognized that any adjustments and improve-ments would need to take into account possible resource implications for the Fund.

Most Directors agreed that incentives to participate in FSAP assessments and updates were critical for maintain-ing the program’s effectiveness. They were concerned that some countries that are systemically important or that might have vulnerable financial systems had not yet volun-teered for initial assessments and that some countries had been reluctant to volunteer for updates, but most Directors considered that the voluntary nature of the FSAP should be maintained.

Directors welcomed the discussion in the IEO report on whether the criteria for prioritizing FSAPs and FSAP updates were adequate (Recommendation 1). While a few Directors considered that the IEO report did not provide

5 The Handbook is available online at www.imf.org/external/pubs/ft/fsa/eng/index.htm.

6 The IEO’s “Report on the Evaluation of the Financial Sector Assessment Program” is available at www.imf.org/external/np/ieo/2006/fsap/eng/index.htm; the summary of the Board’s discussion can be found at www.imf.org/external/np/ieo/2006/fsap/eng/pdf/sumup.pdf.

sufficient evidence that current mechanisms are inad-equate, many Directors agreed on the need for clearer guidance.

To align FSAP coverage better with the needs of surveil-lance, most Directors agreed with the IEO proposal that management should indicate to the Board which coun-tries it considered the highest priorities for FSAP assess-ments and updates (Recommendation 2). Most Directors considered that Article IV staff reports should explicitly recommend an initial FSAP or FSAP update in priority cases but should be mindful of potential market sensitivi-ties. A number of Directors also pointed to the report’s finding that the burden of FSAPs on the authorities is high and stressed that reducing this burden through bet-ter planning and focus is critical for achieving increased participation.

Many Directors saw merit in the IEO proposal that staff develop country-specific plans for financial sector surveil-lance. It was noted, however, that this proposal goes to fundamental questions as to how the Fund should conduct financial sector surveillance. Directors agreed that the pro-posal, as well as possible adjustments to resource allocation and other modalities (including the frequency of FSAPs), would be considered in the broader context of the ongoing discussion on enhancing the effectiveness of Fund financial sector surveillance.

The offshore financial center (OFC) assessment program was initiated in 2000 and reviewed by the Executive Board in 2003. At that time, the Executive Board agreed that the monitoring of OFCs, to ensure their compliance with super-visory and integrity standards, should become a standard component of the Fund’s financial sector work. In February 2006, the staff issued a progress report to the Executive Board.1

Forty-two assessments were completed under the first phase of the program. In the second phase, as of April 30, 2006, six jurisdictions had been assessed. Assessments are being conducted in accordance with the four– to five-year cycle envisaged by the Executive Board.

Progress has also been made on the informa-tion dissemination and monitoring initiative that was undertaken (1) to provide the IMF with information for its ongoing monitoring of financial developments in these centers and

1The report is available at www.imf.org/external/np/pp/eng/2006/020806.pdf

(2) to help improve the transparency of activi-ties in international and offshore financial cen-ters. As of end-April 2006, 18 jurisdictions had provided the IMF with data as part of this ini-tiative. The IMF continues to provide technical assistance, generally to small, lower-income jurisdictions, mainly on banking supervision and anti-money-laundering and combating-the-financing-of-terrorism measures.

In November 2005, the IMF held the third roundtable for onshore and offshore supervi-sors and standard setters. The roundtable highlighted the need for continued attention to cooperation and information sharing, risk-based supervision, and appropriate sequenc-ing of standards implementation as the means to address increasingly complex cross-border issues. Participants agreed that super-visors and standard setters should consider disseminating good practices on information sharing, providing Web site guides to jurisdic-tions’ information-sharing arrangements, and assigning priority and resources to information exchange issues.

Box 4.3 Monitoring offshore financial centers

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Directors concurred with the IEO recommendation to strengthen links between FSAPs and surveillance (Recom-mendation 3). To facilitate this, Financial Sector Stability Assessments (FSSAs) should contain candid summaries of the main findings of FSAPs with relevance for the macro-economy and potential macroeconomic implications of key financial sector risks. Directors stressed that financial stabil-ity issues judged to be of high importance—including those with potential global repercussions—should be a major focus of Article IV consultations and of the Board discus-sions of them.

Directors encouraged the staff to follow up on IEO recom-mendations to improve further the quality of FSAPs and strengthen their impact (Recommendation 4). Staff recom-mendations should be clearly prioritized and the potential consequences of not addressing key weaknesses candidly discussed. Directors emphasized the importance of treating financial sector and cross-border linkages more systemati-cally in FSAP analysis in light of the growing importance of regional and global spillover effects. To improve the quality

and clarity of stress-testing analysis, the reports needed to contain more informative and candid discussions on methodological and data limita-tions, and the staff should not refrain from carrying out analysis of politi-cally sensitive shocks.

Directors discussed the implications of the publication policy of FSSAs for the effectiveness of FSAPs. While some Directors considered that a move to presumed publication of the FSSA would enhance the impact of FSAPs on country authorities, donors, and market participants, many other Directors argued that such a move would not be consistent with the vol-untary nature of the program.

Many Directors welcomed the IEO’s recommendation to introduce changes in the organization of IMF mission activities to utilize scarce financial sector expertise more effec-tively in the surveillance process (Recommendation 5).

While the view was expressed that the Fund should take the lead on all FSAPs, most Directors were in broad agreement with the report’s recom-mendations regarding Bank-Fund collaboration (Recommendation 6).

They concurred that the current joint approach, includ-ing the central role for the Bank-Fund Financial Sector Liaison Committee, should be maintained. At the same time, further efforts should be made to take full advantage of the distinctive contributions that the two institutions can make—with the Fund focusing on stability issues and the Bank on financial sector development and institution building.

Directors concurred that there was room to improve the coordination of FSAP-related technical assistance activities, based on the country’s own action plans (Recommendation 7). They noted that steps had been taken in this direction—such as follow-up meetings on technical assistance of the authorities with IMF staff and, sometimes, donors. At the same time, Directors cautioned against overburdening the FSAP with additional expectations regarding the assessment and planning of technical assistance needs and taking exces-sively formal approaches to follow-up that could overtax already stretched Fund resources and discourage ownership by the authorities.

In September 2005, the IMF’s Executive Board endorsed an adjustment of the IMF’s anti-money-laundering/combating-the-financing-of-terrorism (AML/CFT) program to focus more on tackling the challenges faced by countries implementing standards and regimes. The IMF’s Board also endorsed Special Recom-mendation IX of the Financial Action Task Force (FATF) concerning measures to deter cross-border movements of currency and monetary instruments related to the financing of terror-ism and money laundering. These decisions were based on a review of the Fund’s and the Bank’s work programs following a call by their Boards in March 2004 to make AML/CFT a regular part of the work of both institutions.1

Although AML/CFT regimes have been strength-ened in the member countries of the Fund and the Bank in recent years, the review indicated that the revision of the FATF standard in June 2003 significantly raised the bar for countries’ legal, regulatory, and institutional frameworks. Comparing assessments carried out before and after the revision, the review showed that all countries faced difficulties in achieving compliance with the revised standard. Given the complexity of the revised standard, the

1The review is available at www.imf.org/external/np/pp/eng/2005/083105.htm.

higher costs of implementation, and the com-peting demands on national resources, the review advised focusing on practical consider-ations, vulnerabilities, priorities, and sequenc-ing in putting AML/CFT regimes in place.

The IMF and the World Bank, in collaboration with other donors, have greatly intensified the delivery of technical assistance to respond to countries’ needs. Nearly 1,000 officials from 111 countries have been trained in AML/CFT, including legal, financial intelligence unit, and supervisory issues, and 37 countries have adopted or are in the process of enact-ing AML/CFT legislation, while a number of others are at earlier stages in the process. However, in light of the Fund’s and the Bank’s limited resources, the review urged the donor community to commit additional resources to helping countries implement the revised standard.

Going forward, the Fund and the Bank will focus on conducting assessments of mem-bers’ AML/CFT regimes, technical assistance delivery, and broader regulatory and economic policy issues; increasing outreach to raise awareness among parliamentarians and key decision makers on AML/CFT; and working with the donor community to commit additional resources in support of countries’ needs for technical assistance.

Box 4.4 Update on AML/CFT

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Fiscal analysis and policy advice

Many countries with IMF-supported programs must undertake fiscal adjustment to stabilize their economies, address their balance of payments problems, and improve their longer-term growth performance.7 How can coun-tries undertake fiscal adjustment without neglecting their infrastructure needs? The Board first discussed this issue at an informal seminar in April 2004, based on two papers prepared by IMF staff.8 Following up on that discussion, the IMF staff carried out a study in eight pilot countries in Africa, Asia, Latin America, and the Middle East. Another staff study focused on the contingent liabilities created by government guarantees and reviewed related disclosure and fiscal accounting issues. The findings were summarized in three papers discussed by the Board in May 2005.9

Public investment and fiscal policy

At their discussion, Directors generally supported the staff ’s conclusions. They reiterated the importance of public infrastructure investment for economic growth, while acknowledging the lack of hard evidence in the pilot countries on the precise relationship between the two, and emphasized the relative importance of complementary fac-tors such as macroeconomic stability and the investment climate. Public infrastructure investment and rehabilitation needs remained sizable, especially in low-income countries. Directors noted the possible causes and consequences of the decline in public investment observed in several of the pilot countries. Among the possible causes are fiscal consolida-tion, including in the context of Fund-supported programs; a fall in public saving; completion of major public infra-structure projects; preference for a smaller public sector; and private sector development. Directors encouraged the staff to investigate further how the quality and composition of public expenditure affect growth and to improve debt

7The IMF issued updated guidelines for fiscal adjustment in January 2006, reflecting not only the significant changes that have taken place in the world economy since the previous guidelines were published in 1995 but also changes in the IMF’s approach to fiscal adjustment. The new guide-lines can be found at www.imf.org/external/np/pp/eng/2006/012706a.pdf.

8See Public Information Notice No. 04/45, “IMF Executive Board Holds Informal Seminar on Public Investment and Fiscal Policy,” www.imf.org/external/np/sec/pn/2004/pn0445.htm; “Public Investment and Fiscal Policy,” www.imf.org/external/np/fad/2004/pifp/eng/index.htm; and “Public-Private Partnerships,” www.imf.org/external/np/fad/2004/pifp/eng/031204.htm.

9 See Public Information Notice No. 05/68, “IMF Executive Board Holds Follow Up Meeting on Public Investment and Fiscal Policy,” www.imf.org/external/np/sec/pn/2005/pn0568.htm; “Public Investment and Fiscal Policy—Lessons from the Pilot Country Studies,” www.imf.org/external/np/pp/eng/2005/040105a.htm; “Public Investment and Fiscal Policy—Summaries of the Pilot Country Studies,” www.imf.org/external/np/pp/eng/2005/040105b.htm; and “Government Guarantees and Fiscal Risk,” www.imf.org/external/np/pp/eng/2005/040105c.htm.

sustainability analyses by taking account of robust estimates of the growth implications of public investment. However, they emphasized that the World Bank should take the lead in exploring the growth implications of specific public investment projects.

Directors supported the focus on the overall fiscal balance and on complementary indicators, such as the current fis-cal balance, when assessing the scope for increasing public investment and the quality of a country’s fiscal policy. The scope for increasing public investment by relaxing overall fiscal targets remained quite limited in most countries, particularly in those that had a high debt burden and were vulnerable to macroeconomic shocks. Directors stressed the overarching importance of ensuring that borrowing to finance public investment was consistent with macroeco-nomic stability and debt sustainability. Where this outcome was not assured, increases in public investment would need to be matched by increases in public saving through better prioritization of expenditure and, in many countries, sus-tained efforts to mobilize additional revenue. More policy options were available to countries with relatively low debt burdens and to countries with access to concessional financ-ing on a sustained basis. Directors also emphasized the need to improve the quality of new investment by strengthening the institutional capacity for project appraisal, selection, and implementation, which remain the responsibility of the multilateral development banks; in this regard, they saw an important role for technical assistance from the latter.

A key conclusion that emerged from the studies was that additional room for public infrastructure spending could not be created by changes in fiscal accounting. Coun-tries with different levels of economic and institutional development could well have different “optimal” ratios of public investment to GDP. An assessment of the scope for increasing public investment in any given country would require, in particular, careful analysis of macroeconomic conditions; debt sustainability; the quality of the proposed projects; and the trade-offs among taxes, public infrastruc-ture spending, and other types of expenditure. Directors also emphasized the need to address noninfrastructure bottlenecks to economic development, in particular, the policy and institutional environment for private investment, including especially the tax and regulatory frameworks and governance.

Directors generally saw merit in the staff ’s call for compre-hensive coverage of public enterprises in fiscal statistics, in line with the IMF’s Government Finance Statistics Manual 2001 (GFSM 2001) framework, but recognized that this would be a difficult task achievable only over time because of data problems. Most Directors endorsed the approach proposed by the staff for moving forward in this area by progressively integrating public enterprise operations into

countries’ fiscal accounts, thereby ensuring greater unifor-mity of reporting across the membership over time. With regard to the treatment of public enterprises in fiscal indica-tors, Directors noted that hardly any public enterprises met the criteria for commercial orientation proposed in the staff paper considered by the Board in April 2004. They broadly endorsed the proposed revised approach, which focused more on the fiscal risks posed by the operations of public enterprises. Most Directors also agreed that testing the revised criteria in a sample of upcoming Article IV consul-tations could inform the design of a strategy. A few Direc-tors felt that it would not be appropriate to allow for greater case-by-case flexibility in making decisions on integrating public enterprises in fiscal indicators and targets in a Fund-supported program context and noted the difficulties of assessing fiscal risks posed by individual enterprises. These Directors called for the development of a more standard-ized approach.

Public-private partnerships (PPPs) offer a potential avenue to increase infrastructure investment, provided they are appropriately structured and the institutional framework is well developed. Directors agreed with the view that PPPs should be undertaken with the goal of increasing efficiency by attracting private capital. Directors strongly cautioned against pursuing PPPs because of a desire to move invest-ment spending off budget. Furthermore, the government should ensure that the risk associated with PPPs was appro-priately shared with the private sector, with the risk borne by the government reflected in the fiscal accounts. Direc-tors endorsed the view that high priority should be given to strengthening the institutional framework for PPPs—including the establishment of a sound legal framework and the preparation of a public sector comparator—and called on the multilateral development banks to take the lead on these issues.

Directors saw the lack of an internationally accepted accounting and reporting standard for PPPs as a possible obstacle to the development of efficient PPPs and endorsed continued staff work with the relevant accounting bodies to promote the preparation of such a standard. In the mean-time, they generally endorsed the proposed disclosure and reporting requirements for PPPs, noting the importance of valuing the contingent liabilities associated with guar-antees. They saw merit in the staff ’s proposed approach to incorporating PPPs in debt sustainability analysis, which involves counting committed payments by the government under PPP contracts and expected payments arising from the calling of guarantees as future primary spending. A few Directors called for caution in factoring implicit con-tingent liabilities related to PPPs into debt sustainability analyses. Most Directors agreed that the issue of setting caps on expected costs arising from PPPs, including in Fund program design, should be determined on a case-by-case

Ireland’s economy has performed impressively over the past decade. Real GNP growth averaged about 7 percent a year during 1995–2004, bringing income per capita up to the average of the EU-15; the unem-ployment rate declined sharply and is now one of the lowest in the indus-trial countries; and inflation stabilized close to the euro area average. This remarkable performance owed much to sound economic policies, including prudent fiscal policy, low taxes on labor and business income, and social partnership agreements that contributed to wage moderation.

Economic performance continues to be strong. In 2005, real GNP growth reached 5 / percent, driven by domestic demand; unemployment was close to the natural rate; and the general government recorded a surplus of 1 percent of GDP. Labor force growth, fueled by increased participa-tion and immigration, has helped dampen wage pressures. House price appreciation, which had eased through mid-2005, has picked up again against the backdrop of rapid credit growth. In response to a reported relaxation of lending standards, the authorities have increased the risk weighting on residential mortgages.

In March 2006, an IMF team visited Dublin to update the 2000 Financial Sector Assessment Program (FSAP). The team found that Ireland’s finan-cial system remained robust but recommended some improvements to the supervisory framework, including upgrading stress testing, strength-ening on-site supervision of insurers, and enhancing public disclosure requirements for insurers.

Ireland-IMF activities during FY2006

May 2005 Discussions on 2005 Article IV consultation

October 2005 Completion of 2005 Article IV consultation

March 2006 Mission to update the 2000 FSAP

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basis, with a focus on cases where these costs contribute to, or limit the capacity to respond to, debt sustainability problems.

Directors noted the staff ’s assessment that further work along the lines being proposed may require significant addi-tional staff resources, which will be quantifiable only over the longer term, depending on the pace at which national authorities can move to include public enterprises in the fiscal accounts, and on the results of the testing in a sample of Article IV consultations of the revised criteria for assess-ing the fiscal risks posed by public enterprises. The issue of resource cost, as well as the balance of costs and benefits that emerges moving forward, will therefore need to be kept under close review.

Statistical frameworks for strengthening fiscal analysis in the Fund

As a follow-up to the Executive Board May 20, 2005, meet-ing on public investment and fiscal policy, Directors held a seminar in November at which they discussed a staff paper on using the Government Finance Statistics Manual 2001(GFSM 2001)10 statistical framework to strengthen fiscal analysis in the Fund. They considered that the GFSM 2001 provided a comprehensive analytical framework that would strengthen fiscal policy analysis and reporting in Fund sur-veillance and program work through three summary fiscal tables—the operating statement, the balance sheet, and the cash statement—and the core indicators that are derived from these tables.

Use of the GFSM 2001 framework, which enhances the ability to record noncash transactions in a coherent and consistent manner, leads to greater transparency and con-sistency in the presentation of country fiscal data in staff reports. Directors acknowledged that GFSM 2001 was an appropriate framework for handling new and complex fiscal operations that could pose challenges to fiscal reporting and analysis.

Directors were encouraged that the actions recommended by the staff could be accomplished in three phases: data presentation (short term), country reporting (medium term), and full implementation of accrual reporting and the associated underlying systems (long term). Noting that the GFSM 2001 framework had not been tested across the Fund’s membership, most Directors supported the staff ’s proposal to conduct pilot studies for volunteer countries

10The staff paper, “Using the GFSM 2001 Statistical Framework to Strengthen Fiscal Analysis in the Fund,” can be found at www.imf.org/external/np/pp/eng/2005/102505.pdf. The manual is available at www.imf.org/external/pubs/ft/gfs/manual/index.htm. For a summary of the Board discussion, see Public Information Notice No. 05/167, www.imf.org/exter-nal/np/sec/pn/2005/pn05167.htm.

over two years and within the Fund’s existing budgetary envelope to map out more fully the process involved in shifting to the GFSM 2001 framework. The staff will report back to the Board on the pilot studies, together with pro-posals for full implementation of the GFSM 2001 method-ology. Proposals would need to take account of countries’ different capacities and legal constraints and of the costs to the Fund and to national authorities.

Directors were supportive of the technical assistance work being done by the Fund staff, including provision of guid-ance to country compilers in reporting operational data to the Fund using the GFSM 2001 framework. They empha-sized the importance of this technical assistance work to strengthen the underlying accounting and classification systems.

Standards and codes, and data provision to the Fund

The Standards and Codes Initiative and Data Standards Initiatives have been important adjuncts to the Fund’s sur-veillance and capacity-building activities. In FY2006, the IMF’s Executive Board carried out its third review of the Standards and Codes Initiative and its sixth review of the Data Standards Initiatives, the Special Data Dissemination Standard (SDDS) and the General Data Dissemination Sys-tem (GDDS). Of the Fund’s 184 members, 146 subscribe to the SDDS or participate in the GDDS (Box 4.5).

Standards and Codes Initiative

In July 2005, the IMF’s Executive Board considered a joint IMF–World Bank staff paper on the Standards and Codes Initiative, which was launched in 1999 as part of efforts to strengthen the international financial architecture.11 The initiative was designed to promote greater financial stability at both the domestic and the international levels through the development, dissemination, adoption, and implemen-tation of international standards and codes in 12 areas—data quality, monetary and financial policy transparency, fiscal transparency, banking supervision, securities, insur-ance, payments systems, anti-money-laundering provisions, corporate governance, accounting, auditing, and insolvency and creditor rights. The IMF and the Bank evaluate member countries’ policies against international standards and codes that serve as benchmarks of good practice in these areas and

11For a summary of the Board discussion, see Public Information Notice No. 05/106, at www.imf.org/external/np/sec/pn/2005/pn05106.htm. The paper discussed by the Board, “The Standards and Codes Initiative—Is It Effective? And How Can It Be Improved?” is available at www.imf.org/external/np/pp/eng/2005/070105a.htm.

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issue Reports on the Observance of Standards and Codes (ROSCs), which are intended to help countries strengthen their economic institutions, to inform the work of the Fund and the Bank, and to inform market participants.12

The Fund and the Bank Boards previously reviewed the implementation of the initiative in 2001 and 2003. A key focus of the second review13 was on how to handle growing demand for assessments. Directors saw greater prioritiza-tion as key to focusing scarce resources on areas where reforms were most needed. The 2005 review sought to assess the initiative’s effectiveness, including by surveying

12The Board has not yet endorsed a standard for insolvency and creditor rights.

13 See Public Information Notice No. 03/43 at www.imf.org/external/np/sec/pn/2003/pn0343.htm.

the views of stakeholders, such as country authorities and market participants.

At their discussion, Directors noted that the number of completed assessments had grown substantially in the past two years, although at a somewhat slower pace than earlier, reflecting a reduction of the number of financial sector standards assessed under the streamlined FSAP and the completion of initial assessments for a substantial portion of the IMF’s membership. Most systemically important countries had participated in the initiative. There had been some important exceptions, however, and regional partici-pation had remained uneven.

Directors were broadly satisfied with the initiative’s effec-tiveness to date, although some objectives had been met more successfully than others—for example, the identifica-tion of vulnerabilities and establishment of priorities for

Box 4.5 ROSCs and Data Standards Initiatives

Reports on the Observance of Standards and Codes (ROSCs). A ROSC is an assess-ment of a country’s observance of standards in one of 12 areas useful for the operational work of the Fund and the World Bank. The reports—about 74 percent of which have subsequently been published—examine three broad areas: (1) transparent government operations and policymaking (data dissemina-tion, fiscal transparency, monetary and finan-cial policy transparency); (2) financial sector standards (banking supervision, payments sys-tems, securities regulation, insurance supervi-sion, and efforts to combat money laundering and the financing of terrorism (AML/CFT)); and (3) market integrity standards for the corpo-rate sector (corporate governance, accounting, auditing, insolvency, and creditor rights). Par-ticipation in the Standards and Codes Initia-tive continues to grow. As of end-April 2006, 725 ROSC modules had been completed for 130 countries, or 71 percent of the Fund’s membership, and most systemically important countries had volunteered for assessments. More than 340 of the ROSCs were on financial sector standards. Of these, about one-third were related to banking supervision, and the others were fairly evenly distributed across the other standards and codes.

Special Data Dissemination Standard (SDDS). Created in 1996, the SDDS is a vol-untary standard whose subscribers—countries with access to international financial markets or seeking it—commit to meeting interna-

tionally accepted norms of data coverage, frequency, and timeliness. Subscribers also agree to issue calendars on data releases and follow good practice with respect to the integ-rity and quality of the data and access by the public. SDDS subscribers provide information about their data compilation and dissemina-tion practices (metadata) for posting on the IMF’s Dissemination Standards Bulletin Board (DSBB).1 Subscribers are also required to maintain a Web site electronically linked to the DSBB that contains the actual data. SDDS subscribers began disseminating prescribed data on external debt in September 2003; data for 54 countries are published in the World Bank’s Quarterly External Debt Statis-tics (QEDS). Romania and Morocco became subscribers in FY2006, raising the number of SDDS subscribers to 62 as of April 30, 2006.

General Data Dissemination System (GDDS). The GDDS framework was estab-lished in 1997 to help Fund member countries improve their statistical systems. Voluntary participation allows countries to set their own pace but provides a detailed frame-work that promotes the use of internationally accepted methodological principles, the adoption of rigorous compilation practices, and ways in which the professionalism of national statistical agencies can be enhanced.

1 The Web site address is dsbb.imf.org/Applications/web/dsbbhome.

The 83 participants in the GDDS at end-April 2006 provide metadata describing their data compilation and dissemination practices as well as detailed plans for improvement for posting on the IMF’s Dissemination Standards Bulletin Board. Between the fifth review of the Data Standards Initiatives in July 2003 and April 30, 2006, 30 countries and territories began participating in the GDDS. Of the 89 countries and territories participating in the GDDS since it was introduced, 6 have gradu-ated to the SDDS, 5 since the fifth review.

In addition, the Fund staff has been devel-oping the Statistical Data and Metadata Exchange (SDMX) standard, in collaboration with other international organizations. The SDMX aims to facilitate efficient electronic exchange and management of statistical infor-mation among national and international enti-ties by providing standard practices, coherent protocols, and other infrastructural blueprints for reporting, exchanging, and posting data on Web sites.

Data Quality Assessment Framework (DQAF). The DQAF is an assessment meth-odology that was integrated into the structure of the data module of ROSCs following the fourth review of the Data Standards Initiatives in 2001. The DQAF’s broader application in providing guidance for improving data qual-ity has been integrated into the Data Quality Program as well as more prominently into Article IV consultations.

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strengthening domestic institutions. Although the initia-tive had not yet had a large impact on the implementation of reforms, it was still relatively new, considering the long time frame of institutional reforms, and more of its ben-efits should materialize as time passes. The initiative had helped the Fund prioritize technical assistance needs and increasingly led to follow-up technical assistance. In part of the membership—including many emerging market economies—the initiative had contributed significantly to surveillance, even though, overall, its contribution to sur-veillance across the membership had been modest. Direc-tors expressed disappointment that the use of ROSCs by market participants remained low.

The Board saw merit in maintaining the initiative, stress-ing that it had already delivered substantial results in some dimensions and that it was expected to yield fur-ther benefits, particularly in helping members implement institutional reforms. Directors generally concurred with stakeholders that the scope of the initiative and its key governance features should be left unchanged but recom-mended a number of other changes. Although they con-tinued to support the voluntary nature of the initiative, Directors called for stronger efforts to encourage country participation and, in particular, to ensure that countries that chose to participate in the initiative were those most likely to benefit from it. To encourage further participation, many Directors supported the proposal to include consis-tently in Article IV consultations staff ’s views on priority areas for standards assessments.

Directors noted that frequent updating of ROSCs would be too costly. They supported a more flexible approach similar to that agreed for the FSAP, which featured an aver-age update frequency of five years, to allow for country-specific circumstances. Priority would be given to updates for countries in which significant gaps had been identified in previous assessments and that would contribute the most to national or systemic stability.

Directors supported measures to strengthen the integra-tion of the initiative with Fund surveillance and technical assistance through greater coordination between and within departments. In line with the conclusions of the 2004 Bien-nial Review of Surveillance, Directors stressed the need to reflect ROSCs’ macro-relevant findings in Article IV reports, while cautioning against the mechanistic inclusion of detailed ROSC recommendations.

Directors favored steps to enhance the clarity of ROSC findings. Each ROSC should include (1) an executive sum-mary providing a clear assessment, while avoiding a rating or “pass or fail” report; (2) a principle-by-principle sum-mary of the observance of the standard; and (3) a priori-tized list of key recommendations. These changes, while falling short of meeting market participants’ suggestions,

would promote greater use of ROSCs, although the objec-tive of informing market participants would likely remain challenging. Directors agreed that the practice of sharing draft ROSCs with the authorities, the current policy of voluntary publication of ROSCs, and outreach activities should continue.

Directors noted that, after extensive consultations, the Organization for Economic Cooperation and Development (OECD) had revised the Principles of Corporate Governance. The main revisions related to governance, shareholder rights, disclosure and transparency, and insolvency and creditor rights. Directors agreed to recognize the revised principles for use in the initiative.

Sixth review of Data Standards Initiatives

The Fund’s Data Standards Initiatives, the SDDS and GDDS, aim to increase the comprehensiveness and timeli-ness of statistical information available to markets and the public, thus contributing to member countries’ pursuit of sound macroeconomic policies and the improved function-ing of financial markets.

In November 2005, Executive Directors concluded discus-sions on the sixth review of the Data Standards Initia-tives.14 They commended the member country authorities for their efforts to promote adherence to the initiatives. Since the last review, which was concluded in July 2003, the number of SDDS subscribers and GDDS participants had increased. Further progress in these initiatives continued to be important for the efficient operation of markets, and for effective surveillance and crisis prevention. Directors broadly agreed that adherence to international transpar-ency standards—and to the SDDS in particular—could be an important factor in improving a country’s access to international capital markets. In this vein, Directors recom-mended moving forward with the Fund’s voluntary and cooperative strategy for assisting members to participate in the initiatives.

Directors welcomed the graduation of a number of coun-tries from the GDDS to the SDDS since the last review and supported continuing the Fund staff ’s integrated outreach and technical assistance efforts in building countries’ statis-tical capacities to levels that meet SDDS requirements.

Directors also supported continued efforts to promote the dissemination and exchange of statistical information on the Internet among international organizations and their member countries using a common data transmission and dissemination standard. Among these efforts was the

14For a summary of the Board discussion, see Public Information Notice No. 05/155, www.imf.org/external/np/sec/pn/2005/pn05155.htm. The review can be found at www.imf.org/external/np/pp/eng/2005/070105s.pdf.

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development of data and metadata transmission standards under the Statistical Data and Metadata Exchange Initiative (SDMX) of seven international organizations, including the IMF.15

Directors welcomed the generally positive experience with implementing new data categories. In particular, nearly all SDDS subscribers now met the data dissemination require-ments for external debt data, and a majority of GDDS participants disseminated metadata on their external debt (Box 4.6). No member had availed itself of the opportunity to report inflation-targeting indicators, however, and incor-poration of Millennium Development Goals indicators into the metadata of the GDDS had also been slow. Looking ahead, Directors agreed to consider at the next review of the Fund’s Data Standards Initiatives whether a core set of Financial Soundness Indicators (FSIs) should be incorpo-rated into the SDDS.

Directors broadly supported requiring subscribers to use standardized electronic reporting procedures to allow more effective monitoring of their observance of the SDDS. They encouraged the staff to work with subscribing countries in designing the system so as to minimize the reporting bur-

15The SDMX consortium comprises, in addition to the IMF, the Bank for International Settlements, the European Central Bank, Eurostat, the Organization for Economic Cooperation and Development, the United Nations, and the World Bank.

den and cost of observance while maximizing the efficiency of monitoring.

Directors noted the staff ’s intention of posting annual assessments of subscribing countries’ observance of their SDDS undertakings on the Dissemination Standards Bul-letin Board (DSBB), beginning in early 2007, stressing that these reports should distinguish between major and minor deviations from SDDS requirements. They encouraged the staff to continue to raise SDDS observance issues with country authorities.

Many Directors considered that countries’ commitment to improving data transparency and their statistical systems should be a factor in allocating technical assistance. How-ever, they observed that a country’s decision not to partici-pate could be a function of limited resources and capacity constraints and thus felt that the criteria for access to Fund technical assistance should remain flexible. Directors recog-nized the central role played by Fund area departments in developing a technical assistance strategic framework and supported further collaboration with the World Bank and other institutions and donors in helping GDDS participants become SDDS subscribers. In addition, they supported the integration of the GDDS in Poverty Reduction Strategy Papers (PRSPs).

Most Directors endorsed the suggestion that SDDS sub-scribers and GDDS participants be encouraged to provide

Box 4.6 External debt Web site

In March 2006, the IMF, the Bank for Inter-national Settlements (BIS), the Organization for Economic Cooperation and Development (OECD), and the World Bank launched a new Web site—the Joint External Debt Hub (JEDH)—to provide a one-stop source of com-prehensive external debt statistics compiled from national and creditor/market sources.1

The JEDH brings together national external debt data provided by 54 subscribers to the IMF’s Special Data Dissemination Standard (SDDS), creditor/market–sourced data on external debt and data on selected foreign assets for 175 countries, and associated metadata for the two sets of statistics. The national external debt data are sourced from the World Bank’s Quarterly External Debt Statistics (QEDS) database, and the creditor/market data are sourced from the four agen-cies. The JEDH replaces the tables currently

1The new Web site is located at www.jedh.org.

at www.oecd.org/statistics/jointdebt and expands the available range of information.

The new Web site provides timely access to quarterly external debt statistics, thereby greatly facilitating macroeconomic analysis and cross-country and data source compari-sons. For each of the 54 SDDS subscribers, data are provided on loans and deposits, debt securities, and trade credits, and the national and the creditor/market viewpoints, when available, are compared.

The Web site builds on initiatives started in the late 1990s by the Inter-Agency Task Force on Finance Statistics2 to improve the availabil-ity of comprehensive and consistent external debt statistics. Major milestones include the

2 The agency’s members are the IMF, the Com-monwealth Secretariat, the European Central Bank, Eurostat, the Paris Club Secretariat, and the United Nations Conference on Trade and Development.

quarterly publication of market/creditor data from 1999; the publication of the External Debt Statistics: Guide for Compilers and Users3 in 2003; the dissemination since Sep-tember 2003 of national data on the quar-terly external debt position with a one-quarter lag by SDDS subscribers, with redissemination of these data for most subscribers on the World Bank’s QEDS Web site4 from 2004; and the recent development by the IMF of the data quality assessment framework for external debt statistics.

The JEDH uses Statistical Data and Metadata Exchange (SDMX) standards established by the BIS, the European Central Bank, Eurostat, the IMF, the OECD, the United Nations, and the World Bank.

3The Guide is available at www.imf.org/external/pubs/ft/eds/Eng/Guide/index.htm.

4At www.worldbank.org/data/working/QEDS/sdds_main.html.

additional metadata on oil and gas activities and products. They noted that this would promote public knowledge and understanding of how countries incorporate oil market information when compiling macroeconomic indicators.

Directors generally endorsed the further integration of the SDDS and the GDDS into the Fund’s Data Quality Program by reformatting countries’ SDDS/GDDS metadata accord-ing to the Data Quality Assessment Framework (DQAF). Using a common metadata structure would increase both the effectiveness and the efficiency of the staff ’s work on the SDDS, the GDDS, the data ROSC, and statistical technical assistance, without imposing an additional burden on par-ticipating countries.

Guide on Resource Revenue Transparency

In December 2004, the IMF disseminated for public com-ment a draft Guide on Resource Revenue Transparency. The Guide16 was finalized in June 2005, following a period of comment by the Executive Board and the general public. Given the potentially substantial costs of nontransparent practices in the management of natural resource revenues, institutional strengthening to improve transparency in resource-rich countries can provide ample payoff for a rela-tively modest investment.

The Guide applies the principles of the Code of Good Practices on Fiscal Transparency17 to the unique set of problems faced by countries that derive a significant share of revenues from natural resources (the focus of the Guide is on hydrocarbon and mineral resources). It complements the Manual on Fis-cal Transparency18 by providing a framework that covers the resource-specific issues to be considered in assessing fiscal transparency—for example, as part of a fiscal ROSC. It also includes a summary overview of generally recognized good or best practices for transparency of resource-revenue management that can be used by member countries, the IMF, the World Bank, and others providing technical support.

Crisis prevention

Surveillance is one of the IMF’s main tools in the preven-tion of financial crises. Although the crises of the 1990s have been followed by several years of relative calm, the IMF continues to refine its tools for identifying vulnerabilities and weaknesses in its member countries and in the interna-tional financial system so that they can be addressed before a crisis erupts.

16Available at www.imf.org/external/pubs/ft/grrt/eng/060705.pdf.17 The Code can be found at www.imf.org/external/np/fad/trans/code.htm.18Available at www.imf.org/external/np/fad/trans/manual/index.htm.

In June 2005, the IMF’s Executive Board approved a three-year Stand-By Arrangement for Uruguay. Since then, the economy has continued to perform strongly, with sound macroeconomic policies and a supportive external environment contributing to strong growth and low inflation, enabling the government to make progress on its social agenda.

Real GDP growth in 2005 reached 6.6 percent, driven by strong exports and private consumption. The public sector primary surplus moved close to the government’s medium-term target of 4 percent of GDP, and in December 2005 the government adopted a five-year budget consistent with its key objective of ensuring debt sustainability. This was accompa-nied by prudent monetary policy, and annual inflation was 6.5 percent in March 2006, well within the central bank’s target range.

The government has made significant progress on an ambitious structural agenda and expects to complete important reforms in 2006, including tax reform, financial sector restructuring, central bank independence, and improvement of debt management and the investment climate. The implementation of these reforms should further reduce vulnerabilities and help sustain high growth over the medium term.

Market confidence in Uruguay’s policies and favorable external conditions have also contributed to a significant reduction in the country’s sovereign spreads and improved market access. Moreover, strong exports and pri-vate capital inflows have allowed Uruguay to strengthen its reserve posi-tion significantly. In March 2006, Uruguay advanced its planned issuance of global bonds, enabling it to repay, ahead of schedule, $625 million in obligations coming due to the IMF in 2006.

Uruguay-IMF activities in FY2006

June 2005 IMF Executive Board approves a new three-year Stand-By Arrangement for Uruguay

September 2005 Completion of first review of Uruguay’s performance under Stand-By Arrangement

January 2006 Completion of second review of performance under Stand-By Arrangement

March 2006 Completion of third review of performance under Stand-By Arrangement

March 2006 Visit of Deputy Managing Director Agustín Carstens

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In September 2005, the IMF sponsored a high-level conference at its Washington, D.C., headquarters that addressed key financial stability issues. Participants in the conference—central bank and supervisory officials from 40 of the IMF’s member countries—examined the risks stemming from rapid credit growth and asset price bubbles in financial and housing markets, possible monetary and prudential policy responses for addressing these risks, the institutional aspects of implementing the financial stabil-ity mandate, and issues related to supervisory gaps and preconditions.

Another key issue for financial stability is the dramatic increase in capital mobility. Despite its considerable poten-tial benefits, capital mobility can put countries at risk of a crisis if investors suddenly lose confidence and withdraw their capital. The Fund has therefore sought to build up its expertise on the issues surrounding capital account lib-eralization and to strengthen its policy advice in this area. The importance of this issue was highlighted in both the Medium-Term Strategy and the IEO’s “Report on the IMF’s Approach to Capital Account Liberalization.”19

IEO report on IMF’s approach to capital account liberalization

At their May 2005 discussion of the IEO’s report on the IMF’s approach to capital account liberalization, Execu-tive Directors noted that financial integration can confer benefits to the global economy by promoting an efficient allocation of savings and a diversification of risks. Stress-ing the increasing significance of capital account issues in IMF surveillance and of fully addressing the difficulties and complexities the Fund faces in providing advice in this area, they welcomed the opportunity to explore how the Fund’s effectiveness could be further advanced.

Directors appreciated the IEO’s efforts in evaluating the IMF’s experience since the early 1990s with a large sample of representative countries. They noted that the report offered a broadly accurate account of the evolution of Fund thinking and practice on the issues surrounding capital account liberalization and capital flow management. Direc-tors welcomed the IEO’s confirmation that the Fund did not apply an inappropriate “one-size-fits-all” approach to capital account liberalization in individual countries and concurred with the report’s finding that the IMF did not pressure members to liberalize their capital accounts sooner than desired by the authorities and generally did not chal-lenge the use of temporary capital controls. The Fund’s approach to capital account liberalization should continue to be flexible and take account of countries’ specific cir-

19The report and the summary of the Board’s discussion are available at www.imf.org/external/np/ieo/2005/cal/eng/index.htm.

cumstances and preferences. At the same time, Directors recognized that the risks of an open capital account had not always been sufficiently highlighted in the Fund’s past oper-ational policy advice and that little policy advice had been offered in the context of multilateral surveillance. Substan-tial strides have been made in recent years, however, based on experience and supported by the Fund staff ’s extensive analytical work on capital account issues and financial sys-tem stability.

Directors expressed a variety of views on the importance of factors motivating capital account liberalization, such as free trade agreements and bilateral investment treaties. It was acknowledged that such agreements are negotiated voluntarily by country authorities when considered to be in the national interest. At the same time, many Directors saw a key role for Fund involvement in policy advice on capital account issues as a means of promoting orderly and nondis-criminatory capital account liberalization.

Directors also commented on the two main recommen-dations of the IEO report. With respect to the first rec-ommendation—the need for more clarity on the IMF’s approach to capital account issues—Directors stressed that the Fund had long attached importance to capital account issues and vulnerabilities. The Fund had pro-vided country-specific guidance to member countries on strengthening domestic policies and practices to manage risks related to capital account liberalization. Furthermore, regional and global surveillance had increasingly focused on global financial market linkages, demand and sup-ply factors, and the implied costs and benefits of capital account liberalization. Directors agreed that the IMF had a responsibility to its members to analyze the benefits and risks in a world of open capital markets and to provide them with practical, sound, and appropriate policy advice on those issues. On the broader aspects of the Fund’s role in capital account liberalization, most Directors did not wish to explore further at that time the possibility of giving the Fund jurisdiction over capital movements. However, a number of Directors felt that the Fund should be prepared to return to this issue at an appropriate time. Directors also noted that additional work on capital account issues was contemplated in the context of the Fund’s Medium-Term Strategy.

Directors saw scope for sharpening the IMF’s advice on capital account issues. They emphasized that Fund staff should continue to draw upon all available research in its policy advice to members, and that further research and study were needed to fully understand how best to obtain the benefits and manage the risks of capital account liber-alization, including sequencing issues. Directors urged the staff to base policy advice on solid analysis of individual country situations. Directors also encouraged the staff to

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Balance sheet analysis

In line with the increased emphasis on key balance sheet risks and financial vulnerabilities, the World Economic Outlook reports and two issues of the Global Financial Stability Report published in FY2006 applied balance sheet analysis to their coverage of mortgage markets and the U.S. household sector, respectively, as did Germany’s Article IV consultation with respect to long-term public sector issues (see Chapter 3). A staff paper on debt-related vulnerabilities and financial crises examined developments in Argentina, Brazil, Lebanon, Peru, Turkey, and Uruguay.21 The IMF staff refined its modeling tools and developed its databases to support the analysis of global imbalances and other multi-lateral policy issues. In addition, the analytical framework for the balance sheet approach was extended by use of a contingent claims approach.

Global economic and financial impact of an avian flu pandemic

In its present form, the virus that causes avian flu cannot transmit efficiently from human to human, but a mutation allowing such transmission could cause a pandemic. To help raise awareness about the potential economic and financial risks of an avian flu pandemic, the Fund has published a paper, “The Global Economic and Financial Impact of an Avian Flu Pandemic and the Role of the IMF,” with an attachment outlining the elements emerging as good prac-tices in business continuity planning in the financial sector in the event of a pandemic.22

Although predictions are subject to a high degree of uncer-tainty, a severe pandemic would likely have a significant economic impact. A high level of illness and absenteeism could lead to a sharp, albeit temporary, decline in global economic activity because it would pose a negative shock to both supply and demand. Demand could contract sharply, with consumer spending falling and investment being put on hold, while trade and tourism flows could be interrupted in some countries. The fiscal challenges associ-ated with an avian flu pandemic, as fiscal deficits widen, could be significant, especially for low-income countries, and some countries could face overall balance of payments pressures.23

21 Published as Christoph B. Rosenberg and others, 2005, Debt-Related Vulnerabilities and Financial Crises, IMF Occasional Paper No. 240; see www.imf.org/external/Pubs/NFT/Op/240/op240.pdf.

22 Available at www.imf.org/external/pubs/ft/afp/2006/eng/022806.htm; see also “Progress Report to the International Monetary and Financial Com-mittee on Fund Initiatives to Promote Avian Flu Preparedness,” www.imf.org/external/np/pp/eng/2006/041806.pdf.

23The economic and financial impact of a pandemic are discussed in the World Economic Outlook, April 2006, and the Global Financial Stability Report, April 2006.

further strengthen its technical expertise on capital account issues.

With respect to the second recommendation—that the IMF’s analysis and surveillance should give greater atten-tion to the supply-side factors of international capital flows and to what can be done to minimize the volatility of capital movements—Directors welcomed the various initiatives under way in the Fund to strengthen research, analysis, and surveillance of the supply of capital flows. They agreed with the IEO’s view that considerable prog-ress had already been made in this area. A number of recent staff studies had examined the supply-side features of capital flows, and Directors noted that recent issues of the Global Financial Stability Report had examined the determinants and volatility of capital flows to emerging market countries. Directors further pointed to the Capital Markets Consultative Group, which served as an informal forum for dialogue between participants in international capital markets and Fund management,20 as well as to the visibility given to supply-side issues by staff at the Finan-cial Stability Forum (FSF) and the Basel Committee on Banking Supervision.

Directors encouraged the staff to continue to deepen its understanding of supply-side factors and their operational and policy implications. In particular, they suggested that more attention be devoted to the spillover effects from regional developments and from policies in systemically important advanced and developing countries. Direc-tors cautioned that any expanded work on supply-side issues should not entail Fund involvement in the regula-tion of the sources of capital, noting that the Fund should instead coordinate with the FSF and other forums that have the necessary expertise and mandate in the setting of standards.

Directors agreed that the IMF’s future work on capital account issues should seek to buttress efforts to promote financial stability, while helping to ensure that controls are not used as a substitute for adjustment. The aim would be to build on existing Fund expertise in this area and to ensure that policy advice on capital account issues was fully incorporated in bilateral and multilateral surveil-lance. As a follow-up to the findings of the IEO report, Directors looked forward to capital account issues being addressed in the context of the Fund’s Medium-Term Strategy.

20The Capital Markets Consultative Group (CMCG) was established in July 2000 by Horst Köhler, the IMF’s Managing Director at that time, to provide a forum for informal dialogue between participants in interna-tional capital markets and the IMF. The CMCG is chaired by the IMF’s Managing Director. In March 2006, Rodrigo de Rato, the IMF’s current Managing Director, participated in a meeting of the Capital Markets Consultative Group in Mexico City.

High absenteeism could also disrupt critical functions and services of the financial system, including payments, clear-ing and settlement, and trading. Such disruptions could spill over into other jurisdictions. As regards financial mar-kets, some increase in risk aversion is highly likely, leading to a greater demand for liquidity and for low-risk assets. While the “flight to quality” should be temporary, asset price declines could put the balance sheets of some financial institutions under stress. There could be a period in which net capital flows to some emerging markets decline or are even reversed.

Preparations to limit the impact of the avian flu outbreak are rapidly moving to the forefront of policy priorities in many countries and international organizations. At the International Pledging Conference on Avian and Human Influenza, held in Beijing in January 2006, $1.9 billion was pledged to support efforts at all levels to help fight avian flu and prepare for a possible pandemic. The World Bank, the World Health Organization (WHO), the Food and Agricul-ture Organization (FAO), and the Organization for Animal Health (OIE) are taking the lead in preparing a global coordinated response strategy to the possibility of an avian flu crisis and helping members improve surveillance and control capacity and develop national action plans.

The Fund is encouraging countries to prepare for a possible pandemic and facilitating cooperation across countries in preparing contingency plans, particularly in the financial sector. It would be willing to help organize technical assis-tance for members preparing to deal with a pandemic, if requested to do so.

The level of preparedness in the financial sector for a pan-demic varies significantly across the Fund’s membership. Some countries, particularly those affected by the 2003 SARS (Severe Acute Respiratory Syndrome) outbreak, are well advanced, while others appear to be only starting to develop a comprehensive approach. Cross-country coordi-nation is being supported by efforts of the Financial Stabil-ity Forum, the Fund, and the Joint Forum.24

To facilitate sharing of knowledge and experience in business continuity planning in the financial sector, the Fund is orga-nizing regional seminars bringing central banks and super-visory authorities together with health experts and business continuity planners from private financial institutions to share their knowledge on key issues related to avian flu pan-demic preparedness. Five such seminars were conducted by early May 2006, including four hosted at the Fund’s facili-ties in Singapore, Tunis, Vienna, and Washington, D.C., and one hosted by the Reserve Bank of South Africa in Pretoria. Additional seminars will be offered in 2006 to ensure that all members have an opportunity to participate.

Should a pandemic occur, the Fund will advise members on appropriate macroeconomic policies and help support them with balance of payments financing if needed.

24The Joint Forum consists of the Basel Committee on Banking Supervi-sion, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors. The Joint Forum organized a meeting in Hong Kong SAR on February 22, 2006, to discuss business continuity planning. The Financial Stability Forum met on March 16–17, 2006, in Australia and discussed, among other things, pan-demic avian flu preparedness.

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countries that belong to the IMF can request a loan when they are experiencing balance of payments

problems—when they cannot borrow sufficient financing on affordable terms in financial markets to make international payments. The IMF’s loans are available under a variety of policies and lending instruments tailored to the specific circumstances of different kinds of countries and prob-lems. Most loans are conditional on borrowers implement-ing stabilization policies and reforms designed to address the country’s balance of payments problems and other economic weaknesses and promote sustainable economic growth. In low-income countries, IMF-supported policy programs focus particularly on the objectives of growth and poverty reduction. The conditions attached to Fund loans are also intended to ensure that the Fund is repaid, so that its resources become available for other countries in need. (The Fund’s instruments and associated programs are described in Table 5.1.)

Although any member country, rich or poor, with a balance of payments problem can apply for an IMF loan, since the late 1970s, when industrial countries began to be able to meet their financing needs in the international capital markets, all IMF lending has gone to emerging market, transition, or developing countries. In recent years, the greatest number of IMF loans have been made through the concessional Poverty Reduction and Growth Facility, but the largest loans are made through nonconcessional facilities and policies, including Stand-By Arrangements.

The IMF frequently reviews and refines its lending instru-ments to ensure that they meet members’ needs, and studies the effectiveness of past programs. During FY2006, the IMF introduced two new instruments for low-income countries, the Policy Support Instrument and the Exogenous Shocks Facility; reviewed the design of programs under its Poverty Reduction and Growth Facility; undertook ex post assess-ments in countries with longer-term program engagement and ex post evaluations of exceptional access arrangements; and revised the operational guidance for its conditionality guidelines.

Ensuring that the Fund’s financing instruments are adapted to the needs of member countries is a perennial challenge. Many emerging market countries have taken advantage of

favorable economic and financial conditions to strengthen their net foreign asset positions, and growing access to capi-tal has greatly reduced their need for Fund financing. Dur-ing FY2006, both Argentina and Brazil repaid their entire outstanding obligations to the Fund ahead of schedule. Other members, particularly in Asia, have built up liquid-ity by accumulating international reserves and entering into regional agreements. For more details about develop-ments in the IMF’s financial operations and policies during FY2006, see Chapter 8.

In addition to providing loans to help countries recover from a crisis and resolve an external payments problem, the IMF works on issues relevant to the orderly resolution of financial crises, such as debt restructuring. Regarding its own role in this area, the Fund continues to monitor the implementation of its lending into arrears policy and will undertake a review of the policy in FY2007. In May 2005, the Executive Board discussed the factors that determine the pace at which countries emerging from a crisis are able to regain access to international capital markets.

Strengthening IMF program support

The IMF continued to aim for improved program design during FY2006. It issued revised operational guidance for the conditionality in Fund programs based on the lessons drawn from its 2004–05 Conditionality Review.1 Evalu-ations of past IMF-supported programs, which began in 2003 as part of the Fund’s response to the IEO’s evalu-ation of prolonged use of Fund resources, continued to provide useful lessons for both program design and implementation.2

In FY2006, the Fund reviewed the design of programs supported by its Poverty Reduction and Growth Facility

1“Statement of the IMF Staff, Principles Underlying the Guidelines on Conditionality, Revised January 9, 2006,” www.imf.org/external/np/pp/eng/ 2006/010906.pdf; and “Operational Guidance to IMF Staff on the 2002 Conditionality Guidelines, Revised January 9, 2006,” www.imf.org/external/np/pp/eng/2006/010906g.pdf.

2See “Ex Post Evaluations of Exceptional Access Arrangements Guidance Note,” www.imf.org/external/np/pp/eng/2005/080805.htm; and “Report on the Incidence of Longer-Term Program Engagement,” www.imf.org/external/np/pdr/ufr/2005/081605.htm.

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Table 5.1 IMF financial facilities

Credit facility Purpose Conditions Phasing and monitoring1 Access limits1

Credit tranches and Extended Fund Facility4

Stand-By Arrangements (1952) Medium-term assistance for Adopt policies that provide Quarterly purchases Annual: 100% of quota; countries with balance of payments confidence that the member’s (disbursements) contingent on cumulative: 300% of quota.difficulties of a short-term character. balance of payments difficulties will observance of performance

be resolved within a reasonable criteria and other conditions. period.

Extended Fund Facility (1974) Longer-term assistance to support Adopt 3-year program, with Quarterly or semiannual Annual: 100% of quota; (Extended Arrangements) members’ structural reforms to structural agenda, with annual purchases (disbursements) cumulative: 300% of quota.

address balance of payments detailed statement of policies for contingent on observance of difficulties of a long-term character. the next 12 months. performance criteria and other

conditions.

Special facilitiesSupplemental Reserve Short-term assistance for balance Available only in context of Stand- Facility available for one year; No access limits; access

Facility (1997) of payments difficulties related to By or Extended Arrangements with frontloaded access with two or under the facility only whencrises of market confidence. associated program and with more purchases (disbursements). access under associated

strengthened policies to address regular arrangement wouldloss of market confidence. otherwise exceed either

annual or cumulative limit.

Compensatory Medium-term assistance for Available only when the shortfall/ Typically disbursed over a 45% of quota each for exportFinancing Facility (1963) temporary export shortfalls or excess is largely beyond the control minimum of six months in and cereal components.

cereal import excesses. of the authorities and a member accordance with the phasing Combined limit of 55% ofhas an arrangement with upper provisions of the arrangement. quota for both components.credit tranche conditionality, orwhen its balance of paymentsposition excluding the shortfall/excess is satisfactory.

Emergency Assistance Assistance for balance of payments None, although post-conflict Generally limited to 25% ofdifficulties related to the following: assistance can be segmented quota, though larger amounts

into two or more purchases. can be made available inexceptional cases.

(1) Natural disasters (1962) Natural disasters Reasonable efforts to overcome balance of payments difficulties.

(2) Post-conflict (1995) The aftermath of civil unrest, Focus on institutional andpolitical turmoil, or international administrative capacity building toarmed conflict pave the way toward an upper

credit tranche arrangement or PRGF.

Facilities for low-income membersPoverty Reduction and Longer-term assistance for Adopt 3-year PRGF arrangements. Semiannual (or occasionally 140% of quota; 185% of

Growth Facility (1999) deep-seated balance of payments PRGF-supported programs are quarterly) disbursements quota in exceptionaldifficulties of structural nature; based on a Poverty Reduction contingent on observance of circumstances.aims at sustained poverty- Strategy Paper (PRSP) prepared performance criteria and reviews.reducing growth. by the country in a participatory

process and integrating macro-economic, structural, and poverty reduction policies.

Exogenous Shocks Facility (2006) Short-term assistance to Adopt a 1–2 year program involving Semiannual or quarterly Annual: 25% of quota; address a temporary balance of macroeconomic adjustments disbursements on observance cumulative: 50% of quotapayments need that is due to an allowing the member to adjust of performance criteria and, in except in exceptionalexogenous shock. to the shock and structural reform most cases, completion of circumstances.

considered important for adjustment a review.to the shock, or for mitigating the impact of future shocks.

1Except for PRGF, the IMF’s lending is financed from the capital subscribed by member countries; each country is assigned a quota that represents its financial commitment. A member provides a portion of its quota in foreign currencies acceptable to the IMF—or SDRs (see Chapter 8)—and the remainder in its own currency. An IMF loan is disbursed or drawn by the borrower purchasingforeign currency assets from the IMF with its own currency. Repayment of the loan is achieved by the borrower repurchasing its currency from the IMF with foreign currency. See Box 8.1 on the IMF’s Financing Mechanism. PRGF lending is financed by a separate PRGF Trust.2The rate of charge on funds disbursed from the General Resources Account (GRA) is set at a margin over the weekly interest rate on SDRs. The rate of charge is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter. In addition, a

one-time service charge of 0.5 percent is levied on each drawing of IMF resources in the GRA, other than reserve tranche drawings. An up-front commitment fee (25 basis points on committed amounts up to 100 percent of quota, 10 basis points thereafter) applies to the amount that may be drawn during each (annual) period under a Stand-By or Extended Arrangement; this fee is refunded on a proportionate basis as subsequent drawings are made under the arrangement.3For purchases made after November 28, 2000, members are expected to make repurchases (repayments) in accordance with the schedule of expectation; the IMF may, upon request by a member, amend the schedule of repurchase expectations if the Executive Board agrees that the member’s external position has not improved sufficiently for repurchases to be made.

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(PRGF) and created a new window in that facility for help-ing low-income countries meet balance of payments needs arising from exogenous shocks. A group in the IMF’s Fiscal Affairs Department set up to study the impact of Fund poli-cies on poverty and social issues (Poverty and Social Impact Analysis, or PSIA), primarily in PRGF-eligible countries, became operational. This group’s findings will be used to inform the design of future IMF-supported programs. For low-income countries that do not need or wish to bor-row from the Fund but that want the Fund to monitor and evaluate their policies, the IMF introduced the Policy Sup-port Instrument (PSI) in October 2005. The PSI will help countries design effective economic programs—as strong as those supported by Fund financial arrangements—and, once such a program has been approved by the IMF’s Exec-utive Board, will signal to donors, multilateral development banks, and markets the Fund’s endorsement of a member’s policies. The IMF’s instruments for helping low-income countries are described in greater detail in Chapter 6.

The Executive Board held a preliminary discussion in June 2005 on the charges and maturities for IMF financing, with a focus on bolstering the revolving character of the Fund’s resources.3 Directors believed that the Fund’s policies on charges and maturities could be made clearer, simpler, and more transparent, but they emphasized that any changes should be considered as part of a comprehensive reform package that provides appropriate incentives for repay-ment. Most Directors favored an alignment of surcharges across facilities in the General Resources Account, thereby removing the cost incentive for seeking exceptional access financing from one facility rather than another. Directors also called for the abolition of the policy on time-based repurchase expectations, viewing the existence of both expectation and obligation schedules as inherently con-fusing. However, such a move should be accompanied by the establishment of appropriate incentives to encourage advance repurchases, with many Directors taking the view that such incentives should be based on charges. Directors asked staff to further explore the options and to return with proposals.

In 2005, the Board reviewed the IMF’s safeguards assessments policy. The main objective of the safeguards assessments policy, which was introduced in 2000 and made a perma-nent feature of Fund operations in 2002, is to minimize the possibility of countries misreporting information to the IMF and misusing Fund resources. Before member coun-tries can use its resources, the IMF assesses their central banks’ external and internal audit mechanisms, legal struc-

3The staff paper on which the discussion was based is available at www.imf.org/external/np/pp/eng/2005/052305.htm. The summary of the Board dis-cussion can be found at www.imf.org/external/np/sec/pn/2005/pn05101.htm.

Repurchase (repayment) terms3_____________________________________Obligation Expectationschedule schedule

Charges2 (Years) (Years) Installments

Rate of charge plus surcharge 3 / —5 2 / —4 Quarterly(100 basis points on amountsabove 200% of quota; 200 basispoints on amounts above 300% of quota).5

Rate of charge plus surcharge 4 / —10 4 / —7 Semiannual(100 basis points on amountsabove 200% of quota; 200 basispoints on amounts above300% of quota).

Rate of charge plus surcharge 2 / —3 2—2 / Semiannual(300 basis points, rising by50 basis points a year after firstdisbursement and every 6 monthsthereafter to a maximum of500 basis points).

Rate of charge. 3 / —5 2 / —4 Quarterly

Rate of charge; however, the 3 / —5 Not applicable Quarterlyrate of charge may be subsidizedto 0.5 percent a year, subject toresource availability.

0.5% 5 / —10 Not applicable Semiannual

0.5% 5 / —10 Not applicable Semiannual

4Credit tranches refer to the size of purchases (disbursements) in terms of proportions of the member’s quota in the IMF; for example, disbursements up to 25 percent of a member’s quota are disbursements under the first credit tranche and require members to demonstrate reasonable efforts to overcome their balance of payments problems. Requests for disburse-ments above 25 percent are referred to as upper credit tranche drawings; they are made in installments as the borrower meets certain established performance targets. Such disburse-ments are normally associated with a Stand-By or Extended Arrangement. Access to IMF resources outside an arrangement is rare and expected to remain so.5Surcharge introduced in November 2000.

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ture and independence, financial reporting framework, and internal controls.

The review included discussions on a staff paper, a report prepared by an independent panel of central bank offi-cials,4 and further work on a proposal to share reports on safeguards assessments with other international financial institutions. Following up on their April 2005 discussion, Directors concluded their review in December 2005. They considered the existing framework for assessing central banks’ operations to be broadly appropriate and noted that the Fund’s policy had had a positive impact on these opera-tions, leading to improvements in governance and controls. They also agreed on a proposal to permit transmittal of safeguards assessments to other financial institutions, sub-ject to assurances that similar reports from other interna-tional financial institutions would be shared with IMF staff and that the reports would be treated as confidential docu-

4The staff paper, “Safeguards Assessments—Review of Experience,” is avail-able at www.imf.org/external/np/pp/eng/2005/033105.pdf; the “Report of the Independent Panel on Safeguards Assessments,” at www.imf.org/external/np/pp/eng/2005/013105.pdf. The summary of the Board discussion can be found at www.imf.org/external/np/sec/pn/2005/pn05170.htm.

ments. Transmittal of reports will be subject to the consent of the central bank being assessed; initially, the reports will be shared only with the World Bank. The Fund’s policies on charges and maturities, and safe-guards assessments, are discussed in greater detail in Chapter 8.

Crisis resolution

The IMF continued its work on the orderly resolution of financial crises, analyzing cross-country experiences with sovereign debt restructuring and policy issues raised by specific cases, and promoting the use of collective action clauses (CACs) in international sovereign bonds. A review of the effectiveness of the Fund’s instruments in facilitating crisis resolution is one of the pri-orities listed in the Medium-Term Strategy (see Chapter 2). The staff ’s “Progress Report on Crisis Resolu-tion,”5 which covers progress with initiatives such as CACs, the Institute of International Finance’s Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets,

and the Paris Club’s Evian Approach, as well as develop-ments in sovereign debt restructuring cases, was discussed by the IMF’s Executive Board on September 16, 2005.

Collective Action Clauses

CACs are designed to prevent small minorities of creditors from blocking restructuring deals to which large majori-ties agree. In its efforts to help improve the sovereign debt restructuring process, the IMF has encouraged the adop-tion of CACs, maintaining an active dialogue with private market participants and debt managers from a number of emerging market countries, including through such vehicles as the Forum for Public Debt Managers.

The adoption of CACs in international sovereign bonds has become the market standard for bonds issued under New York law. International sovereign bonds governed by Eng-lish and Japanese law have continued the existing practice of including CAC provisions. As of end-February 2006, the share of emerging market sovereign bonds that include

5See www.imf.org/external/np/pp/eng/2005/092105.pdf.

The IMF’s Executive Board approved a Stand-By Arrangement equivalent to SDR 475.4 mil-lion (about $685 million) for Iraq in December 2005 to support the country’s 15-month economic program. Iraq, one of the IMF’s founding member countries, received Emer-gency Post-Conflict Assistance from the Fund in September 2004.1 That loan supported Iraq’s economic program through 2005 and facilitated Iraq’s negotiations with its Paris Club creditors over a debt-restructuring agreement. The Stand-By Arrangement, which will support Iraq’s economic program for 2006, was a con-dition for the second stage of debt reduction agreed with Iraq’s Paris Club creditors. The Iraqi authorities intend to treat the arrangement as precautionary.

Despite the extremely difficult security environment, the Iraqi authorities made progress toward macroeconomic stability in 2005. Growth was about 4 percent, follow-ing a rebound of almost 50 percent in 2004, although inflation remained high and volatile. The Central Bank of Iraq built up reserves and the exchange rate remained stable. The

1See www.imf.org/external/np/sec/pr/2004/pr04206.htm.

projected fiscal deficit was much lower than expected mainly because of higher-than-projected export prices for crude oil.

Iraq’s program for 2006, which envisages an increase in economic growth, a reduction in inflation, and an increase in net international reserves, maintains a focus on macroeco-nomic stability, while improving governance and advancing Iraq’s transition to a market economy. Throughout the rest of 2006, Iraq plans to expand the oil sector, cut back on general subsidies in favor of improving public services, and strengthen administrative capac-ity. The country’s central bank is establishing a modern payments system and improving its supervisory capacity.

Iraq took an important first step in raising prices of refined petroleum products and now needs to press ahead to reduce fuel subsi-dies further and carry on with other structural reforms, including measures to enhance the efficiency and transparency of public finan-cial management and the development of a comprehensive restructuring strategy for the state-owned banks. The central bank needs to develop the instruments required to strengthen its ability to conduct a monetary policy geared to ensuring price and financial stability.

Box 5.1 Stand-By Arrangement for Iraq

CACs climbed to 60 percent of the total outstanding stock of such bonds, in terms of their value, from 32 percent at the end of 2002. This reflects both the increased use of CACs in sovereign bond contracts and the recent sovereign debt exchanges that have replaced a large volume of bonds that did not include CACs with bonds that do include CACs. The inclusion of CACs has had no observable effect on the pricing of bonds.

Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets

Outside the Fund, the Institute of International Finance (IIF) reported that progress had been made on developing a monitoring process for its voluntary Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Mar-kets,6 with the establishment of a Principles Consultative Group. The Group is seeking dialogue with debtor countries and creditors on transparency and investor relations. At the invitation of the IIF, IMF staff participated as observers in the Group’s conference calls in November 2005 and Febru-ary 2006, intended to allow private sector representatives and emerging market officials to participate in informal discussions with the Group about how the Principles apply to specific countries.

Sovereign debt rescheduling by the Paris Club

In October 2005, the Paris Club provided a flow re-scheduling to the Dominican Republic under the Evian Approach—a flexible approach adopted by the Paris Club in 2003 for addressing the debt sustainability concerns of countries not receiving debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative.

Following the Fund’s approval in October 2005 of a Policy Support Instrument for Nigeria, Paris Club creditors granted Nigeria a comprehensive, concessional debt treat-ment. The treatment includes the clearance of arrears in two phases, together with a debt reduction under Naples terms on eligible debt, and the buyback of the remain-ing debt at a market-related discount. Consistent with the Evian Approach, the debt treatment was phased and aimed at providing a definitive solution to Nigeria’s debt problems.

In December 2005, the Fund approved a Stand-By Arrange-ment for Iraq, which was a condition for the second stage of debt reduction agreed with Iraq’s Paris Club creditors in 2004 (Box 5.1).

6For the current version of the Principles, see www.iif.com/data/public/Principles.pdf.

The Dominican Republic has staged a remarkable economic turnaround since its banking crisis in 2003–04. Large amounts of public assistance to bail out depositors and inadequate fiscal management had set off a vicious cycle of weak activity, high inflation, peso depreciation, growth of public debt, and capital flight.

Upon taking office in August 2004, a new administration formulated a comprehensive program aimed at strengthening macroeconomic policies and introducing a wide range of structural reforms. In January 2005, the IMF supported this program with a 28-month Stand-By Arrangement.

Macroeconomic performance in 2005 exceeded expectations, with real GDP growing 9.3 percent and inflation declining to 7.4 percent. The con-solidated fiscal balance improved by 4 percentage points of GDP, owing to expenditure cuts and a tax package approved in late 2004. Net interna-tional reserves recovered, climbing to $850 million by the end of 2005.

With the restructuring of the Dominican Republic’s external debt—a key element of the program—external bond spreads have dropped below 250 basis points. Two global bonds with combined principal of $1.1 bil-lion were exchanged, with bondholders’ participation at 97 percent. Com-mercial banks and Paris Club creditors restructured claims amounting to about $550 million, and a bond for $300 million was issued to buy debt back from a creditor, providing additional cash relief.

The country’s Article IV consultation, completed in October 2005, focused on the significant challenges that lie ahead. Fiscal consolida-tion will require strengthening the revenue base, following the significant tax reform of late 2005; pursuing prudent expenditure policies; and improving fiscal institutions. Large financial losses in the electricity sector need to be reduced, and the central bank’s financial position requires strengthening. The banking sector needs further strengthening, including enhanced supervision.

The Fund has provided technical assistance in the fiscal and banking areas, and the Dominican Republic has begun participating in the Fund’s General Data Dissemination System (GDDS).

Dominican Republic–IMF activities in FY2006

October 2005 Executive Board completes first and second reviews of the Dominican Republic’s Stand-By Arrangement

October 2005 Executive Board concludes the Dominican Republic’s Article IV consultation

November 2005 The Dominican Republic formally begins participation in the GDDS

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Pace of market access by countries emerging from crises

The Executive Board held a seminar in May 2005 to dis-cuss a paper by the IMF staff, “Assessing the Determinants and Prospects for the Pace of Market Access by Countries Emerging from Crises: Further Considerations,” follow-ing up on an informal seminar on the same subject held in September 2001.7

Directors reaffirmed that the circumstances underpinning the loss of market access were a key determinant of how and when a country regained market access, noting that countries that lost market access because of adverse market developments normally regained access quickly if there was only a minor decline in investors’ risk appetite that did not affect the assessment of the country’s creditworthi-ness. When a country lost access because of both adverse market developments and policy slippages that caused concern about its ability to service its debt, it had to com-mit to policy adjustments to regain access, which could take anywhere from several months to approximately a year and a half when conditions in international capital markets were favorable. The length of time depended heavily on the strength of the country’s corrective policies. Some Directors suggested caution in unduly relying on tightening monetary policy in response to crises, given the associated balance sheet effects. Structural reforms played a crucial role. Direc-tors stressed the role that Fund policy advice could play in helping countries regain market access, and many Directors pointed to the importance of Fund financial assistance dur-ing the crisis.

A country that restructured its debt also had to demon-strate a commitment to strong corrective policies to regain access to markets. Countries that had bond restructurings had taken anywhere from 18 months to 5 or more years to regain market access, or 4 months to 4 years after comple-tion of the debt restructuring, depending on the nature of the external environment and the success of their policy efforts. Directors also emphasized the importance of a sound and independent debt sustainability analysis in help-ing countries regain market access. It was also noted, how-ever, that demand as well as supply factors influence capital flows, and that countries may choose to delay their reaccess to capital markets—for example, because of the cost of borrowing.

Directors stressed that countries seeking to regain access to international capital markets should put in place a strong communications strategy to explain to investors their efforts to strengthen their creditworthiness and the nature

7Available at www.imf.org/external/np/pp/eng/2005/030105a.pdf. The sum-mary of the Board discussion can be found at www.imf.org/external/np/sec/pn/2005/pn05132.htm.

In October 2005, the IMF’s Executive Board approved a two-year Policy Support Instrument (PSI) for Nigeria. Nigeria was the first of the IMF’s member countries to benefit from the new instrument, which was approved in FY2006. The PSI is designed for low-income countries that may not need IMF financial assistance but that still seek close coopera-tion with the IMF in the preparation and endorsement of their economic policy frameworks. PSI-supported programs are based on Poverty Reduc-tion Strategies developed by countries in a process in which civil society and development partners participate.

Nigeria’s performance under the PSI has been strong. Real GDP growth in the non-oil sector accelerated to 8 percent in 2005, exceeding expecta-tions. Inflationary pressures subsided in the fourth quarter of 2005 and in early 2006. Progress in implementing the structural reform agenda, as outlined in Nigeria’s 2004 National Economic Empowerment and Devel-opment Strategy (NEEDS), has been excellent. The first review under the PSI was completed in April 2006.

The completion of the first PSI review enabled Nigeria and its Paris Club creditors to fully implement the agreement they reached in October 2005 on a comprehensive concessional debt treatment. Nigeria’s external pub-lic debt will be reduced to a projected 4 percent of GDP by end–2006. Implementation of the debt agreement is well under way.

Nigeria-IMF activities in FY2006

July 2005 Conclusion of 2005 Article IV discussion

October 2005 Approval of a two-year Policy Support Instrument (PSI) for Nigeria

April 2006 Completion of the first review of Nigeria’s PSI

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and objectives of their corrective policies. This would allow investors to better manage the information risk and to reas-sess the risk-return trade-off of possibly increasing their holdings of the country’s debt. Directors believed that a country would benefit from open, two-way dialogue with investors.

For their first bond issue after regaining access to the mar-kets, countries needed to give careful attention to selecting target investors and to the size and maturity of the bond. Market participants often preferred that such countries issue a fixed-coupon, bullet, or “plain vanilla” bond, which

was easy to price and trade and facilitated price discovery. However, countries should also consider that issuing a bond with a more complicated structure could facilitate the man-agement of certain risks.

Directors supported continued work by the staff in this area, including the development of a framework for predict-ing the pace and terms of market reaccess based on further analysis and country experiences, the potential role played by reaccess to domestic markets, and the effects of IMF sup-port on market reaccess and the implications for the Fund’s work.

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t he IMF plays a vital role in the international community’s efforts to help low-income countries

(which constitute 42 percent of its membership) achieve faster economic growth and poverty reduction. The Fund’s chief contributions are promoting macroeconomic and financial stability—a precondition for growth and poverty reduction—in these countries by providing policy advice, loans (typically under the Poverty Reduction and Growth Facility), and technical assistance, and promoting a healthy global economy from which these countries can benefit. It also participates in debt relief efforts, mainly through the joint IMF–World Bank Heavily Indebted Poor Countries (HIPC) Initiative; during FY2006, it also participated in the Multilateral Debt Relief Initiative (MDRI; see Box 6.1)—its contribution was approved by the IMF’s Board in Novem-ber 2005.

In FY2006, the IMF introduced two new instruments—the Policy Support Instrument (PSI), for countries that do not need or want Fund financing but that do want its evalua-tion and endorsement of their policies; and the Exogenous Shocks Facility (ESF), which provides concessional financ-ing to low-income countries faced with external shocks beyond their control.

The Poverty Reduction and Growth Facility (PRGF), which was established in 1999 as a replacement for the Enhanced Structural Adjustment Facility (ESAF), provides conces-sional financing (loans with below-market interest rates and long-term maturities) to low-income countries experienc-ing balance of payments problems (see Table 5.1 for a list of the Fund’s lending facilities). Members seeking assistance under the PRGF prepare a Poverty Reduction Strategy Paper (PRSP) with input from their external development partners, including the IMF and the World Bank. They must also seek input from domestic stakeholders, such as civil society groups, to ensure “local ownership” of the eco-nomic, structural, and social policies outlined in the PRSP. As of April 30, 2006, the IMF had committed SDR 13 billion (nearly $20 billion) to 55 countries under the PRGF. The Executive Board reviewed both the PRGF and the Poverty Reduction Strategy approach during FY2006.

The Fund has a variety of other instruments for providing financial support to its low-income members, including

Emergency Post-Conflict Assistance, Emergency Natural Disaster Assistance, and the Trade Integration Mechanism, for countries adjusting to trade liberalization.

The preparation of a PRSP is also required for countries seeking debt relief under the HIPC Initiative, which was launched in 1996 as a tool for coordinated action by the international financial community to help reduce poor countries’ external debt burdens to sustainable levels. The Initiative was enhanced in 1999 to provide faster, deeper, and broader debt relief aimed at reducing the net pres-ent value (NPV) of countries’ external public debt to a maximum of 150 percent of exports, or 250 percent of government revenue for small open economies. The MDRI supplements the assistance provided under the HIPC Ini-tiative. Countries are meant to use the resources freed up by debt relief to alleviate poverty and accelerate progress toward achieving the UN Millennium Development Goals (MDGs).

The MDGs include eradicating extreme poverty and hunger; achieving universal primary education; promot-ing gender equality; reducing child mortality; improving maternal health; combating HIV/AIDS, malaria, and other diseases; and ensuring environmental sustainability—all by the target date of 2015. Although the MDGs have received growing attention, progress toward their achieve-ment has been slow and uneven. At the Conference on Financing for Development, which was sponsored by the United Nations and held in Monterrey, Mexico, in March 2002, the international community adopted the Monterrey Consensus, a two-pillar strategy to improve prospects for achieving the MDGs. The first pillar is the pursuit of sound policies, stronger institutions, and improved governance by low-income countries. The second pillar is greater and more effective international support—including official development assistance (ODA) and trade liberalization to open markets to developing country exports. The Fund and the World Bank monitor and report on progress toward the MDGs, including in the annual Global Monitoring Report.

For information on how the IMF’s lending activities and debt relief in low-income countries are financed, see Chapter 8.

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Debt relief and sustainability

The IMF, together with the World Bank and other official creditors, made further progress in implementing the HIPC Initiative in FY2006. As of end-April 2006, 29 HIPCs—or nearly three-fourths of the 40 countries that might wish to be considered for debt relief under the Initiative—had reached the decision point and were receiving debt relief, including from the Fund. The debt stocks of these countries

are projected to decline by about two-thirds in NPV terms once they reach their respective completion points, when creditors provide the full amount of debt relief committed at the decision point on an irrevocable basis. To date, 19 HIPCs have reached the completion point, accounting for 64 percent of HIPC Initiative assistance committed by the international community.

The Boards of the IMF and the World Bank decided in 2004 to extend the HIPC Initiative sunset clause to December

Box 6.1 Debt relief initiatives

The Heavily Indebted Poor Countries (HIPC) Initiative, which was established in 1996, remains the only internationally agreed frame-work for providing comprehensive debt relief to countries that qualify for HIPC assistance. Participation in the Initiative is voluntary for both creditors and debtors. The initiative was enhanced in 1999 to provide faster, deeper, and broader debt relief and to strengthen the links between debt relief, poverty reduction, and social policies.

To qualify for HIPC assistance, a country must pursue strong economic policies supported by the IMF and the World Bank. There are three phases. In phase I, leading up to the deci-sion point, the country needs to establish a track record of good performance (normally, over a three-year period) and develop a Pov-erty Reduction Strategy Paper (PRSP) or an interim PRSP. Its efforts are complemented by concessional aid from all relevant donors and institutions and traditional debt relief from bilateral creditors, including the Paris Club. In this phase, the country’s external debt situation is analyzed in detail. If its external debt in net present value (NPV) terms, after the full use of traditional debt relief, is above 150 percent of exports (or, for small open economies, above 250 percent of government revenue), the country qualifies for HIPC relief. At the decision point, the IMF and the World

Bank formally decide on the country’s eligibil-ity, and the international community commits itself to reducing the country’s debt to a sus-tainable level.

Once it reaches the decision point (phase 2), the country must continue its good track record with the support of the international community, satisfactorily implementing key structural policy reforms, maintaining macro-economic stability, and adopting and imple-menting a Poverty Reduction Strategy. Paris Club bilateral creditors reschedule obligations coming due, with a minimum 90 percent reduction in NPV terms, and other bilateral and commercial creditors are expected to do the same. The IMF and the World Bank and some other multilateral creditors may provide interim debt relief between the decision and completion points.

A country reaches its completion point—thethird phase—once it has met the objectives set at the decision point. It then receives the balance of the debt relief committed. This means that all creditors are expected to reduce their claims on the country, measured in NPV terms, to the agreed sustainable level. A number of bilateral creditors, particularly in the Paris Club, have committed to providing additional debt relief beyond what is required under the HIPC Initiative.

The Multilateral Debt Relief Initiative (MDRI) was launched in 2005 as a supple-ment to the HIPC Initiative, to help accelerate progress toward the Millennium Development Goals. The MDRI allows for 100 percent debt relief by three multilateral institutions—the IMF, the International Development Association (IDA) of the World Bank Group, and the Afri-can Development Fund (AfDF)—for countries completing the HIPC process. Unlike the HIPC Initiative, the MDRI does not propose any par-allel debt relief on the part of official bilateral or private creditors, or of multilateral institu-tions other than the IMF, IDA, and the AfDF. Although the MDRI is an initiative common to the three institutions, the decision to grant debt relief is ultimately the separate responsi-bility of each institution, and the approach to coverage and implementation may vary.

The MDRI became effective at the Fund on January 5, 2006, and 19 countries (17 HIPCs and 2 non-HIPC countries) received MDRI relief the following day. The Fund delivered SDR 2.3 billion in MDRI and remaining HIPC Initiative relief to the qualifying countries, reducing their exposure to the Fund by 94 percent, on average. Cameroon qualified for SDR 0.2 billion in debt relief after reaching its completion point on April 28, 2006, and other HIPCs will qualify for MDRI relief upon reaching their completion points.

Comparing the HIPC Initiative and the MDRI

HIPC Initiative MDRI

Country coverage IDA-only, PRFG-eligible countries with debt indicators above HIPCs that have reached the completion point (and non-HIPCs the HIPC Initiative thresholds. with per capita income below $380 in the case of the IMF).

Participating creditors All creditors, on a voluntary basis. IMF, IDA, and AfDF.

Debt covered Debt above the HIPC Initiative thresholds. All outstanding obligations as of end–2004 (IMF and AfDF) and end–2003 (IDA), and remaining debt outstanding at the time of qualification for the relief.

Modality of delivery Variable. The IMF provides interim debt relief and delivers the All participating creditors provide debt relief as a stock-of-debt remainder as a stock cancellation at the completion point. operation at or shortly after the completion point.

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31, 2006, for countries that meet the end-2004 income and indebtedness criteria.1 Subsequently, 11 countries were identified as meeting the criteria, including four countries not previously eligible (Eritrea, Haiti, the Kyrgyz Republic, and Nepal). (Three other countries that met the criteria indicated that they did not wish to avail themselves of the Initiative.)2 Grant resources will need to be mobilized to finance HIPC debt relief for those countries that become potentially eligible under the extended sunset clause, including three countries with protracted arrears to the Fund (Liberia, Somalia, and Sudan). Some countries that might be eligible for debt relief under the HIPC Initiative may not be able to adopt a Fund-supported program before the sunset clause expires, however. The Board will consider options by end-July 2006 for dealing with the expiration of the sunset clause.

Status of implementation of the enhanced HIPC

At a Board discussion in September 2005, Directors reiter-ated their strong support for the Initiative and welcomed the continued progress being made.3 They recognized that progress toward reaching the completion point depended on countries’ satisfactory performance under their PRGF arrangements and their Poverty Reduction Strategies. Directors urged staff to continue working with these HIPCs to help them reach their completion points. They empha-sized the need to help countries improve their institutional capacity and policy processes—especially management of public expenditure and tracking of poverty outlays.

Directors acknowledged that most of the countries’ bilat-eral creditors had agreed to provide debt relief but stressed that ensuring the full participation of non–Paris Club and commercial creditors remained an important challenge. They reiterated their call to creditors that had not yet joined the international community’s efforts to provide compre-hensive debt relief to do so and regretted that a number of non–Paris Club creditors had withdrawn from the Ini-tiative. Directors were also concerned about the increase in lawsuits initiated by private creditors against Heavily Indebted Poor Countries. Underscoring the crucial impor-tance of equitable participation and burden sharing in

1“Enhanced HIPC Initiative: Possible Options Regarding the Sunset Clause,” prepared by the staffs of the IMF and the World Bank, July 7, 2004 (www.imf.org/external/np/hipc/2004/070704.htm).

2 “IMF Executive Board Discusses the List of Ring-Fenced Countries That Meet the End-2004 Income and Indebtedness Criteria Under the Enhanced HIPC Initiative and the Review of Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Member Countries,” Public Information Notice No. 06/41, April 18, 2006; www.imf.org/external/np/sec/pn/2006/pn0641.htm.

3“IMF Executive Board Discusses the Status of Implementation of the Enhanced HIPC Initiative,” Public Information Notice No. 05/129, Sep-tember 21, 2005, www.imf.org/external/np/sec/pn/2005/pn05129.htm.

the HIPC Initiative, they strongly urged Fund staff to help increase creditor participation in the Initiative and facili-tate cooperation between creditors and debtor countries. Directors recommended steps to enhance the transparency of creditor participation, give more explicit attention to these issues in Article IV consultations, provide targeted technical assistance to improve debt management systems, intensify moral suasion, and educate creditors on the HIPC methodology.

The Multilateral Debt Relief Initiative

In an effort to step up debt relief, the Fund’s Board approved the Multilateral Debt Relief Initiative (MDRI)4 in November 2005. This initiative provides debt relief to mem-ber countries with annual per capita incomes at or below $380, as well as to countries above that threshold that reach the completion point under the HIPC Initiative. MDRI relief covers the full stock of eligible debt owed to the IMF at the end of 2004 that remains outstanding at the time of the provision of debt relief.

The MDRI was a response to a proposal advanced by the Group of Eight (G-8: Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States) at the July 2005 Gleneagles Summit for cancellation by the IMF, the World Bank’s International Development Association (IDA), and the African Development Fund (AfDF) of debt owed to them by countries eligible for debt relief under the HIPC Initiative.

Directors agreed that debt relief under the MDRI should be part of an effort to strengthen the IMF’s role in sup-porting low-income countries. The IMF must remain fully equipped to advise and assist members in the design of macroeconomic stabilization and structural reforms, in capacity building, and in the provision of financing, whether in response to shocks or to address remaining or protracted balance of payments problems.

On December 21, 2005, the Board approved a list of coun-tries qualifying for debt relief under the MDRI.5 To qualify, members must meet three criteria: satisfactory macroeco-nomic performance, implementation of poverty reduction policies, and progress in public expenditure management. For countries that had already reached the completion point under the HIPC Initiative, the qualification criteria

4 “IMF Executive Board Agrees on Implementation Modalities for the Multilateral Debt Relief Initiative,” Public Information Notice No. 05/164, December 8, 2005, www.imf.org/external/np/sec/pn/2005/pn05164.htm.

5“IMF Executive Board Discusses the First Assessment of Eligible Countries under the Multilateral Debt Relief Initiative,” Public Information Notice No. 05/168, December 27, 2005, www.imf.org/external/np/sec/pn/2005/pn05168.htm.

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were that they had not experienced any substantial lapses in the three areas.

The list of members eligible for debt relief included 18 that had already reached the completion point under the HIPC Initiative and 2 non-HIPCs (Cambodia and Tajikistan; Table 6.1). Twelve countries, including the two non-HIPCs, were eligible for debt relief under the MDRI-I Trust, for countries with annual per capita incomes at, or below, $380. The other eight HIPCs, with annual per capita incomes above $380, were eligible for debt relief under the MDRI-II Trust. (See Chapter 8 for more information about the MDRI Trusts.)

Directors determined that 19 of the 20 countries met the three qualification criteria. Burkina Faso, Cambodia, Ethiopia, Ghana, Madagascar, Mali, Mozambique, Niger, Rwanda, Tajikistan, Tanzania, and Uganda would receive debt relief from the MDRI-I Trust, while Benin, Bolivia, Guyana, Honduras, Nicaragua, Senegal, and Zambia quali-fied for debt relief from the MDRI-II Trust.6 Directors urged all countries qualifying for debt relief to maintain sound macroeconomic policies and progress with struc-tural reforms, and to make productive use of the resources freed by debt relief.

The cost of debt relief to IDA and the AfDF is to be met by bilateral contributions from the G-8 countries and other donors based on agreed burden sharing. The cost to the Fund is to be covered through its own resources, with a call for bilateral contributions to cover additional needs. The G-8 will cover the cost of debt relief for countries that may

6Mauritania qualified for debt relief under the MDRI-II Trust early in FY2007 after taking certain remedial actions.

become eligible for the HIPC Initiative under the extended sunset clause, while donors will provide the extra resources necessary for full debt relief at the completion point for Liberia, Somalia, and Sudan.

Directors stressed the importance of ensuring that the Fund’s financing capacity was not jeopardized by the MDRI, noting that the cost of MDRI debt relief for Cam-bodia and Tajikistan was higher than estimated in earlier Board papers and that there was a need to ensure that the PRGF’s financing capacity was not reduced. In this context, they again welcomed the G-8’s commitment to providing an additional subsidy contribution of SDR 100 million and to consider dealing with the potential additional costs of including Cambodia and Tajikistan.

On January 5, 2006, after all contributors to the PRGF Subsidy Account had given their amount for the MDRI to become effective, the Board approved immediate debt relief from the Fund under the MDRI for the 19 countries meet-ing the qualification criteria and delivered SDR 2.3 billion in debt relief to them (see Table 8.5). This is expected to have a substantial impact on these countries’ external debt service payments. A progress report on the MDRI was pro-duced in late March 2006.7

Cameroon, which reached its completion point on April 28, 2006, became the twentieth country to qualify for debt relief under the MDRI, in the amount of SDR 0.2 billion.8

7“The Multilateral Debt Relief Initiative: Progress Report on Implementa-tion,” March 20, 2006, www.imf.org/external/np/pp/eng/2006/032006.pdf.

8On June 21, 2006, the IMF approved SDR 32.9 million in debt relief for Mauritania.

Table 6.1 Countries covered by the MDRIEligible under the “MDRI-I Trust” Eligible under the “MDRI-II Trust”(per capita income below $380)1 (per capita income above $380)2

Countries eligible for MDRI relief as of April 30, 2006

“Completion point” HIPCs: 19 countries that have reached Burkina Faso, Ethiopia, Ghana, Madagascar, Mali, Benin, Bolivia, Cameroon, Guyana, Honduras, the completion point under the enhanced HIPC Initiative3 Mozambique, Niger, Rwanda, Tanzania, Uganda Mauritania, Nicaragua, Senegal, Zambia

Non-HIPC countries (2) with per capita income below $380 Cambodia, Tajikistanand outstanding debt to the IMF

Countries that will be eligible once they reach the completion point under the enhanced HIPC Initiative

“Decision point” HIPCs: 10 countries that have reached the Burundi, Chad, Democratic Republic of the Congo, Guinea, Republic of Congodecision point under the enhanced HIPC Initiative The Gambia, Guinea-Bissau, Malawi, São Tomé

and Príncipe, Sierra Leone

11 additional countries may wish to be considered for HIPC Central African Republic, Eritrea, Liberia, Nepal, Togo Comoros, Côte d’Ivoire, Haiti, Kyrgyz Republic, Sudandebt relief. Their eligibility was assessed based on income

Somalia is the eleventh country, but data on itsand indebtedness criteria as of end-2004per capita income are not available.

1The MDRI-I Trust consists of the IMF’s own resources.2The MDRI-II Trust consists of bilateral contributions administered by the Fund.3These countries qualified for debt relief under the MDRI before April 30, 2006, with the exception of Mauritania, which qualified in June 2006.

Debt sustainability framework

In April 2006, Directors reviewed the experience with the joint IMF and World Bank debt sustainability framework (DSF) for low-income countries since it was endorsed by the Boards of the IMF and the World Bank in April 2005 and discussed the implications of the MDRI for the DSF.9

Directors noted that the DSF had become an effective tool for assessing and monitoring countries’ debt burdens and sustainability in the context of surveillance and IMF-supported arrangements. Directors welcomed the wide use of the DSF by multilateral development banks in their lend-ing decisions. They saw room for making debt sustainability analyses more useful for bilateral creditors, with a view to facilitating donor coordination. Directors also underlined the DSF’s role in raising donors’ awareness of the need to boost grant financing and deliver on their commitments. While there was scope for improvement to the DSF, the Board saw no need for major changes.

Excessive accumulation of debt, particularly the nonconces-sional type, should be avoided in countries benefiting from the MDRI. Directors agreed that, on balance, the indicative DSF debt thresholds should not be lowered because of the MDRI, as this would limit countries’ ability to mobilize resources for the MDGs and could run counter to the prin-ciple of uniformity of treatment. Directors broadly sup-ported a case-by-case approach to debt accumulation below the debt thresholds.

Strengthening instruments for supporting low-income countries

In FY2006, the IMF continued to reflect on the adequacy of its instruments for engaging its low-income members. Although the PRGF remains the main instrument for assist-ing these members, the emergence of countries that might not need the Fund’s financial assistance on a sustained basis motivated not only a new emphasis on surveillance in these cases but also an examination of other forms of engagement, resulting in the adoption of the Policy Support Instrument and the Exogenous Shocks Facility.

PRGF program design

In September 2005, the IMF’s Executive Board discussed the design of policy programs supported with loans under the

9 The Board’s discussion was based on a report prepared jointly by the staffs of the World Bank and the IMF: “Review of Low-Income Country Debt Sustainability Framework and Implications of the Multilateral Debt Relief Initiative,” which is available at www.imf.org/external/np/pp/eng/2006/032406.pdf. The summary of the Board’s discussion was released in Public Information Notice No. 06/61, which can be found at www.imf.org/external/np/sec/pn/2006/pn0661.htm.

The IMF has supported Burkina Faso’s economic reform programs almost continuously since 1993 with arrangements under the Enhanced Struc-tural Adjustment Facility (ESAF) and its successor, the Poverty Reduction and Growth Facility (PRGF). During this time, Burkina Faso’s performance has generally been good: the annual real GDP growth rate has averaged about 6 percent (among the highest in Africa); social expenditures have increased significantly; and poverty has declined. Nevertheless, Burkina Faso continues to rank among the poorest countries in the world, and reaching the Millennium Development Goals poses major challenges.

Burkina Faso has also benefited from debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, and, more recently, from debt relief under the Multilateral Debt Relief Initiative (MDRI), including $82 million in debt owed to the IMF. This debt relief will be used to fur-ther raise poverty-reducing spending.

The latest PRGF arrangement, which covers 2003–06, was approved by the IMF’s Executive Board in June 2003. Macroeconomic perfor-mance under the program has been good, with average real GDP growth increasing to about 7 percent a year in 2003–05, in spite of a number of adverse shocks—oil prices have increased by more than 60 percent since early 2003; in 2004, world cotton prices reached record lows; and drought and locusts have disrupted agricultural production. The overall fiscal deficit during the program period has narrowed slightly relative to the preceding three-year period, while the government has continued to increase spending on health care, education, and infrastructure.

Burkina Faso–IMF activities in FY2006

May 2005 Board considers Joint Staff Advisory Note on Burkina Faso’s Poverty Reduction Strategy Paper

September 2005 Conclusion of Article IV consultation and comple-tion of fourth review under Burkina Faso’s PRGF arrangement

December 2005 IMF approves assistance under the Multilateral Debt Relief Initiative for Burkina Faso

March 2006 Completion of the fifth review of Burkina Faso’s PRGF arrangement

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PRGF.10 Two earlier reviews, one by the staff in 2002 and one by the Independent Evaluation Office in 2004, had con-firmed that PRGF-supported programs had become more accommodating to higher public spending, especially to address poverty reduction. However, as an increasing num-ber of low-income countries have reduced macroeconomic imbalances and resumed growth, the policy challenges fac-ing them have evolved. The 2005 review therefore focused on selected policy issues, with particular emphasis on the role of institutions in economic growth, the macroeconom-ics of managing aid, and the fiscal and monetary policies that encourage growth and poverty reduction.

Directors noted the importance of broad economic insti-tutions for the ability of developing countries to sustain economic growth and avoid crises. They observed that some countries ignited growth without having particularly strong broad institutions initially but were able to improve their institutions during the growth period. Directors concurred that the traditional focus in Fund-supported programs on maintaining broad macroeconomic stability, avoiding over-valued currencies, and pursuing trade openness was vital to helping countries sustain growth and reiterated that Fund conditionality should focus on areas that are critical to the macroeconomy. Fund-supported programs could also make a useful contribution to institutional reform by enhancing fiscal transparency and governance.

Directors saw a need for increased spending in many low-income countries, in particular on public infrastructure investment, health care, and education, for these countries to achieve the Millennium Development Goals. However, there was potential tension between higher government spending and both debt sustainability and private sec-tor activity, which could be crowded out. Directors con-sidered that, while increased aid inflows could relax the constraints relating to taxation, private sector credit, and debt sustainability, real currency appreciation could result in a loss of export competitiveness, dampening growth. However, the countries studied by the staff had avoided real exchange rate appreciation because the authorities had restricted absorption and intensified efforts to raise revenues. The Board emphasized the need for low-income countries to bolster domestic revenues to provide more room for public expenditures, including by expanding

10The Board’s discussion was based on four staff papers: “Review of PRGF Program Design—Overview,” www.imf.org/external/np/pp/eng/2005/080805r.htm; “Monetary and Fiscal Policy Design Issues in Low-Income Countries,” www.imf.org/external/np/pp/eng/2005/080805m.htm; “The Macroeconomics of Managing Increased Aid Inflows—Experiences of Low-Income Countries and Policy Implications,” www.imf.org/external/np/pp/eng/2005/080805a.htm; and “Can PRGF Policy Levers Improve Institu-tions and Lead to Sustained Growth?” www.imf.org/external/np/pp/eng/2005/080805L.htm. The summary of the Board’s discussion can be found at www.imf.org/external/np/sec/pn/2005/pn05127.htm.

Since the mid-1990s, Georgia has engaged in several arrangements with the IMF, including three consecutive programs under the Poverty Reduction and Growth Facility (PRGF) and its predecessor, the Enhanced Structural Adjustment Facility (ESAF). These programs have supported the Georgian authorities in establishing and maintaining macroeconomic stability after a period of civil unrest and hyperinflation in the early 1990s. Since 2001, real economic growth has averaged 7 percent a year, while inflation has averaged below 6 percent. The programs have promoted structural reforms and financial stability, while bolstering the National Bank of Georgia’s reserve position, which has increased fourfold since 2000.

During the most recent PRGF-supported program, which was approved in June 2004, the Georgian authorities have managed an impressive turnaround of the fiscal position. Owing mainly to improvements in tax administration, tax revenues as a share of GDP—a measure of fiscal performance—rose from 14.5 percent in 2003 to almost 20 percent in 2005, enabling higher spending on priority areas, including infrastructure, as well as the clearance of most arrears. This improvement occurred against the backdrop of a significant tax reform in early 2005 aimed at simplifying the tax system. Georgia has also continued to reduce its exter-nal debt burden, helped by the marked appreciation of the lari in 2004.

The IMF has provided considerable technical assistance to Georgia, especially in fiscal and monetary policy and financial matters. Using this assistance efficiently, the Georgian authorities continue to implement reforms that should contribute to macroeconomic stability.

Georgia-IMF activities in FY2006

June 2005 Managing Director participates in the annual meeting of the constituency to which Georgia belongs, held for the first time in Tbilisi; the constituency comprises 12 coun-tries represented by the same Executive Director (who is elected by the countries) on the IMF’s Executive Board

June 2005 Joint Staff Advisory Note on the authorities’ Progress Report on Georgia’s Poverty Reduction Strategy Paper, the Economic Development and Poverty Reduction Program

July 2005 Completion of the second review of Georgia’s perfor-mance under the PRGF-supported program

March 2006 Joint IMF–World Bank mission in Tbilisi to conduct the Financial Sector Assessment Program (FSAP) update

March 2006 Completion of 2006 Article IV consultation and third review of Georgia’s performance under the PRGF-supported program

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the tax base. Directors also noted that a better allocation of existing resources could help increase fis-cal space and emphasized the need for strengthening public financial management and improved project selection in this regard. For coun-tries with little debt, external bor-rowing could be an efficient route to finance development expenditures, but even concessional borrowing could lead to an excessive buildup of debt. Directors reaffirmed that the recently operationalized frame-work for debt sustainability analysis in low-income countries should be the main vehicle for assessing the appropriate fiscal path.

Directors considered higher aid inflows to be an important comple-ment to domestically generated funds for financing poverty-reducing expenditures. Effective management of these resources is critical for achievement of the MDGs (see Box 6.2). In the event of a large increase in aid inf lows, countries with ade-quate absorption capacity that are able to contain adverse effects on the tradables sector could increase spending, using aid to finance the resulting rise in net imports. However, a more restrained spend-ing policy could be in order if the effectiveness of higher spending is constrained by absorptive capac-ity, if there is tension between aid volatility and spending rigidities, or if there is an unacceptable erosion of com-petitiveness. To help limit concerns about aid volatility, Directors urged donors to increase the predictability of aid.

Most Directors supported the case for continuing to target single-digit inflation, as higher inflation levels tend to depress economic growth and hurt the poor disproportionately.

Policy Support Instrument

In October 2005, the IMF established the Policy Support Instrument (PSI), agreeing to monitor and endorse the policies of members that do not need or desire the Fund’s financial assistance but still want its policy assessment and

endorsement.11 The PSI is intended to help these countries design effective economic programs and, once approved by the IMF, would signal to donors, multilateral development banks, and markets the Fund’s endorsement of a member country’s policies. The PSI is a complement to, not a substi-tute for, the Poverty Reduction and Growth Facility.

The PSI is available to PRGF-eligible countries with a Pov-erty Reduction Strategy that helps ensure ownership of the policies to be implemented under the PSI and a policy

11“IMF Executive Board Approves the Establishment of Policy Support Instruments for Aiding Low-Income Countries,” Public Information Notice No. 05/145, October 14, 2005, www.imf.org/external/np/sec/pn/2005/pn05145.htm; see also “IMF Executive Board Discusses Policy Support and Signaling in Low-Income Countries,” Public Information Notice No. 05/144, October 14, 2005, www.imf.org/external/np/sec/pn/2005/pn05144.htm.

On April 19–20, 2006, the IMF and the U.K. Department for International Development (DfID) held a workshop at IMF headquarters to assess the macroeconomic challenges of scaling up aid, an issue that has become potentially critical since the 2005 Gleneagles Summit, at which G-8 countries committed to doubling aid to Africa by 2010. The aim of the workshop was to advance the debate on scaling up aid from theory to the operational issues that confront countries and their devel-opment partners. It was attended by African finance ministers and central bank governors, representatives from donors and multilateral development institutions, and academics.

Participants agreed that by responding to increased aid inflows with improved produc-tivity and higher employment, countries could mitigate cases of “Dutch disease”—instances when large revenue or aid inflows significantly reduce the competitiveness of the traded goods sector. They emphasized more bal-anced aid-financed spending, with investment in productive sectors, and trade liberalization, which could both enhance domestic competi-tion and alleviate exchange rate pressures arising from increased aid. Participants also highlighted the importance of strengthening institutions and governance for effectively managing scaled-up aid. Sound fiscal institu-tions, especially strong public financial man-agement, could facilitate aid absorption.

Over the next decade, African countries are expected to be the largest beneficiaries of

increased donor aid, which is intended to improve their prospects of achieving the Mil-lennium Development Goals. To that end, the IMF’s African Department has published a handbook, Macroeconomic Challenges of Scaling Up Aid to Africa: A Checklist for Practi-tioners,1 which aims to help African countries assess the macroeconomic implications of increased aid and respond to the associated policy challenges. It is directed at policymak-ers, practicing economists in Africa, and the staffs of international financial institutions and donor agencies participating in the preparation of medium-term strategies for African countries and lists the five main steps countries will need to take:

absorb as much aid as possible;

boost growth in the short to medium term;

promote good governance and reduce corruption;

prepare an exit strategy if, or when, the scaled-up aid returns to, or even falls below, normal levels; and

regularly reassess the policy mix, because scaling-up scenarios are not forecasts.

1The handbook, by Sanjeev Gupta, Robert Powell, and Yongzheng Yang, is available in full text at www.imf.org/external/pubs/ft/afr/aid/2006/eng/index.htm or can be ordered from IMF Publication Services.

Box 6.2 Workshop and handbook on scaling up aid

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framework that focuses on consolidating macroeconomic stability and debt sustainability while deepening struc-tural reforms in areas that constrain growth and poverty reduction. The PSI requires that country policies meet the standard of IMF upper credit tranche conditionality,12 and PSI-endorsed programs will normally be reviewed semi-annually by the Fund. As of April 30, 2006, the Board had approved PSIs for Nigeria and Uganda.

Exogenous Shocks Facility

In November 2005, the IMF’s Board approved the estab-lishment of the Exogenous Shocks Facility (ESF) within the PRGF Trust. (The Trust was subsequently renamed the PRGF-ESF Trust.) The ESF provides policy support and financial assistance to low-income countries facing exog-enous shocks beyond their control.13 Such shocks can have significant negative effects, especially on poor countries that lack economic diversification and have a limited capacity to build up reserves.

The ESF is available to countries eligible for the PRGF that do not have a PRGF-supported program in place. Financing terms are the same as for a PRGF arrangement and more concessional than those under other IMF emergency lend-ing facilities (Emergency Post-Conflict Assistance, Emer-gency Natural Disaster Assistance, and the Compensatory Financing Facility).

Programs supported by the ESF can be up to two years and should meet upper credit tranche conditionality standards, even though structural reform plans can be less ambi-tious than under a PRGF arrangement. At a minimum, an interim Poverty Reduction Strategy Paper (PRSP) should be in place at the time an ESF arrangement is approved, or, in exceptional circumstances, at the time of the first review. An on-track PSI could provide the basis for rapid access to ESF financing in the event of a shock, but access would not be automatic.

Board review of the Poverty Reduction Strategy approach

In September 2005, the Board undertook an in-depth review of the Poverty Reduction Strategy (PRS) approach.14

Under this approach, governments in low-income coun-tries prepare Poverty Reduction Strategy Papers (PRSPs) in

12See Table 5.1, footnote 4, for an explanation of credit tranches.13 “IMF Establishes an Exogenous Shocks Facility,” Public Information

Notice No. 05/163, December 8, 2005, www.imf.org/external/np/sec/pn/ 2005/pn05163.htm. A factsheet on the ESF is available at www.imf.org/ external/np/exr/facts/esf.htm.

14See staff papers at www.imf.org/external/np/pp/eng/2005/091905p.htm and www.imf.org/external/np/pp/eng/2005/091905s.htm. For the Board discussion, see www.imf.org/external/np/sec/pn/2005/pn05128.htm.

concert with domestic stakeholders and external develop-ment partners such as the IMF and the World Bank. PRSPs present countries’ macroeconomic, structural, and social policies and programs, over a two- to five-year horizon, aimed at promoting broad-based growth and reducing pov-erty. PRSPs form the crucial link between national public actions, donor support, and development outcomes. Pov-erty reduction strategies must be

country-driven, with broad-based participation by civil society in the adoption and monitoring of the PRS;

results-oriented and focused on outcomes that benefit the poor;

comprehensive in recognizing the multidimensional nature of poverty;

partnership-oriented, aimed at improved coordination of efforts by all development partners; and

based on a long-term perspective on the challenges of obtaining, and the need for, commitments to reduce poverty.

The joint IMF–World Bank staff papers on which the review was based drew lessons regarding the PRS as a model for more effective development cooperation and suggested actions to strengthen it. Directors agreed that the PRS approach was a useful framework for balancing domestic and external accountabilities for development results and provided a platform for scaling up efforts to achieve the MDGs. They also noted that the use of alternative scenarios could bridge the gap between an operationally realistic PRS framework and more ambitious development plans. Directors suggested that Fund staff help in preparing such scenarios for countries that request them (see Box 6.3). More generally, Directors emphasized that the Fund would play a critical role in helping low-income countries manage higher aid inflows.

Global Monitoring Report

Progress in implementing the policies and actions needed to achieve the UN Millennium Development Goals (MDGs) and related outcomes is assessed annually in the Global Monitoring Report (GMR), produced jointly by the IMF and the World Bank in collaboration with other international partners.

The third annual GMR, subtitled Strengthening Mutual Accountability, Aid, Trade, and Governance, was published in April 2006.15 It cites evidence of reduced child deaths in 9 of the 10 developing countries surveyed—Bangladesh, Bolivia, Burkina Faso, Cameroon, Indonesia, Madagascar,

15The Global Monitoring Report is available at www.imf.org/external/pubs/ft/gmr/2006/eng/gmr.pdf.

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Morocco, Mozambique, and the Phil-ippines. It points to the rapid gains in primary school enrollment, with 50 countries having achieved universal completion of primary school, up from 37 in 2000. And it cites signs of the first decline in HIV/AIDS infec-tion rates in such high-prevalence countries as Haiti, Uganda, and Zimbabwe. But the advances remain uneven. Many countries, especially in Africa and Latin America, are still not making strong inroads into poverty reduction, while progress on human development indicators in South Asia has been insufficient.

The GMR highlights six main points for accelerating progress toward the MDGs and strengthening the mutual accountability of the advanced and the low-income countries:

Growth has helped reduce poverty, but more even and accelerated progress requires a strengthening of infrastructure and the invest-ment climate.

Recent progress in human devel-opment outcomes points to the need for more flexible aid, better coordination, and improved governance.

Although major aid and debt relief commitments were made in 2005, better aid and vigilant monitoring are needed to guard against risks to their effective implemen-tation. Trade reform needs new life.

The focus of the international financial institutions must shift from managing inputs to achieving real results on the ground.

Governance should be regularly monitored to help track progress, generate greater accountability, and build demand for further progress.

The international community must support efforts to strengthen governance systems through ratification and support for global checks and balances.

On the theme of good governance, the GMR defines public sector governance as the way a country’s govern-ment gains and exercises authority over public goods and services. Good governance requires more than tech-nical skills and organizational capacities in the public sector. It also demands clear rules and expectations, transparent information to allow performance to be monitored, and incentives and enforcement mechanisms

to reward success and address failure. To help achieve this, the report outlines a framework for monitoring “the key actors in a governance system,” namely, political leaders, institutions providing checks and balances, the public bureaucracy, and citizens and firms.

Trade and poverty reduction

Multilateral trade liberalization has been a major contribu-tor to the world economy’s unprecedented growth over the past half century. In tackling remaining restrictions on trade, the Doha Development Agenda has the potential to benefit all countries. In 2005, at the urging of the Devel-opment Committee and the International Monetary and Financial Committee, the staffs of the IMF and the World Bank prepared a paper, “Doha Development Agenda and Aid for Trade,”16 following a consultation process with donors and developing countries. The paper emphasized that trade could be an important engine of growth and stressed the importance of achieving an ambitious outcome from the Doha Round. However, some countries might require assistance in alleviating the infrastructural and

16See www.imf.org/external/np/pp/eng/2005/091905.pdf.

The third Forum on Poverty Reduction Strategies for the western Balkans was held in Thessa-loniki, Greece, on May 27–28, 2005. Organized by the IMF and the World Bank, the forum was sponsored by the government of Greece, the U.K. Department for International Development, the United Nations Development Program, and the European Union. Participants included government and civil society representatives from Balkan countries with Poverty Reduction Strategies—Albania, Bosnia and Herzegovina, and Serbia and Montenegro—and representa-tives from the United Nations Mission in Kosovo (UNMIK) and the former Yugoslav Republic of Macedonia.

The participants recognized that—notwithstand-ing recent progress in reducing poverty and moving toward the UN Millennium Development Goals—these countries need to accelerate growth to better address poverty, economic vulnerability, and unemployment. Measures to promote competitiveness are critical to creating jobs and accelerating growth.

Although each country faces specific circum-stances in implementing its poverty reduction

strategy, participants identified some common challenges:

accelerating growth by improving the busi-ness environment, reducing barriers to the creation of new firms, curbing corruption, promoting labor market flexibility, improv-ing infrastructure, expanding trade, further integrating and liberalizing product and factor markets, and strengthening regional cooperation;

enhancing human capabilities by improving the quality of public services and providing well-targeted social protection while main-taining prudent fiscal policies;

managing the political economy of dif-ficult reforms, such as the privatization and restructuring of state-owned enterprises, and restructuring of public finances; and

harmonizing foreign aid in the context of a single, country-driven development frame-work and ensuring that aid reflects the needs, priorities, and absorptive capacity of the recipient countries.

Box 6.3 Forum on Poverty Reduction Strategies for the western Balkans

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other supply constraints that prevent them from taking advantage of the opportunities of open international trade and in mitigating and managing adjustment costs (see Box 6.4).

The IMF provides trade-related financial and technical assistance through several different vehicles. In addition to its Trade Integration Mechanism, which allows the Fund to provide loans under its lending facilities to countries fac-ing lower export earnings or higher import prices because of other countries’ trade liberalization, the Fund provides technical assistance for data improvements, customs reform, and tax and tariff reform. It also contributes to the Integrated Framework (IF), a multi-agency framework that promotes the reform of trade regimes as part of Poverty Reduction Strategies and coordinates trade-related tech-nical assistance. As part of its surveillance activities, the Fund works with country authorities in identifying areas of opportunity and risk and devising policy responses to the challenges of international integration. The Fund has also strengthened its research capacity in the trade area and is helping to develop methodologies for assessing the impact of trade reforms on member countries. In January 2006, the Trade and Investment Division of the IMF’s Research Department sponsored a conference at IMF headquarters at which researchers explored the connections between trade, aid, and growth.

At a meeting in November 2005, IMF Executive Directors discussed joint Fund–World Bank proposals on trade-related assistance (“Aid for Trade”).17 They reaffirmed the importance of successfully conclud-ing the Doha Round of multilateral trade negotiations. An ambitious agreement on improved market access in both goods and services, and stronger trading rules in the World Trade Organization, will be key to promoting efficiency, eco-nomic growth, and poverty reduc-tion, and hence to achieving the MDGs. Directors pointed to the criti-cal role that developed countries can play in addressing remaining trade impediments by removing market access restrictions, reducing tariff escalation, and cutting agricultural and other subsidies. In the same vein, Directors called on developing coun-tries to commit themselves to further trade liberalization. They stressed that Aid for Trade was not a substi-tute for an ambitious outcome in the

Doha Round but an essential and useful complement aimed at allowing some developing countries to address obstacles to exploiting trade opportunities fully.

Most Directors agreed that an examination by the Fund and Bank staffs of the adequacy of existing mechanisms to address regional or cross-country infrastructural needs would be useful. The Board also supported a firm Fund and Bank commitment to helping countries facing adjustment needs use all available instruments.

Directors agreed that the Fund will continue to have a major role to play in helping members address the potential adjustment costs and any associated financing needs arising from more open international trade. However, they noted that financing needs assessments should take into account countries’ implementation capacities. In addition, the Fund should confine its work to its mandate and core areas of competence, be guided by the principles of selectivity and effectiveness, and draw on the expertise of other institu-tions as much as possible. The Fund will continue to carry this work forward through its regular surveillance function, research, lending, and technical assistance—particularly on

17“IMF Executive Board Discusses Doha Development Agenda and Aid for Trade,” Public Information Notice No. 05/169, December 27, 2005, www.imf.org/external/np/sec/pn/2005/pn05169.htm.

Cotton, which accounts for up to 60 percent of the export receipts of many West and Central African states, has been one of the major export success stories in sub-Saharan Africa and is the main source of cash income for millions of smallholders. However, the viability of the sector is under pressure as farmers and ginners face declining world cotton prices exacerbated by euro-dollar exchange rate movements; distortions in global agricultural trade, including producer subsidies in some major exporting countries; a surge in output from other developing countries; and slow productivity gains. Given the economic and social importance of the cotton sector, these developments threaten the region’s macroeco-nomic stability, economic growth, and poverty reduction programs.

Against this background, the Beninese gov-ernment and the IMF’s African Department organized a high-level conference in Cotonou on May 18, 2005. Senior officials from Benin, Burkina Faso, Chad, and Mali (the “Cotton-4”), cotton producers, and officials from interna-

tional trade and development agencies met to discuss ways to weather the crisis.

Conference participants proposed a multi-pronged approach:

making cotton production more efficient and boosting farmers’ incomes;

maintaining macroeconomic and fiscal sta-bility in the region by ensuring that changes in world prices are reflected in domestic prices;

eliminating cotton subsidies and other price-distorting factors within the framework of multilateral trade negotiations; and

requesting support from development partners, such as the World Bank and the IMF, for reforms that strengthen productivity and institutions and for mechanisms that protect the most vulnerable groups during adjustment.

The text of the Conference Declaration is avail-able on the IMF’s Web site at www.imf.org/external/np/sec/pr/2005/pr05121.htm.

Box 6.4 Helping Africa’s cotton producers

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tax and customs reforms, and on financial sector regulation and supervision. In this context, Directors noted the estab-lishment of a staff working group to examine the potential revenue impact of Doha tariff reduction scenarios for coun-tries likely to face adjustment shocks.

Directors welcomed the staff ’s suggestions to enhance the Integrated Framework (IF) within the guidelines for the IMF’s work on trade issues generally, and they looked forward to the work of the IF task force in developing

practical ways of implementing the suggestions to improve the IF by increasing engagement by donors, the private sec-tor, and civil society. Directors recognized that members’ technical assistance needs could increase as a result of the Aid for Trade initiative. The Fund’s response to any such increased requirements will need to be based on carefully exploiting the scope for proper prioritization of projects and redeployment of resources, and may need to be quan-tified in due course in the context of the Fund’s medium-term budget.

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t he IMF complements its surveillance operations and its lending in support of member countries’ policy

programs with technical assistance and training. The goal is to help member countries strengthen their human and insti-tutional capacity to design and implement macroeconomic and structural policies that promote macroeconomic and financial stability, economic growth, and poverty reduction.

The IMF offers technical assistance and training mainly in its core areas of expertise, such as macroeconomic policy, tax and revenue administration, public expenditure man-agement, monetary policy, exchange systems, financial sec-tor reforms, and macroeconomic and financial statistics. In recent years, member countries increasingly have requested assistance in addressing issues related to monitoring off-shore financial centers, preventing money laundering and the financing of terrorism, strengthening public invest-ment, managing fiscal risks from public-private sector partnerships, adopting international standards and codes for financial and fiscal management, and correcting weak-nesses identified under the joint IMF–World Bank Financial Sector Assessment Program (see Chapter 4). At the same time, there is demand from heavily indebted poor countries (HIPCs) for assistance with debt sustainability analysis and debt reduction–related work. In December 2005, the Execu-tive Board also considered joint IMF–World Bank staff proposals regarding the provision of trade-related technical assistance to low-income countries (see Chapter 6).

The IMF’s technical assistance is delivered mainly by its Monetary and Financial Systems Department (MFD), its Fiscal Affairs Department (FAD), and its Statistics Depart-ment (STA). Overall institutional policy on, and the coordi-nation of, technical assistance are handled by the Office of Technical Assistance Management (OTM), in consultation with other IMF departments. OTM is also responsible for raising and managing external finance for this area of the IMF’s work. Training activities are handled primarily by the IMF Institute, which conducts seminars, workshops, and other training events for country officials, often in collabo-ration with other Fund departments, on topics within the IMF’s core areas of expertise.

The IMF uses a variety of methods to deliver technical assistance, including short-term expert missions and the appointment of long-term resident advisors. In each case, the recipient country is always fully involved in the entire pro-

cess, from identifying its assistance needs to implementing, monitoring, and evaluating the assistance it receives. In recent years, an increasing portion of the Fund’s technical assistance has been provided through regional technical assistance centers (RTACs) in the Pacific Islands, the Caribbean, Africa, and the Middle East. Experience with delivering assistance through RTACs has been very positive. Accordingly, in March 2006, the IMF announced that it would establish a new RTAC in Central Africa, its third RTAC in Africa and its sixth worldwide. Scheduled to begin operations in 2007 in Libre-ville, Gabon, the new center will aim to strengthen capacity in macroeconomic management in the six countries of the Central African Economic and Monetary Community—Cameroon, Chad, the Central African Republic, Equatorial Guinea, Gabon, and the Republic of Congo—as well as Burundi and the Democratic Republic of the Congo.

Direct IMF financing for technical assistance delivery and supervision, and to meet administrative and other costs, comes from the institution’s total net administrative budget. Fund technical assistance is also financed partly by resources from bilateral and multilateral donors. This cooperation with external donors both leverages the inter-nal resources available for technical assistance and prevents duplication of effort.

Technical assistance delivery in FY2006

In FY2006, the IMF delivered more than 429 person-years of technical assistance. (One person-year equals 260 working days.) More than three-fourths of the Fund’s technical assistance goes to low-income and lower-middle-income countries. Post-conflict countries are also major beneficiaries. The IMF’s technical assistance activities are summarized in Tables 7.1 and 7.2 and Figures 7.1 and 7.2.

The Fund took a number of steps during the year to improve the management and delivery of technical assistance. Further efforts were also made to align technical assistance priori-ties with the needs of surveillance and to strengthen country ownership of technical assistance programs.

In response to an Independent Evaluation Office (IEO) report in January 20051 on the Fund’s technical assistance

1Available at www.imf.org/external/np/ieo/2005/ta/eng/013105.htm.

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program, the Executive Board in July 2005 endorsed pro-posals by a staff task force to implement the IEO’s main recommendations (see below). The proposals included an action plan that gives area departments a central role in working with country authorities to develop technical assistance strategies to better integrate technical assistance with country surveillance and program work; foster greater ownership of recommendations by country authorities; and enhance monitoring and evaluation. Other evaluations completed in FY2006 and planned for FY2007 under OTM’s

formal evaluation program, which was launched in 2003, are summarized in Table 7.3.

Preparation during the year of pilot Technical Assistance Country Strategy Notes also aims to improve planning, tracking, and evaluation. In addition, measures formulated by Fund staff will increase participation by country authori-ties and resident representatives in technical assistance plan-ning and execution. As a follow-up to the Board review of the Fund’s Regional Technical Assistance Centers, guidelines and operational arrangements have also been strengthened in the centers.

The Fiscal Affairs Department, one of the Fund’s princi-pal technical assistance providers, carried out a range of technical assistance and training activities during the year. These included seminars on public financial management in China, Colombia, and Washington, D.C., and at the Arab Monetary Fund; a two-week course at the IMF’s Wash-ington, D.C., headquarters on fiscal policy in low-income countries; and regional outreach seminars in Brazil, and, in cooperation with the Korean Development Institute, in Seoul, on public-private partnerships (PPPs); as well as missions to Serbia and Montenegro and Cyprus to address the fiscal risks associated with PPPs. FAD also facili-tated regional tax coordination in the wake of the Central American–Dominican Republic–United States Free Trade Agreement (CAFTA-DR).

In the critical areas of banking supervision and anti-money-laundering/combating the financing of terrorism (Box 7.1), 17 jurisdictions from around the world received technical assistance in 2005, with a focus on extending delivery to small

Table 7.1 Technical assistance program areas, FY2004–06

(Field delivery in person-years)1

FY2004 FY2005 FY2006

Main program areasCrisis prevention 34.8 27.7 31.9Poverty reduction 57.0 58.5 53.9Crisis resolution and management 25.2 23.6 20.4Post-conflict/isolation 27.2 28.1 21.9Regional 57.0 63.8 64.0Total 201.1 201.6 192.1

Key policy initiatives and concernsAssistance on standards and codes, excluding FSAP 21.7 14.8 13.7FSAP-related 9.9 15.4 19.8HIPC-associated 11.5 5.7 6.8Safeguarding Fund resources — — 1.1Offshore financial centers and AML/CFT 8.6 11.3 6.1Policy reform/capacity building 147.4 154.4 144.3Other 1.9 — 0.3

Total 201.1 201.6 192.1

Source: IMF Office of Technical Assistance Management.Note: FSAP = Financial Sector Assessment Program; HIPC = Heavily Indebted Poor Countries Initiative; AML/CFT = anti-money-laundering and combating the financing of terrorism.1Excludes headquarters-based activities related to technical assistance. An effective person-year of technical assistance is 260 days.

Figure 7.1 Technical assistance by region, FY2006

(As a percent of total regional delivery, in effective person-years)

Western Hemisphere14%

Regional and international5%

Africa28%

Asia and Pacific21%

Europe13%

Middle Eastand Central Asia

19%

Figure 7.2 Technical assistance delivery by department,FY2006

(As a percent of total resources, in effective person-years)

Legal Department5%

Other departments11% Fiscal Affairs

Department23%

Monetary and FinancialSystems Department

29%Statistics Department

13%

IMF Institute19%

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and low-income areas. The IMF’s Monetary and Financial Systems Department and Legal Department conducted supervision and legislative workshops in the Asia-Pacific region in which several international and offshore financial centers participated, as well as in the Caribbean and the Middle East. To address the techni-cal assistance needs of several small Pacific jurisdictions, Fund staff, in cooperation with the Pacific Finan-cial Technical Assistance Center, are strengthening cooperation with bilat-eral agencies working in the region.

The Statistics Department provided technical assistance and training to a wide range of member countries during the year to support lasting improvements in national statistical systems. The department’s technical assistance program promotes inter-nationally accepted data standards, with an emphasis on regional proj-ects and collaboration with other donors and providers. The depart-ment fielded 289 technical assistance missions during the year, of which 108 benefited African countries. The department oversees technical assis-tance in macroeconomic statistics provided through the RTACs, and during the year it also conducted 21 training courses in macroeconomic statistics through the IMF Institute and the IMF Regional Training Centers and offered 26 regional seminars in col-laboration with various organizations.

Technical assistance from the International Capital Markets (ICM) Department supports the Fund’s work in crisis pre-vention and resolution by building capital market capacity in emerging market countries. Technical assistance efforts focus on

access and reaccess to international capital markets, including sovereign credit quality, investor relations, and investment climate issues;

public liability management issues;

development and deepening of local securities markets and instruments; and

evaluation of risk transmission at the macro level between the corporate, banking, and public sector balance sheets and, in particular, the ability to analyze potential policy mixes to counter potential vulnerabilities.

In FY2006, the Regional Office for Asia and the Pacific (OAP) administered an Executive Program for Macro-economic Policymakers under which 45 mid- and senior-level officials from East and Central Asia were brought to Hitotsubashi University in Japan for two-week seminars on current economic policy issues conducted by prominent aca-demics and other authorities. The IMF received funding for the program from the government of Japan. The OAP also continued to administer the Japan–IMF and Australia–IMF Scholarship Programs for Asia.

Task force on technical assistance

In July 2005, the Executive Board discussed the conclusions of the Task Force on Technical Assistance2 created by the

2The Task Force’s report is available at www.imf.org/external/np/pp/eng/2005/071205.htm; the summary of the Board discussion can be found at www.imf.org/external/np/sec/pn/2005/pn05114.htm.

Table 7.2 IMF technical assistance resources and delivery, FY2002–06

(In effective person-years)1

FY2002 FY2003 FY2004 FY2005 FY2006

IMF technical assistance budget 268.8 262.2 262.1 283.4 341.1Staff 172.2 174.1 186.1 195.6 258.7Headquarters-based consultants 23.2 20.1 20.6 27.4 23.7Field experts 73.4 68.0 55.4 60.4 58.7

External technical assistance resources 77.8 93.5 105.3 97.1 88.1United Nations Development Program 9.6 9.6 8.1 5.8 5.0Japan 56.2 61.9 61.6 52.5 45.6Other cofinanciers 12.0 22.0 35.6 38.9 37.6

Total technical assistance resources 346.6 355.7 367.4 380.6 429.2

Technical assistance regional delivery2 280.0 286.5 291.1 301.4 290.9Africa 71.9 72.1 83.8 86.9 82.7Asia and Pacific 63.1 67.5 69.0 68.2 59.8Europe I 30.3 27.7 — — —Europe II 32.6 25.1 — — —Europe — — 35.5 34.5 37.3Middle East 22.4 26.5 — — —Middle East and Central Asia — — 40.1 45.1 56.3Western Hemisphere 28.0 32.6 26.6 32.7 40.5Regional and interregional 31.7 35.1 36.0 33.9 14.4

Technical assistance management and administration3 66.6 69.2 76.4 79.2 138.3

Total technical assistance delivery 346.6 355.7 367.4 380.6 429.2

Total technical assistance delivery by department 346.6 355.7 367.4 380.6 429.2Monetary and Financial Systems Department 115.5 120.0 122.0 127.0 125.7Fiscal Affairs Department 97.5 94.3 95.6 99.5 100.2IMF Institute 56.0 55.4 53.6 57.0 80.7Statistics Department 49.2 55.7 59.0 53.1 54.3Legal Department 15.5 19.6 23.9 23.5 20.0Other4 12.9 10.7 13.3 20.4 48.3

Source: Office of Technical Assistance Management.1An effective person-year of technical assistance is 260 days. New definitions used since 2001; data adjusted retroactively.2In FY2004 the former European II Department was dissolved, and its countries were absorbed by the new European Department and the Middle East and Central Asia Department.

3Indirect technical assistance, including technical assistance policy, management, evaluation, and other related activities.4Includes the Policy Development and Review Department, the Technology and General Services Department, the International Capital Markets Department, the Office of Technical Assistance Management, the Finance Department, the Human Resources Department, and all area departments.

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Managing Director to follow up on recommendations of an Independent Evaluation Office assessment of the Fund’s technical assistance program issued earlier in the year. The Task Force was chaired by Deputy Managing Director Agustín Carstens, and it liaised with the Working Group on the Regional Technical Assistance Centers. It was asked to make concrete proposals to implement the IEO’s recom-mendations, estimate their budgetary costs, and assess their implications for technical assistance work practices and delivery (Box 7.2).

Directors broadly endorsed the Task Force’s proposals, which they viewed as key steps toward further enhancing the effectiveness of the Fund’s technical assistance. They noted that the Task Force proposals addressed the IEO’s main recommendations to (1) introduce a more medium-term perspective for setting technical assistance strategy and priorities; (2) strengthen the tracking and evaluation of implementation and results; and (3) enhance country own-ership of technical assistance activities.

Directors supported the IEO’s call for a central role for area departments in developing a country-focused, medium-term, and holistic technical assistance strategic framework. They welcomed the Task Force’s proposal to produce Technical Assistance Country Strategy Notes for intensive Fund technical assistance users and countries where such assistance is particularly important from a strategic point of view. Key features of these Notes should be the involvement and ownership of country authorities and sufficient flexibil-ity to respond to shifts in priorities. Coordination with and support from donors are also important.

Directors further endorsed the Task Force proposal to use the Technical Assistance Information Management System (TAIMS) to develop more systematic approaches to track-ing progress on technical assistance, identify reasons behind major shortfalls, and shift emphasis to monitoring results. Looking ahead, they also emphasized the importance of using TAIMS to generate information on the cost associated

with individual technical assistance activities that could be used to inform medium-term budget decisions.

The Board saw particular merit in greater involvement by country authorities in the design and follow-up of techni-cal assistance activities, based on the needs and priorities set out, where possible, in Poverty Reduction Strategy Papers (see Chapter 6). They noted that area and functional departments already maintained extensive contacts with the authorities on technical assistance, but emphasized that there was merit in making these consultations systematic and in setting mutually agreed-upon milestones to monitor progress in implementation.

Directors agreed that Fund staff and experts should iden-tify options and discuss the feasibility of alternatives with the authorities before drafting technical assistance recom-mendations, as this greatly enhanced prospects for effective implementation. They supported the Task Force’s proposals to encourage staff and experts to be attentive to the political and institutional environment for the design and imple-mentation of technical assistance projects and to discuss constraints and identify and address risks.

In view of the magnitude of both the internal and the exter-nal resources spent by the Fund on providing technical assistance, Directors emphasized that it was critical to have in

Table 7.3 Technical assistance evaluation program,FY2006–07

Subject of evaluation report Financial year

Technical assistance (TA) related to strengthening the commercialcourt and the implementation of the bankruptcy law in Indonesia 20061

Financial sector TA to Sierra LeoneFinancial sector TA to the Democratic Republic of the CongoFinancial sector TA to Bosnia and HerzegovinaFinancial sector TA to Kosovo

Experience with implementation of the “upstream” approach fordelivery of TA in revenue administration 20072

Tax policy TA on revenue aspects of trade reform

1Completed.2Under way.

One of the highest priorities of the IMF Legal Department’s anti-money-laundering and combating-the-financing-of-terrorism (AML/CFT) program is to provide technical assistance on the drafting of legislation.

Toward this end, the IMF, in collaboration with the Joint African Insti-tute, conducted a five-day Legislative Drafting Workshop on Combat-ing the Financing of Terrorism in July 2005 for government officials from Djibouti, Egypt, Eritrea, Ethiopia, Libya, Sudan, and Tunisia. Training was provided by experts from the IMF Legal Department, the World Bank, and the United Nations Office Against Drugs and Crime. The workshop, which was held in Tunis, Tunisia, aimed to promote the adoption of harmonized terrorism-financing legislation in the eastern horn of Africa and to help these countries draft their own laws. Participants were officials with responsibility for CFT policies in central banks and ministries of justice, including prosecutors, leg-islative specialists, and financial regulators. The workshop provided general background on current international CFT standards and on legal requirements relating to the components of a comprehensive CFT framework in accordance with the 1999 International Conven-tion for the Suppression of the Financing of Terrorism and other pertinent United Nations instruments, such as criminalization of the financing of terrorism, preventive measures in the financial sector, and alternative remittance systems.

Box 7.1 Promoting legislation to combat the financingof terrorism

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place systematic procedures for evalu-ating effectiveness and efficiency. They supported the Task Force proposal to strengthen and expand the Technical Assistance Evaluation Program and called on staff to develop and imple-ment more systematic procedures for feeding back into the technical assistance program the lessons learned from self-assessments and evaluations.

Directors agreed that in a constrained budget environment, implement-ing the Task Force’s proposals would involve trade-offs and stressed the importance of clearly defining the technical assistance to be provided to specific countries and identifying associated costs.

Review of regional technical assistance centers

The Executive Board’s review of the Fund’s regional technical assistance centers (RTACs), concluded in July 2005,3 aimed to (1) present the lessons learned from recent inde-pendent evaluations of the centers; (2) assess the effectiveness and the implications of the RTACs based on these lessons and other information; and (3) discuss strategic options concerning the future use of the RTACs. Effectiveness was assessed from two main perspectives: value added and cost effectiveness. The analy-sis was complemented by a review of the financial and orga-nizational implications of the RTAC model.

Directors noted that the review provided a useful starting point for developing an overall strategy for the RTACs and for decentralizing the Fund’s operations in the context of the institution’s Medium-Term Strategy.

They acknowledged the positive conclusions of indepen-dent evaluations of the centers and agreed that the RTACs had proven to be a useful addition to the Fund’s technical assistance program, filling a niche role and offering practi-cal technical assistance based on a knowledge of regional circumstances, while providing access to donor financing.

3The review is available at www.imf.org/external/np/pp/eng/2005/062805.htm; the summary of the Board discussion can be found at www.imf.org/external/np/sec/pn/2005/pn05113.htm.

However, the Board stressed the need to further enhance the effectiveness of the RTACs along the lines mentioned by the independent evaluations and to fully develop their potential to assist member countries in formulating a medium-term technical assistance strategy and imple-menting it in the context of Poverty Reduction Strategy Papers.

Directors had wide-ranging discussions on the organiza-tional and managerial challenges posed by operating the RTACs, which represented a departure from traditional Fund technical assistance delivery methods. The main priority was to consolidate the achievements of the RTACs thus far and to strengthen their management, organiza-tion, and financing. Directors underscored the need to develop the strategy and framework for RTACs in line with the Fund’s strategic priorities; clarify staff and other stakeholder responsibilities; improve and harmonize work planning and coordination with headquarters; and reduce the financial risks to the Fund stemming from the RTACs’ heavy reliance on external financing. In making the adjust-ments that might be necessary to face the underlying chal-

1. Country-focused framework

Preparation of Technical Assistance Country Strategy Notes for intensive Fund TA users and countries in which TA is particularly important.

Formal enhancement of role of Fund resi-dent representatives to include facilitating TA implementation.

2. Better tracking of implementation

Systematic use of the central Technical Assistance Information Management Sys-tem (TAIMS) for tracking TA implementa-tion, including progress indicators and risk factors.1

3. Increased ownership by stakeholders

Systematic use of the Technical Assistance Country Strategy Notes as a basis for dis-cussion with the country authorities on TA strategy.

Systematic sharing of terms of reference

1TAIMS is a multiyear information technology proj-ect aimed at bringing forward departmental best practices as well as at providing tools for more effective resource management and monitoring. For more information about TAIMS, see Box 2 of the “Conclusions of the Task Force on IMF Techni-cal Assistance,” which is available at www.imf.org/external/np/pp/eng/2005/071205.htm.

with country authorities to get the latter’s input.

Systematic dialogue with authorities to specify progress indicators, resource com-mitments, and critical steps.

Summaries of authorities’ views on key issues and recommendations to be incorpo-rated in TA reports when relevant.

4. Discussion of alternative solutions

Systematic discussion with country authori-ties before drafting main recommendations to incorporate feedback. Record discussions on alternative options in TA reports when relevant.

Dissemination of draft TA reports and aide-mémoire within agencies with the consent of the authorities.

5. Systematic ex post evaluation

Production of standardized self-assessments for larger TA projects.

Continuation of the formal, Fund-wide TA evaluation program, with production of two ex post evaluations each year.

Establishment of an evaluation knowledge base and systematic dissemination within the Fund of lessons learned.

Box 7.2 Proposals of the Task Force on Technical Assistance (TA)

lenges of the RTAC model, it is important to preserve the advantages associated with the RTACs’ field presence—in particular, the ability to strengthen countries’ ownership and to provide rapid and flexible technical assistance to member countries.

RTAC activities should complement other forms of Fund technical assistance and are an integral component of the institution’s overall technical assistance program. Direc-tors thus expressed support for closer integration of RTAC activities with the Fund’s technical assistance program and agreed on the need to ensure appropriate quality control and accountability for all activities delivered by the RTACs.

A clearer definition of the roles and responsibilities of the stakeholders will be instrumental to coping with the challenges raised by the RTAC delivery modality. Direc-tors noted that tensions would arise given the number of stakeholders involved but suggested that this reflected a broader need for a more consultative process. In revisiting the organizational structure, it was therefore important to preserve the sense of shared ownership and take account of the specific characteristics of each RTAC to retain its particular comparative advantages. Directors suggested that the findings from the recent IEO evaluation of techni-cal assistance could provide useful guidance regarding the respective roles of area and functional departments in the organizational structure of the RTACs. They agreed that area departments should have a strategic role in defining the overall technical assistance priorities of the RTACs, and that functional departments should be responsible for the technical aspects of the centers’ work.

The role of the Steering Committees should be bet-ter defined to clarify the roles and responsibilities of all stakeholders, and to strengthen the Committees’ role in providing guidance, setting priorities, and monitoring the performance of the RTACs. In this context, Directors also stressed the need to preserve existing effective practices and to avoid rigid, one-size-fits-all solutions. They acknowl-edged that the RTAC delivery modality carried inherent tensions between Fund control over technical assistance priorities and delivery modalities, on the one hand, and countries’ ownership and donor interests, on the other. It was important to find an appropriate balance that pre-served the advantages of RTAC delivery while ensuring proper accountability and quality control.

Although the RTACs had been relatively costly, Directors recognized that their field presence provided important qualitative benefits that would be difficult to quantify. It was therefore difficult to compare the cost-effectiveness of the RTACs with other traditional delivery modalities. The most suitable delivery modality should be selected on a case-by-case basis.

Egypt had several IMF-supported programs during the 1990s, the last of which, a Stand-By Arrangement, expired in September 1998. Since then, Egypt has maintained a close policy dialogue with the Fund and benefited from IMF technical assistance, notably in the following areas: customs and tax reform, revenue administration, public finance management, the foreign exchange market, operations and technical capacities of the central bank, and subscription to the Special Data Dissemination Standard (SDDS).

The Fund has provided substantial advice on economic policies to the government. Since 2004, reforms in Egypt have accelerated, address-ing many of the obstacles to faster sustainable growth identified in the surveillance process. As part of Egypt’s move to a managed float-ing exchange rate regime, an interbank foreign exchange market was launched in December 2004 and the parallel market disappeared. Customs tariffs and income taxes were reduced and streamlined; mon-etary policy formulation and implementation were strengthened; a major financial sector restructuring program was launched; public finance man-agement and transparency were improved; and the quality of statistics was strengthened. Privatization was accelerated, and regulatory barriers to business entry and licensing were eased.

Egypt also participated in a pilot program aimed at more closely aligning Fund technical assistance (TA) with the country’s macroeconomic policy priorities through the preparation of a Technical Assistance Country Strat-egy Note in March 2006.

Egypt-IMF activities in FY2006

May/July/November 2005, Visits by Fund experts on improving theMarch 2006 monetary policy strategy and stance, and

operations of the Central Bank of Egypt

May/June 2005 TA on sales tax reform, taxation system for small taxpayers

October 2005 TA on budget classification and the fiscal reporting framework

November 2005 TA on reforming the real estate tax

December 2005 TA on modernizing revenue administra-tion, including small business tax regime, consolidation of the large taxpayer center, and implementation of self-assessment for income tax

March 2006 TA on tax policy, drafting of property tax law, and review of agricultural taxation

April 2006 2006 Article IV consultation begun

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The Board noted that the RTAC modality had been par-ticularly beneficial in mobilizing external contributions for technical assistance and leveraging Fund resources. To avoid any potentially damaging disruption in external financing, Directors suggested that a clear strategy, includ-ing options for alternative financing arrangements and an exit financing strategy, should be developed within the context of the Fund’s medium-term budget framework. In the meantime, where feasible, steps should be taken to mitigate the financial risk for the Fund. Many Directors felt that the establishment of new centers could be considered on a case-by-case basis following rigorous assessment of the business case for establishing the proposed center and assurances that the necessary internal Fund resources and full external financing had been secured.

IMF Institute

The IMF Institute offers courses and seminars for officials from member countries in four core areas—macroeconomic management in general and policies related to the financial sector, the budget, and the balance of payments, including how to strengthen the statistical, legal, and administrative framework in these areas. Close to 80 percent of the train-ing benefits low-income countries. The training is delivered by Institute staff or by staff from other IMF departments, occasionally assisted by outside academics and experts at IMF headquarters in Washington, D.C., and at various over-seas locations. In recent years, the Institute program has accounted for about three-fourths of all training for officials delivered by the IMF, including training delivered by the regional technical assistance centers.

In FY2006, courses delivered by the IMF Institute, in col-laboration with other IMF departments, were in session for 285 weeks, producing over 9,500 participant-weeks of training and benefiting more than 4,600 participants (Table 7.4). Relative to FY2005, these measures of training activity rose by 5 and 7 percent, respectively. About one-half of the participant-weeks in FY2006 were provided at the IMF’s six regional training centers located in Austria, Brazil, China, Singapore, Tunisia, and the United Arab Emirates (Table 7.5). Training at headquarters, where courses are longer, also played an important role, accounting for about 30 percent of participant-weeks. The remainder of the training was at overseas locations outside the regional network, largely as part of an ongoing collaboration between the IMF Institute and national or regional training programs, and also in the form of distance-learning courses. The latter courses incor-porate residential segments that have generally been held at IMF headquarters. However, in FY2006, the residential sec-tion of a distance-learning course was delivered overseas for the first time.

The main task for policymakers in the Pacific Islands1 is to raise the medium-term sustainable growth rate; over the past decade, the increase in real GDP has averaged less than 3 percent annually, barely enough to raise per capita income. Accelerating growth will require intensified efforts to reform the civil service, address governance and law-and-order problems, stimulate private sector activity, and encourage regional inte-gration. In several countries, there is also a need to restore fiscal disci-pline and overcome political uncertainties.

One issue is the large size of the public sector throughout the region. In particular, the government wage and salary bill is typically about 10 percent of GDP, far higher than in other regions. Another issue is the major role of public enterprises, which frequently operate at a loss. By contrast, the private sector is very small in most of the islands. Compli-cated regulatory requirements impede the opening of new businesses, impose substantial restrictions on their operations, and discourage foreign direct investment. With insufficient employment opportunities, there is widespread migration. While remittances are a major source of foreign exchange receipts, the loss of skilled workers adds to capacity constraints.

Pacific leaders are committed to structural reforms and most countries have prepared medium-term development strategies. Regional free trade agreements are in force, and three countries are receiving more reliable airline service, in partnership with a foreign airline. The recently adopted Pacific Plan, sponsored by the island governments, endorses the necessary structural changes. The key to success will be their pace of implementation.

The Fund provides extensive technical assistance to the region, primarily through the Pacific Financial Technical Assistance Center in Fiji, in the areas of tax policy and administration, public expenditure management, bank regulation and supervision, and statistics.

Pacific Islands-IMF activities in FY2006

Starting in July 2005 Interim staff visits to Pacific Islands (except Papua New Guinea, Solomon Islands, and Tonga) on 24-month Article IV consultation cycle

March 2006 Deputy Managing Director Agustín Carstens attends meeting of the Steering Committee of the Pacific Financial Technical Assistance Center

1The 10 islands that are members of the IMF are Fiji, Kiribati, the Marshall Islands, the Federated States of Micronesia, Palau, Papua New Guinea, Samoa, the Solomon Islands, Tonga, and Vanuatu.

Pacific Islands

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FY2006 saw the continuation of a gradual shift in the com-position of training delivery away from headquarters, with overseas locations accounting for all of the increase in train-ing during the year. The overall level of training at head-quarters has stayed broadly unchanged in recent years, with this location being used for long courses that can be deliv-ered more practically in Washington, D.C. The headquar-ters location also ensures global access to shorter training activities whose widespread delivery is not feasible through regional programs because of resource limitations.

Combining the increase in training in FY2006 with the smaller increases of the two preceding years, the number of participant-weeks of training has risen by 13 percent since FY2003. Courses and seminars supporting new IMF initiatives have been a major factor contributing to this rise,

reflecting a significant increase in training activity related to efforts to combat money laundering and the financing of terrorism in FY2004 and FY2005, and, in FY2006, the addition of special seminars on protecting financial systems from the effects of an avian flu pandemic (see Chapter 4). There also has been a notable increase in training in macro-economic management.

Increased training has been accommodated within the tight IMF budget through increases in external funding and through efficiency measures that have significantly reduced participant costs. The additional external funding reflects the financial contributions from training partners that bear a large share of the costs of regional programs and pro-grams at other overseas locations, as well as new sources of donor funding.

Table 7.4 IMF Institute training programs, FY2002–06FY2002 FY2003 FY2004 FY2005 FY20061

Headquarters training2

Course weeks 74 84 77 80 78Participant-weeks 2,746 3,083 2,848 2,993 2,951

Regional training institutes and programs3

Course weeks 133 121 140 148 153Participant-weeks 4,261 3,969 4,449 4,541 4,835

Other overseas trainingCourse weeks 30 31 32 27 39Participant-weeks 828 899 949 797 1,143

Distance learningCourse weeks 13 13 9 16 16Participant-weeks 519 481 324 594 602

Total course weeks 250 249 258 271 285Total participant-weeks 8,354 8,432 8,570 8,925 9,531

Source: IMF Institute.1Figures for FY2006 are estimates.2Excludes residential component of distance-learning courses, which are counted here as distance learning.3Includes the Joint Vienna Institute (JVI), IMF-Singapore Regional Training Institute (STI), IMF-Arab Monetary Fund Regional Training Program, Joint Africa Institute (JAI), Joint China–IMF Training Program, and Joint Regional Training Center for Latin America. Data for the JAI do not include courses partially financed by the IMF that are delivered by the African Development Bank and the World Bank. Data for the JVI do not include courses partially funded by the IMF since FY2004 that are delivered by the Austrian authorities.

Table 7.5 IMF Institute regional training programsDate

Regional program established Location Cosponsors Intended participant countries

Joint Vienna Institute 1992 Austria Austrian authorities, European Bank for Transition countries in EuropeReconstruction and Development, Organization and Asiafor Economic Cooperation and Development, World Bank, and World Trade Organization1

IMF–Singapore Regional Training Institute 1998 Singapore Government of Singapore Developing and transition countries in Asia and the Pacific

IMF–AMF Regional Training Program 1999 United Arab Emirates Arab Monetary Fund Member countries of the Arab Monetary Fund

Joint Africa Institute 1999 Tunisia African Development Bank, World Bank African countries

Joint China–IMF Training Program 2000 China People’s Bank of China China

Joint Regional Training Center for Latin America 2001 Brazil Government of Brazil Latin American countries

1A number of other European countries and the European Union, although not formal sponsors of the Joint Vienna Institute, provide financial support.

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The IMF Institute has continued to pay close attention to curriculum development. The training program is regu-larly reviewed to ensure that it responds to the evolving needs of member countries and supports new IMF initia-tives. Feedback on member country needs comes through participant evaluations, contacts with country officials, and independent surveys of country officials that are now undertaken every three years, most recently in early 2006 (Box 7.3). In FY2006, the Institute for the first time held a formal regional meeting on the training curriculum in the Asia-Pacific region. Plans are in the works to follow up with similar meetings in other regions.

The Institute launched two courses at headquarters in FY2006. A four-week course focused on strengthening the ability of participants to assess a country’s macroeconomic situation, emphasizing practical tools for use in day-to-day analysis. The second new course, on macroeconomic man-agement and fiscal policy, provided a more comprehensive and systematic treatment of this topic than is possible in existing shorter courses. Benefits from the intensive cur-

riculum development effort behind these two courses are already being channeled to shorter INS courses. Moreover, plans are in the works to deliver two-week versions of the macroeconomic diagnostic courses through some of the regional programs in 2007.

Other IMF departments were also active in curriculum development in FY2006. The avian flu seminars were devel-oped and delivered within a very short space of time. A new workshop focused on strengthening the ability of countries to compile financial soundness indicators (Box 4.2), and a number of specialized new fiscal courses were delivered.

The Institute also continued to provide, both in Washing-ton, D.C., and through the regional institutes and programs, short seminars tailored to the needs of high-level officials on key current issues. Seminar topics in FY2006 included managing fiscal risks in Asia; realizing the potential for profitable investment in Africa; integrity supervision of financial sector firms and markets; and the impact of EU enlargement on factor flows in Europe.

Box 7.3 Feedback from country officials on the IMF Institute’s curriculum

Feedback from country officials is critical to the IMF Institute’s ongoing efforts to ensure that the curriculum is well adapted to mem-ber country needs. In addition to participant evaluations at the end of every course and regular contact with country officials, the Institute commissions an independent survey of country officials every three years. The most recent survey was carried out in FY2006 and, as was the case with previous surveys, was global in scope. For the first time, the Institute in FY2006 also held a formal meeting on the training needs of a specific region with train-ing directors from central banks, ministries of finance, and other agencies in the Asia-Pacific region.

Results of the recent survey. The most recent survey of country officials was conducted between January and March 2006 by Harris Interactive, which sent questionnaires to 516 central banks, ministries of finance, statistical agencies, and other agencies in 179 member countries that had sent participants to IMF Institute training programs during 2003–05. The response rate was 58 percent, which is high for a survey of this type. Key feedback included the following:

Virtually all organizations responding (97 percent) agreed that they were satis-fied with their IMF Institute experience, and 72 percent indicated that they were very satisfied.

Over two-thirds of the respondents indi-cated that demand for Institute training would increase over the next five years.

The greatest increase in demand would be for courses recently added to the cur-riculum, especially specialized courses on topics such as inflation targeting and mac-roeconomic diagnostics and forecasting.

Demand also remains strong for traditional core courses such as those on financial programming and policies and macro-economic statistics.

There was general agreement that Institute training helped participants do their jobs better (95 percent), enhanced their under-standing of the IMF and its work (94 per-cent), and improved their ability to formulate and implement policy (91 percent).

Seventy percent of the organizations responding to the survey said that officials had been given added responsibilities or

promotions as a result of their Institute training.

Regional meeting on training needs in Asia-Pacific. The meeting took place in Singapore over two days in April 2006 and was attended by 36 senior officials with training responsi-bilities in 24 Asian and Pacific countries.

The meeting provided an opportunity to discuss the training program offered at the IMF–Singapore Regional Training Institute (STI). Officials were broadly satisfied with the mix of courses at the STI, but many indicated a particularly strong demand for the more advanced courses on macroeconomic and financial topics that had been introduced into the curriculum in recent years.

The meeting also covered issues related to promoting a good match of training partici-pants to courses, including the question of how to make sure that the level and content of courses is well understood by applicants and their sponsors. An important initiative resulting from the meeting is the creation of a directory of senior officials with responsibility for training, which will facilitate communica-tion between countries and the STI.

Financial operations and policies

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t he IMF is a cooperative financial institution that lends to member countries experiencing balance of

payments problems. The IMF extends financing to mem-bers through three channels:

Regular financing activities. The IMF provides loans to countries from a revolving pool of funds consisting of members’ capital subscriptions (quotas) on the condition that the borrower undertake economic adjustment and reform policies to address its external financing difficulties. These loans are extended under a variety of policies and facilities designed to address specific balance of payments problems (see Table 5.1). Interest is charged on the loans at market-related rates, and repayment periods vary depend-ing on the lending facility.

Concessional financing activities. The IMF provides loans at a very low interest rate and with long maturities to low-income member countries. These loans support programs designed to strengthen balance of payments positions, respond to unexpected shocks, foster durable growth, raise living standards, and reduce poverty. The Fund also makes grants available to eligible heavily indebted poor coun-tries and certain other low-income countries to help them achieve sustainable external debt positions and achieve their poverty reduction goals. The principal for concessional loans is funded by member countries that make resources available to the IMF at market-based rates, with the Fund acting as a trustee. Resources used to subsidize the rate charged to borrowers and grants for debt relief are financed by separate contributions from some member countries and out of the IMF’s own resources.

Special Drawing Rights. The IMF can also create international reserve assets by allocating special drawing rights (SDRs) to members. SDRs can be used to obtain foreign exchange from other members and to make payments to the Fund.

There were a number of significant financial developments in FY2006:

Outstanding IMF credit declined to low levels as a favor-able external financing environment for emerging market countries contributed to a sharp reduction in the demand for IMF credit and to the early repayment of outstanding IMF credit by a number of large borrowers.

The decline in credit outstanding led to a correspond-ing drop in IMF income, the main source of which is the

interest charged on loans. In response, the Fund initiated steps to develop a stable and diversified income base that is less dependent on its lending operations. The Executive Board established an Investment Account to enable the IMF to invest its reserves, thereby broadening the sources and increasing the level of its income. Further steps to strengthen the IMF’s financial structure and enhance its income-generating capacity are being considered in the context of an ongoing review of the Fund’s finances.

Major initiatives were introduced that enhance the ways in which the IMF helps its low-income members achieve faster economic growth, reduce poverty, decrease their debt burdens, and address the impact of adverse shocks. These initiatives include the establishment of the Exog-enous Shocks Facility and the Multilateral Debt Relief Initiative, which are described in detail in Chapter 6.

Regular financing activities

The funds for the IMF’s regular lending activity come from member countries’ quota subscriptions, which are held in the General Resources Account (GRA) (Box 8.1). The bulk of IMF lending is provided under Stand-By Arrangements, which address members’ short-term balance of payments dif-ficulties, and the Extended Fund Facility (EFF), which focuses on external payments difficulties caused by longer-term structural problems. Loans under Stand-By and Extended Arrangements can be supplemented with short-term resources from the Supplemental Reserve Facility (SRF) for members experiencing a sudden and disruptive loss of access to capital markets. All loans incur interest charges and can be subject to surcharges, depending on the type and duration of the loan and the amount of IMF credit outstanding. Repay-ment periods also vary by type of loan (see Table 5.1).

Lending

During FY2006, repayments on loans increased sharply, to SDR 32.8 billion. Many countries—Algeria, Argentina, Armenia, Brazil, the Republic of Congo, Georgia, Papua New Guinea, Uzbekistan, and Zimbabwe—repaid all of their GRA obligations to the IMF, some ahead of schedule. Advance repayments totaling SDR 21.9 billion were made by Algeria (SDR 246 million), Argentina (SDR 6.7 billion),

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Brazil (SDR 14.2 billion), Bulgaria (SDR 249 million), and Uruguay (SDR 519 million).

Disbursements during the financial year were relatively low—totaling SDR 2.2 billion—the bulk of which was dis-bursed to Turkey under its Stand-By Arrangement. In addi-tion, Emergency Post-Conflict Assistance disbursements totaling SDR 17.2 million were made to the Central African Republic and Haiti.

Reflecting the high level of net repayments, IMF credit out-standing at the end of FY2006 stood at SDR 19.2 billion, a 25-year low, compared with SDR 49.9 billion in April 2005 (Figure 8.1).1

In addition to advance repayments, 18 members—Bolivia, Bosnia and Herzegovina, Brazil, Bulgaria, the Dominican Republic, Ecuador, Indonesia, Jordan, the former Yugo-slav Republic of Macedonia, Pakistan, Papua New Guinea, Romania, Serbia and Montenegro, Sri Lanka, Turkey, Ukraine, Uruguay, and Yemen—made repayments on the expectation schedule in the amount of SDR 2.9 billion during the year. Five members requested and were granted extensions of repurchase expectations (Table 8.1). As of April 30, 2006, there was no outstanding credit subject to time-based repurchase expectations under the policies adopted in November 2000 (Box 8.2).

New IMF commitments rose sharply, from SDR 1.3 billion in FY2005 to SDR 8.4 billion in FY2006—largely reflecting the Stand-By Arrangement in the amount of SDR 6.7 bil-lion approved for Turkey in May 2005 (Table 8.2). The IMF approved a total of five new Stand-By Arrangements and one augmentation of an existing Stand-By Arrangement. In addition, one Extended Arrangement was approved for Albania. Haiti and the Central African Republic made purchases under the policy on Emergency Post-Conflict Assistance (EPCA). No commitments were made under the

1As of April 30, 2006, SDR 1 = US$1.47106.

IMF’s Supplemental Reserve Facility (SRF) and Compensa-tory Financing Facility (CFF) during the year.

Eleven Stand-By and Extended Arrangements were in effect as of the end of FY2006, of which seven are being treated as precautionary, with borrowers having indicated that they do not intend to draw on the funds committed to them by the IMF. At the end of April 2006, undrawn balances under all arrangements still in effect amounted to SDR 7.5 billion.

Resources and liquidity

The IMF’s lending is financed primarily from the fully paid-in capital (quotas) subscribed by member coun-tries in the form of reserve assets and currencies. General reviews of IMF quotas, during which adjustments may be proposed in the overall size and distribution of quotas to reflect developments in the world economy, are con-ducted at five-year intervals, and the current Thirteenth General Quota review period will end in January 2008. A member’s quota can also be adjusted separately from a general review to take account of major developments in the member’s economy relative to the world economy. In addition, the IMF can borrow to supplement its quota resources and has in place two formal borrowing arrange-ments with member countries.

Only a portion of the paid-in capital is readily available to finance new lending because of previous commitments made by the IMF and as a result of the Fund policy of lend-ing only in the currencies of members that are financially strong. The IMF’s base of usable resources increased dur-ing FY2006 after Kazakhstan and the Slovak Republic were

Figure 8.1 Regular loans outstanding, 1996–April 30, 2006

(In billions of SDRs)

Source: IMF Finance Department.

1996 97 98 99 2000 01 02 03 04 05 060

10

20

30

40

50

60

70

80

Figure 8.2 IMF one-year forward commitment capacity(FCC), 1996–April 2006

(In billions of SDRs)

Source: IMF Finance Department.Note: The IMF started publishing data for FCC in December 2002. For earlier periods the figure shows estimates of the FCC. The FCC increases when quota payments are made. It also increases when repurchases are made and decreases when the IMF makes new financial commitments. The reference to member countries and the Asian crises note selected large financial commitments by the IMF to members and groups of members.

0

20

40

60

80

100

120

140

Asian crises

EleventhReview quota

payments

Turkeypurchase

Argentinapurchase

Brazilpurchases

Argentinarepurchase

Brazilrepurchase

1996 97 98 99 2000 01 02 03 04 05 06

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added to the IMF’s Financial Trans-actions Plan (Box 8.3).

The IMF’s liquidity, as measured by the Forward Commitment Capacity (FCC; see Box 8.4), rose to an all-time high of SDR 120.1 billion at the end of April 2006, from SDR 94.3 billion at the end of April 2005 (Figure 8.2).

Concessional financing activities

The IMF provides support to its low-income members through a variety of instruments. These include concessional lending through its Poverty Reduction and Growth Facil-ity (PRGF), grants to eligible heavily indebted poor countries (HIPCs) to help them achieve debt sustainability, and subsidized emergency assistance to post-conflict countries and to countries hit by natural disasters. During FY2006, the IMF launched two major initiatives to further strengthen its financial assistance to its low-income members—the Multilateral Debt Relief Initiative (MDRI) and the Exog-enous Shocks Facility (ESF).

In July 2005, the Group of 8 (G-8) proposed that the IMF, the International Development Association, and the African Development Fund cancel 100 percent of their claims on countries having reached, or upon reaching, the completion point under the enhanced HIPC Initiative. In response, the IMF Executive Board adopted the MDRI in November 2005, which became effective on January 5, 2006. The MDRI provides debt relief to member countries with an annual per capita income at or below $380, and to HIPCs above that threshold, with respect to the stock of their debt to the IMF disbursed as of end-2004 that remains outstanding when the country qualifies for MDRI debt relief. The MDRI debt relief is intended to comple-ment the HIPC Initiative by providing additional resources to help a group of low-income countries reach the Mil-lennium Development Goals. The cost to the IMF is to be covered through the institution’s own resources and those provided through bilateral contributions.

At its September 2005 meeting, the International Monetary and Financial Committee (IMFC) endorsed a proposal to establish a facility to provide concessional financing to low-income countries that experience exogenous shocks but do not have a PRGF arrangement in place. The IMF Execu-tive Board subsequently approved on November 23, 2005,

the establishment of the ESF within the PRGF Trust (now known as the PRGF-ESF Trust).

The implementation of the MDRI and ESF decisions resulted in changes to the financial structure for providing concessional assistance to low-income members (Box 8.5).

See also Chapter 6.

Poverty Reduction and Growth Facility

The IMF’s concessional lending through the PRGF includes, as a key objective, an explicit focus on poverty reduction in the context of a growth-oriented economic strategy. PRGF loans support strategies elaborated by the borrow-ing country in a Poverty Reduction Strategy Paper (PRSP) prepared with the participation of civil society and devel-opment partners. These loans carry an annual interest rate of 0.5 percent, with semiannual repayments beginning 5 years and ending 10 years after disbursement.

During FY2006, the Executive Board approved seven new PRGF arrangements (for Albania, Armenia, Benin, Camer-oon, Grenada, Malawi, and São Tomé and Príncipe), with commitments totaling SDR 107.9 million (Table 8.3). In addition, the Board approved the augmentation of an exist-ing arrangement for Niger in the amount of SDR 19.7 mil-lion to help the country recover from the economic impact of a severe drought and terms of trade deterioration. Total

Table 8.1 Extension of repurchase expectations in FY2006Member Period covered by extension1 Approval date Amount extended

(In millions of SDRs)

Argentina May 20, 2005–April 28, 2006 May 18, 2005 1,683.1Dominica December 22, 2005–December 22, 2006 October 14, 2005 1.3Macedonia, FYR November 4, 2005–September 29, 2006 August 31, 2005 5.4Macedonia, FYR September 30, 2006–December 31, 2007 April 20, 2006 13.4Turkey January 2, 2006–December 22, 2006 May 11, 2005 2,520.7Uruguay February 8, 2006–December 19, 2006 January 18, 2006 540.9

Total2 4,764.7

Source: IMF Finance Department.1The period in which extended repurchases were originally due.2Figures may not add up to total because of rounding.

Table 8.2 IMF regular loans approved in FY2006Member Type of arrangement Effective date Amount approved1

(In millions of SDRs)Albania 3-year Extended Arrangement February 1, 2006 8.5Colombia 18-month Stand-By May 2, 2005 405.0Croatia Augmentation of Stand-By March 29, 2006 2.0Iraq 15-month Stand-By December 23, 2005 475.4Macedonia, FYR 3-year Stand-By August 31, 2005 51.7Turkey 3-year Stand-By May 11, 2005 6,662.0Uruguay 3-year Stand-By June 8, 2005 766.3

Total 8,370.9

Source: IMF Finance Department.1For augmentations, only the amount of the increase is shown.

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PRGF disbursements amounted to SDR 0.4 billion during FY2006. As of April 30, 2006, 27 member countries’ reform programs were supported by PRGF arrangements, with commitments totaling SDR 1.8 billion and undrawn bal-ances of SDR 0.7 billion; total PRGF credit outstanding as of end-April 2006 stood at SDR 3.8 billion (Figure 8.3).

As described in Box 8.5, financing for the PRGF is pro-vided through the PRGF-ESF and PRGF-HIPC Trusts. As of end-April 2006, total loan resources available for PRGF-ESF operations amounted to SDR 15.8 billion, of which SDR 12.9 billion had already been committed to borrowing members. The remaining uncommitted PRGF-ESF loan resources of SDR 2.9 billion are expected to be able to cover the projected demand for PRGF lend-

ing through 2008.2 SDR 12.1 billion of the committed resources had been disbursed. Based on current assump-tions, subsidy resources available for the PRGF, amounting to SDR 1.3 billion in end-2005 net present value (NPV) terms, would need to be supplemented by about SDR 0.1 billion to ensure full subsidization of existing and future PRGF lending through 2008.

Exogenous Shocks Facility

The IMF launched the ESF in FY2006 to provide conces-sional assistance to low-income members that are facing sudden exogenous shocks (such as a large terms of trade shock) but do not have a PRGF arrangement in place. The IMF’s Executive Board adopted decisions to implement the ESF on November 23, 2005, and the decisions became effec-tive on January 5, 2006. Loans under the ESF carry repay-ment terms identical to those of the PRGF.

2This excludes any potential need for concessional financing for the three protracted arrears cases—Liberia, Somalia, and Sudan—in the event of arrears clearance and a subsequent PRGF arrangement.

The IMF’s regular lending is financed from the capital (quotas) sub-scribed by member countries. Each country is assigned a quota—based largely on the country’s relative economic size and external trade vol-ume—which determines its maximum financial commitment to the IMF.

A portion of the quota is provided in the form of reserve assets (foreign currencies acceptable to the IMF or SDRs) and the remainder in the country’s own currency. The IMF extends financing by providing reserve assets to borrowers from the reserve asset subscriptions of members or by calling on countries that are considered financially strong to exchange their own currency subscriptions for reserve assets (Box 8.3).

A loan is disbursed by the IMF when a borrower “purchases” reserve assets from the IMF with its own currency. The loan is considered repaid when the borrower “repurchases” its currency from the IMF in exchange for reserve assets. The IMF levies a basic rate of inter-est (charge) on loans based on the SDR interest rate (Box 8.9) and imposes surcharges depending on the amount and maturity of the loan and the level of credit outstanding.

A country that provides reserve assets to the IMF as part of its quota subscription or through the use of its currency receives a liquid claim on the IMF (reserve tranche position) that can be encashed on demand to obtain reserve assets to meet a balance of payments financing need. These claims earn interest (remuneration) based on the SDR interest rate and are considered by members as part of their international reserve assets. As IMF loans are repaid (repurchased) by borrowers with reserve assets, these funds are transferred to the credi-tor countries, and the creditors’ claims on the IMF are extinguished.

The “purchase/repurchase” approach to IMF lending affects the com-position of the IMF’s resources but not their overall size. An increase in loans outstanding will reduce the IMF’s holdings of reserve assets and the currencies of members that are financially strong and increase its holdings of the currencies of countries that are borrowing from the IMF. The amounts of the IMF’s holdings of reserve assets and the currencies of financially strong countries determine the IMF’s lending capacity (Box 8.4).

Detailed information on various aspects of the IMF’s financial struc-ture and regular updates of its financial activities are available on the IMF’s website at www.imf.org/external/fin.htm.

Box 8.1 The IMF’s financing mechanism

Table 8.3 PRGF arrangements approved in FY2006Member Effective date Amount approved

(In millions of SDRs)

Albania February 1, 2006 8.5Armenia May 25, 2005 23.0Benin August 5, 2005 6.2Cameroon October 24, 2005 18.6Grenada April 17, 2006 10.5Malawi August 5, 2005 38.2Niger1 November 14, 2005 19.7São Tomé and Príncipe August 1, 2005 3.0

Total 127.7

Source: IMF Finance Department.1PRGF augmentation.

Figure 8.3 PRGF credit outstanding1

(In billions of SDRs; end of financial year)

Source: IMF Finance Department.1Includes outstanding associated loans from the Saudi Fund for Development.

0

1

2

3

4

5

6

7

1996 97 98 99 2000 01 02 03 04 05 06

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To finance projected ESF lending over the next five years, it is estimated that loan resources totaling SDR 2 billion and subsidy resources of SDR 0.5 billion (in end-2005 NPV terms) will need to be mobilized. In November 2005, the IMF initiated efforts to mobilize resources for ESF subsidies and approached a broad spectrum of members, including the members of the Organization for Economic Coopera-tion and Development (OECD), oil exporters, and countries that have built up substantial foreign exchange reserves. As of end-April 2006, nine member countries have pledged bilateral subsidy contributions totaling SDR 219 million (Table 8.4). One member (France) has also pledged new loan resources of $1 billion at a concessional rate so as to generate an implicit subsidy contribution.

The Multilateral Debt Relief Initiative (MDRI) and the enhanced Heavily Indebted Poor Countries (HIPC) Initiative

Originally launched by the IMF and the World Bank in 1996, the HIPC Initiative was considerably strengthened in 1999 to provide deeper, faster, and broader debt relief for the world’s heavily indebted poor countries. By April 30, 2006, 29 coun-tries had reached their decision points under the enhanced HIPC Initiative,3 of which 19 had reached their completion points.

The IMF provides HIPC Initiative assistance in the form of grants that are used to service part of member countries’ debt to the institution. As of April 30, 2006, the IMF had

3Excludes Côte d’Ivoire, which reached the decision point only under the original HIPC Initiative.

The Financial Transactions Plan, adopted by the Executive Board for each upcoming quarter, specifies the amounts of SDRs and selected member currencies to be used in transfers and receipts expected to be conducted through the General Resources Account during that period. The IMF extends loans by calling on financially strong countries to provide reserve assets to weaker members in balance of payments need. The members that participate in financing IMF transactions in foreign exchange are selected by the Executive Board based on an assessment of each country’s financial capacity. These assessments are ultimately a matter of judgment and take into account recent and prospective developments in the balance of pay-ments and reserves, trends in exchange rates, and the size and dura-tion of external debt obligations.

The amounts transferred and received by these members are man-aged to ensure that their creditor positions in the IMF are broadly equal in relation to quota, the key measure of members’ rights and obligations in the IMF. The IMF publishes on its Web site the out-come of the Financial Transactions Plan for the quarter ending three months before publication. As of April 30, 2006, with the addition of Kazakhstan in December 2005 and the Slovak Republic in March 2006, there were 48 participants in the Financial Transactions Plan.

Australia France Luxembourg Saudi ArabiaAustria Germany Malaysia SingaporeBelgium Greece Mauritius Slovak RepublicBotswana Hungary Mexico SloveniaBrunei Darussalam India Netherlands SpainCanada Ireland New Zealand SwedenChile Israel Norway SwitzerlandChina Italy Oman ThailandCyprus Japan Poland Trinidad and TobagoCzech Republic Kazakhstan Portugal United Arab EmiratesDenmark Korea Qatar United KingdomFinland Kuwait Russian Federation United States

Box 8.3 Financial Transactions Plan

Box 8.2 Expectations versus obligations

The IMF’s Articles of Agreement (Article V, Section 7(b)) specify that members are expected to make “repurchases” (repayments of loans) as their balance of payments and reserve positions improve. To encourage early repayment, the review of Fund facilities carried out in FY2001 introduced time-based repurchase expectations on “pur-chases” (loan disbursements) made after November 28, 2000, in the credit tranches, under the Extended Fund Facility, and under the Compensatory Financing Facility. Purchases under the Supplemental Reserve Facility have been subject to repurchase expectations since that facility’s inception. The expectations schedule entails earlier repayments than the original obligations schedule, as shown in the table. The time-based repurchase expectations can be extended upon request by members.

Obligations Expectationsschedule schedule

Credit facility (Years) (Years)

Stand-By Arrangements 3 –5 2 –4Compensatory Financing Facility (CFF) 3 –5 2 –4Extended Fund Facility (EFF) 4 –10 4 –7Supplemental Reserve Facility (SRF) 2 –3 2–2

Table 8.4 Subsidy contributions for the ESF

(FY2006; on a cash basis)

Contribution Date of SDRContributors pledged1 pledge equivalent

(In millions of currency units)

Canada SDR 14.3 11/28/05 14.3France2 US$ 30 12/16/05 20.43

Japan SDR 20 11/28/05 20.0Oman SDR 3 3/19/06 3.0Norway SDR 24.7 3/15/06 24.7Russian Federation SDR 30 1/30/06 30.0Saudi Arabia4 SDR 40 3/7/06 40.0Spain SDR 5.3 4/24/06 5.3United Kingdom5 £50 11/23/05 61.33

Total 219.0

Source: IMF Finance Department.1Some contributions are still subject to parliamentary approval.2To be generated as an implicit subsidy through new loan resources of $1 billion provided at a concessional rate.

3Calculated using the end-April exchange rate for contributions to be disbursed.4In end-2005 NPV terms.5First installment (£10 million) was disbursed on March 21, 2006, equivalent to SDR 12.1 million.

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committed SDR 1.9 billion in grants to the following coun-tries: Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Chad, Côte d’Ivoire, the Democratic Republic of the Congo, the Republic of Congo, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tomé and Príncipe, Senegal, Sierra Leone, Tan-zania, Uganda, and Zambia. Cameroon reached its comple-tion point and two members (Burundi and the Republic of Congo) reached their decision points under the enhanced

HIPC Initiative during FY2006. As of April 30, 2006, total disburse-ments of HIPC assistance by the IMF amounted to SDR 1.6 billion.

Under the enhanced HIPC Initia-tive, a portion of the assistance committed at the decision point can be disbursed before the country reaches its completion point. Such interim assistance from the IMF may amount to up to 20 percent annually, with a cumulative maxi-mum of 60 percent of the total com-mitted amount of HIPC assistance. In exceptional circumstances, the annual and maximum amounts of assistance can be raised to 25 per-cent and 75 percent, respectively. During FY2006, SDR 16 million of interim assistance was disbursed to five countries. As of April 30, 2006, a total of SDR 640 million had been disbursed as interim assistance.

On November 7, 2005, the Executive Board of the IMF reached agreement on the implementation modalities of the MDRI. The Board approved the associated decisions to implement the MDRI on November 23, 2005. The MDRI became effective on Jan-uary 5, 2006, following receipt of the consents of the 43 members that have made contributions to the Subsidy Account of the PRGF Trust.

The IMF’s MDRI relief covers the full stock of debt owed to the IMF at end-2004 that remains outstanding at the time of the provision of debt relief. All countries (both HIPCs and non-HIPCs) with per capita incomes of $380 or less (on the basis of 2004 gross national income) would receive MDRI relief financed from the IMF’s

own resources held in the Special Disbursement Account (SDA) subject to applicable requirements on eligibility, qualification, and availability of resources. HIPCs with per capita incomes above $380 would receive MDRI relief financed from bilateral contributions in the original PRGF Trust Subsidy Account, subject to the consent of contribu-tors and other applicable requirements (Box 8.6).

The IMF delivered debt relief totaling SDR 2.3 billion to 19 qualifying countries on January 6, 2006, immediately

The IMF’s key measure of liquidity is the For-ward Commitment Capacity (FCC), which is an indicator of the IMF’s capacity to make new loans. The one-year FCC indicates the amount of quota-based resources available for new lending over the next 12 months.

The one-year FCC is defined as the IMF’s stock of usable resources less undrawn balances under current lending arrange-ments, plus projected repayments during the coming 12 months, less a prudential balance intended to safeguard the liquid-ity of creditors’ claims and allow for any potential erosion of the IMF’s resource

base. The IMF’s usable resources consist of its holdings of SDRs and the currencies of financially strong members included in the Financial Transactions Plan (Box 8.3). The prudential balance is calculated as 20 percent of the quotas of members included in the Financial Transactions Plan plus any undrawn amounts under activated borrow-ing arrangements.

Information on the one-year FCC is pub-lished weekly (Financial Activities: Week-at-a-Glance) and monthly (Financial Resources and Liquidity) on the IMF’s Web site at www.imf.org/external/fin.htm.

Box 8.4 The IMF’s lending capacity

Box 8.5 The IMF’s financial structure for concessional assistance anddebt relief to low-income member countries

The main changes to the structure for IMF concessional assistance resulting from the MDRI and ESF initiatives include the following:

The PRGF Trust was renamed the PRGF-ESF Trust. The Trust consists of the Loan Account, the Reserve Account, and three Subsidy Accounts.

The Trust borrows from central banks, gov-ernments, and official institutions through the Loan Account, largely at market-related interest rates, and lends these resources to PRGF-eligible countries under the PRGF and ESF.

The Reserve Account provides security for both types of loans. Thus, the resources in the Reserve Account are available to pro-tect the lenders to the Trust against risks arising from overdue principal and interest payments by borrowers.

The original subsidy account was renamed the PRGF-ESF Subsidy Account to receive

and provide resources for subsidizing both PRGF and ESF loans (the resources in this account are used to subsidize the difference between the interest charged to PRGF-ESF borrowers and that owed to PRGF-ESF lenders). In addition, two new subsidy accounts were established under the Trust—the ESF Subsidy Account and the PRGF Subsidy Account—to receive and pro-vide subsidy resources earmarked for ESF loans and PRGF loans, respectively.

Two new MDRI Trusts were established to receive and provide resources for MDRI debt relief (see Box 8.6 for a more detailed discussion).

The PRGF-HIPC Trust remains unchanged and continues to receive and provide resources for financing HIPC Initiative assistance and helps subsidize the PRGF. In addition, HIPC Umbrella Subaccounts have been maintained for channeling HIPC assistance to qualifying members.

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after the MDRI decision took effect (Table 8.5). These countries included 17 HIPCs that had reached their completion points (Mauritania had reached its completion point but did not qualify as yet because it did not meet the criteria set by the Executive Board) and two non-HIPCs (Cambodia and Tajiki-stan). On April 28, 2006, one more country—Cameroon—reached its completion point and qualified for MDRI debt relief of SDR 0.2 bil-lion. This initial phase of full debt relief under the MDRI—totaling SDR 2.5 billion—was financed from the HIPC Umbrella Subaccounts of 18 HIPC completion point coun-tries (SDR 0.3 billion) and the newly established MDRI-I and MDRI-II Trusts (SDR 1.1 billion from each).

Investments supporting concessional lending and debt relief

The IMF invests assets support-ing PRGF lending and the HIPC Initiative in a diversified portfolio of fixed-income securities issued by governments and international financial institutions. As of April 30, 2006, the value of these assets declined from last year’s total of SDR 9.6 billion to SDR 7.4 billion, primarily owing to the early repay-ment of PRGF-ESF Trust lenders in connection with MDRI debt relief.

In March 2000, the IMF’s Executive Board endorsed investment objec-tives and risk-tolerance parameters designed to supplement returns over time while maintaining prudent limits on risk.4 Under this invest-ment strategy, about half the assets have been invested in fixed-income portfolios and are currently man-aged by the World Bank and two private external managers. Following

4Prior to this shift in investment strategy, these assets had been invested in short-term SDR-denominated deposits with the Bank for Inter-national Settlements.

Table 8.5 Delivery of MDRI debt relief to 20 qualifying members

(In millions of SDRs; as of April 30, 2006)

Fund credit Sources of financing________________________________ outstanding from Balance in the Delivery disbursements made HIPC Umbrella MDRI-I MDRI-IIRecipient country date before January 1, 2005 Subaccounts Trust Trust

Benin January 6, 2006 36 2 — 34 Bolivia January 6, 2006 161 6 — 155 Burkina Faso January 6, 2006 62 5 57 — Cambodia1 January 6, 2006 57 — 57 — Ethiopia January 6, 2006 112 32 80 —

Ghana January 6, 2006 265 45 220 — Guyana January 6, 2006 45 13 — 32 Honduras January 6, 2006 107 9 — 98 Madagascar January 6, 2006 137 9 128 — Mali January 6, 2006 75 13 62 —

Mozambique January 6, 2006 107 24 83 — Nicaragua January 6, 2006 140 49 — 92 Niger January 6, 2006 78 18 60 — Rwanda January 6, 2006 53 33 20 — Senegal January 6, 2006 100 6 — 95

Tajikistan1 January 6, 2006 69 — 69 — Tanzania January 6, 2006 234 27 207 — Uganda January 6, 2006 88 12 76 — Zambia January 6, 2006 403 4 — 398 Cameroon April 28, 2006 173 24 — 149

Total2 2,503 330 1,120 1,053

Source: IMF Finance Department.1Not eligible for assistance under HIPC.2Figures may not add up to totals because of rounding.

The current estimate of the cost to the IMF of full MDRI debt relief is around SDR 3.4 bil-lion in end–2005 NPV terms, excluding four newly identified HIPCs and the three protracted arrears cases (see below). Financing of the debt relief is expected to come from the MDRI-I Trust, the MDRI-II Trust, and resources already earmarked under the HIPC Initiative. Two sepa-rate Trusts were established to maintain the principle of uniformity of treatment with respect to the use of the Fund’s own resources.

The MDRI-I Trust, financed with the IMF’s own resources of SDR 1.5 billion trans-ferred from the Special Disbursement Account (SDA), was designed to provide MDRI debt relief to low-income countries, both HIPCs and non-HIPCs, with per capita incomes at or below $380.

The MDRI-II Trust was designed to receive and provide resources for MDRI debt relief to HIPCs with per capita incomes above $380. It was financed with bilateral resources of SDR 1.12 billion, transferred from the renamed PRGF-ESF Trust.

The remainder of about SDR 0.8 billion is to be financed from earmarked HIPC Initiative resources in the PRGF-HIPC Trust.

Additional contributions will be needed to cover the cost of HIPC Initiative and MDRI debt relief for the three protracted arrears cases (Liberia, Somalia, and Sudan) and the four newly identified countries that meet the HIPC Initiative’s income and indebted-ness criteria at end–2004 and might wish to be considered for debt relief. The total cost to the IMF for these countries is estimated at SDR 1.9 billion in end–2005 NPV terms. Financial resources needed to meet these additional costs have not yet been mobilized. In this context, the G-8 has committed to cover, on a fair burden-sharing basis, the cost of debt relief for countries that may become eligible for the HIPC Initiative under the extended sunset clause; donors would provide the extra resources necessary for full debt relief at completion point for the three protracted arrears cases.

Box 8.6 Financing of the MDRI

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a shortening of the average duration of the fixed-income portfolio in January 2002, the benchmark was changed to a customized index based on three-month Libor rates and 0-to-1 year government bonds. The remaining assets have been invested in short-term deposits with the Bank for Interna-tional Settlements (BIS) to provide liquidity and to conform with the administrative arrangements agreed with certain contributors.

Currency risk is minimized by limiting purchases to securi-ties denominated in the four currencies of the SDR basket (euros, Japanese yen, pound sterling, and U.S. dollars), with regular rebalancing of the portfolio weight of each currency

to remain in line with the weights of the SDR basket.

For the year ended April 30, 2006, the annual return on the portfolio was 2.8 percent, up from 2.1 percent a year earlier. In the six years that the investment strategy has been in place, the annual portfolio return has been 3.3 percent.

Emergency assistance

The IMF provides emergency assis-tance to post-conflict countries, as well as to countries struck by natural disasters, in the form of loans subject to the IMF’s normal rate of charge. In May 2001, a decision was taken to provide emergency post-conflict assistance (EPCA) to PRGF-eligible countries at a subsidized rate of 0.5 percent a year, and an adminis-tered account was established at that time for contributions by bilateral donors. In January 2005, the IMF’s Executive Board decided to extend the subsidization to emergency natu-ral disaster assistance (ENDA) for PRGF-eligible countries—provided sufficient resources are available—and requested new bilateral contribu-tions from member countries. Three subaccounts were created under the existing administered account, allow-ing for bilateral contributions to be earmarked for either EPCA or ENDA, or to be used flexibly for either kind of emergency assistance.

As of end-April 2006, 17 member countries had pledged bilateral contributions totaling SDR 40.3 mil-

lion for the subsidization of emergency assistance (Table 8.6). New pledges received after the January 2005 decision accounted for SDR 29.1 million of this amount. Of the overall total, SDR 9.7 million is available for the subsidiza-tion of EPCA only, SDR 17.6 million for the subsidization of ENDA only, and SDR 13.0 million can be used for the subsidization of either kind of emergency assistance.

During FY2006, two countries made purchases under emergency assistance. Both purchases were made under EPCA—SDR 10.2 million for Haiti in October 2005, and SDR 7.0 million for the Central African Republic in January 2006.

Table 8.6 Subsidy contributions for emergency assistance

(In millions; as of April 30, 2006)

Contribution Date of SDR Contribution SubsidyContributor pledge pledge equivalent1 received disbursed2

Subaccount 1: EPCA subsidization onlyBelgium SDR 0.63 March 2002 0.63 0.6 0.3Canada Can$ 3.25 October 2002 1.7 1.7 —Norway SDR 3.0 June 2002 3.0 3.0 —Sweden SDR 0.8 January 2002 0.8 0.8 0.8Switzerland US$ 1.0 March 2002 0.8 0.8 —United Kingdom £ 2.5 October 2001 2.9 2.9 1.8

Subtotal 9.7 9.7 2.9

Subaccount 2: ENDA subsidization onlyAustralia Aus$ 2.0 June 2005 1.0 0.4 —Austria4 SDR 1.2 April 2005 1.2 — —Canada Can$ 5.0 February 2005 3.1 1.1 0.5China US$ 2.0 May 2005 1.4 1.4 —Germany5 Euro 1.65 November 2005 1.4 1.4 —India SDR 1.5 February 2005 1.5 — —Japan US$ 2.5 April 2005 1.7 1.7 1.5Luxembourg Euro 1.25 February 2005 1.0 0.2 0.2Russia US$ 1.5 February 2005 1.0 0.2 0.2Saudi Arabia US$ 4.0 April 2005 2.8 — —Switzerland US$ 2.0 February 2005 1.4 1.4 1.4

Subtotal 17.6 7.8 3.8

Subaccount 3: Subsidization of EPCA and ENDAFrance Euro 1.5 January 2005 1.2 1.2 —Netherlands6 US$ 2.0 March 2002 1.5 1.5 —Netherlands US$ 2.0 March 2005 1.4 1.4 —Norway NKr 10.0 February 2005 1.1 1.1 —Sweden US$ 10.0 February 2005 6.6 6.6 —United Kingdom £ 1.0 February 2005 1.2 1.2 0.2

Subtotal 13.0 13.0 0.2

Total 40.3 30.5 6.9Memorandum item:Pledges made since 2005 29.1 19.2 4.0

Source: IMF Finance Department.Note: Figures may not add up to subtotals because of rounding.1For contributions that have been fully received, the SDR equivalent is the actual SDR amount received using the exchange rate on the value date. For contributions that are not yet disbursed, the SDR equivalent is calculated using the exchange rate at end-April 2006.

2Donors can earmark their subsidy contributions for specific ENDA/EPCA users.3Belgium has fulfilled its pledge to subsidize Burundi’s emergency post-conflict assistance in full, as Burundi made an early repurchase in February 2004.

4Reflecting investment income to be generated on a deposit agreement.5To subsidize the rate of charge on purchases by Sri Lanka and Maldives under ENDA following the 2004 tsunami.6Existing contribution, previously earmarked for EPCA.

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Thus far, disbursements from the administered account have totaled SDR 2.9 million to subsidize the rate of charge on EPCA for nine countries (Albania, Burundi, the Central African Republic, the Republic of Congo, Guinea-Bissau, Haiti, Rwanda, Sierra Leone, and Tajikistan). Of these, only two countries—the Central African Republic and Haiti—still have purchases outstanding under EPCA. A total of SDR 3.8 million has been disbursed to date to subsidize interest on ENDA for four countries (Grenada, Malawi, Maldives, and Sri Lanka). All four countries became eligible for subsidization with the Executive Board’s decision in January 2005, and, as of end-April 2006, all four still had outstanding purchases under ENDA.

Income, charges, remuneration, and burden sharing

The IMF, like other financial institutions, earns income from the interest charges and fees levied on its loans and uses the income to meet funding costs, pay for administra-tive expenses, and build up precautionary balances. While the current framework relies heavily on income from lend-ing, a priority for the IMF in the period ahead will be to establish a new framework that generates other steady and reliable long-term sources of income (Box 8.7).

The basic rate of charge on regular lending is determined at the beginning of the financial year as a margin in basis points above the SDR interest rate (see “SDR develop-ments,” below) to achieve an agreed net income target for the year. Under the current framework, this rate is set to cover the cost of funds and administrative expenses as well as to add to the IMF’s reserves. The IMF’s reliance on quota subscriptions and internally generated resources provides it with some flexibility in setting the basic rate of charge. At the same time, the IMF needs to ensure that it provides creditors with a competitive rate of interest on their IMF claims. The specific margin above the SDR interest rate is based on projections for income and expenses for the year and can be adjusted at midyear in light of actual net income and if income for the year as a whole is expected to deviate significantly from the projections. At the end of the financial year, any income in excess of the target is refunded to the members that paid charges during the year, and any shortfalls can be made up in the following year if the Execu-tive Board decides to do so.

The IMF has imposed level-based surcharges on credit extended after November 28, 2000, to discourage unduly large use of credit in the credit tranches and under Extended Arrangements and to preserve the revolving nature of IMF

Box 8.7 Medium-term income outlook and options

Under its current financing framework, the IMF earns the bulk of its income on the inter-est margin associated with its GRA loans to member countries. The income from lending is used to finance all of the IMF’s principal activ-ities that promote global economic stability, including multilateral and country surveil-lance, technical assistance, and administra-tion and oversight of program arrangements. However, this framework is not sustainable in an environment of low IMF lending. Thus there is some urgency to developing options for a new framework that broadens the long-term sources of steady income.

To this end, the Executive Board and the Fund’s management and staff are investigat-ing such options. Indeed, some important measures have already been implemented. First, for FY2007 the Board agreed to a tem-porary pause in the accumulation of reserves, reflecting a shift in the current environment to a greater emphasis on income risk than on credit risk. Second, an Investment Account (IA) was established, as authorized by the IMF’s Articles of Agreement, to generate income and protect the capital of the IMF. The IA also helps diversify the sources of IMF

income. The IA may invest an amount up to the level of the IMF’s balances in the General and Special Reserves—currently nearly SDR 6 billion—in eligible marketable obliga-tions denominated in SDRs or in the securities of members whose currencies are included in the SDR basket. Eligible investments include the domestic government bonds of countries in the euro area, Japan, the United Kingdom, and the United States; the bonds of eligible national agencies; and the obligations of international financial organizations. The IA is expected to earn returns above the SDR interest rate, while seeking to minimize the risk of large fluctuations in annual investment income. The earnings of the IA may be used to meet the expenses of conducting the IMF’s business. Action has also been taken on the expenditure side, where real reductions are proposed in the medium-term administrative budget.

Other, more far-reaching changes to broaden the Fund’s income base are also under con-sideration. Some options include charging user fees for technical assistance, raising income from new financing instruments, mobilizing greater external financing, and

lowering the rate of remuneration. However, to ensure medium-term income sustainabil-ity, structural changes in the IMF’s finances will be needed. In May 2006, the Managing Director announced the appointment of an eight-member committee of eminent persons to provide the Fund with an independent view of the available options for ensuring that it has a sustainable and durable income base to finance its running costs over the long term.1 The committee is expected to make specific recommendations to the Managing Director in the first quarter of 2007. Structural options include an amended authority in the Articles of Agreement to allow the IMF to use its quota-based resources for purposes other than adjustment lending, more effective management of gold resources, and annual membership fees. Structural changes will take time to develop and require the broad support of the membership. In the meantime, the IMF has the security of being able to meet imme-diate operating income shortfalls by drawing, if necessary, on its accumulated reserves.

1See Press Release No. 06/100 at www.imf.org/external/np/sec/pr/2006/pr06100.htm.

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financial resources. The IMF also imposes surcharges on shorter-term loans under the SRF that vary according to the length of time credit is outstanding. Income derived from surcharges can be placed in the IMF’s reserves or used for other purposes as decided by the Executive Board.

The IMF also receives income from borrowers in the form of service charges, commitment fees, and special charges. A one-time service charge of 0.5 percent is levied on each loan disbursement from the GRA. A refundable commitment fee on Stand-By and Extended Arrangements, payable at the beginning of each 12-month period under the arrangement, is charged on the amounts that may be drawn during that period, including amounts available under the SRF. The fee is 0.25 percent on amounts committed up to 100 percent of quota and 0.10 percent for amounts exceeding 100 percent of quota. The commitment fee is refunded when credit is used in proportion to the drawings made. The IMF also lev-ies special charges on overdue principal payments and on charges that are overdue by less than six months.

The Fund pays interest (remuneration) to creditors on their IMF claims (reserve tranche positions) based on the SDR interest rate. The basic rate of remuneration is currently set at 100 percent of the SDR interest rate (the upper limit per-mitted under the Articles of Agreement), but it may be set as low as 80 percent of that rate (the lower limit).

Since 1986, the rates of charge and remuneration have been adjusted under a burden-sharing mechanism that dis-tributes the cost of overdue financial obligations between creditor and debtor members. Loss of income from unpaid interest charges overdue for six months or more is recov-ered by increasing the rate of charge and reducing the rate of remuneration. The amounts thus collected are refunded when the overdue charges are settled. Additional adjustments to the basic rates of charge and remunera-tion are made to generate resources for a Special Contin-gent Account (SCA-1), which was established specifically to protect the IMF against the risk of loss resulting from arrears. The burden-sharing mechanism has also been used in recent years to make annual contributions to the SCA-1 in order to mitigate the income impact of the off-market gold transactions in 1999–2000. In FY2006, the combined adjustment for unpaid interest charges and the allocation to the SCA-1 resulted in an increase in the basic rate of charge of 18 basis points and a reduction in the rate of remunera-tion of 23 basis points. The adjusted rates of charge and remuneration averaged 4.18 percent and 2.68 percent, respectively, for the financial year.

In FY2006, the margin for the basic rate of charge was set at 108 basis points above the SDR interest rate, and no adjustments were made at midyear. Net income for FY2006 amounted to SDR 128 million, which fell short of the target by SDR 60 million, owing mainly to lower income from

lending after the voluntary advance repurchases (repay-ments) by Argentina and Brazil of their entire outstanding obligations to the IMF, as well as to sizable net repayments by Indonesia, Turkey, and other members. The Executive Board has decided not to make up this shortfall in FY2007, given the expectation of further income pressures associ-ated with the low level of IMF credit outstanding. Income derived from SRF and level-based surcharges amounted to SDR 294 million in FY2006. Adjusted for expenses associ-ated with administering the PRGF Trust (SDR 51 million)5

and the cost of pension and other post-retirement provi-sions (SDR 136 million), total net income for the year amounted to SDR 235 million. This amount was added to the IMF’s reserves. For FY2007, given the expected pressures on the IMF’s income, the Executive Board has agreed to a temporary pause in the accumulation of reserves, and sur-charge income will be used to cover a portion of the cost of the IMF’s administrative expenses.

Credit risk management in the IMF and the level of precautionary balances

The IMF faces credit risk from its existing loan portfolio. In addition, it must be ready to address the additional credit risk that would arise from a large unexpected demand for IMF credit. The Fund mitigates credit risk by rigorously implementing the policies governing the use of its resources and carefully managing its liquidity while accumulating adequate precautionary balances.6 Precautionary balances also contribute to the IMF’s net income and help mitigate the risk of net income shortfalls.

Credit risk managementThe principal credit risks faced by the IMF stem from large arrangements with middle-income countries. As of the end of April 2006, three countries (Indonesia, Turkey, and Uru-guay) accounted for some 80 percent of all GRA credit out-standing, and these three plus Serbia and Montenegro and Ukraine accounted for 87 percent, or some SDR 16.7 billion.

The IMF’s Articles of Agreement charge the IMF with assist-ing cooperating members—including those in very difficult circumstances. As a result, the size of the IMF’s loan portfolio can change dramatically in a short time, as can assessments of its riskiness. Sound risk management requires the IMF to be prepared for the possibility of payments disruptions, which could arise from the increase in, and concentration of, its outstanding credit. However, in view of the cooperative

5As agreed in April 2004, the GRA is not reimbursed for the expenses of administering the PRGF Trust; instead, these resources remain in the PRGF Trust to help meet concessional financing needs.6For more details, see www.imf.org/external/np/sec/pn/2004/pn0416.htm.

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nature of the IMF and the Fund’s role in promoting global macroeconomic stability as a public good, diversification of lending is not, and cannot be, one of its objectives.

Although the specific features of the IMF’s institutional framework and financing role suggest that high credit concentration is inevitable in an uncertain world, such con-centration does not embody the same degree of risk for the IMF as for other financial institutions. This is because the Fund relies on a multilayered structure to safeguard against credit risk. This risk-mitigating structure includes its lend-ing policies (conditionality, access limits and the exceptional access framework, its policies on charges and maturities, and safeguards assessments), its arrears strategy and bur-den-sharing mechanism, and maintenance of an adequate level of precautionary balances. IMF conditionality, together with its preferred creditor status, can mitigate credit risk to a considerable extent but does not eliminate it. Risks remain because successful balance of payments adjustment depends ultimately on borrowers’ ownership and effective imple-mentation of appropriate policies, because member coun-tries may be subject to further shocks, and because renewed timely access to other sources of financing is not assured.

Precautionary balances

To safeguard its financial position, the IMF has a policy of accumulating precautionary financial balances in the GRA. These precautionary balances consist of reserves and a Special Contingent Account (SCA-1, see previous subsection). Reserves provide the IMF with protection against financial risks, including income losses and capital losses. The SCA-1 was established as an additional layer of protection against the adverse financial consequences of protracted arrears.

Existing precautionary balances have been financed through the retention of income and the burden-sharing mechanism (see previous subsection). Under the Articles of Agreement, the resources in the General Reserve may be distributed by the IMF to members on the basis of their quota shares. The IMF may use the Special Reserve for any purpose for which it may use the General Reserve except distribution. Total reserves increased to SDR 6.0 billion as of April 30, 2006, from SDR 5.7 billion a year earlier. The balance in the SCA-1 amounted to SDR 1.7 billion, compared with overdue principal of SDR 0.6 billion. SCA-1 resources are to be refunded after all arrears have been cleared but can be refunded earlier by a decision of the Executive Board.

The Executive Board has set an eventual target level of precautionary financial balances of SDR 10 billion. The adequacy of precautionary balances and the pace of accu-mulation, as well as the application of the burden-sharing mechanism, are kept under close review.

Quota developments

In September 2005, Executive Directors considered three broad options for adjustments in quotas and voting power in the absence of a general increase: ad hoc increases for selected countries whose quotas are much lower than their weight in the global economy; voluntary adjustments among country groups or individual members; and an increase in basic votes. Executive Directors agreed to con-tinue to explore ways to achieve a redistribution of quotas in the absence of a general quota increase.

The Managing Director has identified quota and voice issues as a priority in the Fund’s Medium-Term Strategy (MTS). In his April 2006 report to the IMFC on implementing the MTS, the Managing Director underscored the need to make con-crete progress on this issue by the time of the September 2006 Annual Meetings. In April 2006, the International Monetary and Financial Committee (IMFC) underscored the role an ad hoc increase in quotas would play in improving the distribu-tion of quotas to reflect important changes in the weight and role of countries in the world economy. The committee called on the Managing Director to work with the IMFC and the Executive Board to come forward with concrete proposals for agreement at the 2006 Annual Meetings.

As of April 30, 2006, 180 member countries accounting for more than 99 percent of quotas proposed in 1998 under the Eleventh General Review of Quotas had consented to, and paid for, their proposed quota increases (see Box 8.8 on general reviews of quotas). All member countries eligible to consent had done so by the end of the financial year, and three member countries were ineligible to consent to their proposed increases because they were in arrears to the IMF. On August 24, 2005, the Executive Board approved an

The IMF normally conducts general reviews of members’ quotas every five years to assess the adequacy of its resource base and to adjust the quotas of individual members to reflect changes in their relative positions in the world economy. Of the twelve general reviews that have been conducted so far, five have concluded that no increase in quotas was needed. The Executive Board completed the Twelfth General Review of Quotas on January 30, 2003, without proposing an increase (or adjustments), which leaves the maximum size of quo-tas unchanged at SDR 213.7 billion. The ongoing Thirteenth General Review of Quotas will need to be completed by January 2008.

In addition to general reviews of quotas, ad hoc quota increases are possible to address cases in which quotas are not representative of a country’s weight in the global economy. Ad hoc quota increases outside general reviews have been rare in recent decades, although China was granted a higher quota in 2001 following its resumption of sovereignty over Hong Kong SAR.

Box 8.8 General reviews of quotas

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extension of the period for consent to the Eleventh Review quota increases to September 29, 2006. At the close of the financial year, total quotas amounted to SDR 213.5 billion.

SDR developments

The SDR is a reserve asset created by the IMF in 1969 to supplement other reserve assets. SDRs are allocated to members in proportion to their IMF quotas. A member may use SDRs to obtain foreign exchange reserves from other members and to make payments to the IMF. Such use does not constitute a loan; members are allocated SDRs unconditionally and may use them to meet a balance of payments financing need without undertaking economic policy measures or repayment obligations. However, a member that makes net use of its allocated SDRs pays the SDR interest rate, while a member that acquires SDRs in excess of its allocation receives interest at the SDR rate. A total of SDR 21.4 billion has been allocated to members—SDR 9.3 billion in 1970–72 and SDR 12.1 billion in 1978–81.

The value of the SDR is based on the weighted average of the values of a basket of major international currencies, and the SDR interest rate is a weighted average of interest rates on short-term instruments in the markets for the currencies in the valuation basket. The method of valuation is reviewed every five years. The latest review was completed in Novem-ber 2005, and the IMF Executive Board decided on changes in the valuation basket, effective January 1, 2006 (see Box 8.9). The SDR interest rate provides the basis for calculating the interest charges on regular IMF financing and the inter-est rate paid to members that are creditors to the IMF. In addition, the SDR serves as the unit of account for the IMF and for a number of other international organizations.

There are two types of SDR allocations:

General allocations. Decisions on general allocations are made in the context of five-year basic periods and require a finding that an allocation would meet a long-term global need to supplement existing reserve assets. A deci-sion to allocate SDRs requires an 85 percent majority of the total voting power.

Special one-time allocation. In September 1997, the IMF Board of Governors proposed an amendment to the Articles of Agreement to allow a special one-time alloca-tion of SDRs to correct for the fact that more than one-fifth of the IMF membership, having joined the IMF after the last general allocation, had never received an SDR allocation. The special allocation of SDRs would enable all members of the IMF to participate in the SDR system on an equitable basis and would double cumulative SDR allocations to SDR 42.9 billion. The proposal will become effective when it has been accepted by three-fifths of the IMF membership (111 members) having 85 percent of

Valuation

The value of the SDR is based on the weighted average of the values of a basket of major international currencies. The method of valuation is reviewed at five-year intervals. Following completion of the latest review, in November 2005, the Executive Board decided to change the weights of the currencies in the SDR basket based on the value of the exports of goods and services and the amount of reserves denominated in the currencies held by other members of the IMF. The new weights became effective on January 1, 2006. Currencies included in the valuation basket are among the most widely used in international transactions and are widely traded in the principal for-eign exchange markets. Currencies selected for inclusion in the SDR basket for 2006–10 continued to be the euro, the Japanese yen, the pound sterling, and the U.S. dollar (see table). The next review by the Executive Board is scheduled to be completed in 2010 and the new basket to be in effect on January 1, 2011.

Interest rate

The weekly SDR interest rate is determined on the basis of a weighted average of interest rates (expressed as equivalent annual bond yields) on short-term instruments in the markets for the currencies included in the SDR valuation basket, namely, the three-month Eurepo rate,1

Japanese government 13-week financing bills, 3-month U.K. treasury bills, and 3-month U.S. treasury bills. During FY2006, the SDR interest rate evolved in line with developments in the major money markets, rising gradually from 2.49 percent at the beginning of May 2005 to peak at 3.51 percent in the last week of April 2006. Over the course of FY2006, the SDR interest rate averaged 2.9 percent (see figure).

SDR valuation, as of April 30, 2006Amount of Exchange U.S. dollar

Currency currency rate2 equivalent3

Euro 0.4100 1.25510 0.514591Japanese yen 18.4000 114.17000 0.161163Pound sterling 0.0903 1.80850 0.163308U.S. dollar 0.6320 1.00000 0.632000________ 1.471062Memorandum:SDR 1 = US$1.47106US$1 = SDR 0.679781

Note: Valuation as of April 28, 2006, which was the last business day of the IMF’s financial year.1Prior to January 1, 2006, the euro area interest rate was represented by the three-month Euro Interbank Offered Rate (Euribor).

2Exchange rates in terms of U.S. dollars per currency unit, except for the Japanese yen, which is in currency units per U.S. dollar.

3Rounded to six digits.

SDR interest rate, 1996–April 2006(In percent)

Box 8.9 Review of SDR valuation and interest rate

0

1

2

3

4

5

6

7

8

1996 97 98 99 2000 01 02 03 04 05 06

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the total voting power. As of April 30, 2006, 131 members having 77.33 percent of the total voting power had agreed and only acceptance by the United States was required to implement the proposal.

SDR operations and transactions

All SDR transactions are conducted through the SDR Department (which is a financial entity, not an organiza-tional unit). SDRs are held largely by member countries and by official entities prescribed by the IMF to hold SDRs. The balance of allocated SDRs is held in the IMF’s GRA. Prescribed holders do not receive SDR allocations but can acquire and use SDRs in operations and transactions with IMF members and with other prescribed holders under the same terms and conditions as IMF members. Transac-tions in SDRs are facilitated by 14 voluntary arrangements under which the parties stand ready to buy or sell SDRs for currencies that are readily usable in international transac-tions, provided that their own SDR holdings remain within certain limits.7 These arrangements have helped ensure the liquidity of the SDR system.8

The total level of transfers of SDRs increased in FY2006 to SDR 13.0 billion, from SDR 10.6 billion in FY2005. The larg-est transfers of SDRs (49.1 billion) took place in FY1999, when the volume of SDR transactions increased significantly because of members’ payments for quota increases.

By April 30, 2006, the IMF’s own holdings of SDRs had increased to SDR 3.6 billion from SDR 0.6 billion at end-FY2005, as a result of advance repayments of financial obligations from several members. SDRs held by pre-scribed holders amounted to SDR 0.3 billion. SDR hold-ings by participants decreased to SDR 17.5 billion from SDR 20.6 billion in FY2005.

Safeguards assessments

Since FY2000, the IMF has conducted safeguards assess-ments of member countries’ central banks in connection with IMF lending operations. The assessments aim to pro-vide reasonable assurance to the IMF that a central bank’s framework of financial reporting, audit, and controls is adequate to manage its resources, including IMF disburse-ments (see Box 8.10). In FY2006, 12 safeguards assessments

7These include 12 IMF members and one prescribed holder. In addition, one member has established a one-way (selling only) arrangement with the Fund.8Under the designation mechanism, participants whose balance of pay-ments and reserve positions are deemed sufficiently strong may be obliged, when designated by the IMF, to provide freely usable currencies in exchange for SDRs up to specified amounts. The designation mechanism has not been used since 1987, following the set-up of the voluntary arrangements starting in 1986.

of member countries’ central banks were conducted, bring-ing the total number of completed assessments as of April 30, 2006, to 124.9

The findings of safeguards assessments to date have indi-cated that significant, but avoidable, risks to IMF resources may have existed in certain cases, although identified vul-nerabilities have declined in significance and frequency over time. Experience has shown that central banks are progres-sively implementing the measures recommended to miti-gate identified vulnerabilities.

Typical recommendations include (1) independent external audits in accordance with international audit standards; (2) reconciliation of the economic data reported to the IMF for program-monitoring purposes with the underlying accounting records of the central bank; and (3) enhance-ment of the transparency and consistency of financial reporting, through the adoption of International Financial Reporting Standards (IFRS) and publication of the audited financial statements. Central banks have generally embraced the findings of safeguards assessments, and this policy has enhanced the IMF’s reputation and credibility as a pru-dent lender while helping to improve the operations and accounting procedures of central banks.

As in previous years, in FY2006, IMF staff continued to conduct seminars on safeguards assessments. The seminars cover the safeguards methodology and the relevance of the framework to central banks. Such seminars were held at the Joint Africa Institute (Tunis) in May 2005 and at the IMF Institute (Washington, D.C.) in December 2005. As of April 30, 2006, some 236 officials from 104 countries had attended these seminars.

Arrears to the IMF

Overdue financial obligations to the IMF totaled SDR 1.9 bil-lion at end-April 2006, a slight decline from SDR 2.0 billion at the beginning of the financial year (Table 8.7). The main reason for the decline was Zimbabwe’s clearance of its arrears to the IMF’s General Resources Account (GRA) in February 2006 (Zimbabwe still has arrears to the PRGF-ESF Trust). Sudan’s arrears to the IMF also declined as a result of its regu-lar monthly payments in excess of obligations falling due. At end-April 2006, virtually all arrears to the IMF were pro-tracted (outstanding for more than six months), 41 percent of which represented overdue principal, with the remainder consisting of overdue charges and interest. More than four-

9This total includes 27 abbreviated assessments that were conducted for arrangements in effect prior to June 30, 2000, and that examined only one key element of the safeguards framework, namely, that central banks pub-lish annual financial statements that are independently audited by external auditors in accordance with internationally accepted standards.

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fifths of arrears were to the GRA and the remainder to the SDR Department and the PRGF-ESF Trust.

The two countries with the largest protracted arrears to the IMF—Sudan and Liberia—account for 83 percent of the overdue financial obligations; Somalia and Zimbabwe account for the remainder. Under the IMF’s strengthened cooperative strategy on arrears, remedial measures have been applied against the countries with protracted arrears to the IMF.10

The IMF’s Executive Board reviewed the overall arrears strategy in August 2005 and extended the rights approach for one more year.11 The Board also conducted several reviews of individual member countries’ overdue financial obligations to the IMF during FY2006:

10In the case of Somalia, the application of remedial measures has been delayed because of the absence of a functioning central government.

11 Established in 1990, the rights approach permits an eligible member to establish a track record on policies and payments to the IMF under a rights accumulation program and to earn “rights” to obtain IMF resources under successor arrangements following the completion of the program and settlement of the arrears to the IMF.

The Board reviewed Liberia’s overdue financial obliga-tions to the IMF on April 26, 2006. The Board com-mended the authorities’ resolve to work closely with their international partners in addressing the daunting challenges of rebuilding Liberia’s economy and reduc-ing pervasive poverty. As a first key step, they welcomed the agreement that had been reached on an ambitious macroeconomic program to be monitored by the IMF during February–September 2006. Directors concurred that satisfactory implementation of the staff-monitored program (SMP), along with continued repayments to the IMF, would be important for providing a basis for con-sidering the timely de-escalation of the IMF’s remedial measures. Prompt and sufficient indications of support from donors and strong performance under the SMP would be important steps toward the clearance of arrears to the IMF and a formal IMF arrangement. Satisfactory performance under such an arrangement would help pave the way to Liberia’s timely participation in the HIPC Initiative and the MDRI, and would lead, in turn, to a resolution of Liberia’s debt overhang.

The Board reviewed Sudan’s overdue financial obliga-tions to the IMF on December 2, 2005. The Board noted

Box 8.10 Safeguards assessment policy

The safeguards policy was initiated in FY2000 against the background of several instances of misreporting to the IMF and allegations of misuse of IMF resources. It aims at supple-menting conditionality, technical assistance, and other means that have traditionally helped assure the proper use of IMF loans.

In FY2005, the Executive Board’s review of the safeguards policy concluded that the frame-work for assessing operations of central banks continued to be broadly appropriate.

Objective of safeguards assessments

To provide reasonable assurance to the IMF that a central bank’s controls, finan-cial reporting, auditing systems, and legal framework are adequate to ensure the integrity of financial operations and report-ing to the IMF.

Applicability of safeguards assessments

Central banks of (1) member countries with new arrangements for use of IMF resources approved after June 30, 2000, or existing arrangements that are aug-mented, (2) member countries following a Rights Accumulation Program (RAP) under which resources are being committed, and

(3) member countries receiving Emergency Post-Conflict Assistance (determined on a case-by-case basis);

Central banks of member countries with a Policy Support Instrument (PSI) are encouraged to undertake a safeguards assessment, which would become a requirement in the event of a need for access to IMF resources;

Voluntary for central banks of members with staff-monitored programs; and

Not applicable to first-credit-tranche pur-chases, stand-alone CFFs, or Emergency Natural Disaster Assistance (ENDA).

Scope of policy—ELRIC

The External audit mechanism;

The Legal structure and independence;

The financial Reporting framework;

The Internal audit mechanism; and

The internal Controls system.

Methodology

Safeguards assessments follow an estab-lished set of procedures to ensure con-sistency in application. All central banks

subject to an assessment provide a stan-dard set of documents to IMF staff, who review the information and communicate as needed with central bank officials and the external auditors. The review may be supplemented by an on-site visit.

The outcome of a safeguards assessment is a confidential report that identifies vulner-abilities and makes recommendations to mitigate the identified risk. Central bank authorities have the opportunity to com-ment on all safeguards assessment reports. The conclusions and agreed-upon remedial measures are reported in summary form to the IMF Executive Board at the time of arrangement approval or, at the latest, by the first review under the arrangement, but the safeguards report itself is not made available to the Board or the general public.

The implementation of safeguards recom-mendations is continuously monitored by IMF staff.

Publication references

The staff’s papers and other background infor-mation concerning the safeguards policy are available at www.imf.org/external/fin.htm.

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that Sudan had continued to make regular payments to the IMF in 2005, in line with its commitment. Many Directors observed that Sudan’s rapid export growth and reserve accumulation should permit an increase in its payments to the IMF in 2006, and urged the authori-ties to increase the level of payments. The Board agreed that Sudan’s external debt remains unsustainable, and that debt relief beyond traditional mechanisms would be needed to achieve sustainability. However, they noted that while the situation in Darfur remains unresolved, serious discussion of arrears clearance options would be premature. Sudan has committed to increasing its annual payments to $45 million in 2006.

The Board discussed the complaint by the Managing Director regarding Zimbabwe’s compulsory withdrawal from the IMF on September 9, 2005.12 The Board urged the authorities to implement a comprehensive adjust-ment program—including measures on the exchange rate, monetary and fiscal tightening, and structural reforms—as a matter of urgency. The Board welcomed Zimbabwe’s payments of $131 million to the IMF since the previous review. To provide the authorities with a further opportunity to improve cooperation with the IMF, the Board decided to further consider the complaint before March 9, 2006. At its meeting on March 8, 2006, the Board noted that, as a result of Zimbabwe’s full settle-ment of its arrears to the GRA, the Managing Director had withdrawn his complaint with respect to compulsory withdrawal. The Board decided not to restore Zimba-bwe’s voting and related rights and not to terminate its ineligibility to use the general resources of the IMF at that juncture. The Board called for urgent implemen-tation of a comprehensive policy package comprising several mutually reinforcing actions in the areas of mac-roeconomic stabilization and structural reforms. The Board urged Zimbabwe to continue its efforts to resolve

12 The procedure on Zimbabwe’s compulsory withdrawal from the IMF (under Article XXVI, Section 2(c) of the Articles of Agreement) was initi-ated on February 6, 2004.

the remaining overdue financial obli-gations to the PRGF-ESF Trust and agreed that the IMF would consider further Zimbabwe’s overdue financial obligations to the PRGF-ESF Trust within six months.

As of end-April 2006, Liberia, Soma-lia, Sudan, and Zimbabwe were ineligible under Article XXVI, Section 2(a) to use the General Resources of the IMF. In addition, Zimbabwe had earlier been removed from the list of PRGF-eligible countries. Declarations

of noncooperation—a further step under the strengthened cooperative arrears strategy—were in effect for Liberia and Zimbabwe, and the voting and related rights of those two countries in the IMF were suspended.

External audit mechanism

The IMF’s external audit arrangements consist of an Exter-nal Audit Committee and an external audit firm. The External Audit Committee has general oversight of the external audit function and internal control processes. It consists of three members selected by the Executive Board and appointed by the Managing Director. The members serve for three years, on a staggered basis, and are indepen-dent. Committee members are nationals of different mem-ber countries of the IMF at the time of their appointment and must possess the qualifications required to carry out the oversight of the annual audit. The External Audit Com-mittee generally meets twice a year in Washington, D.C., and is available for consultation throughout the year.

The 2006 External Audit Committee members are Mr. Pentti Hakkarainen (Chair), Board Member, Bank of Finland; Dr. Len Konar, Board Member, South African Reserve Bank; and Mr. Satoshi Itoh, Professor, Chuo University, Japan.

The responsibility for performing the external audit and issuing the opinion rests with the external audit firm, which is selected by the Executive Board in consultation with the External Audit Committee and appointed by the Managing Director. At the conclusion of the annual audit, the Exter-nal Audit Committee transmits the report issued by the external audit firm, through the Managing Director and the Executive Board, to the Board of Governors. In the process, the External Audit Committee briefs the Executive Board on the results of the audit. The external audit firm is normally appointed for five years. Deloitte and Touche LLP is the IMF’s present external auditor.

The IMF’s financial statements for FY2006 form Appendix VII of this Annual Report.

Table 8.7 Arrears to the IMF of countries with obligations overdue by six months or more

(In millions of SDRs; as of April 30, 2006)By type__________________________________________________________________

General Department Total (incl. SAF)1 SDR Department Trust Fund PRGF-ESF

Liberia 519.1 462.3 26.3 30.5 —Somalia 227.5 208.1 11.4 8.0 —Sudan 1,050.7 971.1 0.1 79.5 —Zimbabwe 83.1 — — — 83.1

Total 1,880.4 1,641.5 37.8 118.0 83.1

Source: IMF Finance Department.1Structural Adjustment Facility.

Governance and management of the IMF

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t he IMF is accountable to its Board of Governors and thus to the governments of its 184 member coun-

tries, which, in collaboration with its management, decide on its policies, operations, and work program for each year (see Boxes 9.1 and 9.2 on how the IMF is run).

One of the priorities of the Fund’s Medium-Term Strategy is to enhance the IMF’s governance and boost its effective-ness and credibility by addressing issues related to mem-bers’ quotas and voting power. Quotas, which are allocated largely on the basis of the relative size of countries’ econo-mies, help to determine members’ voting rights in the Fund and determine the amounts they are allowed to borrow.1

During FY2006, the Executive Board and IMF manage-ment explored proposals from the membership on how to adjust quotas and voting power so as to reflect the emerg-ing market countries’ growing role in the world economy and to give smaller member countries, especially countries in sub-Saharan Africa, which account for a large share of the Fund’s work, a greater voice. In a seminar in September 2005, the Board explored options for moving forward in this area.

The IMF has increased its transparency and communications and outreach activities over the past decade and maintains an active publishing program and Web site, as described in Box 9.3. In FY2006, it continued to deepen its dialogue with legislators and various nonofficial groups, eliciting the views of stakeholders in its member countries on a number of issues, including its Medium-Term Strategy, and seeking to build consensus around its policy advice. In June 2005, the Board reviewed the Fund’s transparency policy.

The IMF is committed to following best international prac-tices for internal governance and to ensuring the most effec-tive use of resources. During FY2006, the Fund developed a new medium-term budgetary framework in line with the priorities outlined in the Medium-Term Strategy; reformed

1Under the IMF’s Articles of Agreement, general reviews of quotas are con-ducted at intervals of not more than five years. Each country’s voting power in the IMF, set by the Articles of Agreement, is the sum of its 250 basic votes (the same for each member) and one vote per SDR 100,000 of its quota in the Fund. Until the mid-1970s, each member’s basic votes accounted for more than 10 percent of total votes; however, general increases in quotas have since reduced that share to about 2 percent. For more information about quotas, see www.imf.org/external/np/exr/facts/quotas.htm.

its employment, compensation, and benefits framework; evaluated options for putting the Fund’s income on a sounder financial footing (see Chapter 8); and set up a task force to review the Fund’s risk management (Box 9.4). It also reexamined the division of labor with the World Bank (Box 9.5). The IMF collaborates with the World Bank and other international and regional bodies—such as the regional development banks, the international standard-setting bodies, the World Trade Organization, and the UN agencies—in a number of areas to maximize the use of its resources and avoid duplication of efforts. In FY2006, it col-laborated with a group of organizations in the development of an international approach to fighting corruption (see Box 9.6).

Quotas and voice

On January 30, 2003, the IMF’s Board of Governors adopted a resolution concluding the Twelfth General Review of Quotas without proposing an increase. The reso-lution also noted the Executive Board’s intention during the Thirteenth General Review, which is to be concluded by January 2008, to monitor closely and assess the adequacy of Fund resources, to consider measures to achieve a dis-tribution of quotas that reflects developments in the world economy, and to consider measures to strengthen the gover-nance of the Fund. The IMF’s Articles of Agreement provide for substantial flexibility in the adjustment of quotas: such adjustments can take place at any time, and the Board has considerable flexibility in determining the basis for and composition of such adjustments.

At a seminar in September 2005, Executive Directors held a preliminary exchange of views on the issue of quotas and voice. Most Directors appeared to support—as a pragmatic way forward—continued exploration of ways to achieve an adjustment in quotas and voting power in the absence of a general quota increase. Three broad options were consid-ered: ad hoc increases for selected countries whose quotas are most out of line; voluntary adjustments among country groups or individual members; and an increase in basic votes.

Many Directors saw a need for ad hoc quota increases for countries whose quotas were most out of line. Such

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increases had been agreed in the past and could be accom-modated without requiring a reduction in other members’ actual quotas, although quota shares would decline for all other members. However, a consensus was not reached.

Progress on the second option—voluntary adjustments among country groups or individual members as a means of reallocating existing quotas to members that are “under-represented”—would be challenging since members have the right to veto the reduction of their own quotas. The implications for the Fund’s liquidity will need to be taken into account.

As for the third option, Directors underscored the desir-ability of ensuring adequate representation of developing countries in the Fund’s decision making. Most Directors considered that an increase in basic votes would be the most effective means of ensuring appropriate representa-tion for the smallest members, although they recognized the difficulties likely to be involved in achieving the required amendment of the Articles of Agreement. A few saw scope for ad hoc quota increases for small countries if a consensus on basic votes is not achievable. At the same time, a num-ber of Directors considered that an increase in basic votes

would not of itself be sufficient to address broader con-cerns about relative voting power across the membership as a whole and should be combined with increases in the quota shares of developing countries. Concerns were also expressed that proposals regarding basic votes or ad hoc increases would have to be consistent with the overarching principle that voting power in the Fund remain linked to countries’ relative economic and financial weight.

The discussion revisited some of the issues surrounding quota formulas. Many Directors reiterated their support for a simpler and more transparent quota formula. Most felt that such a formula should be based on an updating of the traditional economic and financial variables and com-prise at most four variables, including GDP as the most important indicator of countries’ economic size, along with measures of openness, variability of current receipts and net capital flows, and reserves. Although Directors’ views converged on the objectives of simplicity and transparency in quota formulas, there remained a range of views on the details and the weights to be assigned to the variables, and a number of Directors viewed agreement on a new quota formula as an integral part of any adjustment in actual

Box 9.1 How the IMF is run

The highest decision-making body of the IMF is the Board of Governors, which is appointed by the member countries. Some of the Board of Governor’s powers are delegated to the Fund’s Executive Board, which is composed of 24 Executive Directors, who are appointed or elected by the member countries.

The Board of Governors consists of one gover-nor and one alternate governor from each of the IMF’s 184 member countries. The governor is usually the member country’s minister of finance or the head of its central bank. All governors meet once a year at the IMF–World Bank Annual Meetings.

There are two committees of governors that represent the whole membership. The Inter-national Monetary and Financial Committee(IMFC) is an advisory body composed of 24 IMF governors (or their alternates) represent-ing the same countries or constituencies (groups of countries) as the 24 Executive Directors. The IMFC normally meets twice a year, in March or April and at the time of the Annual Meetings in September or October. Its responsibilities include providing guid-ance to the Executive Board and advising and reporting to the Board of Governors on issues

related to the management of the interna-tional monetary system. The current Chairman of the IMFC is Gordon Brown, Chancellor of the Exchequer of the United Kingdom. The Development Committee (formally, the Joint Ministerial Committee of the Boards of Governors of the World Bank and the IMF on the Transfer of Real Resources to Developing Countries) is a joint World Bank–IMF body composed of 24 World Bank or IMF governors or their alternates. The Committee serves as a forum that helps build intergovernmental consensus on development issues. It also nor-mally meets twice a year, following the IMFC meetings. Both committees summarize their meetings in communiqués, which are pub-lished on the IMF’s Web site and in its AnnualReports (see Appendix IV).

The day-to-day oversight of the work of the IMF is conducted at its Washington, D.C., headquarters by its Executive Board; this work is guided by the IMFC and supported by the IMF’s staff. The Managing Director is Chair of the Executive Board and head of the IMF staff; he is assisted by a First Deputy Manag-ing Director and two other Deputy Managing Directors. The Executive Board has a central role in policy formulation and decision making

in the IMF, and exercises all the powers for conducting the institution’s business except those that the Articles of Agreement reserve for the Board of Governors or the Managing Director. The Board meets in “continuous ses-sion,” that is, as often as the business at hand requires, usually for three full days each week. In calendar 2005, total Board meeting time amounted to about 462 hours. The Board held 266 formal meetings (including those in which decisions were made), 10 informal seminars, and 92 other informal meetings, including committee meetings (Box 9.2). It spent 42 percent of its time on member coun-try matters (mainly Article IV consultations and reviews and approvals of IMF financing arrangements); 28 percent of its time on global and regional surveillance and general policy issues (such as the World Economic Outlook, Global Financial Stability Report, IMF financial resources, the international financial system, the debt situation, low-income coun-tries, and issues related to IMF lending facili-ties and program design); and the remaining time on committees and administrative and other matters. The Executive Board’s seven-day calendar can be found at www.imf.org/external/np/sec/bc/eng/index.asp.

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quotas. However, many other Directors noted the extensive discussions on this topic in the past and the likely difficulty of reaching a timely consensus on a new quota formula and saw no need to link an adjustment of quotas to agreement on a revised formula.

The issue was raised again in the Managing Director’s “Report to the International Monetary and Financial Com-mittee (IMFC) on Implementing the Medium-Term Strat-egy” (see Chapter 2), discussed by the IMFC at its meeting in April 2006. In its communiqué of April 22, 2006, the IMFC emphasized the importance of fair voice and repre-sentation for all members and underscored the role an ad hoc increase in quotas would play in improving the distri-bution of quotas to reflect important changes in the weight and role of countries in the world economy. It agreed on the need for fundamental reforms and called upon the Man-aging Director to work with the IMFC and the Executive

Board in developing concrete proposals to put before the membership at the World Bank–IMF Annual Meetings in September 2006 (see Appendix IV).

Transparency

The IMF’s transparency policy stems from an Executive Board decision in January 2001 to allow the voluntary pub-lication of country documents and systematic publication of policy papers and associated Public Information Notices (PINs). The decision followed steps that had been taken since 1994 to enhance the transparency of the IMF and to increase the availability of information about its mem-bers’ policies. It also defined the key elements of the IMF’s publication policy, including safeguards to maintain the frankness of the Fund’s policy discussions with members by striking the right balance between transparency and confi-

Box 9.2 Executive Board standing committees

There are currently 10 standing committees on which Executive Directors serve:

The Committee on Administrative Policies considers and makes recommendations to the Executive Board on matters of adminis-trative policy requiring action by the Board that are referred to it by the Chairman, the Board, or individual Executive Directors.

The Committee on the Budget considers the Managing Director’s budget proposals and other material circulated by the Man-aging Director regarding the Fund’s admin-istrative and capital budgets. It makes its views on the budget proposals known to the Executive Board and meets as needed to consider budget implementation.

The Committee on Executive Board Administrative Matters considers and reports to the Executive Board on aspects of administrative policy relating to the Executive Directors and their Alternates or senior advisors, advisors, and assistants referred to it by the Executive Board or by an Executive Director.

The Agenda and Procedures Committee contributes to the development and smooth implementation of the Executive Board’s work program.

The Committee on Liaison with the World Trade Organization considers and makes recommendations to the Executive Board

on issues that arise concerning the Fund’s relationship to the WTO or in connection with matters of common interest to the Fund and the WTO.

The Evaluation Committee follows closely the evaluation function in the Fund and advises the Executive Board on matters relating to evaluations.

The Committee on Interpretation consid-ers and makes reports and recommenda-tions to the Executive Board on questions of interpretation. Legal questions are sent to the Committee by the Executive Board at the request of an Executive Director.

The Pension Committee decides matters of a general policy nature arising under the Staff Retirement Plan.

The Ethics Committee considers matters relating to the Code of Conduct for IMF staff and may also provide guidance to Executive Directors, at their request, on ethical aspects of the conduct of their Alternates, advisors, and assistants.

The Committee on the Annual Reportreviews and makes recommendations to the Executive Board on the format and content of the Fund’s Annual Report in line with the provisions of the Fund’s Articles of Agreement and By-Laws, as well as with the Fund’s commitment to transparency and role in the international monetary

system. The Committee aims to ensure that the Annual Report helps promote the Fund’s accountability.

Board standing committees are reconstituted by decisions of the Executive Board following the regular election every two years of Executive Directors, on the basis of a proposal by the Managing Director following consultation with the Dean of the Board. Several long-standing principles have guided the proposals for con-stituting the membership of Board committees: the desirability of a reasonable geographical balance in the composition of each committee; a need for rotation, with some continuity; and maintenance of a reasonable distribution of the burden of committee work among Executive Directors. There are formal requirements for some committees concerning the number of members. In addition, account is taken, to the extent possible, of the preferences of individual Executive Directors.

Executive Directors hold the chairmanship of all but three Board committees—namely, the Committee on Administrative Policies, the Committee on the Budget, and the Pension Committee, which are chaired by the Manag-ing Director or one of his representatives. The Secretary of the Fund, or his representative, serves as the Secretary of every Committee except the Ethics Committee. Executive Direc-tors may participate in all regular meetings of the Executive Board’s committees.

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dentiality. Under these safeguards, which were revisited in the June 2005 review of transparency, members may request deletions of information not already in the public domain that constitutes either highly market-sensitive material or premature disclosure of policy intentions.

At the previous review, in September 2003, the Executive Board noted that progress had been made in publication rates. Nonetheless, thinking that further impetus was needed, the Board endorsed a policy of voluntary but pre-sumed publication for most country reports and policy papers.

At their discussion in June 2005, based on a staff review of the transparency policy,2 Directors agreed that the publication policy remained appropriate and welcomed the continued rise in publication rates, with more than three-fourths of staff reports published during the review period. They were particularly encouraged by the decline

2The staff report is available at www.imf.org/external/np/pp/eng/2005/ 052405.htm. The summary of the Board discussion can be found in Public Information Notice No. 05/116, at www.imf.org/external/np/sec/pn/2005/pn05116.htm.

Box 9.3 Disseminating information: the IMF’s publishing operations and Web site

The IMF publishes a wide variety of material targeted at a broad range of readerships. Many of the Fund’s publications are available both in print and on its Web site (www.imf.org).

The World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR) are the main vehicles through which the IMF publicizes its global surveil-lance findings and some of its most signifi-cant analytical work.

The IMF releases a large number of reports and other country documents covering economic and financial developments and trends in member countries. Each report, based on the staff’s analytical work and meetings with country officials, is prepared independently by a staff team and pub-lished at the option of the members. This series includes Article IV Reports, Reports Related to Use of IMF Resources, Selected Issues papers, and Statistical Appendixes. In almost all cases, Executive Board dis-cussions on these papers are summarized in Public Information Notices (PINS), which are available on the IMF’s Web site.

The IMF’s Annual Report provides a com-prehensive look at the IMF’s activities in each financial year and is designed to be used as a reference tool.

The Annual Report on Exchange Arrange-ments and Exchange Restrictions presents information on the exchange and trade systems of the IMF’s member countries in a tabular format.

Staff research on the international mon-etary system and other topical subjects is published in IMF Staff Papers, a quarterly journal; the quarterly newsletter IMFResearch Bulletin; the IMF Working Papers

series; the Occasional Papers series; books; and various other publications.

The Fund’s Dissemination Standards Bul-letin Board (dsbb.imf.org/Applications/web/dsbbhome) provides links to the data and statistical Web sites of subscribers to the Special Data Dissemination Standard (SDDS) and participants in the General Data Dissemination System (GDDS) and presents comprehensive information on the methods and practices behind the compi-lation and dissemination of such data in a user-friendly format comparable across countries.

International Financial Statistics (IFS), produced monthly, provides updated finan-cial information from countries around the world; the IMF’s Statistics Department also produces a yearbook containing annual data over 12 years for the countries cov-ered in the monthly publication. The IFSdatabase is available online to subscribers. Other statistical publications include the Balance of Payments Statistics Yearbook, Government Finance Statistics Yearbook, and Direction of Trade Statistics (quarterly, yearbook, and CD-ROM issues).

Guides and manuals published by the Fund cover a variety of subjects, such as balance of payments statistics and com-pilation, external debt statistics, foreign direct investment trends, monetary and financial statistics, the producer price index, and financial soundness indicators.

The biweekly newsletter IMF Survey reports on current IMF policies and activities, and its annual companion, IMF In Focus, offersa clear, concise picture of IMF policies and operations.

Pamphlets such as What Is the IMF? andIMF Technical Assistance are written for the nonspecialist, as are factsheets and issues briefs posted on the IMF’s Web site, which aim to explain key aspects of IMF opera-tions and policies.

The quarterly magazine Finance and Development (F&D) and the Economic Issues series (pamphlets on broad eco-nomic subjects related to the Fund’s areas of expertise) are written in nontech-nical language and aimed at disseminat-ing information on topical subjects to nonspecialists.

Op-eds in publications worldwide and speeches published on the external Web site offer broad overviews of the IMF and its policies.

An on-line, quarterly Civil Society Newslet-ter (www.imf.org/external/np/exr/cs/eng/index.asp) covers IMF activities and issues of particular interest to civil society organizations.

Videos about the work of the IMF are avail-able to interested media, educational insti-tutions, and social organizations, and are also used in recruitment activities.

Educational material is available from the IMF Center and at www.imf.org/econed. The IMF Center hosts a permanent exhibi-tion on the international monetary system, offers book and economic forums and tours of the institution, and includes a bookstore and giftshop. The IMF Center is open to the general public daily, from Mon-day to Friday.

Selected Fund publications are also avail-able in languages other than English.

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in regional disparities, thanks to the substantial increases in publication rates by emerging market and devel-oping countries in Africa, Asia, the Middle East, and the Western Hemi-sphere. Some Directors attributed these improvements to the enhance-ments introduced at the time of the last review, including the policy of voluntary but presumed publica-tion, while others saw the voluntary approach as continuing to be the key driving force.

Directors noted that more wide-spread publication of Fund docu-ments had been accompanied by a lengthening of the average time lag between the Board discussion and the publication date. They under-scored the time-sensitive nature of country documents and reaffirmed the expectation that documents subject to voluntary but presumed publication be published on a timely basis.

About one-third of country docu-ments were modified through dele-tions or substantive corrections before they were published. Most Directors were concerned about the adverse consequences of extensive document modifications for the timeliness of publication and resource requirements for staff and the authorities, although a few other Direc-tors regarded the resources now dedicated to handling such modifications as commensurate with the importance of the task at hand.

Most Directors were satisfied that increased publication had not led to a significant erosion of candor although, in the view of a few other Directors, the staff paper pro-vided evidence of loss of candor. Directors emphasized the importance of preserving the frankness both of the policy dialogue between Fund staff and member countries and of the information provided in staff reports to the Board. In this regard, several Directors reiterated that member coun-tries must remain assured that the Fund is upholding its primary role as confidential policy advisor and that publi-cation does not undermine confidence in this relationship. They stressed the need for continued monitoring of this issue.

A majority of the Board generally agreed with the staff ’s recommendations for improving timeliness of publication, better preserving candor, and reducing implementation

costs. Specifically, they saw merit in clarifying the criteria and procedures for document modifications and in intro-ducing a number of incentives for prompt publication. Some of these Directors suggested measures going further than those proposed by the staff, based on the view that the staff paper might have underplayed the benefits of greater transparency and overstated the potential trade-off between transparency and candor.

It was agreed that IMF staff would produce a report annu-ally on key trends in the implementation of the trans-parency policy and that the reports would be posted on the IMF’s Web site. The first annual report was issued in February 2006.3

Communications and outreach

The IMF communicates with the public at large and a wide range of more specific nonofficial audiences. These com-

3“Key Trends in Implementation of the Fund’s Transparency Policy” is available at www.imf.org/external/np/pp/eng/2006/013106.pdf.

Executive Directors met in February 2006 to discuss the report of the Task Force on Risk Management. They noted that the Fund’s risk-management environment reflected its unique character and governance structure. They broadly supported the Task Force’s assessment that the Fund’s overall internal control environ-ment displayed many of the prerequisites for a sound risk-management system. Nevertheless, most Directors were of the view that the pres-ent environment could be strengthened further and made more explicit.

The risks faced by the IMF could be seen as falling into four broad categories: strategic, core mission, financial, and operational. Risks in the strategic, core mission, and financial areas are brought to the attention of management and the Board through different mechanisms, including policy reviews by the Board. Directors were concerned that no systematic framework existed for regularly appraising and reporting on operational risks. In addition, they saw value in introducing a comprehensive exercise for gath-ering, synthesizing, and reporting information on risks and controls throughout the Fund.

Directors noted that the IMF should be at the forefront of international developments in risk

management. They observed that, although a number of comparator organizations had begun to develop integrated risk-management programs, most were still at an early stage of implementation. They accepted the Task Force finding that there was no single “best practice” approach to implementing integrated risk-management systems but noted that a set of common principles was emerging that could provide useful benchmarks. Directors agreed on the need to put in place strong and effective mechanisms to manage risk and considered that annual reporting by Fund departments of risks, potential impacts, and existing or planned mitigation measures would strengthen the pres-ent risk-management framework. While recog-nizing that the risk-assessment process needed to be further developed, Directors agreed that the Task Force should develop proposals for modalities for implementing a risk-management framework.

There was broad agreement that the Board should be appropriately involved in the pro-cess of risk management. Further discussions are needed on how this can be done in the most efficient way, including, as one possible option, through the establishment of a Board committee.

Box 9.4 Risk management in the IMF

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munications activities are led by the IMF’s management and External Relations Department (EXR). But, in recent years, staff throughout the organization, together with Executive Directors, have increasingly recognized the need for and value of communication with external audiences as an integral component of the Fund’s operational work. The relative strength of economic and financial systems during FY2006 meant that the Fund was able to focus its communications on a few strategically important issues and, at the same time, to extend its outreach activities to selected nonofficial audiences, especially parliamentary organizations.

The Medium-Term Strategy

The Managing Director presented his Medium-Term Strategy (MTS) for the Fund to the international commu-nity at the September 2005 Annual Meetings. The MTS was subsequently disseminated to policymakers and opinion leaders around the world, sparking a lively public debate about the role of the IMF and the changes needed for it to discharge that role effectively. The debate spanned a wide

range of issues—from global surveil-lance to crisis financing to internal governance. It encouraged frank exchanges about the Fund’s effective-ness in coming to grips with the chal-lenges facing today’s world. And it brought attention to bear on how to ensure that countries were adequately represented and had a fair voice in the decisions made by the Fund.

The Managing Director made the MTS a theme of many speeches, articles, and op-eds during the ensu-ing months. He also engaged in a series of public discussions on the MTS with policymakers and opinion leaders worldwide, including offi-cials, civil society, businesspeople, academics, and journalists in Africa (Equatorial Guinea and Zambia), North America (Mexico and the United States), and Europe (Italy). Legislators played a significant part, too, with a hearing on the IMF in the European Parliament; a parliamen-tary inquiry in the United Kingdom; a report by the Parliamentary Assem-bly of the Council of Europe; and discussions within umbrella orga-nizations such as the Parliamentary Network on the World Bank and the

Commonwealth Parliamentary Association. The ideas that emerged from this outreach and debate helped to shape thinking on the MTS and were reflected in a second report, “Implementing the Medium-Term Strategy,” presented to the IMFC at the 2006 Spring Meetings. Further outreach was planned for FY2007 to support the process of imple-menting the new strategy.

Communication on other issues

With growing international concern over global imbalances, the IMF played a significant role in placing the issues on the table and identifying policy options. The messages conveyed to governments through the Fund’s routine country surveil-lance, which are, for the most part, made public under the Fund’s transparency policy, were increasingly reinforced by public statements made by IMF management and senior staff. A recurring theme in many public speeches, inter-views, and op-eds was the risk that international financial stability could be jeopardized by continued global imbal-ances. In his Annual Meetings address, the Managing Direc-tor summarized the problem pointedly: “[T]he world needs

The IMF and the World Bank have had a productive history of collaboration since they were founded at the Bretton Woods Conference in 1944. In recent years, they have worked jointly in individual countries as well as on such initiatives and issues as the Financial Sector Assessment Program; trade policy; reports on members’ observance of international standards and codes (ROSCs); debt sustainability analysis for low-income countries; the Poverty Reduction Strategy Paper process; growth prospects for low-income countries; donor coordination; and implementation of the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative. But the demarcation between macroeconomic and development issues has become blurred in some of these joint activities, and significant overlaps have developed. Therefore, in March 2006, the Managing Director of the IMF and the President of the World Bank Group launched a review of Fund–Bank collaboration, beginning with the establishment of a six-member Exter-nal Review Committee.

The Review Committee will solicit a representa-tive sample of views from member countries on the nature and practice of Fund-Bank collabo-ration, which has been guided since 1989 by

a formal Concordat.1 The Committee will con-sider whether the Concordat provides a clear foundation for Fund-Bank collaboration as well as whether the areas for which each institution was given responsibility in the Concordat are consistent with its mandate. It will also exam-ine the “lead agency concept” (when the Fund and the Bank work collaboratively, each institu-tion is supposed to take the lead on matters in which it has more expertise).

The Committee is expected to recommend spe-cific improvements to Fund-Bank collaboration on the areas listed above as well as to their collaboration on the policy advice, lending, and technical assistance provided to individual countries. It will also explore how collabora-tion can be tailored to suit the circumstances of different categories of members, such as post-conflict countries, low-income countries, middle-income developing countries, and emerging market economies.

The Committee will present its final report to Fund and Bank management before the end of 2006.

1For details regarding the 1989 Concordat see page 62, www.imf.org/external/pubs/ft/history/ 2001/ch20.pdf.

Box 9.5 Enhancing IMF–World Bank cooperation

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to move away from a pattern of growth where investment in most of Asia is too low, and high consumption in the United States is financed by rapidly increasing debt, and where growth of domestic demand in Europe and Japan is too weak. New risks—and new imbalances—are caused by higher oil prices.”

During 2005, international attention came to bear on the plight of the world’s poorest people, and the progress made toward achieving the United Nations Millennium Development Goals (MDGs). The IMF participated in this international dialogue, consistently advocating trade reform and increased aid flows as means of helping low-income countries achieve their objectives. The international com-munity made new commitments to increase resource flows to help reduce poverty. The IMF responded to a proposal by the Group of Eight to cancel debt to some multilateral organizations by designing the Multilateral Debt Relief Initiative, and implementing it for a first group of 19 low-income countries (see Chapter 6). In the subsequent months, the IMF began to focus its policy dialogue and out-reach on discussions with governments and other audiences on how countries could make the best use of the new flow of resources from aid and debt relief. This issue of “scaling up” was the focus of an international roundtable in Zambia attended by finance ministers, civil society, legislators and press. A workshop in Washington, D.C. also addressed this issue (see Box 6.2).

Several issues recurred frequently in dialogue with the Fund’s critics and interlocutors. Prominent among these was the criticism that the IMF’s policy advice frequently leads governments to curtail essential social expenditures, thereby slowing poverty reduction. Concerns over poor governance, especially corruption, arose in a number of countries that were supported by use of Fund resources, with the assertion that the IMF was not doing enough to counter them. Fund management and staff take every opportunity to rebut such criticisms, often quite force-fully, using speeches, seminars, articles, letters to the editor, material posted on the IMF’s Web site, and direct interaction with civil society organizations. Other issues that are being raised with increasing frequency include the Fund’s attitude toward human rights and workers’ rights.

Country and regional perspective

Consistent with the trend identified in the Executive Board’s last review of the Fund’s external communications strategy,4

country teams, particularly resident representatives, are

4The staff paper discussed by the Board is available at www.imf.org/external/np/exr/docs/2005/020805.htm; the summary of the Board discus-sion can be found at www.imf.org/external/np/sec/pn/2005/pn0534.htm.

increasingly building outreach into their work programs. This may include direct interaction with the media, such as press briefings, interviews, or written statements. An increasing number of country teams are using op-eds to convey targeted explanations of policy to wider audiences, a significant example being the placement of articles on reform priorities in Europe in a number of newspapers in the region. Other outreach includes in-country interaction with civil society organizations and legislators as a means of, among other things, understanding the views of civil society and building consensus and ownership of policies. In low-income countries, the participatory nature of the Poverty Reduction Strategy process creates an expectation that governments will consult with civil society, and IMF staff are often invited to participate.

The Fund’s outreach at a regional level received an impor-tant boost from the reception accorded the Regional Eco-nomic Outlooks. The briefings and seminars for the press, academics, market participants, and government officials have received good coverage and are an important means of enhancing the Fund’s regional surveillance. Other regional outreach was often conducted in parallel; for instance, in November 2005, IMF officials visited five Central American countries to present the Regional Economic Outlook and IMF Occasional Paper No. 243, Central America: Global Integration and Regional Cooperation, to local audiences.

The IMF collaborates with the World Bank and many other interna-tional and regional agencies in a variety of areas, including improv-ing the governance of member countries to enable them to better implement policies that will enhance their growth prospects, lead to sustainable development, and reduce poverty.

In a meeting in February 2006, officials from the IMF, the African Development Bank, the Asian Development Bank, the Inter-American Development Bank, the European Investment Bank, the European Bank for Reconstruction and Development, and the World Bank agreed on the need to standardize the definition of corruption, improve the consistency of investigative rules and procedures, strengthen informa-tion sharing, and assure that compliance and enforcement actions taken by one institution are supported by the others.

The institutions also agreed to work together to develop concrete proposals to help countries strengthen their capacity to combat cor-ruption and improve cooperation with civil society and other stake-holders and institutions, such as the press and the judiciary, in order to enhance transparency and accountability over the long term.

A task force was established to report bimonthly on progress in the development of a uniform Framework for Preventing and Combating Fraud and Corruption, with the goal of concluding an agreement by the September 2006 Annual Meetings of the World Bank Group and the IMF.

Box 9.6 A common approach to fighting corruption

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The forums, organized by the IMF and five leading aca-demic institutions, were attended by some 1,000 people, including government officials, academics, media, nongov-ernmental organizations, private sector representatives, and students.

In connection with the publication of the World Economic Outlook in September 2005, the IMF’s European Depart-ment organized outreach events in western and eastern Europe aimed at reinforcing the WEO’s messages in a regional context. Presentations focusing on progress in employment creation and the need to overcome structural rigidities were made in Brussels and Brugge to two think tanks and an academic institution, and interviews were given to newspapers. In presentations and in media contacts in Warsaw and Budapest, IMF staff highlighted the impact of global imbalances and oil prices on the economies of the newest EU member states and discussed policies needed to reduce regional vulnerabilities such as large fiscal imbal-ances and rapid credit growth.

A group of 17 academics from Latin America visited the IMF in April 2006 to discuss the region’s economic pros-pects and the MTS. Seminar participants exchanged ideas and points of view with the Managing Director, the First Deputy Managing Director, and other senior IMF offi-cials. In welcoming the IMF’s communications efforts, the academics expressed the need to build stronger ties with international organizations to enable the academic com-munity to participate more actively in economic policy debates. During the discussions, they stressed the urgency of working toward policy continuity despite electoral turnover and encouraged the IMF to have a closer dia-logue with political parties to help bring a wider consen-sus on policy priorities.

Outreach to legislators

The IMF has expanded its outreach to legislators in recent years in accordance with the high priority given to this activity by both management and the Executive Board, and resources have been targeted to this activity. The following are some of the highlights of FY2006:

Legislators and journalists from six Central American countries and the Dominican Republic met in San José, Costa Rica, in May 2005 with IMF management and senior staff to discuss their countries’ policy priorities and the importance of greater integration and coopera-tion for the region.

In November 2005, the IMF, in cooperation with the Par-liament of Morocco, organized a seminar for legislators from Algeria, Libya, Morocco, and Tunisia to discuss how to achieve stronger economic growth and higher employ-ment and, thus, faster poverty reduction.

The Fund organized a regional seminar for legislators from Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, and Serbia and Montenegro at the Joint Vienna Institute in September 2005, and another for legislators from Moldova, the Kyrgyz Repub-lic, and Tajikistan in April 2006. Both seminars were aimed at increasing mutual understanding of macroeco-nomic issues.

Administrative and capital budgets

The IMF’s administrative budget, covering the period May 1 through April 30, provides the financial resources to meet personnel costs, travel, and other recurrent expendi-tures. The IMF’s net administrative expenditures (defined as gross expenditures less receipts5) are funded from its operational income, which includes charges on the use of Fund resources. The rate of charge depends mainly on the income outlook—itself determined largely by the level of Fund credit outstanding and the SDR interest rate (see Chapter 8).

The IMF’s capital budget provides funds for capital proj-ects starting in the forthcoming financial year, within an approved three-year capital plan that covers all new capital projects scheduled to start in each of those years. Capital appropriations are available to projects for a period of three years; funds unused by the end of the three-year period lapse.

Budgets and actual expenditures in FY2006

The IMF’s administrative budget for the financial year that ended April 30, 2006 (FY2006) authorized total gross expenditures of $937 million ($876.1 million net of receipts). The FY2006 capital budget made provision for expenditures of $52.5 million over three years on new proj-ects commencing in FY2006, of which $28.5 million was provided for building facilities and $24 million for informa-tion technology (IT) projects.

The FY2006 administrative and capital budgets were formulated as transitional in nature, in light of the then still evolving Medium-Term Strategy (MTS) and pend-ing reviews covering some 75 percent of administrative expenditures, including the employment, compensation, and benefits framework and IT systems. Relative to the previous financial year, gross administrative expenditures were held constant in real terms, while the capital plan included only high-priority security projects and essential IT backup facilities, in part by rephasing or delaying other

5Receipts are mainly in the form of external donor contributions for tech-nical assistance to, and training of officials from, member countries.

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capital projects. With the completion of the Headquarters 2 (HQ2) building, no further major building works were planned.

The outturn on the administrative budget for FY2006 amounted to $930.3 million on a gross basis, $6.7 million (0.7 percent) less than budgeted. Receipts were almost $5 million lower than was estimated in setting the FY2006 net budget; the outturn was some $1.7 million (0.2 percent) below the net administrative budget.

A number of factors underpinned the gap between the FY2006 gross budget and outturn. Relative to estimates when the budget was set, staffing levels and building and other costs were lower, airfares rose by less, and a number of externally financed projects were delayed. The combined effect of these factors more than outweighed the budget-ary impact of higher-than-projected spending on medical and retirement benefits. Further information on the actual expenditures of the administrative budgets for FY2004 through FY2006 and budgeted expenditures for FY2007 is provided in Table 9.1.

The small underrun on overall gross administrative expenditures is reflected in lower-than-planned use of resources in the delivery of some of the Fund’s outputs.

The interpretation of the data on the allocation of resources to the delivery of specific outputs, however, is complicated by the introduction of the new Time Reporting System (TRS), which limits comparisons with the figures for earlier years.

Nonetheless, the information available suggests that the share of resources devoted to bilateral and regional surveillance was slightly higher than anticipated when departmental business plans were drawn up. With fewer active Fund programs than anticipated, the share of resources devoted to such work was below planned levels. Policy development, research, and the operation of the international monetary system accounted for a larger share of total administrative resources than planned, which was related, in part, to the development of the Fund’s MTS. Finally, work on capacity building accounted for a slightly smaller share of admini-strative resources than planned because of delays in the implemen-tation of some large, externally

financed technical assistance projects.

Total capital spending in FY2006 was within the budget for projects approved during FY2004–06. Of the $47.9 million in total capital spending, $21 million was for building facili-ties and $26.9 million for IT projects.

Medium-term budget, FY2007–09In preparation for the FY2007 budget, the Fund undertook further reform of its budgetary systems.

A new medium-term budget framework (MTBF) was developed, and the first formal medium-term budget for the Fund is being introduced in FY2007. The new archi-tecture of the medium-term administrative budget and the resulting changes to the Fund’s budgetary practices are described in Boxes 9.7 and 9.8, respectively.

Beginning in FY2007, a dollar budget allocation and monitoring framework is being introduced for the Office of the Executive Directors as a whole, with indicative dol-lar budgets for individual Executive Directors’ offices.

Further reforms are planned, including the introduction in FY2008 of performance indicators for the delivery of cer-tain Fund services.

Table 9.1 Administrative budgets, FY2004–071

(In millions of U.S. dollars)

Financial year Financial year Financial year Financial year Financial year ended ended ending ended ending

April 30, 2004: April 30, 2005: April 30, 2006: April 30, 2006: April 30, 2007: Actual expenses Actual expenses Budget Actual expenses Budget

Administrative budgetPersonnel expenses

Salaries 355.9 375.2 394.7 392.6 404.3Benefits and other

personnel expenses 200.3 259.52 263.9 273.9 291.7Subtotal 556.2 634.7 658.6 666.6 696.0

Other expensesTravel 91.5 90.2 99.4 94.2 99.4Buildings and other expenses 158.4 167.3 177.9 169.6 178.8Subtotal 249.9 257.5 277.4 263.8 278.2

Contingency reserve 0.0 0.0 1.0 0.0 1.0Other expenses 0.0 0.0 0.0 0.0 5.03

Total administrative budget (gross) 806.1 892.2 937.0 930.34 980.2

Receipts (58.5) (66.1) (60.9) (56.0) (68.3)5

Total administrative budget (net) 747.6 826.1 876.1 874.4 911.9

Note: Figures may not add up to totals because of rounding.1Administrative budgets as approved by the Board for the financial years ending April 30, 2006, and April 30, 2007, compared with actual expenses for the financial years ended April 30, 2004; April 30, 2005; and April 30, 2006.

2As part of the FY2005 budget, the Board agreed to normalize the annual budgetary contribution to the Staff Retirement Plan (SRP) at a rate of 14 percent of gross remuneration. This resulted in a $48 million step increase in the contribution to the SRP.

3Additional budgetary costs associated with holding the 2006 Annual Meetings in Singapore.4These figures incorporate an advance payment of $8 million to the Staff Retirement Plan (SRP) service credits. The SRP service credits, approved by the Executive Board in December 2002, permitted SRP participants to purchase service credits for periods of prior Fund contractual or other employment.

5Central estimate.

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On the basis of this revised approach, on April 28, 2006, the Executive Board approved the FY2007–09 medium-term administrative and capital budgets, introducing the first three-year administrative budget for the Fund.6 The Board approved a net administrative budget for FY2007 of $911.9 million, a limit on gross expenditures for FY2007 of $987.1 million (based on the upper range of the esti-mate for receipts of $75.2 million), and appropriations for capital projects beginning in FY2007 of $48.1 million. The Board also took note of the indicative net administrative budgets of $929.6 million and $952.8 million for FY2008 and FY2009, respectively, and the three-year capital plan of $141 million.

The budgets approved by the Executive Board will lead to a small reduction in the size of the real administrative resource envelope of the Fund over the medium term and mark the beginning of a downward trend in the capital budget. There will be zero real growth in the FY2007 admin-istrative budget; for FY2008 and FY2009 there will be a 1 percent real reduction in each year (measured against an external price index). Notwithstanding the declining real resource envelope, the approved medium-term budget is designed to deliver the Fund’s existing mandate and—on a budget-neutral basis—the changes flowing from initiatives approved under the Fund’s MTS over FY2007–09. The goal is to sustain the quantity and quality of the Fund’s outputs through enhanced productivity and other measures to

6The budget document can be accessed electronically at www.imf.org/external/np/pp/eng/2006/033106.pdf.

increase efficiency. Moreover, a series of targeted exercises will be undertaken in FY2007 to examine the Fund’s service delivery model in specific areas, with the aim of identifying how Fund services to member countries and the global com-munity can be delivered more efficiently and at a lower cost.

As noted above, the Board approved appropriations of $48.1 million for capital projects beginning in FY2007 ($4.4 million less than in FY2006), and a capital plan for FY2007–09 of $141 million ($7.3 million less than in FY2006–08). This marks a decline in planned capital spend-ing, which is expected to continue over the medium term. The lower planned capital spending reflects the completion of several one-off projects, including the HQ2 building and a number of security measures.

Human resources

The Managing Director appoints a staff whose sole respon-sibility is to the IMF. The efficiency and technical compe-tence of the IMF staff are expected to be, as stated in the Articles of Agreement, of the “highest standards.” Subject to “the paramount importance” of securing such standards, staff diversity should reflect the institution’s membership, with “due regard to the importance of recruiting personnel on as wide a geographical basis as possible.”

The goals of the IMF require that all who work for the institution observe the highest standards of ethical conduct, consistent with the values of integrity, impartiality, and dis-cretion, as set out in the IMF Code of Conduct and its Rules and Regulations. In accordance with these high standards, the IMF relies on a financial certification and disclosure process for staff and other internal controls to prevent actual or perceived conflicts of interest.

The framework for human resource management in the Fund reflects efforts over many years to adopt best practices from other institutions, while ensuring that they are con-sistent with the mission of the institution and the objective of maintaining the quality and diversity of its staff. This framework has served the Fund well but in recent years has been showing signs of strain in the face of changes in the external environment, related changes in the work of the Fund, and demographic trends.

Against this background, the Managing Director set in motion a comprehensive review of the Fund’s employment framework, compensation, and benefits in the summer of 2004. A Steering Committee of senior staff was appointed by management to oversee the conduct of the review. An external consulting firm was hired to conduct an indepen-dent examination of current plan designs and practices and make recommendations. Its report was submitted to man-agement and made available to the Executive Board and

The new MTBF is designed to improve the IMF’s budget architecture. The principal change is a greater focus on the net budget in order to strengthen the link between the administrative budget and its financing through the Fund’s operational income. This requires Board approval of an annual net administrative budget based on a central (baseline) estimate of receipts, and a separate upper limit on gross expenditures based on a higher estimate of receipts. This arrange-ment recognizes the practical difficulties in projecting the availability and use of external financing for capacity-building work in any year; at the same time, it caps gross expenditures and hence the overall size of the institution.

Under the MTBF, in addition to an annual budget appropriation, there are indicative budget limits for the outer two years. Both the MTBF and departmental business plans will be updated annually on a three-year rolling basis.

An external price index is used in setting the nominal budget enve-lope. The index has been constructed as a weighted average of changes in external indices of personnel (70 percent) and nonper-sonnel (30 percent) costs.

Box 9.7 The new medium-term budget framework (MTBF)

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Fund staff in July 2005. Following extensive consultations with stake-holders, proposals for change were considered by the Executive Board in the first few months of 2006, culmi-nating with final agreement in April 2006 on a package of reforms.

Executive Board discussion of these issues underscored two overarch-ing objectives for human resource management in the Fund: first, to attract and retain an international staff of the highest quality, with a mix of skills and experience that will enable the Fund to fulfill its evolv-ing mandate; and, second, to man-age staff efficiently and effectively, in an environment that rewards excellence, fosters teamwork, and promotes cohesiveness, fairness, and diversity—including geographic diversity. With these objectives in mind, the Executive Board adopted a number of changes in human resources (HR) systems that aim to increase the flexibility of the employ-ment framework, strengthen per-formance and career management, simplify the salary-setting mecha-nism while linking internal pay rela-tivities more closely to comparator markets, and streamline and make more flexible benefits provided to expatriate staff.

As of December 31, 2005, the IMF employed 1,999 profes-sional and managerial staff (about two-thirds of whom were economists) and 694 staff at the assistant level. In addition, the IMF had 449 contractual employees on its payroll, includ-ing technical assistance experts, interns, special appointees, and other short-term employees not subject to the staff ceiling. Of the IMF’s 184 member countries, 141 were rep-resented on the staff. (See Table 9.2 for the evolution of the nationality distribution of IMF professional staff since 1980.)

Changes in management

There were no changes in the IMF’s management team in FY2006. The Managing Director, Rodrigo de Rato, was appointed for a five-year term, which began on June 7, 2004. A national of Spain, Mr. de Rato was Minister of Economy and Vice President for Economic Affairs during 2000–04, prior to which he served as Spain’s Minister of Economy and Finance.

Strategy. The Fund’s Medium-Term Strategy will underpin departmental business plans. These plans will now be drawn up on a rolling three-year basis rather than annually.

Executive Board decisions. The Executive Board previously approved gross and net bud-gets along with a staff position ceiling. Under the new medium-term budget framework, the Board approves an annual net administrative budget and a gross expenditure limit based on an upper estimate for receipts.

The Fund’s outputs. The delivery of the Fund’s main services to member countries and the global community has been reclassified to four key output areas with 12 constituent outputs.

The resources provided under the central FY2007 gross budget estimate will be allo-cated to the four key output areas (Figure 9.1); in future years, the intention is to allocate the resources down to the level of the 12 constitu-ent outputs. The table below describes the new classification of outputs for the Fund.

Reporting and accountability. The reporting and accountability mechanisms have been strengthened to include monthly reports to management on inputs, quarterly reports to the Executive Board on inputs and outputs, annual reports from department heads to management on the delivery of departmental business plans, and annual reports from management to the Executive Board on the delivery of the strategy.

Box 9.8 Main changes in the Fund’s budgetary practices

Key output areas Outputs

Global monitoring Oversight of the international monetary system Multilateral surveillance Cross-country statistical information and methodologies General research General outreach

Country-specific and regional monitoring Bilateral surveillance Regional surveillance Standards and codes and financial sector assessments

Country programs and financial support Generally available facilities Facilities specific to low-income countries

Capacity building Technical assistance External training

Figure 9.1 Indicative share of resources by keyoutput areas, FY2007

(As percent of gross administrative budget)

Capacity building25%

Global monitoring15%

Country-specific andregional monitoring

33%

Country programs andfinancial support

27%

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In April 2006, the First Deputy Managing Director, Anne O. Krueger, announced her intention to resign from the IMF in August 2006 after five years of service. The IMF’s Executive Board subsequently approved Mr. de Rato’s nomination of John Lipsky, the Vice Chairman of the JPMorgan Invest-ment Bank, to succeed Ms. Krueger as the IMF’s next First Deputy Managing Director. Mr. Lipsky, a U.S. national, worked at the IMF from 1974 to 1984.

Recruitment and retention

In 2005, 173 people joined the IMF staff, compared with 178 in 2004. The new recruits were 92 economists, 33 pro-fessionals in other specialized career streams, and 48 assis-tants. Fifty-six of the recruits were mid-career economists,7

and 36 entered the two-year Economist Program, which is designed to familiarize entry-level economists with the work of the IMF. Participants in the program are placed in two different departments, for 12 months each. Those who perform well are offered regular staff appointments.

During 2005, 193 staff members, 136 of whom were in professional and managerial grades, separated from the organization. The separation rate for these staff was 7.0 percent.

7The total number of mid-career economists hired in 2005 include 53 staff members at levels A9–A15 and 3 at levels B1–B5.

Salary structure

To recruit and retain the highly qualified staff it needs, the IMF’s compensation and benefits system is designed to be internationally competitive, to reward performance, and to take account of the special needs of a multinational and largely expatriate staff. A new compensation system went into effect on May 1, 2006. Under the new system, annual compensation reviews will be conducted, and annual adjustments to the salary structure will be made, on a three-year cycle. In the first year of the cycle, the IMF’s staff salary structure is adjusted on the basis of a com-parison with salaries paid by selected private financial and industrial firms in the United States, France, and Germany, and in representative public sector agencies, mainly in the United States. In the intervening years, the structural adjustments will be made based on an index of private and public sector salary increases in the United States. FY2007 represents the first year under the new system. After analy-ses of updated comparator salaries, the Board approved an overall adjustment of –0.4 percent. This adjustment represents the combined impact of (1) change in the defi-nition of markets (for example, allocating more weight to the public sector); and (2) market salary developments in 2005–06. The new Fund payline also achieves a closer relationship with the U.S. comparator market by tilting upward at the upper grades and downward at the lower grades. As a transitional measure for FY2007, the Board approved a general merit budget of 2.5 percent to allow scope for salary increases for staff. In addition, the Board approved a supplementary allocation of 2 percent to staff in Grades A14–B5 to allow the upward shift in the Fund payline to also be reflected in the salaries of individual staff (Table 9.3).

Management remuneration

Reflecting the responsibilities of each management position and the relationship between the management and staff salary structures, the salary structure for management as of July 1, 2005, is as follows:

Managing Director $391,4408

First Deputy Managing Director $340,380

Deputy Managing Directors $324,170

Management remuneration is reviewed periodically by the Executive Board; the Managing Director’s salary is approved by the Board of Governors. Annual adjustments are made on the basis of the Washington, D.C., consumer price index.

8In addition, a supplemental allowance of $70,070 is paid to cover expenses.

Table 9.2 Distribution of professional and managerial staff by nationality1

(In percent)

Region2 1980 1990 2005

Africa 3.8 5.8 6.0

Asia 12.3 12.7 15.5Japan 1.4 1.9 1.8Other Asia 10.9 10.8 13.7

Europe 39.5 35.1 35.5France 6.9 5.5 4.7Germany 3.7 4.3 5.3Italy 1.7 1.4 2.9United Kingdom 8.2 8.0 5.3Transition economies — — 5.3Other Europe 19.0 15.9 12.1

Middle East 5.4 5.5 4.4

Western Hemisphere 39.1 41.0 38.6Canada 2.6 2.8 3.6United States 25.9 25.9 23.4Other Western Hemisphere 10.6 12.3 11.7

Total 100.0 100.0 100.0

1Includes staff in Grades A9-B5.2Regions are defined broadly on the basis of the country distribution of the IMF’s area departments; beginning in 2004, regions are defined according to the country groupings in the 2004 Diversity Annual Report. The European region includes Russia and countries of the former Soviet Union. The Middle East region includes countries in North Africa.

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Executive Board remuneration

Upon the recommendation of the Board of Governors’ Committee on the Remuneration of Executive Directors, the Governors approved increases of 3.9 percent in the remuneration of Executive Directors and their Alternates effective July 1, 2005.9 The remuneration of Executive

9In determining the salary adjustments for Executive Directors, the com-mittee took into consideration such things as the percentage change in the remuneration of the highest-level civil servant in the ministry of finance and central bank of selected member countries, and the change in the selected countries’ consumer price index.

Directors is $204,400; the remuneration of Alternate Execu-tive Directors is $176,810.10

Diversity

The IMF has continued to emphasize the importance of staff diversity in improving the IMF’s effectiveness as an international institution. The diversity of its staff is a source of strength for the institution. The IMF recognizes that the membership must have at its service individuals who understand, through their professional experience and training, a wide range of policymaking challenges that confront country officials and who can offer policy advice appropriate to the circumstances of each of the 184 mem-ber countries.

To enable the IMF to recruit and retain an internation-ally diverse staff, the institution has in place a diversity strategy grounded in the principle of inclusion, quantita-tive and qualitative benchmarks, regular monitoring, and mainstreaming of diversity into the Fund’s daily work. The institution actively seeks candidates from all over the world and has in place various programs that ease the integration of new staff into the working culture of the institution. The IMF places strong emphasis on people management skills, which are of particular importance in an institution with a diverse workforce. Management receives regular updates on quantitative and qualitative benchmarks for the most underrepresented staff groups, as established in the 2003 Enhanced Diversity Action Plan. Notable progress has been achieved in the recruitment and promotion of several underrepresented staff groups, but more has to be done to establish gender and regional balance in all grades (Tables 9.2, 9.4, and 9.5). In line with the IMF’s diversity strategy, the Human Resources Depart-ment continues to focus on integrating diversity into human-resource-management policies, procedures, and practices.

The IMF is establishing a Diversity Council to further elevate the internal dialogue on diversity and to advance the diversity agenda. Chaired by a member of the management team, the Diversity Council will bring together the key stakeholders for the purposes of developing a common understanding of issues and guiding the Fund’s diversity efforts. This initiative builds on the creation in 1995 of the position of Diversity Advisor, with a mandate to help strengthen, manage, and monitor diversity in the Fund. Promoting and sustaining diversity of staff in any institution is a continuing challenge that requires concerted effort. Progress is monitored and problems are reported in a transparent manner in various

10 These figures do not apply to the U.S. Executive Director and Alternate Executive Director, who are subject to U.S. congressional salary caps.

Table 9.3 IMF staff salary structure

(In U.S. dollars, effective May 1, 2006)

Range RangeGrade1 minimum maximum Illustrative position titles

A1 25,110 37,670 Not applicable (activities at this level have been outsourced)

A2 28,110 42,170 Driver

A3 31,470 47,210 Staff Assistant (clerical)

A4 35,260 52,900 Staff Assistant (beginning secretarial)

A5 39,530 59,290 Staff Assistant (experienced secretarial)

A6 44,210 66,310 Administrative Assistant, other Assistants (for example, Editorial, Computer Systems,

Human Resources, External Relations)

A7 49,550 74,330 Research Assistant, Senior Administrative Assistant, other Senior Assistants (for example, Accounting, Human Resources, Editorial, External Relations)

A8 55,510 83,270 Senior Administrative Assistant

A9 56,480 84,720 Librarian, Translator, Research Officer, Human Resources Officer, External Relations Officer

A10 64,800 97,200 Accountant, Research Officer, Administrative Officer

A11 73,940 110,920 Economist (Ph.D. entry level), Attorney, Specialist (for example, Accounting, Computer Systems, Human Resources, External Relations)

A12 84,880 127,320 Economist, Attorney, Specialist (for example, Accounting, Computer Systems, Human Resources, External Relations)

A13 96,720 145,080 Economist, Attorney, Specialist (for example, Accounting, Computer Systems, Human Resources, External Relations)

A14 112,480 168,720 Deputy Division Chief, Senior Economist

A15/B1 128,080 192,120 Division Chief, Deputy Division Chief

B2 149,630 216,970 Division Chief, Advisor

B3 177,770 231,090 Assistant Department Director

B4 204,720 261,420 Deputy Department Director, Senior Advisor

B5 238,160 298,660 Department Director

Note: Because IMF staff other than U.S. citizens are usually not required to pay income taxes on their IMF compensation, the salaries are set on a net-of-tax basis, which is generally equivalent to the after-tax take-home pay of the employees of the public and private sector firms from which IMF salaries are derived.1Grades A1–A8 are support staff; grades A9–A15 are professional staff; and grades B1–B5 are managerial staff.

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formats—including the Diversity Annual Report—on the IMF Web site. The Diversity Advisor also has ready access to the Managing Director and the management team. Work-ing closely with the Human Resources Department and other departments, the Diversity Advisor helps to identify needs and opportunities for promoting diversity in each department’s annual human resources plan, which provides a business-relevant and systematic framework for the IMF’s diversity efforts. Typically, departmental and Fund-wide diversity actions include initiatives in recruitment and career planning, orientation and mentoring for newcomers, and measures to improve performance assessment and manage-ment selection and development. The Fund is making special efforts to increase the transparency of human resource poli-cies, procedures, and statistics.

Organization

The IMF staff is organized mainly into departments with regional (or area), functional, information and liaison, and support responsibilities (Figure 9.2). These departments are headed by directors who report to the Managing Director.

Area departments

The five area departments—African, Asia and Pacific, European, Middle East and Central Asia, and Western Hemisphere—advise management and the Executive Board on economic developments and policies in countries in their regions. Their staffs are also responsible for putting together financial arrangements to support members’ economic reform programs and for reviewing performance under these IMF-supported programs. Together with relevant functional departments, they provide member countries with policy advice and technical assistance, and maintain contact with regional organizations and multilateral institutions in their geographic areas. Supplemented by staff in functional depart-ments, area departments carry out much of the IMF’s coun-try surveillance work through direct contact with member countries. In addition, 87 area department staff are assigned to members as IMF resident representatives (Box 9.9).

Functional and special services departments

The Finance Department is responsible for mobilizing, managing, and safeguarding the IMF’s financial resources

Table 9.5 Distribution of staff by developing and industrial countries

1990 20051_______________________ _______________________

Staff Number Percent Number Percent

All staff 1,774 100.0 2,693 100.0Developing countries 731 41.2 1,186 44.0Industrial countries 1,043 58.8 1,507 56.0

Total support staff2 642 100.0 694 100.0Developing countries 328 51.1 386 55.6Industrial countries 314 48.9 308 44.4

Total professional staff3 897 100.0 1,641 100.0Developing countries 343 38.2 690 42.0Industrial countries 554 61.8 951 58.0

Total economists 529 100.0 1,024 100.0Developing countries 220 41.6 448 43.7Industrial countries 309 58.4 576 56.3

Total specialized career streams 368 100.0 617 100.0Developing countries 123 33.4 242 39.2Industrial countries 245 66.6 375 60.8

Total managerial staff4 235 100.0 358 100.0Developing countries 60 25.5 110 30.7Industrial countries 175 74.5 248 69.3

Total economists 184 100.0 293 100.0Developing countries 54 29.3 91 31.1Industrial countries 130 70.7 202 68.9

Total specialized career streams 51 100.0 65 100.0Developing countries 6 11.8 19 29.2Industrial countries 45 88.2 46 70.8

1Includes only staff on duty; differs from the number of approved positions.2Staff in Grades A1–A8.3Staff in Grades A9–A15.4Staff in Grades B1–B5.

Table 9.4 Distribution of staff by gender1980 1990 20051

_____________________ _____________________ ____________________

Number Percent Number Percent Number Percent

All staff 1,444 100.0 1,774 100.0 2,693 100.0Women 676 46.8 827 46.6 1,237 45.9Men 768 53.2 947 53.4 1,456 54.1

Total support staff2 613 100.0 642 100.0 694 100.0Women 492 80.3 540 84.1 601 86.6Men 121 19.7 102 15.9 93 13.4

Total professional staff3 646 100.0 897 100.0 1,641 100.0Women 173 26.8 274 30.5 580 35.3Men 473 73.2 623 69.5 1,061 64.7

Total economists 362 100.0 529 100.0 1,024 100.0Women 42 11.6 70 13.2 257 25.1Men 320 88.4 459 86.8 767 74.9

Total specializedcareer streams 284 100.0 368 100.0 617 100.0

Women 131 46.1 204 55.4 323 52.3Men 153 53.9 164 44.6 294 47.7

Total managerial staff4 185 100.0 235 100.0 358 100.0Women 11 5.9 13 5.5 56 15.6Men 174 94.1 222 94.5 302 84.4

Total economists 99 100.0 184 100.0 293 100.0Women 4 4.0 9 4.9 33 11.3Men 95 96.0 175 95.1 260 88.7

Total specializedcareer streams 86 100.0 51 100.0 65 100.0

Women 7 8.1 4 7.8 23 35.4Men 79 91.9 47 92.2 42 64.6

1Includes only staff on duty; differs from the number of approved positions.2Staff in Grades A1–A8.3Staff in Grades A9–A15.4Staff in Grades B1–B5.

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(As of April 30, 2006)

Joint IMF–World BankDevelopmentCommittee

International Monetaryand Financial Committee Board of Governors

IndependentEvaluation OfficeExecutive Board

Managing Director––––––––––––––––––––––

Deputy ManagingDirectors

Office ofBudget

and Planning

InvestmentOffice–Staff

Retirement Plan

Office of Internal Audit and Inspection

Office of Technical Assistance

Management

AfricanDepartment

Asia and PacificDepartment

EuropeanDepartment

Middle East and Central AsiaDepartment

Finance Department

Fiscal Affairs Department

International Capital Markets

Department1

Legal Department

Monetary and Financial Systems

Department1

StatisticsDepartment

Policy Development and

Review Department

Research Department

External Relations Department

Regional Office for Asia and the Pacific2

Fund OfficeUnited Nations2

Human Resources Department

Secretary’sDepartment

Technology andGeneral Services

Department

Area Functional and special Information Supportdepartments services departments and liaison services

Joint Africa Institute

Joint Vienna Institute

Singapore Training Institute

IMFInstitute

Western Hemisphere Department

Offices in Europe(Paris,

Brussels, Geneva)

Figure 9.2 IMF organization chart

1The International Capital Markets Department and the Monetary and Financial Systems Department will be merged in FY2007.

2Attached to the Office of the Managing Director.

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to ensure that they are deployed in a manner consistent with the Fund’s mandate. This entails major responsibili-ties for the institution’s financial policies and for the con-duct, accounting, and control of all financial transactions. In addition, the department helps safeguard the IMF’s financial position by assessing the adequacy of the Fund’s capital base (quotas), net income targets, precautionary balances, and the rates of charge and remuneration. Other responsibilities include investing funds in support of assistance to low-income countries and conducting assess-ments of financial control systems in borrowing members’ central banks.

The Fiscal Affairs Department is responsible for activities involving public finance in member countries. It partici-pates in area department missions, particularly with respect to the analysis of fiscal issues; reviews the fiscal content of IMF policy advice, including in the context of IMF-sup-ported adjustment programs; helps countries draw up and implement fiscal programs; and provides technical assis-tance in public finance. It also conducts research and policy studies on fiscal issues, including tax policy and revenue administration, as well as on income distribution and pov-erty, social safety nets, public expenditure policy issues, and the environment.

As part of the IMF’s efforts under the Medium-Term Strategy to strengthen its work on financial surveillance, the Interna-tional Capital Markets Department is being merged with the

Monetary and Financial Systems Department (see below) early in FY2007. During FY2006, the department assisted the Executive Board and management in overseeing the international monetary and financial system and enhanced the IMF’s crisis prevention and crisis management activities. It also prepared the semiannual Global Financial Stability Report, assessing developments in international capital mar-kets. Staff members liaised with private capital market partic-ipants, national authorities, and official forums dealing with the international financial system. In addition, the depart-ment played a leading role in the IMF’s analytical work and advice to members on access to international capital markets and on strategies for external debt management.

The IMF Institute provides training for officials of member countries—particularly developing countries—in such areas as financial programming and policy, external sec-tor policies, balance of payments methodology, national accounts and government finance statistics, and public finance (see Chapter 7). The Institute also conducts an active program of courses and seminars in economics, finance, and econometrics for IMF economists.

The Legal Department advises management, the Execu-tive Board, and the staff on the applicable rules of law. It prepares most of the decisions and other legal instruments necessary for the IMF’s activities. The department serves as counsel to the IMF in litigation and arbitration cases, provides technical assistance on legislative reform, assesses the consistency of laws and regulations with selected inter-national standards and codes, responds to inquiries from national authorities and international organizations on the laws of the IMF, and arrives at legal findings regarding IMF jurisdiction on exchange measures and restrictions.

As mentioned above, the Monetary and Financial Systems Department and the International Capital Markets Depart-ment are being merged in early FY2007 to strengthen the IMF’s work on financial surveillance. During FY2006, the department engaged in four operational areas—financial system surveillance (including the Financial Sector Assess-ment Program and Article IV consultations), banking supervision and crisis resolution, monetary and exchange rate infrastructure and operations, and technical assistance. It provided analytical, operational, and technical support to member countries and area departments, including development and dissemination of good policies and best practices. An important role was coordinating with col-laborating central banks, supervisory agencies, and other international organizations.

The Policy Development and Review Department (PDR)plays a central role in the design and implementation of the IMF’s policies related to surveillance and the use of the IMF’s financial resources. Through its review of coun-

At the end of April 2006, the IMF had 87 resident representative positions covering 92 member countries in Africa, Asia, Europe, the Middle East, and the Western Hemisphere. New offices were opened in Burundi, Liberia, Paraguay, the Republic of Congo, Sierra Leone, and Sudan. These posts—usually filled by one IMF employee sup-ported by local staff—enhance IMF policy advice and are often set up in conjunction with a reform program. The representatives, who typi-cally have good access to key national policymakers, can bring major benefits to the quality of IMF country work. In particular, through their professional expertise and deeper familiarity with local condi-tions, resident representatives contribute to the formulation of IMF policy advice, monitor performance—especially under IMF-supported programs—and coordinate technical assistance. They can also alert the IMF and the host country to potential policy slippages, provide on-site program support, and play an active role in IMF outreach in member countries. Since the advent of enhanced initiatives for low-income countries, resident representatives have helped members develop their Poverty Reduction Strategies (see Chapter 6) by taking part in country-led discussions on the strategy and by presenting IMF perspectives. They also support monitoring of program implementa-tion and institution building, working with different branches of gov-ernment, civil society organizations, donors, and other stakeholders.

Box 9.9 Resident representatives

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try and policy work, PDR seeks to ensure the consistent application of IMF policies throughout the institu-tion. In recent years, the department has spearheaded the IMF’s work in strengthening the international financial system, streamlining and focusing conditionality, and devel-oping the Poverty Reduction and Growth Facility (PRGF) and the Heavily Indebted Poor Countries (HIPC) Initiative. PDR economists participate in country missions with area department staff, typically covering 80–90 countries a year, and assist member countries that are making use of IMF resources to mobilize other financial resources.

The Research Department conducts policy analysis and research in areas relating to the IMF’s work. The department plays a prominent role in global surveillance and in devel-oping IMF policy concerning the international monetary system. It cooperates with other departments in formulating IMF policy advice to member countries. It coordinates the semiannual World Economic Out-look exercise and prepares analysis for the surveillance discussions of the Group of Seven, the Group of Twenty, and such regional group-ings as the Asia Pacific Economic Cooperation (APEC) forum, and the Executive Board’s discussions of world economic and market developments. The department also maintains contacts with the academic community and with other research organizations.

The Statistics Department maintains databases of country, regional, and global economic and financial sta-tistics, and reviews country data in support of the IMF’s surveillance role. It is also responsible for developing statistical concepts in external sector, government finance, and monetary and financial statistics, as well as for producing methodological manuals. The department provides technical assistance and training to help mem-

(on April 30, 2006)

Senior officers

Gerd Häusler, Counsellor1

Raghuram G. Rajan, Economic Counsellor

Area departments

Abdoulaye Bio-TchanéDirector, African Department

David BurtonDirector, Asia and Pacific Department

Michael C. DepplerDirector, European Department

Mohsin S. KhanDirector, Middle East and Central Asia Department

Anoop SinghDirector, Western Hemisphere Department

Functional and special servicesdepartments

Michael G. KuhnDirector, Finance Department

Teresa M. Ter-MinassianDirector, Fiscal Affairs Department

Leslie J. LipschitzDirector, IMF Institute

Gerd HäuslerDirector, International Capital Markets Department2

Sean HaganGeneral Counsel and Director, Legal Department

Ulrich BaumgartnerActing Director, Monetary and Financial Systems Department2

Mark AllenDirector, Policy Development and Review Department

Raghuram G. RajanDirector, Research Department

1 Mr. Häusler will be leaving the Fund at the end of July 2006.

2 The International Capital Markets Department and the Monetary and Financial Systems Department will be merged in FY2007. Jaime Caruana will assume the position of Director of the new department in August 2006.

Robert Edwards Director, Statistics Department

Information and liaison

Thomas C. Dawson II3

Director, External Relations Department

Akira AriyoshiDirector, Regional Office for Asia and the Pacific

Saleh M. NsouliDirector, Offices in Europe

Reinhard MünzbergDirector and Special Representative to the UN Office at the United Nations

Support services

Jorge R. Márquez-Ruarte4

Director, Human Resources Department

Shailendra J. AnjariaSecretary, Secretary’s Department

Inger E. Prebensen5

Acting Director, Technology and General Services Department

Offices

Barry H. PotterDirector, Office of Budget and Planning

Bert KeuppensDirector, Office of Internal Audit and Inspection

Claire LiuksilaDirector, Office of Technical Assistance Management

Thomas BernesDirector, Independent Evaluation Office

3 Effective May 1, 2006, Mr. Dawson retired from the Fund. He was succeeded as Director of the External Relations Department by Masood Ahmed.

4Effective June 6, 2006, Liam P. Ebrill succeeded Mr. Márquez-Ruarte as Director of the Human Resources Department. Mr. Márquez-Ruarte became Associate Director of the Policy Devel-opment and Review Department.

5 Frank Harnischfeger will assume the position of Director, Technology and General Services Department, in September 2006.

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bers develop statistical systems and produces the IMF’s statis-tical publications. In addition, it is responsible for developing and maintaining standards for the dissemination of data by member countries.

Information and liaison

The External Relations Department works to promote public understanding of and support for the IMF and its policies. It aims to make the IMF’s policies understandable through many activities aimed at transparency, communication, and engagement with a wide range of stakeholders. It prepares, edits, and distributes most IMF publications and other material, promotes contacts with the press and other exter-nal groups, such as civil society organizations and parlia-mentarians, and manages the IMF’s Web site.

The IMF’s offices in Asia and Europe and at the United Nations maintain close contacts with other international and regional institutions. The UN Office also makes a sub-stantive contribution to the Financing for Development process, while the offices in Asia and Europe contribute to bilateral and regional surveillance and are a major part of the IMF’s outreach effort.

Support services

The Human Resources Department helps ensure that the IMF has the right mix of staff skills, experience, and diversity to meet the changing needs of the organization, and that human resources are managed, organized, and deployed in a manner that maximizes their effectiveness, moderates costs, and keeps the workload and stress at acceptable levels. The department develops policies and procedures that help the IMF achieve its work objectives, manages compensation and benefits, recruitment, and career planning programs, and supports organizational effectiveness by assisting departments with their human-resource-management goals.

The Secretary’s Department organizes and reports on the activities of the IMF’s governing bodies and provides secre-tariat services to them, as well as to the Group of Twenty-Four. In particular, it assists management in preparing and coordinating the work program of the Executive Board and other official bodies, including by scheduling and helping ensure the effective conduct of Board meetings. In carrying out these tasks, the department helps promote open and efficient channels of communication between the governing bodies, management, and staff. The department, in coop-eration with its counterpart office in the World Bank, also organizes the arrangements for the Annual Meetings.

The Technology and General Services Department manages and delivers services essential for the IMF’s operation. These

include information services (information technology, library services, multimedia services, records and archives management, and telecommunications); facilities services (building projects and facilities management); general administrative services (travel management, conference and catering services, and procurement services); language services (translation, interpretation, and preparation of publications in languages other than English); and a broad range of security and business continuity services (covering headquarters security, field security, and information tech-nology security).

The IMF also has offices responsible for internal auditing and review of work practices, budget matters, technical assistance, and investments under the staff retirement plan.

Office of Internal Audit and Inspection

The Office of Internal Audit and Inspection (OIA) contrib-utes to the internal governance of the IMF by providing independent examinations of the effectiveness of the risk-management, control, and governance processes of the IMF. To meet this objective, OIA conducts about 25 audits and reviews per year. These audits and reviews include examining the adequacy of controls and procedures to safeguard and administer Fund assets and financial accounts, assessing the efficiency and effectiveness with which internal resources are being used, evaluating the adequacy of the management of information technology, and ensuring that adequate physical and information secu-rity measures are in place. Under its multiyear program of reviews, OIA subjects IMF departments to comprehensive reviews that assess whether their activities are aligned with the overall goals of the Fund, whether resources dedicated to low-priority activities can be reallocated, and whether the work is conducted in an efficient and effective fashion. In line with best practices, OIA reports to IMF manage-ment and to the External Audit Committee, thus assur-ing its independence. In addition, the Executive Board is briefed annually on OIA’s work program and the major findings of its audits and reviews.

Independent Evaluation Office

The Independent Evaluation Office (IEO) was established in 2001 with a view to increasing transparency and account-ability and strengthening the learning culture of the IMF. The IEO is independent of IMF management and staff and operates at arm’s length from the Executive Board, to which it reports on its findings.11

11Detailed information on the IEO’s activities is available on its Web site, www.imf.org/ieo.

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During FY2006, the IEO completed three evaluations: the Financial Sector Assessment Program (see Chapter 4), mul-tilateral surveillance (see Chapter 3), and IMF support to Jordan 1989–2004. A fourth evaluation, on the IMF’s advice on capital account liberalization, was completed in FY2005 but discussed by the IMF’s Executive Board in FY2006 (see Chapter 4). Formal outreach seminars were held in Asia, Europe, and the Middle East. Currently ongoing evaluations relate to structural conditionality in IMF-supported pro-grams, the IMF’s role in the determination of the external resource envelope in sub-Saharan African countries, and the IMF’s advice on exchange rate policy.

To help prepare additions to its work program in FY2007, the IEO has published a broad list of possible topics for evaluation over the medium term, reflecting the many sug-gestions received from outside stakeholders as well as IMF Executive Directors, management, and staff.

External evaluation of the IEO

The IEO itself underwent an external evaluation in early 2006. The resulting report confirmed that the IEO is an important part of good governance at the IMF, and made several recommendations to further strengthen the work of the office.

In April 2006, the IMF Executive Directors met to discuss the report on the IEO prepared by an External Evaluation Panel.12 They agreed that the IEO had served the IMF well and earned strong support across a broad range of stake-holders. They also agreed that the IMF continued to need an independent evaluation office to contribute to the insti-tution’s learning culture and facilitate oversight and gover-

12The discussion is summarized in Public Information Notice No. 06/67, which can be found at www.imf.org/external/np/sec/pn/2006/pn0667.htm;the report is available at www.imf.org/external/np/pp/eng/2006/032906.pdf.

nance by the Executive Board. In this connection, Directors welcomed the Panel’s observation that the IEO has acted independently.

At the same time, Directors noted the weaknesses high-lighted in the report and welcomed its analysis and recommendations for further strengthening the IEO’s effectiveness. In particular, Directors concurred that a more focused and strategic orientation, together with strong sup-port from the Board and management, would help ensure the IEO’s continued usefulness and relevance.

To maintain the high quality of IEO reports, Directors called for them to be shorter, with more focused assess-ments and recommendations. Many Directors emphasized that IEO reports should look beyond process to substance, including judgments on the theoretical foundations and analytical frameworks underlying the Fund’s advice. Direc-tors generally agreed with the Panel’s recommendation that IEO outreach activities should be intensified.

Directors generally welcomed the Panel’s suggestions for strengthening follow-up to the IEO’s recommendations, including more Board involvement. They considered that the Panel’s call for a more systematic approach for following up on and monitoring the implementation of IEO recommen-dations approved by the Board should be further examined.

Directors were pleased that the IEO was taking the lead in reviewing its existing publications policy to ensure that it reflected evolving best practice. They agreed that any changes in the IEO’s publications policy should be consis-tent with ensuring its independence.

As for next steps, careful consideration will be given to the Panel’s recommendations and the Board’s views, and the Evaluation Committee, the IEO, and IMF staff and manage-ment will engage in further discussion. Directors considered it appropriate to conduct another external evaluation of the IEO in five years.

AP

PE

ND

IXE

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125125

Appendix IInternational reserves 127

Foreign exchange reserves 127Holdings of IMF-related assets 127Gold reserves 127Developments during the first quarter of 2006 127Currency composition of foreign exchange reserves 127Tables in Appendix II.1 Official holdings of reserve assets 129I.2 Share of national currencies in total identified

official holdings of foreign exchange, end of year 130I.3 Currency composition of official holdings of foreign

exchange, end of year 131

Appendix IIFinancial operations and transactions 132

Tables in Appendix IIII.1 Arrangements approved during financial years

ended April 30, 1953–2006 132II.2 Arrangements in effect as of April 30, 1997–2006 133II.3 Stand-By and Extended Arrangements in effect

during financial year ended April 30, 2006 133II.4 Arrangements under the Poverty Reduction and

Growth Facility in effect during financial year ended April 30, 2006 134

II.5 Summary of disbursements, repurchases, and repayments, financial years ended April 30, 1948–2006 135

II.6 Purchases and loans from the IMF, financial year ended April 30, 2006 136

II.7 Repurchases and repayments to the IMF, financial year ended April 30, 2006 137

II.8 Outstanding IMF credit by facility and policy, financial years ended April 30, 1997–2006 138

II.9 Summary of bilateral contributions to the PRGF-ESF and PRGF-HIPC Trusts 139

II.10 Holdings of SDRs by all participants and by groups of countries as percentage of their cumulative allocations of SDRs, at end of financial years ended April 30, 1997–2006 141

II.11 Key IMF rates, financial year ended April 30, 2006 141

II.12 Members that have accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Articles of Agreement 142

II.13 De facto classification of exchange rate regimes and monetary policy framework 144

Appendix IIIPrincipal policy decisions of the Executive Board 147

Burden sharing—implementation in FY2007 147Amendment of Rule I–6(4) 147Poverty Reduction and Growth Facility and Exogenous

Shocks Facility Trust—amendment 148Modalities for surveillance over West African Economic

and Monetary Union policies in context of Article IV consultations with member countries 148

Access limits under the ESF 149Exogenous Shocks Facility (ESF)—establishment 149Multilateral Debt Relief Initiative (MDRI) and related

HIPC Initiative amendments 149Transparency Policy decision—amendments 150Policy Support Instrument—placement of member on

24-month Article IV consultation cycle 153For Policy Support Instrument—framework 154PRGF Trust and PRGF-HIPC Trust Reserve Account—review 155Overdue financial obligations—review of Fund strategy 155Eleventh General Review of Quotas—period for consent

to increases—extension 155

Appendix IVPress communiqués of the International Monetary and Financial Committee and the Development Committee 156

International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund 156Twelfth Meeting, Washington, D.C., September 24, 2005 156Thirteenth Meeting, Washington, D.C., April 22, 2006 158

Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (Development Committee) 160Seventy-second Meeting, Washington, D.C.,

September 25, 2005 160Seventy-third Meeting, Washington, D.C.,

April 23, 2006 162

Appendix contents

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Appendix VExecutive Directors and voting power, April 30, 2006 164

Appendix VIChanges in membership of the Executive Board 168

Appendix VIIFinancial statements, April 30, 2006 169

General DepartmentConsolidated balance sheets 171Consolidated income statements 172Consolidated statements of changes in reserves

and resources 172Consolidated statements of cash flows 173Notes to the consolidated financial statements 174Schedule 1—Quotas, IMF’s holdings of currencies,

reserve tranche positions, and outstanding credit and loans 183

Schedule 2—Financial resources and liquidity position in the General Resources Account 187

Schedule 3—Status of arrangements in the General Resources Account 188

SDR DepartmentBalance sheets 190Income statements 191Statements of cash flows 191Notes to the financial statements 192Schedule 1—Statements of changes in SDR holdings 194Schedule 2—Allocations and holdings of participants 196

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Combined balance sheets 201Combined statements of income and changes in

resources 201Combined statements of cash flows 202Notes to the combined financial statements 203Schedule 1—Schedule of outstanding loans 208

Schedule 2—Cumulative contributions to and resources of the Subsidy Accounts 209

Schedule 3—Schedule of borrowing agreements 210Schedule 4—Status of loan arrangements 211Schedule 5—Disbursed Multilateral Debt Relief

Initiative assistance 212Poverty Reduction and Growth Facility Administered Accounts

Balance sheets 214Statements of income and changes in resources 215Statements of cash flows 215Notes to the financial statements 216

PRGF-HIPC Trust and Related AccountsCombined balance sheets 219Combined statements of income and changes

in resources 219Combined statements of cash flows 220Notes to the combined financial statements 221Schedule 1—Post-SCA-2 Administered Account—

Holdings, interest, and transfers 226Schedule 2—PRGF-HIPC Trust Account—Contributions

and transfers 226Schedule 3—Umbrella Account for HIPC Operations—

Grants, interest, disbursements, and changes in resources 227

Schedule 4—PRGF-HIPC Trust Account—Cumulative contributions and transfers 228

Multilateral Debt Relief Initiative-II TrustBalance sheet 231Statement of income and changes in resources 231Statement of cash flows 231Notes to the financial statements 232

Other Administered AccountsBalance sheets 235Statements of income and changes in resources 236Statements of cash flows 237Notes to the financial statements 238

127

APPENDIX | I

Total international reserves, including gold, increased by 20 percent during 2005 and stood at SDR 3.3 trillion at the end of the year (Table I.1). Foreign exchange reserves, which constitute the largest component of official reserve holdings, grew by 21 percent, to SDR 2.9 trillion. IMF-related assets, which make up the rest of nongold reserves, declined by 36 percent to SDR 49 bil-lion, reflecting the recent decline in outstanding credit to member countries. The market value of gold held by monetary authorities increased by 25 per-cent to SDR 317 billion in 2005.1

Foreign exchange reserves

Foreign exchange reserves represented 98 percent of nongold assets at the end of 2005. Developing countries held 69 percent of all foreign exchange reserves (SDR 2.0 trillion), having increased their holdings by 29 percent relative to end–2004. During 2005, foreign exchange holdings of industrial countries rose by 7 percent to SDR 904 billion, and the foreign exchange assets of oil-exporting developing countries, which amounted to 9 percent of all developing countries’ foreign exchange reserves, increased by 35 percent to SDR 179 billion.

Holdings of IMF-related assets

During 2005, total IMF-related assets (that is, reserve positions in the IMF and SDRs) declined by 36 percent, more sharply than in the previous year. Mem-bers’ reserve positions in the IMF—which consist of members’ reserve tranche and creditor positions—declined by 49 percent to SDR 29 billion, while the SDR holdings of IMF members remained at SDR 20 billion. The decline in the reserve positions was mostly attributed to industrial countries, which account for more than three-fourths of the reserve positions and SDR holdings.

Gold reserves

The market value of gold reserves increased by 25 percent to SDR 317 billion in 2005, as the strong gold price more than offset the 2 percent decline in the physical stock of official gold. However, the share of gold in official reserves in 2005 (10 percent) is much lower than in the early 1980s when gold accounted for about half of all official reserves. Most of the gold reserves (82 percent) are held by industrial countries, for which gold con-stituted 22 percent of their total reserves at the end of 2005. Gold reserves accounted for 3 percent of the total reserves of developing countries.

Developments during the first quarter of 2006

During the first quarter of 2006, total reserve assets rose by SDR 125 billion and foreign exchange reserves by SDR 96 billion. Reflecting the continued

1 Official monetary authorities comprise central banks and also currency boards, exchange stabilization funds, and treasuries, to the extent that they perform monetary authorities’ functions.

strength of gold price in the first quarter, the market value of gold reserves increased by SDR 39 billion, while holdings of IMF-related assets declined by SDR 9 billion.

Currency composition of foreign exchange reserves2

The currency composition of foreign exchange reserves has changed gradually over the past decade. The share of U.S. dollar holdings in foreign exchange reserves peaked at 71 percent over the 1999–2001 period (Table I.2), and declined to 67 percent in 2002, driven by the fall in the value of U.S. dollar holdings and a reduced share of U.S. dollar assets in net pur-chases of reserves (Table I.3). Over the two subsequent years, the dollar share remained at a similar level, as the quantity increase in dollar holdings offset the weakening of the U.S. dollar vis-à-vis other major currencies. In 2005, the share of dollar holdings increased slightly, reflecting the strength-ening of the dollar vis-à-vis other reserve currencies (see the last paragraph for details).

The share of the euro, which replaced 11 European currencies and the Euro-pean currency unit (ECU) on January 1, 1999, increased sharply between 1999 and 2003 and has since remained broadly stable at around 25 percent of total foreign exchange reserves. Given that at the introduction of the euro, the euro system’s reserves previously denominated in euro-legacy currencies3 became domestic assets of the euro area, the share of the euro in 1999–2005 is not directly comparable with the previous years’ combined share of the four euro-legacy currencies identified in Table I.2: deutschemark, French franc, Netherlands guilder, and private ECU.

The share of the Japanese yen in total foreign exchange reserves declined from 7 percent at end–1996 to 4 percent at the end of 2005. The share of pound sterling reached nearly 4 percent at end–2005, while that of the Swiss franc remained well below 1 percent. The share of other currencies not identified in Table I.2 has been less than 2 percent since 1999. The share of unallocated reserves, for which no information on currency composition is available, rose to more than 30 percent of global reserves in 2005.

For industrial countries, the share of U.S. dollar holdings rose to 74 percent at the end of 2005, slightly exceeding the high value of 1999. The share of the euro in industrial countries’ foreign exchange reserves declined slightly to 19 percent in 2005, while the share of the yen decreased further to slightly over 3 percent in 2005. The shares of pound sterling and Swiss franc have remained broadly constant.

The share of the U.S. dollar in developing countries’ foreign exchange reserves remained close to 60 percent in 2005, lower than the average in

2In December 2005, the IMF began quarterly publication on its Web site of data on the currency composition of official foreign exchange reserves; see www.imf.org/external/np/sec/pr/2005/pr05284.htm.

3 Those foreign exchange reserves that, up to December 31, 1998, were denominated in euro area former national currencies and private ECUs.

International reserves

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preceding years.4 Holdings of the euro remain around 29 percent of those countries’ foreign exchange reserves, 10 percentage points higher than the euro’s share in its initial years (1999 and 2000). Over the past decade, the share of the yen gradually decreased by about 4 percentage points, to 4 percent at the end of 2005, while the share of pound sterling has increased by about 2 percentage points, to 5 percent in 2005. The share of the Swiss franc has remained below 1 percent over the same period.

4 This calculation does not include unallocated reserves, which account for nearly half of all official foreign exchange reserves held by developing countries.

Changes in the SDR value of foreign exchange reserves can be decomposed into quantity and valuation (price) changes (Table I.3). Official reserves held in U.S. dollars increased by SDR 190 billion in 2005, reflecting a quantity increase in U.S. dollar holdings of SDR 90 billion and a valuation increase of SDR 99 billion. Euro holdings increased by SDR 55 billion, as a quantity increase of SDR 82 billion was offset by a valuation decline of SDR 27 billion. Japanese yen holdings increased by SDR 5 billion as a quantity increase of SDR 8 billion was offset by a valuation decline of SDR 3 billion. Pound sterling holdings increased by SDR 16 billion whereas Swiss franc holdings remained broadly unchanged.

129

Table I.1 Official holdings of reserve assets1

(In billions of SDRs)

March2000 2001 2002 2003 2004 2005 2006

All countriesTotal reserves excluding gold

Fund-related assetsReserve positions in the Fund 47.4 56.9 66.1 66.5 55.8 28.6 22.2SDRs 18.5 19.6 19.7 19.9 20.3 20.1 17.3

Subtotal, Fund-related assets 65.9 76.4 85.7 86.4 76.1 48.6 39.5Foreign exchange 1,491.0 1,633.6 1,772.0 2,038.5 2,414.3 2,918.8 3,014.6

Total reserves excluding gold 1,556.8 1,710.1 1,857.8 2,124.9 2,490.4 2,967.5 3,054.1Gold2

Quantity (millions of ounces) 952.4 943.0 931.2 913.6 900.0 882.0 879.5Value at London market price 200.6 207.5 234.8 256.5 253.8 316.6 355.2

Total reserves including gold 1,757.5 1,917.5 2,092.5 2,381.4 2,744.2 3,284.0 3,409.3

Industrial countriesTotal reserves excluding gold

Fund-related assetsReserve positions in the Fund 39.7 47.0 53.7 52.6 43.6 21.0 15.8SDRs 14.4 16.0 15.8 15.3 15.3 12.4 12.5

Subtotal, Fund-related assets 54.1 62.9 69.5 67.9 58.9 33.4 28.2Foreign exchange 602.6 627.2 662.4 753.1 846.5 904.1 897.5

Total reserves excluding gold 656.7 690.2 731.9 821.0 905.3 937.6 925.7Gold2

Quantity (millions of ounces) 796.5 783.5 769.8 754.3 740.6 723.8 721.5Value at London market price 167.8 172.4 194.1 211.8 208.9 259.8 291.4

Total reserves including gold 824.5 862.6 926.0 1,032.8 1,114.2 1,197.3 1,217.1

Developing countriesTotal reserves excluding gold

Fund-related assetsReserve positions in the Fund 7.7 9.9 12.3 13.9 12.2 7.6 6.4SDRs 4.1 3.6 3.9 4.6 5.0 7.6 4.8

Subtotal, Fund-related assets 11.8 13.5 16.2 18.5 17.2 15.2 11.3Foreign exchange 888.3 1,006.4 1,109.6 1,285.4 1,567.8 2,014.7 2,117.1

Total reserves excluding gold 900.1 1,019.9 1,125.9 1,303.9 1,585.1 2,029.9 2,128.4Gold2

Quantity (millions of ounces) 155.9 159.4 161.3 159.3 159.4 158.2 158.0Value at London market price 32.8 35.1 40.7 44.7 45.0 56.8 63.8

Total reserves including gold 932.9 1,055.0 1,166.5 1,348.7 1,630.0 2,086.7 2,192.2

Source: International Monetary Fund, International Financial Statistics.Note: Components may not sum to totals because of rounding.1End-of-year figures for all years except 2006. “Fund-related assets” are composed of reserve positions in the IMF and SDR holdings of all IMF members. The entries under “Foreign exchange” and “Gold” comprise official holdings of those IMF members for which data are available and certain countries or areas.

2One troy ounce equals 31.103 grams. The market price is the afternoon price fixed in London on the last business day of each period.

International reserves | I

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Table I.2 Share of national currencies in total identified official holdings of foreign exchange, end of year1

(In percent)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

All countriesU.S. dollar 62.1 65.2 69.4 71.0 71.0 71.4 67.0 65.9 65.8 66.5Japanese yen 6.7 5.8 6.2 6.4 6.1 5.1 4.4 3.9 3.8 3.6Pound sterling 2.7 2.6 2.7 2.9 2.8 2.7 2.8 2.8 3.4 3.7Swiss franc 0.3 0.3 0.3 0.2 0.3 0.3 0.4 0.2 0.2 0.1Euro2 — — — 17.9 18.4 19.3 23.9 25.3 25.0 24.4Deutsche mark 14.7 14.5 13.8 — — — — — — —French franc 1.8 1.4 1.6 — — — — — — —Netherlands guilder 0.2 0.4 0.3 — — — — — — —ECUs3 7.1 6.0 1.2 — — — — — — —Other currencies4 4.3 3.8 4.5 1.6 1.5 1.2 1.5 1.9 1.8 1.6

Industrial countriesU.S. dollar 57.4 59.1 67.6 73.5 72.5 72.7 68.9 70.5 71.5 73.7Japanese yen 5.7 5.9 6.9 6.7 6.5 5.6 4.4 3.8 3.6 3.3Pound sterling 2.1 2.0 2.1 2.2 2.0 1.9 2.1 1.5 1.9 2.1Swiss franc 0.1 0.1 0.2 0.1 0.2 0.3 0.6 0.2 0.1 0.1Euro2 — — — 16.1 17.1 18.0 22.4 22.1 20.9 19.2Deutsche mark 15.9 16.2 13.4 — — — — — — —French franc 1.7 0.9 1.2 — — — — — — —Netherlands guilder 0.2 0.2 0.2 — — — — — — —ECUs3 12.3 11.2 2.3 — — — — — — —Other currencies4 4.7 4.4 6.2 1.4 1.6 1.5 1.7 1.9 2.0 1.6

Developing countriesU.S. dollar 68.5 72.4 71.2 68.2 69.3 70.1 65.2 61.3 60.2 60.5Japanese yen 8.1 5.7 5.6 6.0 5.8 4.6 4.4 4.0 4.1 3.8Pound sterling 3.5 3.3 3.3 3.7 3.5 3.5 3.5 4.0 4.9 5.1Swiss franc 0.6 0.6 0.5 0.4 0.3 0.3 0.2 0.2 0.2 0.2Euro — — — 19.9 19.8 20.6 25.4 28.5 29.0 28.8Deutsche mark 13.0 12.5 14.3 — — — — — — —French franc 2.0 2.1 2.1 — — — — — — —Netherlands guilder 0.3 0.5 0.4 — — — — — —ECUs3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other currencies4 3.9 3.0 2.7 1.7 1.3 1.0 1.3 2.0 1.6 1.6

Memorandum items:Unallocated reserves5

All countries 21.8 21.3 22.1 22.9 21.8 23.8 25.5 26.5 29.6 32.6Industrial countries 2.2 2.1 1.1 1.1 0.4 0.4 0.4 0.3 0.3 0.5Developing countries 38.6 36.1 36.5 37.8 36.4 38.3 40.6 41.9 45.4 47.0

Note: Components may not sum to total because of rounding. Country coverage changes marginally every year, but the changes were larger than usual in 1996 (broader coverage) and in 2000 (narrower coverage). The data for 2005 are preliminary.1The currency shares are calculated for the reserves of member countries that report the currency composition of their foreign exchange reserves. The data include minimal estimation under-taken mainly for late reporters. Reserves for which currency composition is not reported are shown under “Unallocated reserves.”

2Not comparable with the combined share of euro legacy currencies in previous years because it excludes the euros received by euro area members when their previous holdings of other euro area members’ legacy currencies were converted into euros on January 1, 1999.

3In the calculation of currency shares, the ECU is treated as a separate currency. ECU reserves held by the monetary authorities existed in the form of claims on both the private sector and the European Monetary Institute (EMI), which issued official ECUs to European Union central banks through revolving swaps against the contribution of 20 percent of their gross gold holdings and U. S. dollar reserves. On December 31, 1998, the official ECUs were unwound into gold and U. S. dollars; hence, the share of ECUs at the end of 1998 was sharply lower than a year earlier. The remaining ECU holdings reported for 1998 consisted of ECUs issued by the private sector, usually in the form of ECU deposits and bonds. On January 1, 1999, these holdings were auto-matically converted into euros.

4Foreign exchange reserves of IMF member countries and the sum of the reserves that are reported to be held in currencies other than those listed above.5Foreign exchange reserves whose currency composition information is not submitted to the IMF, in percent of total official foreign exchange reserves held by each group of countries.

131

Table I.3 Currency composition of official holdings of foreign exchange, end of year1

(In millions of SDRs)

1997 1998 1999 2000 2001 2002 2003 2004 2005

U.S. dollarChange in holdings 85,753 16,854 80,421 115,475 62,331 –5,105 102,180 132,099 189,643

Quantity change 49,035 43,129 64,551 75,793 31,686 64,799 186,807 182,177 90,490Price change 36,718 –26,275 15,870 39,682 30,645 –69,903 –84,626 –50,078 99,153

Year-end value 614,331 631,185 711,606 827,081 889,412 884,307 986,487 1,118,587 1,308,229

Japanese yenChange in holdings –2,774 2,373 7,128 7,643 –8,421 –5,538 1,420 6,304 5,100

Quantity change 171 –1,947 –1,547 12,352 –1,674 –6,421 141 7,378 8,007Price change –2,945 4,319 8,675 –4,708 –6,747 882 1,279 –1,074 –2,906

Year-end value 54,465 56,838 63,966 71,609 63,188 57,650 59,070 65,374 70,474

Pound sterlingChange in holdings 1,484 –103 4,764 3,060 1,659 3,433 4,261 16,026 16,227

Quantity change 549 851 4,861 3,886 1,410 2,465 3,748 14,408 18,409Price change 934 –954 –97 –825 249 968 513 1,618 –2,182

Year-end value 24,351 24,248 29,013 32,073 33,732 37,165 41,426 57,452 73,679

Swiss francChange in holdings 710 –278 –700 828 342 1,901 –2,062 –541 28

Quantity change 743 –313 –388 734 308 1,400 –2,162 –671 223Price change –33 35 –313 94 34 502 100 129 –195

Year-end value 3,287 3,009 2,308 3,137 3,479 5,380 3,318 2,777 2,805

EuroChange in holdings — — 44,3032 34,562 25,765 74,676 63,509 46,555 54,518

Quantity change — — 64,817 38,320 29,498 48,289 29,630 33,065 81,788Price change — — –20,514 –3,758 –3,733 26,386 33,879 13,490 –27,270

Year-end value — — 179,924 214,486 240,252 314,927 378,436 424,991 479,509

Deutsche markChange in holdings 11,512 –10,958 — — — — — — —

Quantity change 21,123 –14,619 — — — — — — —Price change –9,612 3,661 — — — — — — —

Year-end value 136,631 125,673 — — — — — — —

French francChange in holdings –2,170 1,209 — — — — — — —

Quantity change –1,082 881 — — — — — — —Price change –1,088 327 — — — — — -- —

Year-end value 13,574 14,782 — — — — — — —

Netherlands guilderChange in holdings 1,265 –828 — — — — — — —

Quantity change 1,447 –944 — — — — — — —Price change –182 115 — — — — — — —

Year-end value 3,306 2,478 — — — — — — —

European currency unitChange in holdings –3,245 –46,128 — — — — — — —

Quantity change 511 –47,599 — — — — — — —Price change –3,755 1,472 — — — — — — —

Year-end value 57,018 10,890 — — — — — — —

Sum of the above3

Change in holdings 92,536 –37,859 135,915 161,569 81,676 69,367 169,308 200,443 265,516Quantity change 72,498 –20,560 132,294 131,085 61,227 110,532 218,164 236,358 198,917Price change 20,038 –17,300 3,621 30,484 20,448 –41,165 –48,856 –35,915 66,599

Year-end value 906,963 869,104 986,817 1,148,386 1,230,062 1,299,429 1,468,737 1,669,180 1,934,696

Other currenciesChange in holdings –1,498 5,275 –25,014 1,275 –1,505 4,362 8,930 2,097 542Year-end value 35,480 40,754 15,740 17,015 15,510 19,872 28,802 30,899 31,441

Total official holding4

Change in holdings 108,672 –30,334 132,247 191,241 142,685 138,380 266,460 375,826 504,529Year-end value 1,197,810 1,167,476 1,299,723 1,490,964 1,633,650 1,772,030 2,038,490 2,414,316 2,918,845

Note: Components may not sum to total because of rounding. Country usage changes marginally every year, but the changes were larger than usual in 1996 (broader coverage) and in 2000 (narrower coverage). The data for 2005 are preliminary.1The currency composition of official foreign exchange reserves as reported by countries, including minimal estimation undertaken mainly for late reporters. Quantity changes are derived by multiplying the changes in official holdings of each currency from the end of one quarter to the next by the average of the two SDR prices of that currency prevailing at the corresponding dates. This procedure converts the change in the quantity of national currency from own units to SDR units of account. Subtracting the SDR value of the quantity change so derived from the quarterly change in the SDR value of foreign exchange held at the end of two successive quarters and cumulating these differences yields the effect of price changes over the years shown.

2Represents the change from end–1998 holdings of euro legacy currencies by official institutions outside the euro area.3Each item represents the sum of the currencies above.4Includes “Unallocated reserves” whose currency composition could not be ascertained.

International reserves | I

132

Financial operations and transactions

APPENDIX | II

The tables in this appendix supplement the information given in Chapter 8 on the IMF’s financial operations and policies. Components may not sum to total because of rounding.

Table II.1 Arrangements approved during financial years ended April 30, 1953–2006

Amounts committed under ArrangementsFinancial Number of Arrangements (In millions of SDRs)_____________________________________________ ___________________________________________________year Stand-By EFF SAF PRGF Total Stand-By EFF SAF PRGF Total

1953 2 — — — 2 55 — — — 551954 2 — — — 2 63 — — — 631955 2 — — — 2 40 — — — 401956 2 — — — 2 48 — — — 481957 9 — — — 9 1,162 — — — 1,162

1958 11 — — — 11 1,044 — — — 1,0441959 15 — — — 15 1,057 — — — 1,0571960 14 — — — 14 364 — — — 3641961 15 — — — 15 460 — — — 4601962 24 — — — 24 1,633 — — — 1,633

1963 19 — — — 19 1,531 — — — 1,5311964 19 — — — 19 2,160 — — — 2,1601965 24 — — — 24 2,159 — — — 2,1591966 24 — — — 24 575 — — — 5751967 25 — — — 25 591 — — — 591

1968 32 — — — 32 2,352 — — — 2,3521969 26 — — — 26 541 — — — 5411970 23 — — — 23 2,381 — — — 2,3811971 18 — — — 18 502 — — — 5021972 13 — — — 13 314 — — — 314

1973 13 — — — 13 322 — — — 3221974 15 — — — 15 1,394 — — — 1,3941975 14 — — — 14 390 — — — 3901976 18 2 — — 20 1,188 284 — — 1,4721977 19 1 — — 20 4,680 518 — — 5,198

1978 18 — — — 18 1,285 — — — 1,2851979 14 4 — — 18 508 1,093 — — 1,6001980 24 4 — — 28 2,479 797 — — 3,2771981 21 11 — — 32 5,198 5,221 — — 10,4191982 19 5 — — 24 3,106 7,908 — — 11,014

1983 27 4 — — 31 5,450 8,671 — — 14,1211984 25 2 — — 27 4,287 95 — — 4,3821985 24 — — — 24 3,218 — — — 3,2181986 18 1 — — 19 2,123 825 — — 2,9481987 22 — 10 — 32 4,118 — 358 — 4,476

1988 14 1 15 — 30 1,702 245 670 — 2,6171989 12 1 4 7 24 2,956 207 427 955 4,5451990 16 3 3 4 26 3,249 7,627 37 415 11,3281991 13 2 2 3 20 2,786 2,338 15 454 5,5931992 21 2 1 5 29 5,587 2,493 2 743 8,826

1993 11 3 1 8 23 1,971 1,242 49 527 3,7891994 18 2 1 7 28 1,381 779 27 1,170 3,3571995 17 3 — 11 31 13,055 2,335 — 1,197 16,5871996 19 4 1 8 32 9,645 8,381 182 1,476 19,6841997 11 5 — 12 28 3,183 1,193 — 911 5,287

1998 9 4 — 8 21 27,336 3,078 — 1,738 32,1521999 5 4 — 10 19 14,325 14,090 — 998 29,4132000 11 4 — 10 25 15,706 6,582 — 641 22,9292001 11 1 — 14 26 13,093 –9 — 1,249 14,3332002 9 — — 9 18 39,439 — — 1,848 41,287

2003 10 2 — 10 22 28,597 794 — 1,180 30,5712004 5 — — 10 15 14,519 — — 967 15,4862005 6 — — 8 14 1,188 — — 525 1,7132006 5 1 — 7 13 8,336 9 — 129 8,474

133

Table II.2 Arrangements in effect as of April 30, 1997–2006

Amounts committed under Arrangements as of April 30Financial Number of Arrangements as of April 30 (In millions of SDRs)____________________________________________________ _____________________________________________________year Stand-By EFF PRGF Total Stand-By EFF PRGF Total

1997 14 11 35 60 3,764 10,184 4,048 17,9961998 14 13 33 60 28,323 12,336 4,410 45,0691999 9 12 35 56 32,747 11,401 4,186 48,3342000 16 11 31 58 45,606 9,798 3,516 58,9202001 17 8 37 62 34,906 8,697 3,298 46,901

2002 13 4 35 52 44,095 7,643 4,201 55,9392003 15 3 36 54 42,807 4,432 4,450 51,6892004 11 2 36 49 53,944 794 4,356 59,0942005 10 2 31 43 11,992 794 2,878 15,6642006 10 1 27 38 9,534 9 1,770 11,313

Table II.3 Stand-By and Extended Arrangements in effect during financial year ended April 30, 2006(In millions of SDRs)

Arrangement dates Amounts approved Undrawn balance __________________________ __________________________ _____________________________Effective Expiration Prior to In At date of As of

Member date date FY2006 FY2006 termination April 30, 2006

Argentina 9/20/2003 1/5/2006 8,981 — 4,810 —Bolivia1 4/2/2003 3/31/2006 172 –26 34 —Bulgaria 8/6/2004 9/5/2006 100 — — 100Colombia 1/15/2003 5/2/2005 1,548 — 1,548 —Colombia 5/2/2005 11/2/2006 — 405 — 405

Croatia2 8/4/2004 11/15/2006 97 2 — 99Dominican Republic 1/31/2005 5/31/2007 438 — — 289Gabon 5/28/2004 7/31/2005 69 — 28 —Iraq 12/23/2005 3/22/2007 — 475 — 475Macedonia, FYR 8/31/2005 8/30/2008 — 52 — 41

Paraguay 12/15/2003 11/30/2005 50 — 50 —Peru 6/9/2004 8/16/2006 287 — — 287Romania 7/7/2004 7/6/2006 250 — — 250Turkey 5/11/2005 5/10/2008 — 6,662 — 4,997Uruguay 6/8/2005 6/7/2008 — 766 — 588 _______ _______ _______ _______

Total for Stand-By Arrangements 11,992 8,336 6,470 7,532

Albania 2/1/2006 1/31/2009 — 9 — 7Sri Lanka 4/18/2003 4/17/2006 144 — 124 —Serbia and Montenegro 5/14/2002 2/28/2006 650 — — — _______ _______ _______ _______

Total for Extended Arrangements 794 9 124 7

Total 12,786 8,345 6,594 7,539

1Reduced by SDR 26 million on 10/31/2005.2Augmentated by SDR 2 million on 3/29/2006.

Financial operations and transactions | II

IMF ANNUAL REPORT | 2006

134

Table II.4 Arrangements under the Poverty Reduction and Growth Facility in effect during financial year ended April 30, 2006

(In millions of SDRs)

Arrangement dates Amounts approved Undrawn balance __________________________ __________________________ _____________________________Effective Expiration Prior to In At date of As of

Member date date FY2006 FY2006 termination April 30, 2006

Albania 02/01/06 01/31/09 — 9 — 7Albania1 06/21/02 11/20/05 28 — — —Armenia 05/25/05 05/24/08 — 23 — 16 Azerbaijan1,2 07/06/01 07/04/05 68 — 13 —Bangladesh1,3 06/20/03 12/31/06 400 — — 117

Benin 08/05/05 08/04/08 — 6 — 5 Burkina Faso1 06/11/03 09/30/06 24 — — 3 Burundi 01/23/04 01/22/07 69 — — 29 Cameroon 10/24/05 10/23/08 — 19 — 16 Cape Verde1 04/10/02 07/31/05 9 — — —

Chad 02/16/05 02/15/08 25 — — 21 Congo, Dem. Rep. of1 06/12/02 03/31/06 580 — 27 —Congo, Rep. of 12/06/04 12/05/07 55 — — 39 Dominica 12/29/03 12/28/06 8 — — 2 Gambia, The 07/18/02 07/17/05 20 — 17 —

Georgia 06/04/04 06/03/07 98 — — 42 Ghana1 05/09/03 10/31/06 185 — — 79 Grenada 04/17/06 04/16/09 — 11 — 9 Guyana1 09/20/02 09/12/06 55 — — 9 Honduras 02/27/04 02/26/07 71 — — 31

Kenya4 11/21/03 11/20/06 225 — — 150 Kyrgyz Republic 03/15/05 03/14/08 9 — — 6 Malawi 08/05/05 08/04/08 — 38 — 28 Mali 06/23/04 06/22/07 9 — — 4 Mongolia1 09/28/01 07/31/05 28 — 16 —

Mozambique 07/06/04 07/05/07 11 — — 5 Nepal 11/19/03 11/18/06 50 — — 36 Nicaragua1 12/13/02 12/12/06 98 — — 28 Niger5 01/31/05 01/30/08 7 20 — 15 Rwanda1 08/12/02 06/11/06 4 — — 1

São Tomé and Príncipe 08/01/05 07/31/08 — 3 — 2 Senegal 04/28/03 04/27/06 24 — — —Sierra Leone1 09/26/01 06/25/05 131 — — —Sri Lanka 04/18/03 04/17/06 269 — 231 —Tajikistan1 12/11/02 02/10/06 65 — — —

Tanzania 08/16/03 08/15/06 20 — — 3 Uganda1 09/13/02 01/31/06 14 — — —Zambia 06/16/04 06/15/07 220 — — 33 _______ ______ ______ _______ Total 2,879 129 304 736

1Arrangements are initially approved for a period of three years. An expiration date beyond that reflects an extension.2Reduced by SDR 13 million on 12/22/04.3Augmented by SDR 53 million on 7/28/04.4Augmented by SDR 50 million on 12/20/04. 5Augmented by SDR 20 million on 11/14/05.

135

Table II.5 Summary of disbursements, repurchases, and repayments, financial years ended April 30, 1948–2006

(In millions of SDRs)

Disbursements Repurchases and repayments Total Fund_____________________________________________________ ________________________________________________Financial Trust Fund SAF PRGF Trust Fund SAF/PRGF credityear Purchases1 loans loans loans Total Repurchases repayments repayments Total outstanding2

1948 606 — — — 606 — — — — 1331949 119 — — — 119 — — — — 1931950 52 — — — 52 24 — — 24 2041951 28 — — — 28 19 — — 19 1761952 46 — — — 46 37 — — 37 214

1953 66 — — — 66 185 — — 185 1781954 231 — — — 231 145 — — 145 1321955 49 — — — 49 276 — — 276 551956 39 — — — 39 272 — — 272 721957 1,114 — — — 1,114 75 — — 75 611

1958 666 — — — 666 87 — — 87 1,0271959 264 — — — 264 537 — — 537 8981960 166 — — — 166 522 — — 522 3301961 577 — — — 577 659 — — 659 5521962 2,243 — — — 2,243 1,260 — — 1,260 1,023

1963 580 — — — 580 807 — — 807 1,0591964 626 — — — 626 380 — — 380 9521965 1,897 — — — 1,897 517 — — 517 1,4801966 2,817 — — — 2,817 406 — — 406 3,0391967 1,061 — — — 1,061 340 — — 340 2,945

1968 1,348 — — — 1,348 1,116 — — 1,116 2,4631969 2,839 — — — 2,839 1,542 — — 1,542 3,2991970 2,996 — — — 2,996 1,671 — — 1,671 4,0201971 1,167 — — — 1,167 1,657 — — 1,657 2,5561972 2,028 — — — 2,028 3,122 — — 3,122 840

1973 1,175 — — — 1,175 540 — — 540 9981974 1,058 — — — 1,058 672 — — 672 1,0851975 5,102 — — — 5,102 518 — — 518 4,8691976 6,591 — — — 6,591 960 — — 960 9,7601977 4,910 32 — — 4,942 868 — — 868 13,687

1978 2,503 268 — — 2,771 4,485 — — 4,485 12,3661979 3,720 670 — — 4,390 4,859 — — 4,859 9,8431980 2,433 962 — — 3,395 3,776 — — 3,776 9,9671981 4,860 1,060 — — 5,920 2,853 — — 2,853 12,5361982 8,041 — — — 8,041 2,010 — — 2,010 17,793

1983 11,392 — — — 11,392 1,555 18 — 1,574 26,5631984 11,518 — — — 11,518 2,018 111 — 2,129 34,6031985 6,289 — — — 6,289 2,730 212 — 2,943 37,6221986 4,101 — — — 4,101 4,289 413 — 4,702 36,8771987 3,685 — 139 — 3,824 6,169 579 — 6,749 33,443

1988 4,153 — 445 — 4,597 7,935 528 — 8,463 29,5431989 2,541 — 290 264 3,095 6,258 447 — 6,705 25,5201990 4,503 — 419 408 5,329 6,042 356 — 6,398 24,3881991 6,955 — 84 491 7,530 5,440 168 — 5,608 25,6031992 5,308 — 125 483 5,916 4,768 — 1 4,770 26,736

1993 8,465 — 20 573 9,058 4,083 — 36 4,119 28,4961994 5,325 — 50 612 5,987 4,348 52 112 4,513 29,8891995 10,615 — 14 573 11,202 3,984 4 244 4,231 36,8371996 10,870 — 182 1,295 12,347 6,698 7 395 7,100 42,0401997 4,939 — — 705 5,644 6,668 5 524 7,196 40,488

1998 20,000 — — 973 20,973 3,789 1 595 4,385 56,0261999 24,071 — — 826 24,897 10,465 — 627 11,092 67,1752000 6,377 — — 513 6,890 22,993 — 634 23,627 50,3702001 9,599 — — 630 10,229 11,243 — 588 11,831 48,6912002 29,194 — — 952 30,146 19,207 — 769 19,976 58,699

2003 21,784 — — 1,218 23,002 7,784 — 928 8,712 72,8792004 17,830 — — 865 18,695 21,638 — 890 22,528 69,0312005 1,608 — — 771 2,379 13,907 — 923 14,830 56,5762006 2,156 — — 403 2,559 32,783 — 3,208 35,991 23,144

1Includes reserve tranche purchases.2Excludes reserve tranche purchases; includes outstanding associated loans from the Saudi Fund for Development.

Financial operations and transactions | II

IMF ANNUAL REPORT | 2006

136

Table II.6 Purchases and loans from the IMF, financial year ended April 30, 2006

(In millions of SDRs)

Stand-By/ Extended TotalReserve Emergency credit Fund Total PRGF purchases

Member tranche assistance tranche Facility SRF purchases loans and loans

Albania — — — 1 — 1 5 6Armenia — — — — — — 7 7Bangladesh — — — — — — 134 134Benin — — — — — — 1 1Burkina Faso — — — — — — 7 7

Burundi — — — — — — 7 7Cameroon — — — — — — 3 3Cape Verde — — — — — — 1 1Central African Republic — 7 — — — 7 — 7Congo, Dem. Rep. of — — — — — — 27 27

Congo, Rep. of — — — — — — 8 8Dominica — — — — — — 1 1Dominican Republic — — 96 — — 96 — 96Georgia — — — — — — 28 28Ghana — — — — — — 26 26

Grenada — — — — — — 2 2Guyana — — — — — — 19 19Haiti — 10 — — — 10 — 10Honduras — — — — — — 10 10Kyrgyz Republic — — — — — — 1 1

Macedonia, FYR — — 11 — — 11 — 11Malawi — — — — — — 10 10Mali — — — — — — 3 3Mozambique — — — — — — 2 2Nicaragua — — — — — — 14 14

Niger — — — — — — 11 11Rwanda — — — — — — 1 1São Tomé and Príncipe — — — — — — 1 1Senegal — — — — — — 14 14Serbia and Montenegro — — — 188 — 188 — 188

Sierra Leone — — — — — — 14 14Tajikistan — — — — — — 20 20Tanzania — — — — — — 6 6Turkey — — 1,666 — — 1,666 — 1,666Uganda — — — — — — 4 4

Uruguay — — 178 — — 178 — 178Zambia — — — — — — 16 16___ ______ ______ ______ ______ ______ ______ ______ Total — 17 1,951 189 — 2,156 403 2,559

Note: Components may not sum to total because of rounding.

137

Table II.7 Repurchases and repayments to the IMF, financial year ended April 30, 2006

(In millions of SDRs)Stand-By/ Extended SAF/PRGF and Total

Credit Fund Total Trust Fund repurchasesMember Tranche Facility Others1 repurchases repayments2 and repayments

Albania — — — — 7 7 Algeria — 358 — 358 — 358 Argentina 7,994 107 — 8,101 — 8,101 Armenia — — 1 1 22 23 Azerbaijan — 9 5 14 16 30

Benin — — — — 40 40 Bolivia 102 — — 102 89 191 Bosnia and Herzegovina 27 — — 27 — 27 Brazil 15,356 — — 15,356 — 15,356 Bulgaria 198 235 — 433 — 433

Burkina Faso — — — — 71 71 Cambodia — — — — 59 59 Cameroon — — — — 202 202 Central African Rep. — — — — 3 3 Chad — — — — 11 11

Congo, Rep. of 4 — — 4 3 7 Cote d’Ivoire — — — — 62 62 Djibouti — — — — 1 1 Dominica 0.5 — — 0.5 — 1 Dominican Republic 11 — — 11 — 11

Ecuador 96 — — 96 — 96 Ethiopia — — — — 115 115 Gabon 3 10 — 13 — 13 Gambia, The — — — — 2 2 Georgia — — 2 2 34 36

Ghana — — — — 295 295 Grenada — — 0.4 0.4 — 0.4 Guinea — — — — 14 14 Guinea-Bissau — — — — 2 2 Guyana — — — — 53 53

Haiti — — — — 3 3 Honduras — — — — 119 119 Indonesia — 826 — 826 — 826 Jordan 5 48 — 54 — 54 Kenya — — — — 8 8

Kyrgyz Republic — — — — 21 21 Lao P.D.R. — — — — 4 4 Liberia 0.2 — — 0.2 — 0.2 Macedonia, FYR 0.5 0.3 1 2 5 7 Madagascar — — — — 143 143

Malawi — — 4 4 9 14 Mali — — — — 87 87 Mauritania — — — — 10 10 Moldova — 15 — 15 — 15 Mongolia — — — — 5 5

Mozambique — — — — 122 122 Nicaragua — — — — 150 150 Niger — — — — 83 83 Pakistan 39 19 — 58 53 111 Panama — 7 — 7 — 7

Papua New Guinea 12 — — 12 — 12 Peru — 27 — 27 — 27 Philippines 59 126 — 185 — 185 Romania 127 — — 127 — 127 Rwanda — — — — 58 58

São Tomé and Príncipe — — — — 0.1 0.1 Senegal — — — — 122 122 Serbia and Montenegro 63 — 44 106 — 106 Sierra Leone — — — — 6 6 Sri Lanka 62 — — 62 — 62

Financial operations and transactions | II

IMF ANNUAL REPORT | 2006

138

Table II.8 Outstanding IMF credit by facility and policy, financial years ended April 30, 1997–2006

(In millions of SDRs and percent of total)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

(In millions of SDRs)

Stand-By Arrangements1 18,064 25,526 25,213 21,410 17,101 28,612 34,241 42,100 35,818 11,666Extended Arrangements 11,155 12,521 16,574 16,808 16,108 15,538 14,981 13,751 9,365 7,477Supplemental Reserve Facility — 7,100 12,655 — 4,085 5,875 15,700 6,028 4,569 —Compensatory and Contingency

Financing Facility 1,336 685 2,845 3,032 2,992 745 413 120 84 84Systemic Transformation Facility 3,984 3,869 3,364 2,718 1,933 1,311 644 154 18 — ______ ______ ______ ______ ______ ______ ______ ______ ______ ______

Subtotal (GRA) 34,539 49,701 60,651 43,968 42,219 52,081 65,978 62,153 49,854 19,227

SAF Arrangements 954 730 565 456 432 341 137 86 45 9PRGF Arrangements2 4,904 5,505 5,870 5,857 5,951 6,188 6,676 6,703 6,588 3,819Trust Fund 90 90 89 89 89 89 89 89 89 89 ______ ______ ______ ______ ______ ______ ______ ______ ______ ______Total 40,488 56,026 67,175 50,370 48,691 58,699 72,879 69,031 56,576 23,144

(Percent of total)

Stand-By Arrangements1 45 46 38 43 35 49 47 61 63 50Extended Arrangements 28 22 25 33 33 26 21 20 17 33Supplemental Reserve Facility — 13 19 — 9 10 21 9 8 —Compensatory and Contingency Financing Facility 3 1 4 6 6 1 1 —3 —3 —3

Systemic Transformation Facility 10 7 5 5 4 2 1 —3 —3 —3 ______ ______ ______ ______ ______ ______ ______ ______ ______ ______

Subtotal (GRA) 85 89 90 87 87 88 91 90 88 83

SAF Arrangements 2 1 1 1 1 1 —3 —3 —3 —3

PRGF Arrangements2 12 10 9 12 12 11 9 10 12 17Trust Fund —3 —3 —3 —3 —3 —3 —3 —3 —3 —3 ______ ______ ______ ______ ______ ______ ______ ______ ______ ______Total 100 100 100 100 100 100 100 100 100 100

1Includes outstanding credit tranche and emergency purchases.2Includes outstanding associated loans from the Saudi Fund for Development.3Less than of 1 percent of total.

Table II.7 (concluded)Stand-By/ Extended SAF/PRGF and Total

Credit Fund Total Trust Fund repurchasesMember Tranche Facility Others1 repurchases repayments2 and repayments

Sudan 5 6 8.5 19 — 19 Tajikistan — — — — 78 78 Tanzania — — — — 263 263 Togo — — — — 8 8 Turkey 5,849 — — 5,849 — 5,849

Uganda — — — — 118 118 Ukraine — 231 — 231 — 231 Uruguay 553 — — 553 — 553 Uzbekistan — — 8 8 — 8 Vietnam — — — — 30 30

Yemen, Republic of — 9 — 9 30 39 Zambia — — — — 571 571 Zimbabwe 64 45 — 109 0.2 110 ______ _____ ____ ______ _____ ______Total 30,630 2,077 74 32,783 3,208 35,991

1Includes Compensatory and Contingency Financing Facility, Systemic Transformation Facility, Natural Disaster Emergency Assistance, Post-Conflict Emergency Assistance, and Supplementary Financing Facility.

2Includes MDRI debt relief provided to 19 eligible countries in January and to Cameroon in April 2006.

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Table II.9 Summary of bilateral contributions to the PRGF-ESF and PRGF-HIPC Trusts

(In millions of SDRs; cumulative through April 30, 2006)

PRGF-ESF Trust PRGF-HIPC Trust ________________________________________________________________ ________________________ Subsidy contributions “as needed”1

Subsidies and HIPC_______________________________________ Of which, used for Loan grant contributions

Committed MDRI debt relief commitments “as needed”1

Total 3,352.9 1,120.0 15,759.7 1,561.6

Major industrial countries 2,238.5 818.8 12,864.8 880.5Canada 237.4 84.8 700.0 48.8France 378.2 116.4 2,900.0 82.2Germany 186.8 66.1 2,750.0 127.2Italy 148.7 84.4 1,380.0 63.6Japan 683.6 253.4 5,134.8 144.0United Kingdom 439.1 155.4 — 82.2United States 164.6 58.3 — 332.6

Other advanced countries 931.1 250.4 2,452.8 299.7Australia 16.0 3.7 — 24.8Austria 58.7 — — 14.3Belgium 111.6 39.5 350.0 35.3Denmark 66.7 23.6 100.0 18.5Finland 42.8 15.1 — 8.0Greece 37.7 13.3 — 6.3Iceland 4.3 1.5 — 0.9Ireland 7.9 2.4 — 5.9Israel — — — 1.8Korea 61.8 21.0 92.7 15.9Luxembourg 13.6 — — 0.7Netherlands 134.3 — 450.0 45.4New Zealand — — — 1.7Norway 44.2 15.7 150.0 18.5Portugal 4.2 1.4 — 6.6San Marino — — — 0.05Singapore 18.3 6.5 — 16.5Spain 16.6 3.1 708.4 23.3Sweden 183.8 65.0 — 18.3Switzerland 108.7 38.5 601.7 37.0

Fuel-exporting countries 17.2 6.1 49.5 114.3Algeria — — — 5.5Bahrain — — — 0.9Brunei Darussalam — — — 0.1Gabon — — — 2.5Iran, Islamic Republic of 1.6 0.6 — 2.2Kuwait — — — 3.1Libya — — — 7.3Nigeria — — — 13.9Oman — — — 0.8Qatar — — — 0.5Saudi Arabia 15.6 5.5 49.5 53.5United Arab Emirates — — — 3.8Venezuela — — — 20.4

Other developing countries 153.9 44.8 355.6 224.1Argentina 32.5 11.5 — 16.2Bangladesh 0.8 0.2 — 1.7Barbados — — — 0.4Belize — — — 0.3Botswana 1.7 0.6 — 5.7Brazil — — — 15.0Cambodia — — — 0.04Chile 3.7 1.3 — 4.4China 14.2 4.2 200.0 19.7Colombia — — — 0.9Cyprus — — — 0.8Dominican Republic — — — 0.5Egypt 12.3 4.3 155.6 1.3Fiji — — — 0.1Ghana — — — 0.5Grenada — — — 0.1India 12.4 — — 22.9Indonesia 6.0 2.1 — 8.2

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Jamaica — — — 2.7Lebanon — — — 0.4Malaysia 31.6 11.2 — 12.7Maldives — — — 0.01Malta 1.4 0.5 — 1.1Mauritius — — — 0.1Mexico — — — 54.5Micronesia, Federated States of — — — 0.00*Morocco 8.9 3.2 — 1.6Pakistan 2.3 0.3 — 3.4Paraguay — — — 0.1Peru — — — 2.5Philippines — — — 6.7Samoa — — — 0.00*South Africa — — — 28.6Sri Lanka — — — 0.6St. Lucia — — — 0.1St. Vincent and the Grenadines — — — 0.1Swaziland — — — 0.01Thailand 12.6 4.4 — 4.5Tonga — — — 0.02Trinidad and Tobago — — — 1.6Tunisia 1.0 0.3 — 1.5Turkey 11.2 — — —Uruguay 1.3 0.5 — 2.2Vanuatu — — — 0.1Vietnam — — — 0.4

Countries in transition 12.3 — — 42.9Croatia — — — 0.4Czech Republic 12.3 — — 4.1Estonia — — — 0.5Hungary — — — 6.0Latvia — — — 1.0Poland — — — 12.0Russian Federation — — — 14.6Slovak Republic — — — 4.0Slovenia — — — 0.4

Memorandum Item:OPEC Fund for International Development — — 37.0 —

*Less than SDR 5,000.1Estimated values of total contributions include forthcoming contributions that are not yet received. The term “as needed” refers to the nominal sum of concessional assistance taking into account the profile of subsidy needs associated with PRGF lending and the provision of HIPC assistance, respectively.

Table II.9 (concluded)

(In millions of SDRs; cumulative through April 30, 2006)

PRGF-ESF Trust PRGF-HIPC Trust ________________________________________________________________ ________________________ Subsidy contributions “as needed”1

Subsidies and HIPC_______________________________________ Of which, used for Loan grant contributions

Committed MDRI debt relief commitments “as needed”1

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Table II.10 Holdings of SDRs by all participants and by groups of countries as percentage of their cumulativeallocations of SDRs, at end of financial years ended April 30, 1997–2006

Nonindustrial countries2__________________________________________________________________________________Net debtor countries__________________________________

All Industrial All nonindustrial Net creditor All net debtor Heavily indebtedparticipants1 countries2 countries countries3 countries3 poor countries

1997 87.2 99.8 60.5 303.6 47.8 17.31998 95.0 107.0 69.4 323.7 56.1 24.11999 81.1 94.6 52.5 170.7 46.3 26.32000 84.6 95.0 62.5 174.1 56.6 20.62001 86.6 101.6 54.6 204.2 46.5 12.4

2002 91.5 107.7 56.9 227.9 44.7 14.62003 93.0 102.4 72.0 173.7 57.7 17.12004 96.3 105.6 76.3 230.5 23.5 20.92005 96.2 96.3 96.0 178.7 33.0 17.72006 81.8 85.3 74.3 233.7 20.2 10.4

1Consists of member countries that are participants in the SDR Department. At the end of FY2006, of the total SDRs allocated to participants in the SDR Department (SDR 21.4 billion), SDR 3.9 billion was not held by participants, but instead by the IMF and prescribed holders.

2Based on IFS classification (International Monetary Fund, International Financial Statistics, various years). 3Net creditor countries’ holdings of SDRs are more than their cumulative allocations of SDRs. Net debtor countries’ holdings of SDRs are less than their cumulative allocations of SDRs.

Table II.11 Key IMF rates, financial year ended April 30, 2006

(In percent)

SDR interest rate SDR interest ratePeriod and unadjusted rate Basic rate Period and unadjusted rate Basic ratebeginning of remuneration1 of charge1 beginning of remuneration1 of charge1

1Under the FY2006 decision on burden sharing, the rate of remuneration was adjusted downward and the rate of charge was adjusted upward to share the impact of protecting the IMF’s income from overdue charges and of contributing to the IMF’s precautionary balances. The amounts generated from burden sharing in FY2006 are refundable when overdue charges are paid and when overdue obligations cease to be a problem. During FY2006, the basic rate of charge was equal to the SDR interest rate plus 108 basis points.

2005May 1 2.49 3.57May 2 2.47 3.55May 9 2.45 3.53May 16 2.44 3.52May 23 2.46 3.54May 30 2.49 3.57

June 6 2.50 3.58June 13 2.51 3.59June 20 2.51 3.59June 27 2.54 3.62

July 4 2.56 3.64July 11 2.56 3.64July 18 2.59 3.67July 25 2.63 3.71

August 1 2.65 3.73August 8 2.70 3.78August 15 2.69 3.77August 22 2.70 3.78August 29 2.70 3.78

September 5 2.66 3.74September 12 2.68 3.76September 19 2.69 3.77September 26 2.68 3.76

October 3 2.73 3.81October 10 2.75 3.83October 17 2.82 3.90October 24 2.86 3.94October 31 2.91 3.99

November 7 2.94 4.02November 14 2.97 4.05November 21 2.99 4.07November 28 3.00 4.08

December 5 3.02 4.10December 12 3.00 4.08December 19 3.00 4.08December 26 3.03 4.11

2006January 2 3.06 4.14January 9 3.17 4.25January 16 3.22 4.30January 23 3.24 4.32January 30 3.29 4.37

February 6 3.32 4.40February 13 3.35 4.43February 20 3.36 4.44February 27 3.40 4.48

March 6 3.42 4.50March 13 3.43 4.51March 20 3.43 4.51March 27 3.46 4.54

April 3 3.47 4.55April 10 3.48 4.56April 17 3.49 4.57April 24 3.51 4.59

2005May 1 2.49 3.57May 2 2.47 3.55May 9 2.45 3.53May 16 2.44 3.52May 23 2.46 3.54May 30 2.49 3.57

June 6 2.50 3.58June 13 2.51 3.59June 20 2.51 3.59June 27 2.54 3.62

July 4 2.56 3.64July 11 2.56 3.64July 18 2.59 3.67July 25 2.63 3.71

August 1 2.65 3.73August 8 2.70 3.78August 15 2.69 3.77August 22 2.70 3.78August 29 2.70 3.78

September 5 2.66 3.74September 12 2.68 3.76September 19 2.69 3.77September 26 2.68 3.76

October 3 2.73 3.81October 10 2.75 3.83October 17 2.82 3.90October 24 2.86 3.94October 31 2.91 3.99

November 7 2.94 4.02November 14 2.97 4.05November 21 2.99 4.07November 28 3.00 4.08

December 5 3.02 4.10December 12 3.00 4.08December 19 3.00 4.08December 26 3.03 4.11

2006January 2 3.06 4.14January 9 3.17 4.25January 16 3.22 4.30January 23 3.24 4.32January 30 3.29 4.37

February 6 3.32 4.40February 13 3.35 4.43February 20 3.36 4.44February 27 3.40 4.48

March 6 3.42 4.50March 13 3.43 4.51March 20 3.43 4.51March 27 3.46 4.54

April 3 3.47 4.55April 10 3.48 4.56April 17 3.49 4.57April 24 3.51 4.59

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Table II.12 Members that have accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Articles of Agreement

Effective date Effective dateMember of acceptance Member of acceptance

Algeria September 15, 1997 India August 20, 1994Antigua and Barbuda November 22, 1983 Indonesia May 7, 1988Argentina May 14, 1968 Iran, Islamic Republic of September 6, 2004Armenia May 29, 1997 Ireland February 15, 1961Australia July 1, 1965 Israel September 21, 1993

Austria August 1, 1962 Italy February 15, 1961Azerbaijan November 30, 2004 Jamaica February 22, 1963Bahamas, The December 5, 1973 Japan April 1, 1964Bahrain March 20, 1973 Jordan February 20, 1995Bangladesh April 11, 1994 Kazakhstan July 16, 1996

Barbados November 3, 1993 Kenya June 30, 1994Belarus November 5, 2001 Kiribati August 22, 1986Belgium February 15, 1961 Korea November 1, 1988Belize June 14, 1983 Kuwait April 5, 1963Benin June 1, 1996 Kyrgyz Republic March 29, 1995

Bolivia June 5, 1967 Latvia June 10, 1994Botswana November 17, 1995 Lebanon July 1, 1993Brazil November 30, 1999 Lesotho March 5, 1997Brunei Darussalam October 10, 1995 Libya June 21, 2003Bulgaria September 24, 1998 Lithuania May 3, 1994

Burkina Faso June 1, 1996 Luxembourg February 15, 1961Cambodia January 1, 2002 Macedonia, FYR June 19, 1998Cameroon June 1, 1996 Madagascar September 18, 1996Canada March 25, 1952 Malawi December 7, 1995Cape Verde July 1, 2004 Malaysia November 11, 1968

Central African Republic June 1, 1996 Mali June 1, 1996Chad June 1, 1996 Malta November 30, 1994Chile July 27, 1977 Marshall Islands May 21, 1992China December 1, 1996 Mauritania July 19, 1999Colombia August 1, 2004 Mauritius September 29, 1993

Comoros June 1, 1996 Mexico November 12, 1946Congo, Dem. Rep. of February 10, 2003 Micronesia, Federated States of June 24, 1993Congo, Rep. of June 1, 1996 Moldova June 30, 1995Costa Rica February 1, 1965 Mongolia February 1, 1996Côte d’Ivoire June 1, 1996 Morocco January 21, 1993

Croatia May 29, 1995 Namibia September 20, 1996Cyprus January 9, 1991 Nepal May 30, 1994Czech Republic October 1, 1995 Netherlands February 15, 1961Denmark May 1, 1967 New Zealand August 5, 1982Djibouti September 19, 1980 Nicaragua July 20, 1964

Dominica December 13, 1979 Niger June 1, 1996Dominican Republic August 1, 1953 Norway May 11, 1967Ecuador August 31, 1970 Oman June 19, 1974Egypt January 2, 2005 Pakistan July 1, 1994El Salvador November 6, 1946 Palau December 16, 1997

Equatorial Guinea June 1, 1996 Panama November 26, 1946Estonia August 15, 1994 Papua New Guinea December 4, 1975Fiji August 4, 1972 Paraguay August 22, 1994Finland September 25, 1979 Peru February 15, 1961France February 15, 1961 Philippines September 8, 1995

Gabon June 1, 1996 Poland June 1, 1995Gambia, The January 21, 1993 Portugal September 12, 1988Georgia December 20, 1996 Qatar June 4, 1973Germany February 15, 1961 Romania March 25, 1998Ghana February 21, 1994 Russian Federation June 1, 1996

Greece July 7, 1992 Rwanda December 10, 1998Grenada January 24, 1994 St. Kitts and Nevis December 3, 1984Guatemala January 27, 1947 St. Lucia May 30, 1980Guinea November 17, 1995 St. Vincent and the Grenadines August 24, 1981Guinea-Bissau January 1, 1997 Samoa October 6, 1994

Guyana December 27, 1966 San Marino September 23, 1992Haiti December 22, 1953 Saudi Arabia March 22, 1961Honduras July 1, 1950 Senegal June 1, 1996Hungary January 1, 1996 Serbia and Montenegro May 15, 2002Iceland September 19, 1983 Seychelles January 3, 1978

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Table II.12 (concluded)

Effective date Effective dateMember of acceptance Member of acceptance

Sierra Leone December 14, 1995 Tonga March 22, 1991Singapore November 9, 1968 Trinidad and Tobago December 13, 1993Slovak Republic October 1, 1995 Tunisia January 6, 1993Slovenia September 1, 1995 Turkey March 22, 1990Solomon Islands July 24, 1979 Uganda April 5, 1994

South Africa September 15, 1973 Ukraine September 24, 1996Spain July 15, 1986 United Arab Emirates February 13, 1974Sri Lanka March 15, 1994 United Kingdom February 15, 1961Sudan October 29, 2003 United States December 10, 1946Suriname June 29, 1978 Uruguay May 2, 1980

Swaziland December 11, 1989 Uzbekistan October 15, 2003Sweden February 15, 1961 Vanuatu December 1, 1982Switzerland May 29, 1992 Venezuela July 1, 1976Tajikistan December 9, 2004 Vietnam November 8, 2005Tanzania July 15, 1996 Yemen, Republic of December 10, 1996

Thailand May 4, 1990 Zambia April 19, 2002Timor-Leste July 23, 2002 Zimbabwe February 3, 1995Togo June 1, 1996

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Table II.13 De facto classification of exchange rate regimes and monetary policy framework

This classification system is based on members’ actual, de facto, arrangements as identified by IMF staff, which may differ from their officially announced arrangements.

The scheme ranks exchange rate arrangements on the basis of their degree of flexibility and the existence of formal or informal commitments to exchange rate paths. It distinguishes among different forms of exchange rate regimes, in addition to arrangements with no separate legal tender, to help assess the implications of the choice of exchange rate arrangement for the degree of monetary policy independence. The system presents members’ exchange rate regimes and monetary policy frameworks to provide greater transparency in the classification scheme and to illustrate the relationship between exchange rate regimes and different monetary policy frameworks. The following explains the categories.

Exchange rate regimes

Exchange arrangements with no separate legal tender

The currency of another country circulates as the sole legal tender (formal dollarization), or the member belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. Adopting such regimes implies the complete surrender of the monetary authorities’ control over domestic monetary policy.

Currency board arrangements

A monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. This implies that domestic currency will be issued only against foreign exchange and that it remains fully backed by foreign assets, leaving little scope for discretionary monetary policy and eliminating traditional central bank functions, such as monetary control and lender-of-last-resort. Some flexibility may still be afforded, depending on how strict the banking rules of the currency board arrangement are.

Conventional fixed peg arrangements

The country pegs its currency within margins of ±1 percent or less vis-à-vis another currency; a cooperative arrangement, such as the ERM II; or a basket of currencies, where the basket is formed from the currencies of major trading or financial partners and weights reflect the geographical distribution of trade, services, or capital flows. The currency composites can also be standardized, as in the case of the SDR. There is no commitment to keep the parity irrevocably. The exchange rate may fluctuate within narrow margins of less than ±1 percent around a central rate—or the maximum and minimum value of the exchange rate may remain within a narrow margin of 2 percent—for at least three months. The monetary authority maintains the narrow range of fluctuation through direct intervention (that is, via sale/purchase of foreign exchange in the market) or indirect intervention (for example, via the use of interest rate policy, imposition of foreign exchange regulations, exercise of moral suasion that constrains foreign exchange activity, or through intervention by other public institutions). Flexibility of monetary policy, though limited, is greater than in the case of exchange arrangements with no separate legal tender and currency boards because traditional central banking functions are still possible, and the monetary authority can adjust the level of the exchange rate, although relatively infrequently.

Pegged exchange rates within horizontal bands

The value of the currency is maintained within certain margins of fluctuation of more than ±1 percent around a fixed central rate or the margin between the maximum and minimum value of the exchange rate exceeds 2 percent. As in the case of conventional fixed pegs, reference may be made to a single currency, a currency composite, or a cooperative arrangement (such as the ERM II). There is a limited degree of monetary policy discretion, depending on the band width.

Crawling pegs

The currency is adjusted periodically in small amounts at a fixed rate or in response to changes in selective quantitative indicators, such as past inflation differentials vis-à-vis major trading partners, or differentials between the inflation target and expected inflation in major trading partners. The rate of crawl can be set to adjust for measured inflation or other indicators (backward looking), or set at a preannounced fixed rate and/or below

the projected inflation differentials (forward looking). Maintaining a crawling peg imposes constraints on monetary policy in a manner similar to a fixed peg system.

Exchange rates within crawling bands

The currency is maintained within certain fluctuation margins of at least ±1 percent around a central rate—or the margin between the maximum and minimum value of the exchange rate exceeds 2 percent—and the central rate or margins are adjusted periodically at a fixed rate or in response to changes in selective quantitative indicators. The degree of exchange rate flexibility is a function of the band width. Bands are either symmetric around a crawling central parity or widen gradually with an asymmetric choice of the crawl of upper and lower bands (in the latter case, there may be no preannounced central rate). The commitment to maintain the exchange rate within the band imposes constraints on monetary policy, with the degree of policy independence being a function of the band width.

Managed floating with no predetermined path for the exchange rate

The monetary authority attempts to influence the exchange rate without having a specific exchange rate path or target. Indicators for managing the rate are broadly judgmental (for example, balance of payments position, international reserves, parallel market developments), and adjustments may not be automatic. Intervention may be direct or indirect.

Independently floating

The exchange rate is market-determined, with any official foreign exchange market intervention aimed at moderating the rate of change and preventing undue fluctuations in the exchange rate, rather than at establishing a level for it.

Monetary policy framework

Exchange rate anchor

The monetary authority stands ready to buy or sell foreign exchange at given quoted rates to maintain the exchange rate at its preannounced level or within a range; the exchange rate serves as the nominal anchor or intermediate target of monetary policy. This type of regime covers exchange rate regimes with no separate legal tender; currency board arrangements; fixed pegs with and without bands; and crawling pegs with and without bands.

Monetary aggregate anchor

The monetary authority uses its instruments to achieve a target growth rate for a monetary aggregate, such as reserve money, M1, or M2, and the targeted aggregate becomes the nominal anchor or intermediate target of monetary policy.

Inflation targeting framework

This involves the public announcement of medium-term numerical targets for inflation with an institutional commitment by the monetary authority to achieve these targets. Additional key features include increased communication with the public and the markets about the plans and objectives of monetary policymakers and increased accountability of the central bank for attaining its inflation objectives. Monetary policy decisions are guided by the deviation of forecasts of future inflation from the announced target, with the inflation forecast acting (implicitly or explicitly) as the intermediate target of monetary policy.

Fund-supported or other monetary program

This involves implementation of monetary and exchange rate policies within the confines of a framework that establishes floors for international reserves and ceilings for net domestic assets of the central bank. Indicative targets for reserve money may be appended to this system. Countries that maintain nominal anchors, exchange rate anchors, monetary anchors, or inflation targeting frameworks are classified under those respective rubrics.

Other

The country has no explicitly stated nominal anchor but, rather, monitors various indicators in conducting monetary policy, or there is no relevant information available for the country.

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Table II.13 (continued)Monetary policy framework1

________________________________________________________________________________________________________________Exchange IMF-supportedrate regime Monetary Inflation- or other(number of aggregate targeting monetarycountries) Exchange rate anchor target framework program Other2

Exchange Another Euro area (12)arrangements currency as CFA franc zone (14) ___________________________ Austriawith no separate legal tender (9) ECCU (6)3 WAEMU CEMAC Belgiumlegal tender (41) Ecuador Antigua and Benin* Cameroon* Finland

El Salvador4 Barbuda Burkina Faso* Central African Rep. France Kiribati Dominica* Côte d’Ivoire Chad* Germany Marshall Islands Grenada* Guinea-Bissau Congo, Rep. of* Greece Micronesia, Fed. St. Kitts and Nevis Mali* Equatorial Guinea Ireland States of St. Lucia Niger* Gabon Italy Palau St. Vincent and Senegal Luxembourg Panama the Grenadines Togo Netherlands San Marino Portugal Timor-Leste Spain

Currency board Bosnia and Herzegovinaarrangements (7) Brunei Darussalam

Bulgaria* Djibouti Estonia5

Hong Kong SAR Lithuania5

Other conventional Against a single China†6 Pakistan†7

fixed-peg currency (44) Against a composite (5) Guyana*7,8

arrangements (49) Aruba Fiji Suriname7,8,9

Azerbaijan7 Libyan Arab Jamahiriya Bahamas, The9 Morocco Bahrain Samoa Barbados Vanuatu Belarus7

Belize Bhutan Cape Verde China†6

Comoros10

Egypt7 Eritrea Guyana*7

Honduras*†7

Iraq*7

Jordan7

Kuwait Latvia5

Lebanon7

Lesotho Macedonia, FYR*7

Maldives Malta5

Mauritania7

Namibia Nepal* Netherlands Antilles Oman Pakistan†7

Qatar Saudi Arabia Seychelles7

Solomon Islands7

Suriname7,9

Swaziland Syrian Arab Rep.9 Trinidad and Tobago7

Turkmenistan7

Ukraine7

United Arab Emirates Venezuela, Rep. Bolivariana de Vietnam7

Zimbabwe9

Pegged exchange Within a Other band Hungary†rates within cooperative arrangements (2) Slovak Rep.†5

horizontal arrangement (4)bands (6)11 Cyprus5 Hungary†

Denmark5 Tonga Slovak Rep.†5

Slovenia5

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Table II.13 (concluded)Monetary policy framework1

________________________________________________________________________________________________________________Exchange IMF-supportedrate regime Monetary Inflation- or other(number of aggregate targeting monetarycountries) Exchange rate anchor target framework program Other2

Crawling pegs (5) Bolivia Iran, I.R. of7 Botswana9

Costa Rica Iran, I.R. of7

Nicaragua*

Managed floating Argentina Colombia* Afghanistan, Algeriawith no pre- Bangladesh* Czech Rep. I.R. of* Angoladetermined path Cambodia Guatemala7 Georgia* Burundi*for the exchange Ethiopia7 Peru* Kenya* Croatiarate (53) Gambia, The7 Romania* Kyrgyz Rep.* Dominican Rep.*

Ghana*7 Thailand Mozambique*7 Guinea7

Haiti7 Rwanda* India Indonesia Kazakhstan Jamaica7 Liberia7

Lao P.D.R.9 Malaysia Madagascar7 Myanmar9

Malawi* Nigeria7

Mauritius Papua New Guinea7

Moldova* Paraguay Mongolia Russian Federation Serbia and São Tomé and Montenegro*12 Príncipe* Sri Lanka7 Singapore

Sudan Uzbekistan9

Tajikistan Tunisia Uruguay*7 Yemen, Rep. of7 Zambia*

Independently Albania* Australia Armenia* Japanfloating (26) Congo, Dem. Brazil Tanzania*7 Somalia9,13

Rep. of Canada Switzerland Sierra Leone7 Chile United States Uganda Iceland Israel Korea Mexico New Zealand Norway Philippines Poland South Africa Sweden Turkey* United Kingdom

Sources: IMF staff reports; Recent Economic Developments; and IMF staff estimates.1An asterisk (*) indicates that the country has an IMF-supported or other monetary program. A dagger (†) indicates that the country adopts more than one nominal anchor in conducting monetary policy (it should be noted, however, that it would not be possible, for practical reasons, to include in this table which nominal anchor plays the principal role in conducting monetary policy).

2Includes countries that have no explicitly stated nominal anchor, but rather monitor various indicators in conducting monetary policy. 3The ECCU has a currency board arrangement.4The printing of new colones, the domestic currency, is prohibited, but the existing stock of colones will continue to circulate along with the U.S. dollar as legal tender until all colón notes wear out physically.

5The member participates in the ERM II.6On July 21, 2005, China announced a 2.1 percent revaluation of the renminbi–U.S. dollar exchange rate and a change in its exchange rate arrangement to allow the value of the renminbi to fluctu-ate based on market supply and demand with reference to an undisclosed basket of currencies. To permit a greater role for market forces in determining the renminbi exchange rate, steps have been taken since July 2005 to liberalize and develop China’s foreign exchange markets, including the establishment of an over-the-counter spot foreign exchange market and markets for currency swaps and futures. From end-July 2005 to end-April 2006, the renminbi exchange rate was more flexible, but the fluctuation in the renminbi-U.S. dollar exchange rate was less than the 2 percent range (for a three-month period) used in the IMF’s de facto exchange rate classification system as an indicator for a conventional fixed peg exchange rate arrangement.

7The regime operating de facto in the country is different from its de jure regime.8There is no evidence of direct intervention by the authorities in the foreign exchange market.9The member maintains an exchange arrangement involving more than one foreign exchange market. The arrangement shown is that maintained in the major market.

10Comoros has the same arrangement with the French Treasury as the CFA franc zone countries. 11The bands for these countries are as follows: Cyprus ±15%, Denmark ±2.25%, Hungary ±15%, Slovak Republic ±15%, Slovenia (undisclosed), and Tonga ±5%.12The description of the exchange rate regime applies to the Republic of Serbia only, which accounts for about 93% of the economy of Serbia and Montenegro; in the Republic of Montenegro,

the euro is legal tender. In the UN-administered province of Kosovo, the euro is the most widely used currency.13Insufficient information on the country is available to confirm this classification, and so the classification of the last official consultation is used.

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APPENDIX | III

Principal policy decisions of the Executive Board

Burden sharing—implementation in FY2007

Section I. Principles of burden sharing

1. The financial consequences for the Fund that stem from the existence of overdue financial obligations shall be shared between debtor and creditor member countries.

2. The sharing shall be applied in a simultaneous and symmetrical fashion.

Section II. Determination of the rate of charge

The rate of charge referred to in Rule I-6(4) shall be adjusted in accordance with the provisions of Section IV of this decision and Section IV of Executive Board Decision No. 12189-(00/45), adopted April 28, 2000.

Section III. Adjustment for deferred charges

Notwithstanding paragraph 1(a) of Section IV of Executive Board Decision No. 12189-(00/45), adopted April 28, 2000, the rate of charge and the rate of remuneration determined under that Section shall be rounded to two decimal places.

Section IV. Amount for Special Contingent Account–1

1. An amount of SDR 60 million shall be generated during financial year 2007 in accordance with the provisions of this Section and shall be placed to the Special Contingent Account-1 referred to in Decision No. 9471-(90/98), adopted June 20, 1990.

2. (a) In order to generate the amount to be placed to the Special Contin-gent Account–1 in accordance with paragraph 1 of this Section, not-withstanding Rule I-6(4)(a) and (b) and Rule I–10, the rate of charge referred to in Rule I-6(4) and, subject to the limitation in (b), the rate of remuneration prescribed in Rule I-10 shall be adjusted in accor-dance with the provisions of this paragraph.

(b) Notwithstanding paragraph 1 above, adjustments to the rate of charge and the rate of remuneration under this paragraph shall be rounded to two decimal places. No adjustment in the rate of remuneration under this paragraph shall be carried to the point where the average remuneration coefficient would be reduced below 85 percent for an adjustment period.

(c) The adjustments under this paragraph shall be made as of May 1, 2006, August 1, 2006, November 1, 2006 and February 1, 2007; shortly after July 31 for the period May 1 to July 31; shortly after October 31 for the period from August 1 to October 31; shortly after January 31 for the period from November 1 to January 31; shortly after April 30 for the period from February 1 to April 30.

3. (a) Subject to paragraph 3 of Decision No. 8780-(88/12), adopted Janu-ary 29, 1988, the balances held in the Special Contingent Account–1 shall be distributed in accordance with the provisions of this para-graph to members that have paid additional charges or have received reduced remuneration as a result of the adjustment when there are no outstanding overdue charges and repurchases, or at such earlier time as the Fund may decide.

(b) Distributions under (a) shall be made in proportion to the amounts that have been paid or have not been received by each member because of the respective adjustments.

(c) If a member that is entitled to a payment under this paragraph has any overdue obligation to the Fund in the General Department at the time of payment, the member’s claim under this paragraph shall be set off against the Fund’s claim in accordance with Decision No. 8271-(86/74), adopted April 30, 1986, or any subsequent decision of the Fund.

(d) Subject to paragraph 4 of Decision No. 8780-(88/12), adopted Janu-ary 29, 1988, if any loss is charged against the Special Contingent Account–1, it shall be recorded in accordance with the principles of proportionality set forth in (b).

Section V. Review

The operation of this decision shall be reviewed when the adjustment in the rate of remuneration reduces the remuneration coefficient to the limit set forth in paragraph 2(b) of Section IV of this decision and Section IV of Executive Board Decision No. 12189-(00/45), adopted April 28, 2000. (EBS/06/51, 4/12/06)

Decision No. 13707-(06/40)Adopted April 28, 2006

Amendment of Rule I-6(4)

With effect from FY2007, Rule I-6(4) of the Fund’s Rules and Regulations shall be amended to read as follows:

“The rate of charge on holdings (i) acquired as a result of a purchase under a policy that has been the subject of an exclusion under Article XXX(c), or (ii) that exceed the amount of the member’s quota after exclud-ing any balances referred to in (i), shall be determined in accordance with (a), (b), and (c) below.

(a) The rate of charge shall be determined at the beginning of each financial year as the SDR interest rate under Rule T–1 plus a margin expressed in basis points. The margin shall be determined on the basis of the estimated income and expense of the Fund during the year, and the target amount of net income for the year. The latter shall be 5 percent of the Fund’s reserves

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at the beginning of the year or such other percentage as the Executive Board may determine particularly in the light of the results in the previous financial year.

Notwithstanding the second sentence of this paragraph (a), in exceptional circumstances, the margin may be determined on a basis other than the esti-mated income and expense of the Fund during the year and a target amount of net income for the year.

(b) A mid-year review of the Fund’s income position shall be held shortly after October 31 of each year.

(i) If the margin has been determined on the basis of the estimated income and expense of the Fund during the year and a target amount of net income for the year and actual net income for the first six months of the financial year, on an annual basis, is below the target amount for the year by an amount equal to, or greater than, two percent of the Fund’s reserves at the beginning of the financial year, the Executive Board will consider how to deal with the situation. If by December 15 no agreement has been reached as a result of this consideration, the margin over the SDR interest rate under Rule T-1 determined under (a) at the beginning of the year shall be increased as of November 1 to the level necessary to reach the target amount of net income for the year.

(ii) If the margin has been determined on a basis other than the esti-mated income and expense of the Fund during the year and a target amount of net income for the year, the Executive Board will review any change in the exceptional circumstances and decide by December 15 whether the margin over the SDR interest rate under Rule T-1 determined under (a) at the beginning of the year shall be changed as of November 1 in light of the actual income position for the first six months of the financial year, on an annual basis.

(c) A review of the Fund’s income position shall be held shortly after the end of each financial year. If the net income for the year just ended is in excess of the any target amount for the year, the Executive Board will consider whether the whole or a part of the excess should be used to reduce the rate of charge retroactively for the year just ended, or to place all or part of the excess to reserve.

(d) If the Fund’s net income for a financial year is in excess of the any tar-get amount for that year, the Executive Board may for the purposes of the determinations and estimates referred to in (a) and (b) above in respect of the immediately subsequent financial year, decide to deem any part of the excess over the target amount that has been placed to reserve as income for that subsequent financial year.” (EBS/06/51, 4/12/06)

Decision No. 13705-(06/40)Adopted April 28, 2006

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust—amendment

The Instrument to Establish the Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust, annexed to Decision No. 8759-(87/176), shall be amended as follows:

(a) The following new sentence shall be added at the end of Section III, Paragraph 2:

“For this purpose the Managing Director of the Trustee is authorized to enter into borrowing agreements and agree to their terms and conditions with lenders to the Loan Account of the Trust.”

(b) The following new sentence shall be added at the end of Section IV, Paragraph 2:

“For this purpose the Managing Director of the Trustee is authorized to accept donations of resources and agree to their terms and conditions with donors to the Subsidy Accounts of the Trust.”

(c) The following new sentence shall be added at the end of Section IV, Paragraph 3:

“For this purpose the Managing Director of the Trustee is authorized to enter into borrowing agreements and agree to their terms and conditions with lenders to the Subsidy Accounts of the Trust.” (EBS/06/24, 2/22/06)

Decision No. 13689-(06/24) ESFAdopted March 10, 2006

Modalities for surveillance over West African Economic and Monetary Union policies in context of Article IV consultations with member countries

Staff will hold annual discussions with the regional institutions responsible for common policies in the West African Economic and Monetary Union (WAEMU). These discussions will be held separately from the discussions with individual WAEMU members.

There will be an annual staff report and Board discussion of the common policies of WAEMU. Both staff’s discussions with WAEMU institutions and the Board discussion of the annual staff report will be considered an integral part of the Article IV consultation with each member of WAEMU.

In addition to common policies in WAEMU that are relevant for surveillance, including monetary and exchange rate policies, the annual staff report will cover from a regional perspective other economic policies relevant for Fund surveillance for which responsibility remains at the national level. There will be a summing-up of the conclusion of the Board’s annual discussion on WAEMU’s common policies. It will be cross-referenced in the summings-up for the Article IV consultations with individual WAEMU members at the con-clusion of the Article IV consultation for each member. The Board discussions for the Article IV consultations with individual WAEMU members will be clus-tered, to the extent possible, around the Board discussion on the common policies of WAEMU.

If considered necessary by the Managing Director, staff will hold a second round of discussions during the year with regional institutions and report to the Board informally on these discussions to provide adequate context for bilateral consultations with the individual WAEMU members that do not coin-cide broadly with the annual Board discussion on the WAEMU’s policies.

The frequency of Article IV consultations with individual WAEMU members shall be determined in accordance with the Board decisions on consultation cycles. (SM/05/429, 12/22/05)

Decision No. 13656-(06/1)Adopted January 6, 2006

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Access limits under the ESF

1. The Fund as Trustee of the PRGF-ESF Trust decides that Decision No. 8845-(88/61) ESAF, adopted April 20, 1988, shall be amended as follows:

(a) In paragraph 1, the phrase “under the Poverty Reduction and Growth Facility” shall be added after “a three-year commitment”;

(b) A new paragraph 3 shall be inserted to read as follows:

“3. In accordance with Section II, paragraph 2(b) of the Instrument to Establish the Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust, the maximum limit on total outstanding access for each eligible member under the ESF shall be 50 percent of a member’s quota in the Fund, provided that this limit may be exceeded in exceptional circumstances.”; and

(c) The existing paragraph 3 shall be deleted and a new paragraph 4 shall be inserted to read as follows: “The Fund shall review the maximum access limit and the exceptional maximum limit under the PRGF, and the maximum access limit under the ESF”.

2. This decision shall become effective when Decision No. 13590-(05/99) ESF becomes effective. (EBS/05/158, Sup. 3, 12/2/05)

Decision No. 13591-(05/99) ESFAdopted November 23, 2005

Exogenous Shocks Facility (ESF)—establishment

1. Paragraph 1 of Decision No. 8759-(87/176) ESAF, adopted December 18, 1987, shall be amended by replacing “Poverty Reduction and Growth Facility Trust” with “Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust.”

2. The Poverty Reduction and Growth Facility Trust (“PRGF Trust”) Instrument annexed to Decision No. 8759-(87/176) ESAF, along with its Appendices, shall be amended to read as set forth in the Attachment annexed to this decision.

3. References in other Fund decisions, instruments, agreements or docu-ments to Poverty Reduction and Growth Facility, Poverty Reduction and Growth Facility Trust, Subsidy Account, PRGF, or PRGF Trust shall be under-stood to be, respectively, references to Poverty Reduction and Growth Facility and Exogenous Shocks Facility, Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust, PRGF-ESF Subsidy Account, PRGF-ESF and PRGF-ESF Trust.

4. With respect to the PRGF-HIPC Trust Instrument that is annexed to Deci-sion No. 11436-(97/10), adopted February 4, 1997:

(a) notwithstanding paragraph 3 above, the following provisions shall remain unchanged:

(i) the references to “Interim PRGF Subsidy Operations” in the title and Introductory Section;

(ii) the references to “interim PRGF subsidy operations” in Section I, paragraph 1(vii) and Section III bis, and to “PRGF” in the definition of this term in Section I, paragraph 1(vii);

(iii) the references to “self-sustained PRGF operations” in Section I, paragraph 1(viii) and Section V, paragraph 2;

(iv) the reference to “PRGF-type operations” in Section I paragraph 1(viii); and

(v) the reference to “interim PRGF operations” and “PRGF-eligible members” in Section I, paragraph 2(b); and

(b) Section III bis, as amended by paragraphs 3 and 4(a) above, shall be further amended by adding “and PRGF-ESF Subsidy Account” immedi-ately after the first reference to “PRGF Subsidy Account.”

5. This decision shall become effective when all lenders to the Loan Account of the PRGF Trust and all third party contributors to the Subsidy Account of the PRGF Trust have consented to the amendments set forth above, provided, however, that this decision shall not become effective until Decision No. 13588-(05/99) MDRI is effective.

6. The Fund shall review the application of this decision at intervals of three years and at such other times as consideration of it is placed on the agenda of the Executive Board. (EBS/05/158, Sup. 3, 12/2/05)

Decision No. 13590-(05/99 ESF)Adopted November 23, 2005

Multilateral Debt Relief Initiative (MDRI) and related HIPC Initiative amendments

1. Pursuant to Article V, Section 2(b), the Fund adopts the Instrument to Establish the Multilateral Debt Relief Initiative-I Trust (“MDRI-I Trust”) that is annexed as Attachment I to this decision. The Fund shall conduct semi-annual reviews of the financing of the MDRI-I Trust.

2. Pursuant to Article V, Section 2(b), the Fund adopts the Instrument to Establish the Multilateral Debt Relief Initiative-II Trust (“MDRI-II Trust”) that is annexed as Attachment II to this decision. The Fund shall conduct semi-annual reviews of the financing of the MDRI-II Trust.

3. Section IV, paragraph 6 of the Poverty Reduction and Growth Facility Trust (“PRGF Trust”) Instrument annexed to Decision No. 8759-(87/176) ESAF, adopted December 18, 1987, shall be amended as follows:

(a) the current text shall become paragraph “(a)”; and

(b) a new paragraph (b) shall be added to read as follows:

“(b) Prior to the termination of the Subsidy Account in accordance with (a) above, the equivalent of SDR 1.12 billion of the resources in that Account that are not derived from the Special Disbursement Account shall be transferred to the Multilateral Debt Relief Initiative-II Trust established pursuant to paragraph 2 of Decision No. 13588-(05/99) MDRI, upon the notification by sufficient contributors that up to the full amount of their outstanding contributions may be used for such a transfer.”

4. The following decisions relating to the use of the proceeds of the 1999/2000 off-market gold sales are hereby rescinded: (a) paragraph 2 of Decision No. 12063-(99/130), adopted December 8, 1999, other than the first sentence of such paragraph, and (b) Decision No. 12330-(00/118), adopted November 30, 2000.

5. Of the resources held in the Special Disbursement Account (SDA) as of January 5, 2006:

(a) the equivalent of SDR 530 million, which shall include all the proceeds from investment of the profits of the 1999/2000 gold sales held in the

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SDA as of January 5, 2006, shall be transferred to the HIPC subac-count of the PRGF-HIPC Trust Account and shall be used exclusively to provide debt relief from the Fund under the HIPC Initiative to members that qualify for such relief or, if not needed for such purpose, shall be used to replenish resources from other sources that have been used for such relief;

(b) the equivalent of SDR 1.5 billion shall be transferred to the MDRI-I Trust established pursuant to paragraph 1 of this decision, and shall be used exclusively to provide debt relief from the Fund in accordance with the provisions of the Instrument establishing that Trust; and

(c) the remaining balance shall be transferred to the Subsidy Account of the PRGF Trust.

6. In accordance with Article V, Section 12(i), the General Resources Account of the Fund shall be reimbursed annually by the MDRI-I Trust, from resources transferred to the MDRI-I Trust from the SDA, in respect of the expenses of administering SDA resources in the MDRI-I Trust, other than expenses already attributed to other accounts or trusts administered by the Fund or to the General Resources Account.

7. Section III, paragraph 4(b) of the Instrument to Establish a Trust for Spe-cial PRGF Operations for the Heavily Indebted Poor Countries and Interim PRGF Subsidy Operations (“PRGF-HIPC Trust”) annexed to Decision No. 11436-(97/10), adopted February 4, 1997, shall be amended to read as follows:

“(b) Trust grants and Trust loans (including any income from investment of their proceeds) advanced to a member as interim assistance shall be used to meet the member’s debt service payments on its existing debt to the Fund as they fall due, in accordance with the schedule for using the proceeds of such grants and loans as determined under the provisions of (a) above. Trust grants and Trust loans (including any income from invest-ment of their proceeds) disbursed to a member at the completion point, along with any amounts previously advanced to the member as interim assistance that remain unused at the completion point, shall be used to effect the early repayment of the member’s qualifying debt to the Fund, in accordance with the schedule for using the proceeds of such grants and loans as determined under the provisions of (a) above. Notwithstanding paragraph 6 below, the preceding sentence shall also apply to Trust grants and Trust loans (including any income from investment of their proceeds) that, prior to January 5, 2006, had been disbursed to a member at the completion point or had been advanced to the member as interim assis-tance and remained unused at the completion point, once agreement is reached between the Trustee and the member on a modified schedule for using the proceeds of the Trust grant or Trust loan as provided for in (a) above.”

8. This decision shall become effective when all third party contributors to the Subsidy Account of the PRGF Trust have consented to the amendments set forth in paragraph 3 above, and the Trustee has received notifications of consent from contributors for transfers to the MDRI-II Trust for the equivalent of SDR 1.12 billion. (EBS/05/158, Sup. 3, 12/2/05)

Decision No. 13588-(05/99) MDRIAdopted November 23, 2005

Transparency Policy decision—amendments

Transparency—publication policies

Authorization and consent

1. The Managing Director shall arrange for publication by the Fund of the documents on the attached list, subject to the consent of the member con-cerned in the case of Documents 1–11, 13, and 16–23 and to the authoriza-tion of the World Bank in the case of Documents 6, 11, and 19. For purposes of this decision: (i) Documents 1–4, 6, 9–10, 11, 13, 17, 19, and 22–23 will be referred to as “Country Documents;” (ii) Documents 5, 7–8, 16, 18, and 20–21 will be referred to as “Country Policy Intentions Documents;” and (iii) Documents 14 and 15 will be referred to as “Fund Policy Documents.”

2. The Executive Board encourages each member to consent, where required, to the publication by the Fund of a document under this decision. It is rec-ognized that for some members such publication would be a longer-term objective.

3.a. A member’s consent to Fund publication of Documents 1–2, 4–11, 13, 18–23 shall be voluntary but presumed. A member’s consent to Fund publication of Documents 3 and 16–17 shall be voluntary.

b. Except as provided in paragraph 18 below, the presumption referred to in paragraph 3(a) means that Fund publication of an applicable docu-ment would be expected to occur within thirty calendar days of the Executive Board meeting at which that document was considered. If, by the time of the relevant Executive Board meeting, the member concerned has not communicated its consent to the publication of the document, the Secretary will remind the member to communicate its publication decision to the Fund within thirty calendar days following the Executive Board meeting. Unless the member’s explicit consent is received by the Fund, Documents 1–11, 13, and 16–23 shall not be published.

4.a. The Managing Director will not recommend that the Executive Board approve (i) a PRGF arrangement or completion of a review under such arrangement, or (ii) a HIPC decision point or completion point decision, or (iii) a member’s request for a Policy Support Instrument (PSI) or the completion of a review under a PSI, if the member concerned does not consent to the publication of its Interim Poverty Reduction Strategy Paper (I-PRSP), Poverty Reduction Strategy Paper (PRSP), PRSP prepara-tion status report, or PRSP annual progress report (APR) (Document 5 or Document 18, as the case may be).

b. The Managing Director will generally not recommend that the Executive Board approve a request to use the Fund’s general resources that would result in the relevant member obtaining exceptional access, unless that member consents to the publication of the associated staff report. The use of the Fund’s general resources under an arrangement that was approved before July 1, 2004, shall not be affected by this policy, unless there is a change in the terms, conditions, or timing of the arrangement. For purposes of this paragraph:

(i) approval of the use of the Fund’s general resources includes the completion of a review under an arrangement; and (ii) exceptional access means access by a member to the Fund’s general resources, under any type of Fund financing, in excess of an annual limit of 100 percent of the member’s quota, or a cumulative limit (net of scheduled repurchases) of 300 percent of the member’s quota.

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5. For the purposes of paragraph 1 above, a member’s consent shall be communicated in writing, normally to the Secretary of the Fund. Such con-sent may be communicated by the Executive Director elected, appointed, or designated by the member.

6. In respect of documents circulated to the Executive Board for which publi-cation requires a member’s consent, the Secretary’s cover note will indicate whether a communication has been received from the member in this regard and, if so, the member’s intentions.

Member’s statement regarding Fund staff reports

7. If a Fund staff report (Documents 1, 9, 17, and 22) on a member is to be published under this decision, the member concerned shall be given the opportunity to provide a statement regarding the staff report and the Execu-tive Board assessment. Such statement shall be communicated to the Fund and published together with the staff report.

Deletions and rephrasing in Country Documents and Country Policy Intentions Documents

8.a. Prior to publication of a Country Document, or a Country Policy Inten-tions Document (Documents 7–8, and 20–21) that has been the basis of a Fund decision, or of Document 16, the member concerned may pro-pose deletions to the Managing Director. Deletions should be limited to: (i) highly market-sensitive material, mainly on the outlook for exchange rates, interest rates, the financial sector, and assessments of sovereign liquidity and solvency; and (ii) material not in the public domain, on a policy the country authorities intend to implement, where premature disclosure of the operational details of the policy would, in itself, seri-ously undermine the ability of the member to implement those policy intentions. For purposes of this decision, highly market-sensitive material shall mean material that (a) is not in the public domain, (b) is market relevant within the near term, and (c) is sufficiently specific to create a clear risk of triggering a disruptive market reaction if disclosed. Politi-cally sensitive material shall not be deleted unless the material satisfies (i) or (ii) above. Information relating to any performance criterion or structural benchmark (Documents 1, 7–9 and 16–17), or to any assess-ment criterion or structural benchmark (Documents 1, 20–22), may not be deleted, unless the information is of such character that would have enabled it to be communicated to the Fund in a side letter pursuant to Decision No. 12067, adopted September 22, 1999.

b. If the Managing Director determines that the proposed deletions satisfy criteria (i) or (ii) in paragraph 8(a), he may decide that the deletions shall be accompanied by minor rephrasing of text, whenever such rephrasing would help retain maximum candor or minimize the risks of misinterpretation.

9. Members’ requests for deletions to a document shall be communicated in writing to the Fund no later than (i) twenty-one calendar days after the Exec-utive Board has considered the document, or (ii) thirty-five calendar days after the document was issued to the Executive Board, whichever is later. Once approved by the Managing Director, deletions and related rephrasing shall be circulated to the Executive Board in redlined form. The modified document circulated to the Executive Board shall include the justification for each modification made. In the case of a serious disagreement between the Managing Director and the member regarding the member’s request for dele-tions, the Managing Director, or the Executive Director elected, appointed, or designated by that member, may refer the matter to the Executive Board. If the Managing Director is of the view that the deletions would result in a

document that, if published, would undermine the overall assessment and credibility of the Fund, the Managing Director may recommend to the Execu-tive Board that the document not be published.

Corrections to Country Documents and Country Policy Intentions Documents

10. Any other changes to Country Documents and Country Policy Intentions Documents covered under this decision shall be limited to the correction of (i) data and typographical errors, (ii) factual mistakes, and (iii) mischaracter-ization of views expressed by the authorities concerned.

Corrections shall normally take the form of substitution of text in existing sentences rather than the addition or deletion of entire sentences.

11. Corrections will normally be made to a document prior to its consid-eration by the Executive Board. Corrections made after Executive Board consideration shall be limited to (i) cases where the correction is brought to the attention of the Executive Board before the conclusion of the Executive Board’s consideration of the document, and (ii) cases where the failure to make the correction would undermine the overall value of publication. Cor-rections shall be circulated to the Executive Board in redlined form. Those corrections with significant implications for the substance of the document shall be discussed and justified in a supplementary staff report or in a cor-rections memorandum issued to the Executive Board.

Chairman’s statements in respect of use of Fund resources and the Policy Support Instrument

12. After the Executive Board (i) adopts a decision regarding a member’s use of Fund resources (including a decision completing a review under a Fund arrangement), or (ii) adopts a decision approving a PSI, or conducts a review under a PSI, or (iii) completes a discussion on a member’s participation in the HIPC Initiative, or, (iv) completes a discussion on a member’s I-PRSP, PRSP, PRSP preparation status report, or APR in the context of the use of Fund resources or a PSI, a Chairman’s statement on the discussion, empha-sizing the key points made by Executive Directors, will be released to the public. Where relevant, the Chairman’s statement will contain a summary of HIPC Initiative decisions pertaining to the member and the Executive Board’s views on the member’s I-PRSP, PRSP, PRSP preparation status report, or APR in the context of use of Fund resources or a PSI. Waivers for nonobservance, or of applicability, of performance criteria, and any other matter as may be decided by the Executive Board from time to time (Document 12), and waiv-ers for nonobservance of assessment criteria, and any other matter as may be decided by the Executive Board from time to time (Document 24), will be mentioned in the factual statement section of the press release containing the Chairman’s statement or in a factual statement issued in lieu of a Chair-man’s statement as provided for in paragraph 14(b). Before a Chairman’s statement is released, it will be read by the Chairman to the Executive Board and Executive Directors will have an opportunity to comment at that time. The Executive Director elected, appointed, or designated by the member concerned will have the opportunity to review the Chairman’s statement, to propose minor revisions, if any, and to consent to its publication immediately after the Executive Board meeting.

Notwithstanding the above, no press release or Chairman’s statement pub-lished under this paragraph shall contain any reference to a discussion or decision pertaining to a member’s overdue financial obligations to the Fund, where a press release following an Executive Board decision to limit the member’s use of Fund resources because of the overdue financial obliga-tions has not yet been issued. In the case of an Executive Board meeting

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pertaining solely to such a discussion or decision, no Chairman’s statement will be published.

Article IV Public Information Notices

13. Following the completion of an Article IV consultation for a member, the Fund may release a Public Information Notice (PIN) reporting on the results of the consultation. If a member has consented to the publication of Docu-ment 1, such publication will be made along with the publication of a PIN. PINs will be in accordance with the following terms:

a. The PIN will be brief (normally 3–4 pages) and will consist of two sections:

(i) a background section, a draft of which should be attached to the staff report whenever possible, with factual information on the econ-omy of a member, including a table of economic indicators; and

(ii) the Fund’s assessment of the member’s prospects and policies. This section will correspond closely to the Chairman’s summing up of the Executive Board discussion.

b. The Executive Director concerned will have the opportunity to review the draft PIN prior to its release to propose changes, if any, consistent with paragraphs 8 through 11 above.

c. In case of a serious disagreement between the Managing Director and the Executive Director concerned on the draft, either may request the Executive Board to consider the matter.

d. The PIN will be released shortly following the completion of the Article IV consultation. As an indicative target, the Fund will aim to issue the PIN five to ten working days following the relevant Executive Board meeting, but in any event not before the end of the working day follow-ing the circulation of the summing up as a Fund document.

e. The following practices are confirmed: (i) the release of PINs shall not affect the current Article IV consultation summing up process. In par-ticular, the Chairman’s summing up will continue to be provided to the Executive Director concerned for review following the Executive Board meeting, and (ii) the possibility of releasing PINs shall not affect in any way the staff’s reporting to the Executive Board on consultation discus-sions with members.

Non-publication of PINs and Chairman’s statements in selected cases—Release by the Fund of factual statements in lieu

14.a. If a member does not consent to the publication of a PIN following the Executive Board’s conclusion of an Article IV consultation with that member (Document 4), or following a post-program monitoring or ex post assessment discussion by the Executive Board pertaining to that member (Document 13), a brief factual statement informing that the Executive Board has concluded that consultation or discussion will be released instead.

b. If a member does not consent to the publication of a Chairman’s statement (Documents 10 and 23) under paragraph 12 where one would be applicable, or if no Chairman’s statement has been issued because a decision was taken on a lapse-of-time basis, a brief factual statement describing the Executive Board’s decision relating to (i) that member’s use of Fund resources (including HIPC Initiative decisions (Document 11), Document 12, and consideration of Document 5,

when relevant), or (ii) the approval of a PSI for that member, or the conduct of a review under that member’s PSI (including Document 24 and consideration of Document 18, when relevant) will be released instead.

Fund policy documents

15. After the Executive Board meets on policy issues, it shall be presumed, unless otherwise decided by the Executive Board, that the staff report con-sidered at the meeting (Document 14) and/or a PIN (Document 15) on the discussion will be published. This presumption of publication shall not apply to Executive Board meetings on policy issues dealing with the administrative matters of the Fund, such as the Fund’s operating budget, personnel policies, staff retirement plan, and asset management, for which the Executive Board may decide to publish Documents 14 and/or 15 on a case-by-case basis. In deciding to publish or not to publish Documents 14 and/or 15, the factors on which that decision shall be based shall include whether the discussions have reached completion or, if not completed, whether informing the public of the state of the discussions would be useful. The staff shall make a rec-ommendation on the publication of a staff policy paper and/or a PIN on its cover. A PIN on policy discussions will be based on the decision adopted by the Executive Board and/or the Chairman’s summing-up, as the case may be. It will also include a short section setting out background information.

16.a. Prior to the publication of a Fund policy staff report, the Managing Director may make necessary factual corrections, deletions, and related rephrasing with respect to the report (including of highly market-sensitive material and country-specific references). However, staff’s proposals in a report shall not be modified prior to its publica-tion. In cases where confusion might arise from differences between staff’s proposals in the report and the Executive Board’s conclu-sions regarding those proposals as reflected in the PIN pertaining to the Executive Board discussion, it would be clearly indicated in the published version of the report which staff proposals the Executive Board did not endorse.

b. Paragraph 16.a. shall not apply to the World Economic Outlook and Global Financial Stability Report. In accordance with established practice, staff may modify these documents prior to their publication in order to, inter alia, take into account views expressed at the relevant Executive Board meeting.

Other changes to documents

17. Before a document is published, the following shall be removed: (i) refer-ences to unpublished Fund documents, and (ii) references to certain internal processes that are not disclosed to the public under existing policies, includ-ing inquiries regarding possible misreporting and breaches of members’ obligations.

Timing and means of Fund publication

18. Documents may be published under this decision only after their consid-eration by the Executive Board, except for: (i) I-PRSPs, PRSPs, PRSP prepara-tion status reports, or APRs in the context of the use of Fund resources or a PSI; (ii) joint staff advisory notes (JSANs) circulated to the Executive Board for information in the context of the use of Fund resources or a PSI; (iii) documents circulated to the Executive Board for information only; and (iv) Reports on Observance of Standards and Codes (ROSCs) and Assess-ment of Financial Sector Supervision and Regulation (AFSSR) Reports. Documents under items (i), (iii) and (iv) may be published immediately

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after circulation to the Executive Board. Documents under item (ii) may be published only after the stated period within which an Executive Director may request that the document be placed on the agenda of the Executive Board.

19. Publication by the Fund under this decision shall normally mean publica-tion on its Web site but may include publication through other media.

Repeal of superseded decisions

20. The following decisions are repealed: (i) “Use of Fund Resources Release of Chairman’s Statement,” Decision No. 11971 (99/58), adopted June 3, 1999; (ii) “Public Information Notices for Policy Matters,” Decision No. 11972-(99/58), adopted June 3, 1999; (iii) “Publication of Letters of Intent, Memoranda of Economic and Financial Policies and Policy Framework Papers,” Decision No. 11974-(99/58), adopted June 3, 1999; (iv) “Release of Information Reports on Recent Economic Developments and Statistical Appendices and Annexes,” Decision No. 10138-(94/61), adopted July 11, 1994; and (v) “Press Information Notices-Release,” Decision No. 11493-(97/45), adopted April 24, 1997. The decision set forth in EBD/98/64 (6/19/98), which was approved on a lapse-of-time basis on June 24, 1998, is repealed to the extent that it relates to the publication of the final decision and completion point documents under the HIPC Initiative.

Article XII, Section 8

21. Nothing in this decision shall be construed to be inconsistent with the power of the Fund to decide under Article XII, Section 8, by a seventy percent majority of the total voting power, 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 payments of members.

Other matters/review

22. In the case of a document pertaining to a country that is not a member of the Fund: (i) all references to “member” in this decision shall be taken to mean “country;” and (ii) all references to “Executive Director elected, appointed, or designated by that member” shall be taken to refer to the appropriate authorities of the country concerned.

23. This decision shall be reviewed in light of experience at regular intervals not to exceed 36 months.

List of documents covered by the decision

I. Surveillance and supporting documents

1. Article IV and Combined Article IV/Use of Fund Resources Staff Reports

2. Selected Issues Papers and Statistical Appendices

3. Reports on Observance of Standards and Codes (ROSCs), Financial Sec-tor Stability Assessment (FSSA) Reports and Assessment of Financial Sector Supervision and Regulation (AFSSR) Reports

4. Public Information Notices (PINs) following Article IV consultations and regional surveillance discussions

II. Use of Fund resources by a member

5. Interim Poverty Reduction Strategy Papers (I-PRSPs), Poverty Reduc-tion Strategy Papers (PRSPs), PRSP Preparation Status Reports, and PRSP Annual Progress Reports (APRs)

6. Joint Fund/World Bank Staff Advisory Notes (JSANs) on I-PRSPs, PRSPs, PRSP Preparation Status Reports, and APRs

7. Letters of Intent and Memoranda of Economic and Financial Policies (LOIs/MEFPs)

8. Technical Memoranda of Understanding (TMUs) with policy content

9. Use of Fund Resources, Post-Program Monitoring and Ex Post Assessment Staff Reports (excluding staff reports dealing solely with a member’s overdue financial obligations to the Fund)

10. Chairman’s Statements

11. Preliminary, decision point, and completion point documents under the HIPC Initiative

12. Statements on Fund decisions on waivers of applicability, or for nonob-servance, of performance criteria, and any other matter as may be decided by the Executive Board from time-to-time

13. PINs following Executive Board discussions on post-program monitoring and ex post assessments

III. Fund policy documents

14. Fund Policy Issues Papers

15. PINs following Executive Board discussions on policy issues

IV. Staff Monitored Programs (SMPs)

16. LOIs/MEFPs for SMPs

17. Stand-alone Staff Reports on SMPs

V. Policy Support Instrument (PSI)

18. I-PRSPs, PRSPs, PRSP Preparation Status Reports, and APRs in the con-text of PSIs

19. Joint Fund/World Bank Staff Advisory Notes (JSANs) on I-PRSPs, PRSPs, PRSP Preparation Status Reports, and APRs in the context of PSIs

20. Letters of Intent and Memoranda of Economic and Financial Policies (LOIs/MEFPs) for PSIs

21. Technical Memoranda of Understanding (TMUs) with policy content for PSIs

22. Staff Reports for PSIs

23. Chairman’s Statements for PSIs

24. Statements on Fund decisions on waivers of nonobservance of assess-ment criteria, and any other matter as may be decided by the Executive Board from time to time (SM/05/343, Sup. 1, 9/22/05)

Decision No. 13564-(05/85)Adopted October 5, 2005

Policy Support Instrument—placement of member on 24-month Article IV consultation cycle

1. The following provisions shall be added as paragraph 4 to Decision No. 12794-(02/76), July 15, 2002, as amended:

“Whenever a Policy Support Instrument (“PSI”) is approved for a member, that member shall automatically be placed on a 24-month Article IV con-

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sultation cycle. If, however, the last Article IV consultation was completed 6 months or more before the approval of the PSI, the next consultation is expected to be completed by the later of 12 months (plus the usual 3-month grace period) after the last consultation or 6 months after the approval of the PSI. Following termination of a PSI—whether through expiry or lapse—the member is automatically placed back on the standard 12-month cycle and the first consultation is expected to be completed by the later of 6 months after the end of the PSI or 12 months (plus a grace period of 3 months) after the completion of the previous consultation but in no event later than 24 months after the completion of the previous con-sultation.” (SM/05/343, Sup. 1, 9/30/05)

Decision No. 13562-(05/85)Adopted October 5, 2005

For Policy Support Instrument—framework

General

1. Upon request, the Fund will be prepared to provide the technical services described in this Decision to members that are eligible for assistance under the Poverty Reduction and Growth Facility (PRGF), i.e., included in the list of members annexed to Decision No. 8240-(85/56), as amended, and that: (a) have a policy framework focused on consolidating macroeconomic stability and debt sustainability, while deepening structural reforms in key areas in which growth and poverty reduction are constrained; and (b) seek to maintain a close policy dialogue with the Fund, through the Fund’s endorse-ment and assessment of their economic and financial policies under a Policy Support Instrument (PSI).

2. A PSI is a decision of the Executive Board setting forth a framework for the Fund’s assessment and endorsement of a member’s economic and financial policies. A PSI may be approved for a duration of one to three years, and may be extended up to an overall maximum period of four years.

3. Members with overdue financial obligations to either the Fund’s General Resources Account (GRA) or to the PRGF Trust are not eligible for a PSI.

The member’s documents

4. Program Documents. The member’s program of economic and financial policies for the period of a PSI will be described in a letter and/or memo-randum that may be accompanied by a technical memorandum (“Program Documents”). The initial Program Documents will include: (a) a macroeco-nomic policy framework, including a quantified framework for at least the first 12 months under the PSI, with quarterly or semiannual quantitative targets, and proposed assessment criteria for the first and second scheduled reviews, and (b) key structural measures that are needed to meet the objectives of the program. The Program Documents will be updated from time to time, as appropriate, in the context of reviews under the PSI.

5. Poverty Reduction Strategy (PRS) Documents. The member’s program will be based on the member’s poverty reduction strategy, which will be set forth in a Poverty Reduction Strategy Paper (“PRSP”), PRSP Preparation Status Report, Interim PRSP (“I-PRSP”), or Annual Progress Report (“APR”).

Approval

6. A member’s request for a PSI may be approved only if the Fund is satisfied that:

(a) the policies set forth in the member’s Program Documents meet the standards of upper credit tranche conditionality; (b) the member’s program will be carried out, and in particular, that the member is suf-ficiently committed to implement the program; and (c) the member has a poverty reduction strategy evidenced by a PRS Document that has been issued to the Executive Board within the previous 18 months, accompanied by a Joint Staff Advisory Note (“JSAN”), provided, how-ever, no JSAN will be required in connection with a PRSP preparation status report, in which case staff’s analysis of the PRSP preparation status report will be included in the staff report on a request for a PSI or a review under a PSI.

7. A member may be expected to adopt measures prior to the Executive Board’s approval of a PSI when it is critical for the successful implementation of the program that such actions be taken.

Program reviews

8. The implementation of the member’s program under a PSI will be assessed through program reviews, which will normally be scheduled semi-annually. A review can be completed only if the Executive Board is satis-fied that the member’s program is on track and that the conditions for the approval of a PSI, noted in paragraph 6, above, continue to be met. Having conducted, but not completed, a scheduled review, the Executive Board may subsequently return to that review, unless the previous scheduled review was not completed.

Documentation supporting a return to the uncompleted review must be issued to the Executive Board prior to the earliest test date of the periodic quantitative assessment criteria linked to the next scheduled review.

9. Implementation of the program will be monitored, in particular, on the basis of assessment criteria, indicative targets, structural benchmarks, and prior actions:

(a) Assessment criteria.

(i) For the purposes of each review, the Fund shall establish assess-ment criteria, which may include: (a) assessment criteria linked to that review; and (b) assessment criteria that will apply on a continuous basis. Assessment criteria will apply to clearly specified quantitative variables or structural measures that can be objectively monitored and are critical for the achievement of program goals or for monitoring implementation and whose nonobservance would normally signify that the program is off track. In principle, quantita-tive assessment criteria shall be established with test dates at six-month intervals. Documentation with respect to the conduct of a scheduled review would normally be issued to the Executive Board within 4 months of the earliest test date for the periodic quantita-tive assessment criteria linked to that review and shall in any event be issued before the earliest test date of the periodic quantitative assessment criteria linked to the next scheduled review.

(ii) A review will not be completed unless each assessment criterion related to that review is observed or a waiver for the nonobservance is granted. A review will not be completed where the member does not provide information necessary for the Fund to conclude that: (a) an assessment criterion related to that review is observed, or (b) a waiver of nonobservance is warranted. The Fund will grant a waiver for the nonobservance of an assessment criterion only if it is satisfied that, notwithstanding the nonobservance, the program

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will be successfully implemented, either because of the minor or temporary nature of the nonobservance or because of corrective actions taken by the authorities.

(iii) In order to complete a review, assessment criteria must be estab-lished for the shorter of: (a) the next two scheduled reviews, or (b) the remaining period of the PSI.

(b) Indicative targets and structural benchmarks. Variables and measures may also be established as quantitative indicative targets or structural benchmarks that will be examined in a review’s assessment of pro-gram performance.

(c) Prior actions. A member may be expected to adopt measures prior to the Executive Board’s completion of a review.

Misreporting

10. Any decision approving a PSI or completing a review will be made con-ditional upon the accuracy of information provided by the member regarding implementation of prior actions or performance under related assessment criteria.

11. Whenever evidence comes to the attention of the staff indicating that the member’s reporting of information noted in paragraph 10 above was inaccu-rate, the Managing Director shall promptly inform the member concerned.

12. If after consultation with the member, the Managing Director finds that, in fact, the member had reported such inaccurate information to the Fund, the Managing Director shall promptly notify the member of this finding.

13. In any case where a PSI was approved, or a review was completed, no more than three years prior to the date on which the Managing Director informs the member, as provided for in paragraph 11 above, the Executive Board shall decide whether misreporting has occurred and shall reassess program performance in the light of that determination.

14. The Fund shall proceed to make relevant information public in every case following an Executive Board decision under paragraph 13 above that misreporting has occurred, with prior Executive Board review of the text for publication.

Applicability of certain UFR policies

15. The Guidelines on Conditionality (Decision No. 12864-(02/102), Sep-tember 25, 2002) shall apply where relevant and except where this Decision sets forth different or more specific provisions.

16. In addition, the Fund’s policies on the following subjects shall apply by analogy to PSIs: (a) requirement of full program financing; (b) arrears to offi-cial sector and external private creditors; and (c) use of side letters.

Termination of a PSI

17. A member may cancel a PSI at any time by notifying the Fund of such cancellation.

18. A PSI for a member will terminate upon: (a) the relevant member incur-ring overdue financial obligations to the GRA or PRGF Trust; or (b) noncom-pletion of two consecutive PSI scheduled reviews.

Miscellaneous

19. For purposes of this decision: (a) the terms PRSP, PRSP Preparation Status Report, I-PRSP, and APR shall have the meaning given to each of them in Section I, Paragraph 1 of the PRGF-HIPC Trust Instrument (Annex to Deci-sion No. 11436- (97/10), adopted February 4, 1997, as amended); and (b) the term JSAN shall have the meaning given to it in Section I, Paragraph 1 of the PRGF-HIPC Trust Instrument (Annex to Decision No. 11436-(97/10), adopted February 4, 1997, as amended).

Periodic review

20. The Fund will review application of this Decision at intervals of three years. (SM/05/343, Sup. 2, 9/30/05)

Decision No. 13561-(05/85)Adopted October 5, 2005

PRGF Trust and PRGF-HIPC Trust Reserve Account—review

Pursuant to Decision No. 10286-(93/23) ESAF, adopted on February 22, 1993, as amended, the Fund has reviewed the adequacy of the balances in the Reserve Account of the PRGF Trust, and determines that they are sufficient to meet all obligations that could give rise to payments from the Account to lenders to the Loan Account of the PRGF Trust in the six months from October 1, 2005, to March 31, 2006. (SM/05/346, 9/8/05)

Decision No. 13570-(05/80) PRGFAdopted September 15, 2005

Overdue financial obligations—review of Fund strategy

The Fund has reviewed progress under the strengthened cooperative strategy with respect to overdue financial obligations to the Fund as described in EBS/05/131. The Fund reaffirms its support for the strengthened coopera-tive strategy and agrees to extend the availability of the rights approach until end-August 2006. (EBS/05/131, 8/24/05).

Decision No. 13559-(05/76)Adopted August 31, 2005

Eleventh General Review of Quotas—period for consent to increases—extension

Pursuant to Paragraph 4 of the Resolution of the Board of Governors No. 59-4, “New Period for Consent—Increase of Quotas of Members Under the Eleventh General Review,” the Executive Board decides that notices of consent from members to increases in their quotas must be received in the Fund by 6:00 p.m., Washington time, on September 29, 2006. (EBD/05/91, 8/17/05)

Decision No. 13548-(05/73)Adopted August 24, 2005

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APPENDIX | I

International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund

Twelfth Meeting, Washington, D.C.September 24, 2005

1. The International Monetary and Financial Committee held its twelfth meet-ing in Washington, D.C. on September 24, 2005 under the Chairmanship of Mr. Gordon Brown, Chancellor of the Exchequer of the United Kingdom.

The global economy and financial markets—outlook, risks, and policy responses

2. The Committee welcomes the ongoing global economic expansion, although it notes that growth divergences between countries remain wide. Global growth is expected to continue, although downside risks to the out-look have increased, especially high and volatile oil prices, recently exacer-bated by the effects of Hurricane Katrina, the widening of global imbalances, increasing protectionist sentiment, and the possibility of tighter financial market conditions. While core inflation generally is contained and inflation expectations remain well anchored, higher oil prices remain a risk to price stability. The Committee notes that these areas should be a particular focus of IMF surveillance and policy advice in the coming months.

3. The Committee emphasizes that oil producers, oil consumers, and oil companies will all have their part to play in working together to promote greater stability in the oil market. First, the Committee welcomes the action by members of the International Energy Agency and oil-producing countries to continue to increase supplies to the market. Second, the Committee calls for further investment both now and in the long term throughout the supply chain, particularly in refining capacity including of heavy oil, and for efforts to create a favorable investment climate. Third, the Committee also stresses the importance of policies to promote energy conservation, efficiency, and sus-tainability, including through new technologies, alternative sources of energy, and reducing subsidies on oil products. Fourth, the Committee encourages closer dialogue between oil producers and consumers, and further efforts to improve oil market data and transparency to improve market efficiency. Fifth, the IMF should stand ready to provide assistance to help members, espe-cially poor countries, deal with oil price shocks.

4. The Committee welcomes recent progress in implementing the agreed policies to address global imbalances and foster growth, but urges further action to promote orderly adjustment in view of the heightened risks to the outlook. This includes: fiscal consolidation to increase national savings in the United States; greater exchange rate flexibility in emerging Asia; further structural reforms to boost potential growth in the euro area; and further structural reforms, including fiscal consolidation, in Japan, where the econ-omy is regaining momentum. Measures to promote a more investor-friendly environment, including in a number of emerging market economies, would also contribute to reducing imbalances. Oil-exporting countries will also

need to play their part, including through efficient absorption of higher oil revenues in countries with strong macroeconomic policies.

5. Steps to strengthen medium-term fiscal positions remain crucial for sup-porting global growth and stability. Fiscal deficits in many industrial countries need to be lowered further, and reforms to address pressures from aging populations and ensure the sustainability of pension and health care sys-tems need to be accelerated. Improvements in the fiscal positions and debt structures of many emerging market countries are welcome, but in countries with high public debt levels continued fiscal consolidation efforts are needed. The Committee also calls for more ambitious efforts to address rigidities in labor and product markets in many countries. Regulatory and supervisory authorities should remain alert to risks stemming from ample global liquidity and associated risk taking and leverage.

6. The Committee emphasizes that a successful outcome to the Doha Round by the end of 2006 remains of critical importance for global growth and poverty reduction. Serious challenges remain in reaching agree-ment at the WTO ministerial meeting in Hong Kong SAR in December. As finance ministers and central bank governors of WTO member countries, we have a vital interest in successful multilateral trade liberalization. Benefit-ing from a useful exchange of views with Mr. Pascal Lamy, the Director-General of the WTO, the Committee calls on all countries to ensure progress on ambitious trade liberalization with the urgency that the timetable now demands. Key areas for action are: increasing market access, especially for developing countries; significantly reducing trade distorting domestic sup-port; eliminating all forms of export subsidies in agriculture; and making significant progress on services, including financial services, and on issues of intellectual property. The Committee welcomes the joint IMF-World Bank staff report on proposals to enable low-income countries to benefit fully from trade liberalization, and urges the Executive Board to consider these proposals expeditiously.

7. The Committee welcomes the enhanced growth performance and pros-pects of many of the world’s poorest countries, reflecting improvements in their underlying policies. With ten years remaining to meet the Millen-nium Development Goals (MDGs),1 those countries should move rapidly to strengthen policies needed for sustainable growth and poverty reduction, including through sound macroeconomic frameworks and building the sound, accountable, and transparent institutions that are essential for fostering growth and supporting vibrant private sector growth. Also, the international community must follow through expeditiously on its renewed commitments to provide additional resources, including at the Gleneagles Summit and the Millennium Review Summit. An ambitious outcome to the Doha Round is also essential for poverty reduction.

1 As endorsed by Heads of State and Government in the UN General Assembly on September 8, 2000.

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IMF objectives and Medium-Term Strategy

8. The Committee welcomes and supports the broad priorities set forth in the Managing Director’s Report on the Fund’s Medium-Term Strategy to improve the IMF’s effectiveness in support of its members. In the coming years the IMF will continue to work to help members meet the economic challenges of globalization within its mandate in the macroeconomic and financial areas. The Committee looks forward to specific proposals and timelines on the main tasks identified in the medium-term strategy in the Executive Board’s work program, within the context of the IMF’s medium-term budget framework and the staff compensation review.

9. The broad priorities set out in the Managing Director’s report2 are to:

Make surveillance more effective;

Adapt to new challenges and needs in different member countries;

Help build institutions and capacity;

Prioritize and reorganize the IMF’s work within a prudent medium-term budget; and

Address the issues of fair quotas and voice.

The Committee agrees that the IMF needs to deepen its analysis of global-ization and continue to develop its strategy for responding to the long-term challenges it poses.

Strengthening IMF support for low-income countries—instruments; financing; and debt relief

10. The Committee reiterates that the IMF has a critical role in supporting low-income countries through policy advice, capacity building, and financial assistance. The PRGF remains the main instrument for IMF financial support for low-income country members. The Committee agrees that the IMF’s con-cessional lending should be financed at an appropriate level as assessed by the IMF. The Committee calls for incorporation of the lessons from the recent review of the design of PRGF-supported programs in the future work of the IMF in low-income countries.

11. The Committee welcomes the progress made on new instruments that will strengthen IMF support for low-income countries. The Policy Support Instrument (PSI) will be available to members that do not need, or want, IMF financial assistance, but voluntarily request IMF endorsement and con-tinued assessment of their policies as meeting the standard of upper credit tranche conditionality. The country-owned policy frameworks designed by the authorities would consolidate medium-term macroeconomic and financial stability, and deepen reforms in support of poverty reduction and economic growth. A new window in the PRGF Trust will also be available to complement existing instruments by providing timely concessional sup-port to low-income members without a regular PRGF arrangement and who are facing exogenous shocks, and we look forward to contributions from countries.

12. The Committee supports the proposal to provide 100 percent cancella-tion of debts owed by Heavily Indebted Poor Countries (HIPCs) to the IMF, the International Development Association, and the African Development Fund. This will provide significant additional resources for countries’ efforts to reach the MDGs and reinforce longer-term debt sustainability. The Committee welcomes the approach subsequently discussed in the IMF to ensure that the IMF’s

2The report can be found at www.imf.org/external/np/omd/2005/eng/091505.pdf.

resources will be used consistently with the principle of uniformity of treat-ment. It stresses the importance of ensuring that the IMF’s capacity to provide financing to low-income countries is maintained, and therefore welcomes G–8 countries’ commitments to provide additional resources. It also emphasizes that countries benefiting from irrevocable debt relief should have demonstrated sound policies and high standards of governance. Following this agreement now reached on all the elements, the Managing Director has informed the Committee that he will now call the Executive Board together to complete its approval of the arrangements to deliver debt relief by the end of 2005. The implications of debt cancellation for the new debt sustainability framework should be addressed in the review scheduled for Spring 2006. There should be a regular report on progress at future meetings of the Committee.

13. The Committee underscores the importance of full creditor participation, including by non-Paris Club creditors and private creditors, in contributing their share to implementing the enhanced HIPC initiative. It takes note of the work on identifying low-income countries with unsustainable debts as of end–2004, with a view to finalization by early 2006 of the list of countries potentially eligible for HIPC assistance.

14. The year 2005 is the International Year of Microcredit. The Committee notes the IMF’s role in improving data availability on microcredit and in addressing microcredit issues in the Financial Sector Assessment Program.

Other issues

15. The Committee welcomes the rapid progress on the inclusion of collective action clauses in international sovereign bonds, and the efforts by emerging market issuers and private sector creditors to broaden the consensus on the “Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets.” The Committee looks forward to further work on the orderly resolu-tion of financial crises, including the implementation of the IMF’s lending into arrears policy.

16. The Committee calls for continued actions by all countries to develop strong programs on anti-money laundering and combating the financing of terrorism (AML/CFT). The Committee supports the IMF’s efforts to implement its intensified AML/CFT work program, and notes the critical importance of supporting countries’ efforts with well-targeted and coordinated technical assistance.

17. The Committee recommends members’ acceptance of the Fourth Amendment of the Articles of Agreement. The Committee reiterates that the IMF’s effectiveness and credibility as a cooperative institution must be safeguarded and further enhanced. Adequate voice and participation by all members should be assured, and the distribution of quotas should reflect developments in the world economy. The Thirteenth General Review of Quotas presents an opportunity to address the issue, and we look forward to prog-ress on this issue and a report back at our next meeting.

18. The Committee looks forward to continued high-quality reports by the Independent Evaluation Office (IEO) under the leadership of its new Director, Thomas Bernes, and to the upcoming external evaluation of the IEO.

19. The Committee paid tribute to Alan Greenspan, in his last meeting of the IMFC, for his outstanding leadership of the Federal Reserve and his unprec-edented and much valued contribution to the Committee’s work over the last eighteen years.

The next meeting of the IMFC will be held in Washington, D.C. on April 22, 2006.

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International Monetary and Financial Committee attendance

September 24, 2005

ChairmanGordon Brown

Managing DirectorRodrigo de Rato

Members or AlternatesBurhanuddin Abdullah, Governor, Bank of IndonesiaIbrahim A. Al-Assaf, Minister of Finance, Saudi ArabiaThierry Breton, Minister of Economy, Finance and Industry, FranceMervyn King, Governor, Bank of England, United Kingdom

(Alternate for Gordon Brown, Chancellor of the Exchequer, United Kingdom)Palaniappan Chidambaram, Minister of Finance, IndiaAxel Weber, President, Deutsche Bundesbank

(Alternate for Hans Eichel, Minister of Finance, Germany)Nicolás Eyzaguirre, Minister of Finance, ChilePer-Kristian Foss, Minister of Finance, NorwayRalph Goodale, Minister of Finance, CanadaDuck-Soo Han, Deputy Prime Minister and Minister of Finance and Economy,

KoreaSultan Al-Suwaidi, Governor, United Arab Emirates Central Bank

(Alternate for Mohamed K. Khirbash, Minister of State for Finance and Industry, United Arab Emirates)

Aleksei Kudrin, Minister of Finance, Russian FederationMohammed Laksaci, Governor, Banque d’AlgérieTito Titus Mboweni, Governor, South African Reserve BankHans-Rudolf Merz, Minister of Finance, SwitzerlandAntonio Palocci, Minister of Finance, BrazilArmando León, Director, Board of Directors, Central Bank of Venezuela

(Alternate for Gastón Parra Luzardo, President, Central Bank of Venezuela)Karl-Heinz Grasser, Minister of Finance, Austria

(Alternate for Didier Reynders, Minister of Finance, Belgium)John W. Snow, Secretary of the Treasury, United StatesToshihiko Fukui, Governor, Bank of Japan

(Alternate for Sadakazu Tanigaki, Minister of Finance, Japan)Paul Toungui, Minister of State, Minister of Finance, Economy, Budget and

Privatization, GabonGiulio Tremonti, Minister of Economy and Finance, ItalyGerrit Zalm, Minister of Finance, NetherlandsZhou Xiaochuan, Governor, People’s Bank of China

ObserversJoaquín Almunia, Commissioner, Economic and Monetary Affairs, European

CommissionDuncan S. Campbell, Director, International Policy Group, International

Labour Organization (ILO)Roger W. Ferguson, Jr., Chairman, Financial Stability Forum (FSF)Heiner Flassbeck, Officer-in-Charge, Division on Globalization and

Development Strategies, United Nations Conference on Trade and Development (UNCTAD)

Donald J. Johnston, Secretary-General, Organisation for Economic Co-operation and Development (OECD)

Malcolm D. Knight, General Manager, Bank for International Settlements (BIS)

Pascal Lamy, Director-General, World Trade Organization (WTO)Trevor Manuel, Chairman, Joint Development Committee

José Antonio Ocampo, Under-Secretary-General, Department of Economic and Social Affairs, United Nations (UN)

Adnan A. Shihab-Eldin, Acting Secretary-General, Organization of the Petroleum Exporting Countries (OPEC)

Jean-Claude Trichet, President, European Central Bank (ECB)Paul Wolfowitz, President, World Bank

Thirteenth Meeting, Washington, D.C.April 22, 2006

1. The International Monetary and Financial Committee held its thirteenth meeting in Washington, D.C. on April 22, 2006 under the Chairmanship of Mr. Gordon Brown, Chancellor of the Exchequer of the United Kingdom.

The global economy and financial markets—outlook, risks, and policy responses

2. The Committee welcomes the continued strong expansion of the global economy, despite higher oil prices. The expansion is becoming geographi-cally more broadly based, and global growth is expected to remain strong in the next couple of years. Inflation and inflationary expectations remain well contained—although with excess capacity diminishing, continued vigilance will be required. The Committee notes that downside risks arise from con-tinued high and volatile oil prices, the potential for an abrupt shift in global financial market conditions, a rise in protectionism, and a possible avian flu pandemic. The major risks posed by underlying vulnerabilities, including from widening global imbalances, have yet to be comprehensively addressed.

3. The Committee reiterates that action for orderly medium-term resolu-tion of global imbalances is a shared responsibility, and will bring greater benefit to members and the international community than actions taken individually. While progress has been made, more concerted and sustained implementation—with every country doing its part—is needed to help reduce medium-term risks associated with the imbalances. Following the discus-sion at the Global Imbalances Conference held at the IMF on April 21, the Committee confirms that the agreed policy strategy to address imbalances remains valid. Key elements include raising national saving in the United States—with measures to reduce the budget deficit and spur private sav-ing; implementing structural reforms to sustain growth potential and boost domestic demand in the euro area and several other countries; further structural reforms, including fiscal consolidation, in Japan; allowing greater exchange rate flexibility in a number of surplus countries in emerging Asia; and promoting efficient absorption of higher oil revenues in oil-exporting countries with strong macroeconomic policies. Given economic interlink-ages, all countries and regions will have a role to play by increasing the flex-ibility of their economies and adapting to changing global demand patterns. The Committee therefore asks the IMF to work on modalities, in consultation with country authorities, aimed at encouraging actions needed to reduce the imbalances, and calls for a report at its next meeting. More generally, the new multilateral consultations, as outlined in the Managing Director’s report on implementing the IMF’s medium-term strategy, can play a role in promoting multilateral action.

4. The Committee welcomes the actions already taken to address capacity constraints in oil production. Building on this progress, it calls for further measures to improve the supply-demand balance in oil markets over the medium term, with oil producers, oil consumers, and oil companies all play-ing their part, including through closer dialogue. The Committee emphasizes the importance of further upstream and downstream investment, policies to

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promote energy efficiency, conservation, and alternative sources of energy, reducing subsidies on oil products, and further efforts to improve the quality and transparency of oil market data. The Committee will review progress on these issues at its next meeting.

5. Steps to strengthen medium-term fiscal positions remain crucial to support growth and stability, and improve resilience against future shocks. Greater advantage should be taken of the economic expansion to reduce fiscal defi-cits, and to move forward with reforms to ensure the sustainability of pension and health systems. The Committee also underscores that faster progress to remove constraints to growth in labor and product markets and improve the business and investment climate is essential to reap the benefits of globaliza-tion. The Committee welcomes the continued strength of the global financial system, and calls for continued vigilance by financial supervisors, especially regarding the potential impact of a turn in the credit cycle. The Committee calls on members to ensure the robustness of essential economic and finan-cial infrastructure as part of a broad strategy to address the risk of an avian flu pandemic and, in this context, supports the IMF’s outreach initiative to promote business continuity planning among financial institutions.

6. The Committee emphasizes the importance of an ambitious and success-ful outcome to the Doha Round by the end of 2006 for global growth and poverty reduction. The Committee calls on all members to resist protection-ism in both trade and foreign direct investment. With time running increas-ingly short, all members must urgently contribute to reaching agreement on the key elements of a comprehensive package supporting a strengthened multilateral trading system. The Committee also calls for continued efforts to help countries take full advantage of the opportunities of global integration arising from ambitious trade liberalization. For poor countries in particular, the Committee urges Aid for Trade assistance firmly grounded in national development strategies and full use of existing and enhanced mechanisms for trade-related technical assistance.

7. The improving growth prospects in poor countries, including in sub-Saharan Africa, are encouraging. The Committee emphasizes that achieving the Mil-lennium Development Goals (MDGs) requires a partnership between poor countries and donors. Developing countries should continue to pursue sound macroeconomic policies and growth-critical reforms, including further sub-stantial efforts to build sound, accountable, and transparent institutions. The international community should follow through expeditiously on its commit-ment to provide additional resources.

Implementing the IMF’s Medium-Term Strategy

8. The Committee welcomes the Managing Director’s report on implementing the IMF’s medium-term strategy, and appreciates the public debate on the role of the IMF. It calls on management and the Executive Board to complete their considerations and then move rapidly to implementation.

9. The Committee reiterates that the IMF’s effectiveness and credibility as a cooperative institution must be safeguarded and its governance further enhanced, emphasizing the importance of fair voice and representation for all members. We underscore the role an ad hoc increase in quotas would play in improving the distribution of quotas to reflect important changes in the weight and role of countries in the world economy. The Committee agrees on the need for fundamental reforms. The Committee calls upon the Manag-ing Director to work with the IMFC and Executive Board to come forward with concrete proposals for agreement at the Annual Meetings.

10. The Committee reiterates the importance of making IMF surveillance more effective and supports a review of the 1977 Surveillance Decision. In

the context of the Managing Director’s medium-term strategy, the Commit-tee proposes a new framework for IMF surveillance that will consist of four elements. First, a new focus of surveillance on multilateral issues, including global financial issues, and especially the spillovers from one economy on others. Second, a restatement of the commitments which member countries and their institutions make to each other under Article IV on which surveil-lance can focus on monetary, financial, fiscal, and exchange rate policies. Third, the Managing Director should implement his proposal for a new pro-cedure, which will involve the IMFC and the Executive Board, for multilateral surveillance. Fourth, the IMFC should set a new annual remit for both bilat-eral and multilateral surveillance through which the Managing Director, the Executive Board and the staff are accountable for the quality of surveillance. This should involve the independence of Fund surveillance, greater transpar-ency, and the Independent Evaluation Office.

11. As emerging market members pursue sound policies and integrate effectively into world trade and capital markets, they make a welcome con-tribution to global economic stability and avoidance of financial crises. The Committee welcomes the IMF’s efforts to respond to the new challenges and needs of emerging market members. Financial and capital markets issues should be increasingly at the center of the IMF’s work in these countries. The Committee supports further examination of the Managing Director’s proposal on a possible new instrument to provide high access contingent financing for countries that have strong macroeconomic policies, sustainable debt, and transparent reporting but remain vulnerable to shocks. The Committee encourages the IMF to explore the role it can play in supporting regional arrangements for pooling reserves. A review is also needed of the operational aspects of the IMF’s policy on lending into arrears.

12. The Committee stresses that the IMF has a critical role in low-income countries, including in helping to ensure that expected increases in aid flows and debt relief are absorbed effectively and in a manner consistent with macroeconomic stability. The IMF needs to play its part within its areas of core competence in monitoring progress toward the MDGs. The Committee welcomes the establishment of new instruments that will strengthen the IMF’s support for low-income countries, including the Policy Support Instru-ment and the Exogenous Shocks Facility, and underlines the importance of further contributions to enable the IMF to provide timely concessional shock financing. The Committee welcomes debt relief provided by the IMF and other institutions under the HIPC Initiative and Multilateral Debt Relief Initiative (MDRI). It also welcomes the agreement on the final list of potentially eligible members that meet the criteria of the HIPC Initiative. The Committee under-scores the importance of ensuring debt sustainability in countries receiving debt relief by refining the joint IMF-World Bank debt sustainability framework, and helping countries to implement sound medium-term debt strategies and strong public expenditure management and tax systems. The Committee notes the importance of countries avoiding the re-accumulation of unsustain-able debt and the potentially adverse consequences of nonconcessional borrowing for debt sustainability. It urges all creditors to work with the IMF and the World Bank to adhere to responsible lending. The Committee consid-ers it critical for the effectiveness of the IMF’s work in low-income countries that its policy advice, support for capacity building, and financial assistance are closely aligned with the countries’ evolving needs and poverty reduction strategies, and focused on macroeconomic issues, including institutions rel-evant to financial stability, trade, and economic growth.

13. The Committee supports efforts to clarify the division of responsibilities and accountabilities of the IMF and the World Bank, and to improve their col-laboration. It welcomes the establishment of the External Review Committee on World Bank-IMF Collaboration, and looks forward to its conclusions.

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14. The Committee notes that the IMF’s budgetary position has changed following the recent decline in IMF credit, and this requires actions on both income and expenditure. The Committee calls on the Managing Director to develop proposals expeditiously for more predictable and stable sources of income. The Committee welcomes that the medium-term strategy is formu-lated in a budget-neutral way, and encourages the IMF to further prioritize and streamline its work.

Other issues

15. The Committee recommends members’ acceptance of the Fourth Amend-ment of the Articles of Agreement. The Committee calls for continued actions by all countries to develop strong programs on anti-money laundering and combating the financing of terrorism (AML/CFT), and supports the compre-hensive assessment of these programs within the context of the Financial Sector Assessment Program.

16. The Committee notes the upcoming discussion by the Executive Board of the external evaluation of the Independent Evaluation Office (IEO), and looks forward to the continuing contribution of the IEO to the IMF’s work.

17. The next meeting of the IMFC will be held in Singapore, on September 17, 2006.

International Monetary and Financial Committee attendance

April 22, 2006

ChairmanGordon Brown

Managing DirectorRodrigo de Rato

Members or AlternatesIbrahim A. Al-Assaf, Minister of Finance, Saudi ArabiaThierry Breton, Minister of Economy, Finance and Industry, FranceMervyn King, Governor, Bank of England, United Kingdom

(Alternate for Gordon Brown, Chancellor of the Exchequer, United Kingdom)Jaime Caruana, Governor, Bank of SpainYaga V. Reddy, Governor, Reserve Bank of India

(Alternate for Palaniappan Chidambaram, Minister of Finance, India)David Dodge, Governor, Bank of Canada

(Alternate for James Michael Flaherty, Minister of Finance, Canada)Tae-Shin Kwon, Vice Minister, Ministry of Finance and Economy, Korea

(Alternate for Duck-Soo Han, Deputy Prime Minister and Minister of Finance and Economy, Korea)

Eero Heinäluoma, Minister of Finance, FinlandSultan Al-Suwaidi, Governor, United Arab Emirates Central Bank

(Alternate for Mohamed K. Khirbash, Minister of State for Finance and Industry, United Arab Emirates)

Aleksei Kudrin, Minister of Finance, Russian FederationMohammed Laksaci, Governor, Banque d’AlgérieGuido Mantega, Minister of Finance, BrazilHans-Rudolf Merz, Minister of Finance, SwitzerlandFelisa Miceli, Minister of Economy and Production, ArgentinaNgozi Okonjo-Iweala, Minister of Finance, NigeriaDidier Reynders, Minister of Finance, BelgiumJohn W. Snow, Secretary of the Treasury, United StatesPeer Steinbrück, Minister of Finance, GermanySadakazu Tanigaki, Minister of Finance, Japan

Paul Toungui, Minister of State, Minister of Finance, Economy, Budget and Privatization, Gabon

Giulio Tremonti, Deputy Prime Minister and Minister of Economy and Finance, Italy

Awang Adek Hussin, Deputy Minister of Finance II, Malaysia(Alternate for Nor Mohamed Yakcop, Minister of Finance II, Malaysia)

Nout Wellink, President, De Nederlandsche Bank(Alternate for Gerrit Zalm, Minister of Finance, Netherlands)

Zhou Xiaochuan, Governor, People’s Bank of China

ObserversMohammad Alipour-Jeddi, Head, Petroleum Market Analysis Department,

Organization of the Petroleum Exporting Countries (OPEC)Joaquín Almunia, Commissioner, Economic and Monetary Affairs, European

CommissionDirk Bruinsma, Deputy Secretary-General, United Nations Conference on

Trade and Development (UNCTAD)Duncan S. Campbell, Director, Policy Integration Department, International

Labour Organization (ILO)Alberto Carrasquilla, Chairman, Joint Development CommitteeRoger W. Ferguson, Chairman, Financial Stability Forum (FSF)Donald J. Johnston, Secretary-General, Organisation for Economic Co-

operation and Development (OECD)Malcolm D. Knight, General Manager, Bank for International Settlements

(BIS)José Antonio Ocampo, Under-Secretary-General, Department of Economic

and Social Affairs, United Nations (UN)Valentine Rugwabiza, Deputy Director-General (WTO)Jean-Claude Trichet, President, European Central Bank (ECB)Paul Wolfowitz, President, World Bank

Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (Development Committee)

Seventy-second Meeting, Washington, D.C.September 25, 2005

1. We met against the background of a series of major meetings in this “Year of Development,” in particular the United Nations 2005 World Summit held in New York on September 14–16. These meetings, including the G8 Summit held in Gleneagles in July, have resulted in significant progress in building and deepening consensus on key elements of the development agenda. In our discussions we focused on implementation and priorities for action.

2. We reiterated our support for the realization of the internationally agreed development goals, including the Millennium Development Goals (MDGs), and recognized that this calls for a stronger international development partnership. We are encouraged by commitments to reinvigorate the aid partnership, with stronger policies in many developing countries matched by commitments by developed countries and other donors for significant additional aid and debt relief and steps to improve development effective-ness. We reaffirmed the importance of sound policies, including promoting a strong private sector and improving governance, in developing countries to the achievement of the development goals. In this connection, we empha-sized the importance of expanding opportunities for those who have the least voice and the fewest resources and capabilities. We welcomed the increased resources that will become available as a result of the recent establishment

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of timetables by many donors to achieve the target of 0.7 percent of GNP for ODA. We commended donors who have already reached or exceeded this tar-get. As called for by world leaders at the recent UN Summit, we urged those developed countries that have not yet done so to make concrete efforts in this regard in accordance with their commitments. We noted the launch of the International Finance Facility for immunization and the upcoming imple-mentation of an airline ticket solidarity tax by a group of countries. We called on the Bank to assist with implementation issues, as appropriate, to ensure that these initiatives are coherent with the overall performance- and country-based aid architecture. We also noted ongoing work on blending arrange-ments and advance market commitments for vaccines.

3. As important as mobilizing more aid is action to improve the quality of aid. We welcomed progress toward establishing tangible indicators and targets for commitments made in the Paris Declaration on Aid Effectiveness. We asked the Bank to work closely with the OECD Development Assistance Commit-tee and other partners to support the delivery and improve the quality of increased assistance, through systematic monitoring and follow-up on aid commitments, and through vigorous implementation of the agreed agenda on managing for results, harmonization, and alignment.

4. We welcomed the World Bank Group’s ambitious Africa Action Plan, which will support African countries in their efforts to increase growth, tackle pov-erty, and achieve the MDGs. We called for timely and vigorous implementa-tion of the Plan and urged that the Bank work closely with the African Union, New Partnership for Africa’s Development, African Development Bank, African Partnership Forum, and other partners. We commended the Plan’s results-oriented approach and the concrete actions it proposes to ensure that increased aid will be used effectively. The Action Plan correctly focuses on building state capacity and improving governance; strengthening the drivers of growth; and promoting broad participation in growth and sharing its ben-efits. We commended its comprehensive approach toward developing an Afri-can private sector, creating jobs, enhancing exports, expanding infrastructure, raising agricultural productivity, strengthening human development, building capacity (including in conflict-affected and fragile states), and increasing regional integration. Related areas we emphasized include strengthening the implementation of Education for All Fast Track Initiative, including closing of the financing gap; stepping up the fight against major diseases including HIV/AIDS and malaria; promoting women’s role in development; and improv-ing the environment for small and medium enterprises, including access to microfinance. We called for further analysis and elaboration of proposed new mechanisms to scale up and strategically target aid to countries and pro-grams with potentially high development impact, which are complementary to and consistent with IDA framework. We also welcomed the Plan’s empha-sis on partnerships, monitoring and evaluation, and consultative mecha-nisms, including reporting back to the Committee on progress on a regular basis in the context of the Global Monitoring Report, starting in 2007.

5. We welcomed the G8 proposal for 100 percent cancellation of debt owed by eligible heavily indebted poor countries (HIPCs) to the International Devel-opment Association (IDA), the African Development Fund (AfDF), and the International Monetary Fund, as providing a valuable opportunity to reduce debt and increase resources for achieving the MDGs. In order to expedite the implementation of the proposal, we agreed on the need for an interde-pendent package consisting especially of dollar for dollar compensation for IDA that is truly additional to existing commitments and that maintains the financial integrity and capacity of IDA to assist poor countries in the future. We are agreed on the need for additionality of donor resources for debt relief to provide tangible benefits to HIPCs. We are confident that the package, including financing, the main technical features of the proposal and burden

sharing on a voluntary basis will provide these benefits. We emphasized the importance of maintaining sound economic performance and good gover-nance by eligible countries. We urged donor countries to ensure financing to fully compensate IDA for forgone reflows resulting from debt relief in order to reach a final agreement on the proposal. We welcomed the delivery com-mitments by the G8 in their letter to the World Bank President. We asked the Bank to prepare a compensation schedule and monitoring system of all donor contributions urgently. On this basis we expressed our support for the aforementioned package and urged the Bank to proceed with the steps to ensure all necessary arrangements for implementation.

6. We also reviewed the implementation of the HIPC Initiative, welcomed continued progress in providing debt relief to HIPCs, noted the need to fill the current funding gap, and urged full creditor participation. We continue to underline the importance of the existing agreement that contributions under the HIPC Initiative be additional to other contributions to IDA. Eighteen countries have reached the completion point and another ten are between decision and completion points. We look forward to a final list of eligible countries in early 2006.

7. Stronger country policies and more and more effective aid must be com-plemented with ambitious moves to increase openness and market access and to ensure that trade benefits the poor. Without a timely and ambitious outcome for the Doha Development Agenda, developing countries will not achieve the economic growth needed to meet the MDGs. As we approach the crucial Hong Kong Ministerial meeting, which will be an important milestone toward concluding the Doha Round in 2006, now is the time for action by all WTO members to move the negotiations forward, and we called upon developed countries to show leadership. We cannot overemphasize the importance for the global economy and for meeting the MDGs of achieving an outcome that includes: (i) a major reform of agricultural trade policies to expand market access and eliminate trade-distorting subsidies; (ii) action to open markets in manufactures and services; and (iii) increased aid for trade to address supply-side constraints and enhance the capacity of developing countries to take advantage of expanded trade opportunities. We endorsed the proposal for an enhanced Integrated Framework for Trade-related Techni-cal Assistance, including expanding its resources and scope and making it more effective. We asked the Bank and the Fund to examine further the adequacy of existing mechanisms to address regional or cross-country aid for trade needs and explore new mechanisms as appropriate. We supported a strengthened framework for assessing adjustment needs so that IFI and donor assistance mechanisms can be better utilized. We urged the Bank and the Fund to better integrate trade-related needs into their support for country programs. We also asked the Bank and the Fund to continue their global advocacy role on trade and development.

8. Scaling up investment in infrastructure, alongside strong programs for edu-cation and health, is key to faster growth and progress in reducing poverty. We welcomed the progress made by the Bank Group in implementing the Infrastructure Action Plan and strengthening public-private partnerships to leverage investment and maximize impact, including in the framework of the newly established Africa Infrastructure Consortium. We called for continued deepening and scaling up of support for infrastructure service delivery, and removal of impediments in this regard, in order to respond to needs in both low- and middle-income countries. As part of this effort, we look forward to a progress report at our next meeting by the Bank on the impact of fiscal space on growth and achievement of the MDGs, in continued cooperation with the Fund on the macroeconomic aspects of this issue.

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9. We welcomed the review of World Bank conditionality and endorsed the good practice principles the Bank has put forward to streamline conditional-ity and strengthen country ownership and leadership. We called for regular monitoring to ensure their consistent implementation at the country level and for a report on progress next year. We also welcomed the work on enhancing IMF instruments in support of its low-income members, and called for further strengthening Bank-Fund collaboration in this area.

10. We welcomed the joint Bank-Fund review of the poverty reduction strat-egy approach and noted the contribution the PRS approach is making to enhancing country leadership of the development agenda, promoting the articulation of clear and coherent country policies and priorities for spur-ring growth and reducing poverty, improving budget and monitoring systems, and sharpening the focus on development results. We noted that country ownership based on broad participation is now central to the PRS approach. We also noted the value of country-led diagnostics including poverty and social impact analysis in supporting the PRS approach. Good progress not-withstanding, continued efforts are needed to strengthen poverty reduction strategies and their implementation in many countries. This includes efforts by countries to improve policies, domestic resource mobilization, gover-nance, and accountability and by donors to provide support in a predictable, aligned, and harmonized manner.

11. We support the World Bank’s efforts, including through the Global Environ-ment Facility, to assist member countries in measures to mitigate and adapt to the impact of climate change and improve energy efficiency and access to renewable and cost-effective energy; and welcomed efforts to follow up on the Gleneagles plan of action with early consultations to identify pragmatic invest-ment and financing policy actions that can help further the goals of the United Nations Framework Convention on Climate Change. We look forward to a report for our next meeting on progress made in developing dialogue with partner countries and institutions and a future investment framework.

12. The Committee considers the issue of enhancing the voice of develop-ing and transition countries in our institutions to be of vital importance. We will continue our discussions with a view to building the necessary political consensus on this matter, taking into account progress in the context of the IMF quota review.

13. The Committee expressed its appreciation to Mr. Trevor Manuel, Minister of Finance of South Africa, for his valuable leadership and guidance as Chairman of the Committee during the past four years, and welcomed his successor, Mr. Alberto Carrasquilla, Minister of Finance and Public Credit of Colombia. We expressed our gratitude to James Wolfensohn for his outstand-ing leadership of the World Bank Group during the last 10 years, and wel-comed the new President of the World Bank, Paul Wolfowitz, who attended his first meeting of the Development Committee, and wished him a successful tenure. The Ministers also expressed their warm thanks to Mr. Thomas Bernes upon conclusion of his tenure as the Committee’s Executive Secretary.

14. The Committee’s next meeting is scheduled for April 23, 2006, in Wash-ington, D.C.

Seventy-third Meeting, Washington, D.C.April 23, 2006

1. Following the important commitments made last year to increase the quantity, quality, and effective use of resources for development, we reviewed progress toward the Millennium Development Goals (MDGs) based on an assessment in the third annual Global Monitoring Report. We reaffirmed the principle of mutual accountability of developing countries, developed

countries, and the international financial institutions for making progress on this agenda, focusing on aid, trade and governance. We also discussed clean energy and development, an issue that requires as a priority the attention of global policymakers.

2. We welcomed recent progress made in reducing income poverty, reflecting both a favorable global economic environment and an improved economic management in many countries. We are encouraged that growth in sub-Saharan Africa exceeded 5% for the third consecutive year. We recognized that progress is uneven and insufficient, particularly in sub-Saharan Africa and in some regions of middle income countries (MICs). There are also signs of better progress toward the human development MDGs. Yet, on current trends many developing countries will fail to meet the MDGs, in particular those related to human development. Achieving rapid, sustained, and shared growth will require further actions to improve the business climate, access to infrastructure, enhanced market access and trade opportunities as well as measures to address issues of equity, including gender equity.

3. We welcomed the rising trend in the volume of official development assis-tance (ODA), not only from the OECD Development Assistance Committee members, but also from non-DAC countries. We called on all donors to fully implement the commitments they have made for substantial increases in aid volumes. We urged those donors that have not done so to make concrete efforts toward the target of 0.7 percent of GNI as ODA in accordance with their commitments. We noted progress made on the International Finance Facility for immunization and on Advance Market Commitments for vaccines, increased support for an airline ticket solidarity levy and its implementation by several countries, and continuing work on the scope for greater use of blending arrangements. We noted the key role of the World Bank and the IMF in helping countries ensure that increases in aid volumes can be absorbed effectively, consistent with macroeconomic stability and growth objectives. We welcomed creation of the Exogenous Shocks Facility and Policy Support Instrument at the Fund, both of which help improve its flexibility in engaging with low-income countries.

We also noted the rising trend of net private flows to developing countries, including remittances.

4. We called for rapid progress in implementing the framework agreed in the Paris Declaration for enhancing aid effectiveness through improved modali-ties and a stronger focus on results. Developing countries need to strengthen their management of financial resources, and improve their domestic resource mobilization as well as governance and delivery of basic services. Donors and other partners need to improve the quality of aid and modalities of aid delivery to reduce volatility, achieve greater predictability, and provide stronger alignment with national poverty reduction strategies. To this end, we encouraged donors where possible to move toward multiyear plans and commitments, and to be ready to finance recurrent costs where sector poli-cies are sound and fiduciary conditions are adequate. We asked the World Bank and other partners to intensify their coordination at the country level, particularly in strengthening health systems and improving access to good-quality education, to reduce transaction costs and to help increase absorp-tive capacity. We emphasized the importance of universal access to primary education and sustained support for good-quality education plans, and the key role the Education for All Fast Track Initiative could play in all qualifying low-income countries. We called on donors to fill the current financing gap. We asked for a progress report on Education for All by our next meeting. We encouraged the Bank to implement the proposal to hold annual Results and Resources Consultative Groups in its Africa Action Plan. We also emphasized the need for the multilateral development banks (MDBs) to strengthen their

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results orientation, so as to contribute better to improved country outcomes. We look forward to the first World Bank report on results monitoring and systems to strengthen both country and institutional incentives and assure learning from results. In this context, we urged all MDBs and all donors to step up support for strengthening statistical and related institutional capacity in partner countries.

5. We noted the importance of continued development progress in MICs and emerging market countries, and asked the Bank to refine and enhance its engagement strategy with these countries by our next meeting, taking into account their contributions to poverty reduction and global public goods, access to market financing, and remaining development challenges.

6. Promoting good governance, including fighting corruption, and mutual accountability are essential to efforts to achieve the MDGs. We agreed on the need for efforts to improve governance in all countries, to help build effective states with strong national systems and to work together on implementing global initiatives to improve governance, increase transparency and build demand for good governance at the country level in a way that strengthens ownership. The Bank and Fund should play a full supporting role. We asked the Bank to further develop disaggregated and actionable indicators in areas such as quality of public financial management, and procurement practices. We noted the diagnosis in the Global Monitoring Report that a significant level of corruption is a symptom of poor governance. Building on work over the last decade, we called on the Bank to lay out a broad strategy, to be discussed at our next meeting, for helping member countries strengthen governance and deepen the fight against corruption, working closely with the Fund, other multilateral development banks and the membership, to ensure a coherent, fair, and effective approach. This strategy should lead to clear guidelines for operations.

7. We welcomed the progress made in implementing the Multilateral Debt Relief Initiative (MDRI) in the Fund, the International Development Associa-tion (IDA), and the African Development Fund, and, in particular, cancellation by the IMF of the MDRI debt of the first 19 countries, and, in the Bank, the approval of the required Resolution by the IDA Governors leading to final agreement on the Initiative. We urged donor countries to secure their financ-ing commitments to achieve full compensation of IDA’s forgone reflows and to ensure that this initiative is truly additional to existing commitments. We called on the Bank and the Fund in consultation with the membership to bring forward proposals to further refine the debt sustainability framework for low-income countries to support growth and avoid accumulation of unsus-tainable debt, and, in this context, to further elaborate and implement an effective approach to deal with the issue of “free-riding” where non-concessional lenders may indirectly obtain financial gain from IDA’s grants and debt forgiveness. We called for participation of all export credit agencies, IFIs, and other official creditors, in such an approach and encouraged them to use the debt sustainability framework in their lending decisions. We also noted the final list of potentially eligible countries for the HIPC Initiative and the initial cost estimate of debt relief for these countries.

8. Implementation of the Doha Development Agenda is a critical complement to other efforts to increase growth and reduce global poverty. After modest progress at the Hong Kong ministerial meeting in December 2005, we urged all WTO members to step up their efforts to reach a successful conclusion to the Doha Round by the end of this year. We welcomed a significant increase in donor commitments for aid for trade, and creation of a task force in the WTO to

make recommendations on how to operationalize aid for trade, recognizing that this is a complement not a substitute for a successful Doha Round. We asked the Bank and the Fund to further examine cross-country and regional aid for trade needs by our next meeting and deepen their work to integrate trade-related needs into their support for country programs. We also asked the Bank and the Fund to continue their global advocacy on trade and development.

9. The global community faces a major challenge in securing affordable and cost-effective energy supplies to underpin economic growth and poverty reduction while preserving the environment. These need not be conflicting goals. We recognized lack of access to energy as an acute problem in many low-income countries. We agreed to explore ways to help developing coun-tries enhance their access to affordable, sustainable and reliable modern energy services over the long term, while paying attention to local and global environmental considerations. We also urged them to do so through policy reform to attract domestic and international investment in clean and efficient energy services. We also noted that adaptation to climate change for poor countries is a critical development issue. We reaffirmed our commitment to the goals of the United Nations Framework Convention on Climate Change. We found broad support for the Bank’s approach in addressing 1) develop-ing country energy needs and access to energy services, 2) efforts to control greenhouse gas emissions, and 3) helping developing countries adapt to cli-mate risks, and the two-track work program. We asked the Bank to review, in close coordination with other partners, existing financial instruments, taking into account the role of the private sector; and to explore the potential value of new financial instruments to accelerate investment in clean, sustainable, cost effective, and efficient energy; so as to report on progress towards an investment framework by our next meeting. We urged member countries of the Global Environment Facility to conclude the fourth replenishment nego-tiation as soon as possible.

10. Avian Influenza poses a major risk for all countries but more particularly for developing countries. We called for continued coordination and plan-ning by countries and agencies at the international and regional levels and, within countries, continued coordination across relevant ministries. We also welcomed the Bank’s rapid operational response under the Global Program for Avian Influenza.

11. We welcomed the interim report on how fiscal policy can best support long-term growth, and its emphasis on specific country experiences. We look forward to the final report in early 2007.

12. We noted the creation of the External Review Committee to review various aspects of Bank-Fund collaboration, and look forward to considering its find-ings and recommendations. We ask the Bank and Fund to ensure that their institutional responsibilities continue to cover all the critical issues relating to reaching the MDGs within their mandates.

13. We welcomed the discussion of quota and voice issues in the Fund, and confirmed our intention to continue our discussions with a view to building the necessary political consensus on the voice issue in the Bank.

14. We welcomed the new Chairman Alberto Carrasquilla. We thanked Zia Qureshi for his services as Interim Executive Secretary to the Committee and welcomed the appointment of Kiyoshi Kodera as new Executive Secretary.

15. The Committee’s next meeting is scheduled for September 18, 2006, in Singapore.

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APPENDIX | V

Director Votes by Total Percent of Alternate Casting votes of country votes1 IMF total2

Appointed

Nancy P. Jacklin United States 371,743 371,743 17.08Meg Lundsager

Shigeo Kashiwagi Japan 133,378 133,378 6.13Michio Kitahara

Karlheinz Bischofberger Germany 130,332 130,332 5.99Gert Meissner

Pierre Duquesne France 107,635 107,635 4.95Olivier Cuny

Tom Scholar United Kingdom 107,635 107,635 4.95Andrew Hauser

Elected

Willy Kiekens Austria 18,973(Belgium) Belarus 4,114

Johann Prader Belgium 46,302(Austria) Czech Republic 8,443

Hungary 10,634 Kazakhstan 3,907 Luxembourg 3,041 Slovak Republic 3,825 Slovenia 2,567 Turkey 9,890 111,696 5.13______

Jeroen Kremers Armenia 1,170(Netherlands) Bosnia and Herzegovina 1,941

Yuriy G. Yakusha Bulgaria 6,652(Ukraine) Croatia 3,901

Cyprus 1,646 Georgia 1,753 Israel 9,532 Macedonia, former Yugoslav Republic of 939 Moldova 1,482 Netherlands 51,874 Romania 10,552 Ukraine 13,970 105,412 4.84______

Moisés Schwartz Costa Rica 1,891(Mexico) El Salvador 1,963

Mary Dager Guatemala 2,352(Venezuela) Honduras 1,545

Mexico 26,108 Nicaragua 1,550 Spain 30,739 Venezuela, República Bolivariana de 26,841 92,989 4.27______

Arrigo Sadun Albania 737(Italy) Greece 8,480

Miranda Xafa Italy 70,805(Greece) Malta 1,270

Portugal 8,924 San Marino 420 Timor-Leste 332 90,968 4.18 ______

Executive Directors and voting power April 30, 2006

165

Jonathan Fried Antigua and Barbuda 385(Canada) Bahamas, The 1,553

Peter Charleton Barbados 925(Ireland) Belize 438

Canada 63,942 Dominica 332 Grenada 367 Ireland 8,634 Jamaica 2,985 St. Kitts and Nevis 339 St. Lucia 403 St. Vincent and the

Grenadines 333 80,636 3.71______

Tuomas Saarenheimo Denmark 16,678(Finland) Estonia 902

Jon Thorvardur Sigurgeirsson Finland 12,888(Iceland) Iceland 1,426

Latvia 1,518 Lithuania 1,692 Norway 16,967 Sweden 24,205 76,276 3.51______

Jong Nam Oh Australia 32,614(Korea) Kiribati 306

Richard Murray Korea 16,586(Australia) Marshall Islands 285

Micronesia, Federated States of 301 Mongolia 761 New Zealand 9,196 Palau 281 Papua New Guinea 1,566 Philippines 9,049 Samoa 366 Seychelles 338 Solomon Islands 354 Vanuatu 420 72,423 3.33______

A. Shakour Shaalan Bahrain 1,600(Egypt) Egypt 9,687

Samir El-Khouri Iraq 12,134(Lebanon) Jordan 1,955

Kuwait 14,061 Lebanon 2,280 Libyan Arab Jamahiriya 11,487 Maldives 332 Oman 2,190 Qatar 2,888 Syrian Arab Republic 3,186 United Arab Emirates 6,367 Yemen, Republic of 2,685 70,852 3.26______

Sulaiman M. Al-Turki Saudi Arabia 70,105 70,105 3.22(Saudi Arabia)

Abdallah S. Alazzaz(Saudi Arabia)

Hooi Eng Phang Brunei Darussalam 2,402(Malaysia) Cambodia 1,125

Made Sukada Fiji 953(Indonesia) Indonesia 21,043

Lao People’s DemocraticRepublic 779

Malaysia 15,116 Myanmar 2,834 Nepal 963 Singapore 8,875 Thailand 11,069 Tonga 319 Vietnam 3,541 69,019 3.17______

Director Votes by Total Percent of Alternate Casting votes of country votes1 IMF total2

Executive Directors and voting power | V

IMF ANNUAL REPORT | 2006

166

Peter J. Ngumbullu Angola 3,113(Tanzania) Botswana 880

Peter Gakunu Burundi 1,020(Kenya) Eritrea 409

Ethiopia 1,587 Gambia, The 561 Kenya 2,964 Lesotho 599 Malawi 944 Mozambique 1,386 Namibia 1,615 Nigeria 17,782 Sierra Leone 1,287 South Africa 18,935 Sudan 1,947 Swaziland 757 Tanzania 2,239 Uganda 2,055 Zambia 5,141 65,221 3.00 ______

WANG Xiaoyi China 63,942 63,942 2.94(China)

GE Huayong(China)

Fritz Zurbrügg Azerbaijan 1,859(Switzerland) Kyrgyz Republic 1,138

Andrzej Raczko Poland 13,940(Poland) Serbia and Montenegro 4,927

Switzerland 34,835 Tajikistan 1,120 Turkmenistan 1,002 Uzbekistan 3,006 61,827 2.84 ______

Aleksei V. Mozhin Russian Federation 59,704 59,704 2.74(Russian Federation)

Andrei Lushin(Russian Federation)

Abbas Mirakhor Afghanistan, Islamic Republic of 1,869(Islamic Republic of Iran) Algeria 12,797

Mohammed Daïri Ghana 3,940(Morocco) Iran, Islamic Republic of 15,222

Morocco 6,132 Pakistan 10,587 Tunisia 3,115 53,662 2.47 ______

Eduardo Loyo Brazil 30,611(Brazil) Colombia 7,990

Roberto Steiner Dominican Republic 2,439(Colombia) Ecuador 3,273

Guyana 1,159 Haiti 1,069 Panama 2,316 Suriname 1,171 Trinidad and Tobago 3,606 53,634 2.46______

B.P. Misra Bangladesh 5,583(India) Bhutan 313

Amal Uthum Herat India 41,832(Sri Lanka) Sri Lanka 4,384 52,112 2.39______

Héctor R. Torres Argentina 21,421(Argentina) Bolivia 1,965

Javier Silva-Ruete Chile 8,811(Peru) Paraguay 1,249

Peru 6,634 Uruguay 3,315 43,395 1.99______

Director Votes by Total Percent of Alternate Casting votes of country votes1 IMF total2

167

Damian Ondo Mañe Benin 869(Equatorial Guinea) Burkina Faso 852

Laurean W. Rutayisire Cameroon 2,107(Rwanda) Cape Verde 346

Central African Republic 807 Chad 810 Comoros 339 Congo, Democratic Republic of the 5,580 Congo, Republic of 1,096 Côte d’Ivoire 3,502 Djibouti 409 Equatorial Guinea 576 Gabon 1,793 Guinea 1,321 Guinea-Bissau 392 Madagascar 1,472 Mali 1,183 Mauritania 894 Mauritius 1,266 Niger 908 Rwanda 1,051 São Tomé and Príncipe 324 Senegal 1,868 Togo 984 30,749 1.41________ ________ _____

2,175,3453,4,5 99.976

1Voting power varies on certain matters pertaining to the General Department with use of the Fund’s resources in that Department.2Percentages of total votes 2,176,037 in the General Department and the Special Drawing Rights Department.3This total does not include the votes of Somalia, which did not participate in the 2004 Regular Election of Executive Directors. The total votes of this member are 692—0.03 percent of those in the General Department and Special Drawing Rights Department.

4Liberia’s voting rights were suspended effective March 5, 2003, pursuant to Article XXVI, Section 2(b) of the Articles of Agreement.5Zimbabwe’s voting rights were suspended effective June 6, 2003, pursuant to Article XXVI, Section 2(b) of the Articles of Agreement.6This figure may differ from the sum of the percentages shown for individual Directors because of rounding.

Director Votes by Total Percent of Alternate Casting votes of country votes1 IMF total2

Executive Directors and voting power | V

168

Changes in the membership of the Executive Board between May 1, 2005 and April 30, 2006 were as follows:

Murilo Portugal (Brazil) relinquished his duties as Executive Director for Brazil, Colombia, the Dominican Republic, Ecuador, Guyana, Haiti, Panama, Suriname, and Trinidad and Tobago, effective May 14, 2005.

Eduardo Loyo (Brazil) was elected Executive Director by Brazil, Colombia, the Dominican Republic, Ecuador, Guyana, Haiti, Panama, Suriname, and Trinidad and Tobago, effective June 6, 2005.

Charles X. O’Loghlin (Ireland) relinquished his duties as Alternate Executive Director to Kevin G. Lynch (Canada), effective June 26, 2005.

Peter Charleton (Ireland) was appointed Alternate Executive Director to Kevin G. Lynch (Canada), effective June 27, 2005.

Oussama T. Kanaan (Jordan) relinquished his duties as Alternate Executive Director to A. Shakour Shaalan (Egypt), effective August 7, 2005.

Pier Carlo Padoan (Italy) relinquished his duties as Executive Director for Albania, Greece, Italy, Malta, Portugal, San Marino, and Timor-Leste, effective September 1, 2005.

Arrigo Sadun (Italy) was elected Executive Director by Albania, Greece, Italy, Malta, Portugal, San Marino, and Timor-Leste, effective September 2, 2005.

Samir El-Khouri (Lebanon) was appointed Alternate Executive Director to A. Shakour Shaalan (Egypt), effective January 3, 2006.

Jon A. Solheim (Norway) relinquished his duties as Executive Director for Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden, effective January 10, 2006.

David Farelius (Sweden) relinquished his duties as Alternate Executive Director to Jon A. Solheim (Norway), effective January 10, 2006.

Tuomas Saarenheimo (Finland) was elected Executive Director by Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden, effective January 11, 2006.

Jon Sigurgeirsson (Iceland) was appointed Alternate Executive Director to Tuomas Saarenheimo (Finland), effective January 11, 2006.

Kevin G. Lynch (Canada) relinquished his duties as Executive Director for Antigua and Barbuda, The Bahamas, Barbados, Belize, Canada, Dominica, Grenada, Ireland, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, effective March 5, 2006.

Jonathan T. Fried (Canada) was elected Executive Director by Antigua and Barbuda, The Bahamas, Barbados, Belize, Canada, Dominica, Grenada, Ireland, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, effective April 17, 2006.

Fritz Zurbrügg (Switzerland) relinquished his duties as Executive Director for Azerbaijan, the Kyrgyz Republic, Poland, Serbia and Montenegro, Switzerland, Tajikistan, Turkmenistan, and Uzbekistan, effective April 30, 2006.

APPENDIX | VI

Changes in membership of the Executive Board

169169

Financial statementsApril 30, 2006

APPENDIX | VII

IMF ANNUAL REPORT | 2006

170

Deloitte & Touche LLPSuite 500555 12th Street, NWWashington, DC 20004-1207USATel: +1 202 879 5600Fax: +1 202 879 5309www.deloitte.com

Member ofDeloitte Touche Tohmatsu

Independent Auditors’ Report

To the Board of Governorsof the International Monetary FundWashington, DC

We have audited the accompanying consolidated balance sheets of the General Department of the International Monetary Fund and subsidiary (the “Depart-ment”) as of April 30, 2006, and 2005, and the related consolidated statements of income, changes in reserves and resources, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Department’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with International Standards on Auditing and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropri-ate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Department’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the General Department of the Interna-tional Monetary Fund at April 30, 2006, and 2005, and the results of their operations and their cash flows for the years then ended in conformity with Interna-tional Financial Reporting Standards.

Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental sched-ules listed on pages 183 to 188 are presented for the purpose of additional analysis and are not a required part of the basic consolidated financial state-ments. These schedules are the responsibility of the Department’s management. Such schedules have been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, are fairly stated in all material respects when considered in relation to the basic consolidated financial statements taken as a whole.

June 12, 2006

171

Financial statements

| VII

171

General DepartmentConsolidated balance sheets

as at April 30, 2006, and 2005(In thousands of SDRs)

2006 2005 2006 2005

AssetsUsable currencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,132,488 122,388,465Credit outstanding (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,227,219 49,853,664Other currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,519,674 41,244,248___________ ___________

Total currencies (Note 6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,879,381 213,486,377___________ ___________

SDR holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,640,792 574,310

Gold holdings (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,851,771 5,851,771

Receivables (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295,054 568,416

Other assets (Notes 9 and 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661,169 709,940

Investments held in Special Disbursement Account (Note 10) . . . . . . . . . . . . . . . . . . . . . — 2,518,613MDRI-I Trust (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384,296 —

Structural Adjustment Facility loans (Note 4) . . . . . . . . . . . . . . . . . . . . . 8,840 45,566___________ ___________Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,721,303 223,754,993___________ ______________________ ___________

Liabilities (including quotas)Remuneration payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,354 247,798

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,901 151,530

Accrued MDRI-I Trust grants (Note 5). . . . . . . . . . . . . . . . . . . . . . . . . . . 380,198 —

Special Contingent Account (Note 13). . . . . . . . . . . . . . . . . . . . . . . . . . 1,683,019 1,589,019

Quotas, represented by (Note 6):Reserve tranche positions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,826,022 49,848,798 Subscription payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,652,378 163,629,602 ___________ ___________

Total quotas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,478,400 213,478,400 ___________ ___________Total liabilities (including quotas) . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,752,872 215,466,747___________ ___________

Reserves of the General Resources Account . . . . . . . . . . . . . . . . . . . . 5,959,591 5,724,067

Resources of the Special Disbursement Account . . . . . . . . . . . . . . . . 8,840 2,564,179___________ ___________Total liabilities, reserves, and resources . . . . . . . . . . . . . . . . . . . . . . . 221,721,303 223,754,993___________ ______________________ ___________

The accompanying notes are an integral part of these consolidated financial statements.

/s/ Michael G. Kuhn /s/ Rodrigo de Rato Director, Finance Department Managing Director

IMF ANNUAL REPORT | 2006

172

General DepartmentConsolidated income statements

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

2006 2005

Operational incomeInterest and charges (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,671,502 2,270,044Interest on SDR holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,330 16,322Investment income of

Special Disbursement Account (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,770 52,157MDRI-I Trust (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,940 —

Other charges and income (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,558 34,035__________ _________ 1,801,100 2,372,558__________ _________

Operational expensesRemuneration (Note 14). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 828,298 1,033,847Administrative expenses (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 692,666 673,204__________ _________ 1,520,964 1,707,051__________ _________

Net operational income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,136 665,507__________ _________MDRI grant assistance (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,499,842) —

Contributions from the Special Disbursement Account to Administered Accounts (Note 10):PRGF-ESF Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (507,109) (40,592)PRGF-HIPC Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (593,000) (164,098)__________ _________

Total net (loss)/income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,319,815) 460,817__________ ___________________ _________

Net income (loss) of the General Department comprisesNet income of the General Resources Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235,524 613,350Loss of the Special Disbursement Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,555,339) (152,533)__________ _________ (2,319,815) 460,817__________ ___________________ _________

The accompanying notes are an integral part of these consolidated financial statements.

General DepartmentConsolidated statements of changes in reserves and resources

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

Special General Resources Account Disbursement____________________________________________ Special General Total Account

resources reserve reserve reserve

Balance at April 30, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,415,435 2,695,282 5,110,717 2,716,712Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,394 581,956 613,350 (152,533)_________ _________ _________ __________Balance at April 30, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,446,829 3,277,238 5,724,067 2,564,179_________ _________ _________ __________Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,510) 243,034 235,524 (2,555,339)_________ _________ _________ __________Balance at April 30, 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,439,319 3,520,272 5,959,591 8,840_________ _________ _________ ___________________ _________ _________ __________

The accompanying notes are an integral part of these consolidated financial statements.

Financial statements | VII

173

General DepartmentConsolidated statements of cash flows

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

2006 2005

Usable currencies and SDRs from operating activitiesNet (loss)/income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,319,815) 460,817Adjustments to reconcile net (loss)/income to usable resources generated by operations:

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,552 15,236Changes in receivables and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323,661 34,176Changes in remuneration payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (188,073) 86,485Changes in accrued MDRI-I Trust grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380,198 — Increase in the Special Contingent Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,000 94,000

Usable currencies and SDRs from credit to members: Purchases in currencies and SDRs, including reserve tranche purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,156,025) (1,613,933)Repurchases in currencies and SDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,782,470 13,907,177Repayments of Structural Adjustment Facility loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,726 40,342___________ ___________

Net usable currencies and SDRs provided by operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,971,694 13,024,300___________ ___________

Usable currencies and SDRs from investment activitiesAcquisition of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,080) (59,111)Net disposition of investments by the Special Disbursement Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,518,613 112,191Net acquisition of investments by the MDRI-I Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (384,296) — ___________ ___________

Net usable currencies and SDRs provided by investment activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,114,237 53,080___________ ___________

Usable currencies and SDRs from financing activities Subscription payments in SDRs and usable currencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 171,100Changes in composition of usable currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 724,574 5,946,355___________ ___________

Net usable currencies and SDRs provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 724,574 6,117,455___________ ___________

Net increase in usable currencies and SDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,810,505 19,194,835Usable currencies and SDRs, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,962,775 103,767,940___________ ___________Usable currencies and SDRs, end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,773,280 122,962,775___________ ______________________ ___________

The accompanying notes are an integral part of these consolidated financial statements.

IMF ANNUAL REPORT | 2006

174

General DepartmentNotes to the consolidated financial statements

as at April 30, 2006, and 2005

1. Purpose and organization

The International Monetary Fund (IMF) is an international organization of 184 member countries. It was established to promote international mon-etary cooperation and exchange stability and to maintain orderly exchange arrangements among members; to facilitate the expansion and balanced growth of international trade, and contribute thereby to the promotion and maintenance of high levels of employment; and to provide temporary financial assistance to member countries under adequate safeguards to assist in solving their balance of payments problems in a manner con-sistent with the provisions of the IMF’s Articles of Agreement. The IMF conducts its operations and transactions through the General Department and the Special Drawing Rights Department (the SDR Department). The General Department consists of the General Resources Account (GRA), the Special Disbursement Account (SDA), including the Multilateral Debt Relief Initiative-I Trust (MDRI-I Trust), over which the SDA has substantial control, and the Investment Account. The IMF also administers trusts and accounts established to perform financial and technical services and financial operations consistent with the purposes of the IMF. The resources of these trusts and accounts are contributed by members or the IMF through the SDA. With the exception of the MDRI-I Trust, whose financial statements are consolidated with those of the General Department, the financial statements of the SDR Department and these trusts and accounts are presented separately.

General Resources Account

The GRA holds the general resources of the IMF. Its resources reflect the pay-ment of quota subscriptions, use and repayment of IMF credit, collection of charges on the use of credit, payment of remuneration on creditor positions, borrowings, and payment of interest and repayment of borrowings.

Special Disbursement Account

The assets and resources of the SDA are held separately from the GRA and the Investment Account of the General Department. The SDA is the vehicle for receiving and investing profits from the sale of the IMF’s gold and for making transfers to other accounts for special purposes authorized in the Articles, in particular for financial assistance on special terms to low-income members of the IMF. Resources of the SDA included proceeds from the sales of the IMF’s gold in the past, including income from the investment of gold profits. The SDA holds claims receivable from outstanding loans extended under the Structural Adjustment Facility (SAF), and repayments of Trust Fund loans to the Trust Fund (in liquidation) are transferred to the SDA (see Note 10 below). Repayments of principal and interest from SAF loans and resources derived from the termination of the Trust Fund are transferred from the SDA to the Reserve Account of the Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust (PRGF-ESF Trust), which is administered separately by the IMF as Trustee.

Effective January 5, 2006, the IMF adopted the legal framework applicable to the Multilateral Debt Relief Initiative (MDRI) to provide full debt relief to low-

income member countries. For this purpose, the MDRI-I and MDRI-II Trusts were established to provide grant assistance under the MDRI. Subsequent to the adoption of the MDRI, the resources held in the SDA were transferred to the MDRI-I Trust, the PRGF-HIPC Trust, and the PRGF-ESF Trust Subsidy Account (Note 10).

Investment Account

On April 28, 2006, the Executive Board of the IMF approved the establish-ment of the Investment Account within the General Department and autho-rized the transfer of currencies from the GRA in an amount equivalent to the total amount of the General and Special Reserves of the GRA on April 30, 2006. The transfers to the Investment Account were made subsequent to the financial year ended April 30, 2006.

2. Summary of significant accounting policies

Basis of accounting

The consolidated financial statements of the General Department are pre-pared in accordance with International Financial Reporting Standards (IFRS). The consolidated financial statements include the accounts of the GRA, the SDA, the Investment Account (inactive in financial year ended April 30, 2006), and the MDRI-I Trust, an entity that is determined to be substantially controlled by the SDA owing primarily to the existence of the Trustee’s power to terminate the Trust and the SDA’s claim to the Trust’s entire residual assets upon termination as long as there are no contributor resources in the MDRI-I Trust. All transactions and balances between these entities have been elimi-nated during the consolidation. Specific accounting principles and disclosure practices are explained further below.

Use of estimates

The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Unit of account

The consolidated financial statements are expressed in terms of SDRs. The value of the SDR is determined by the IMF each day by summing the values in U.S. dollars, based on market exchange rates, of the currencies in the SDR valuation basket. The IMF reviews the SDR valuation basket every five years. The latest review was completed in November 2005, and the new composi-tion of the SDR valuation basket became effective on January 1, 2006. The currencies in the basket as of April 30, 2006, and 2005 and their amounts were as follows:

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Currency Amount

2006 2005

Euro 0.4100 0.4260Japanese yen 18.4000 21.0000Pound sterling 0.0903 0.0984U.S. dollar 0.6320 0.5770

As of April 30, 2006, one SDR was equal to 1.47106 U.S. dollars (one SDR was equal to 1.51678 U.S. dollars as of April 30, 2005).

Currencies

Currencies consist of members’ currencies and securities held by the IMF. Each member has the option of substituting non-negotiable and non-interest-bearing securities for the IMF’s holdings of its currency that exceed

of 1 percent of the member’s quota. These securities are encashable by the IMF on demand.

Each member is required to pay to the IMF its initial quota and subsequent quota increases partly in its own currency, with the remainder to be paid in usable currencies prescribed by the IMF or SDRs. The only exception was the quota increase of 1978, which was paid entirely in members’ own currencies.

Usable currencies consist of currencies of member countries considered by the IMF to have strong balance of payments and reserve positions. These currencies are included in the IMF’s Financial Transactions Plan to finance purchases and other transfers of the IMF. Participation in the Financial Trans-actions Plan is reviewed on a quarterly basis. Usable currencies and SDR holdings readily available to finance IMF operations and transactions are considered cash equivalents. The changes in non-usable currencies result from the IMF’s transactions (purchases and repurchases) where a member’s currency is exchanged for another member’s currency, or from the inclusion/exclusion of a member’s currency in the IMF’s Financial Transactions Plan.

Currencies, including securities, are valued in terms of the SDR on the basis of the currency/SDR exchange rate determined for each currency. Securities can be substituted by members for currencies at their option. These securities are not marketable but can be converted into currencies on demand. Each member is obligated to maintain, in terms of the SDR, the value of the balances of its currency, including its securities, held by the IMF in the GRA. This requirement is referred to as the maintenance-of-value obligation. Whenever the IMF revalues its holdings of a member’s currency, a receivable or a payable is established for the amount required to maintain the SDR value of the IMF’s holdings of that currency. The currency balances in the balance sheet include these receivables and payables. All currencies are revalued periodically in terms of the SDR, including at each financial year end.

Credit outstanding

The IMF provides balance of payments assistance in accordance with established policies by selling to members, in exchange for their own currencies, SDRs or currencies of other members. When members make purchases, they incur obligations to repurchase the IMF’s holdings of their currencies arising from the purchases within specified periods by pay-ments in SDRs or other currencies, as determined by the IMF. IMF credit is subject to specific repayment schedules over periods that vary depending on the type of facility used. Members are entitled to repurchase, at any time, the IMF’s holdings of their currencies on which charges are levied and are expected to make repurchases as and when their balance of pay-ments and reserve position improve.

The repurchase policies of the IMF are intended to ensure the revolving char-acter of its resources. Purchases of currencies from the GRA are subject to repurchase obligations, which can differ depending on the policy or facility under which purchases are made. In keeping with a long-standing principle of the IMF that its resources should be repaid as soon as the balance of payments and reserve position improve, members in a position to do so are expected to make repurchases under predetermined time-based expectation schedules. However, if a member’s external position is not sufficiently strong, it may request that repurchases on the expectation schedule be extended to the original obligation schedule. A member is considered overdue only after failure to make a payment on the repurchase obligation schedule.

Overdue obligations and the burden-sharing mechanism

It is the policy of the IMF to exclude from current income charges due from members that are six months or more overdue in meeting any financial obligation to the IMF. The IMF fully recovers this lost income from the burden-sharing mechanism, through adjustments, in the current period, to the rates of charge and remuneration. Members that have borne the financial consequences of overdue charges receive refunds to the extent that overdue charges that had given rise to burden-sharing adjustments are subsequently settled.

An impairment loss would be recognized if there is objective evidence of impairment as a result of a past event that occurred after initial recogni-tion, and is determined as the difference between the outstanding credit’s carrying value and the present value of the estimated future cash flows. No impairment losses have been recognized.

First Special Contingent Account

In view of the risk resulting from overdue obligations, the IMF accumulates balances in the first Special Contingent Account (SCA-1) by collecting resources under the burden-sharing mechanism. Losses arising from overdue principal, if realized, would be charged against the SCA-1. The IMF has not realized any losses on overdue financial obligations. However, the IMF consid-ers it prudent to maintain the SCA-1 as an added protection until all arrears are fully settled. Balances in the SCA-1 are refundable to the members that shared the cost of its financing in proportion to their contributions when there are no outstanding overdue repurchases and charges, or at such earlier time as the IMF may decide.

SDR holdings

Although SDRs are not allocated to the IMF, the IMF may acquire, hold, and dispose of SDRs through the GRA. The IMF receives SDRs from members in the settlement of their financial obligations to the IMF and uses SDRs in transactions and operations with members. The IMF earns interest on its SDR holdings at the same rate as all other holders of SDRs.

Gold holdings

The Articles of Agreement limit the use of gold in the IMF’s operations and transactions. Any use provided for in the Articles requires a decision adopted by an 85 percent majority of the total voting power. Under the Articles, the IMF may sell gold outright on the basis of prevailing market prices but can-not engage in any other gold transactions, such as loans, leases, swaps, or the use of gold as collateral. In addition, the IMF does not have the authority to buy gold, but it may accept payments from a member in gold instead of

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SDRs or currencies in any operation or transaction under the IMF’s Articles at prevailing market prices.

In accordance with the provisions of the Articles, whenever the IMF sells gold held on the date of the Second Amendment of the IMF’s Articles of Agreement (April 1, 1978), the portion of the proceeds equal to the historical cost must be placed in the GRA. Any portion of the proceeds in excess of the historical cost will be held in the SDA or transferred to the Investment Account. The IMF may also sell gold held on the date of the Second Amendment to those mem-bers that were members on August 31, 1975, in proportion to their quotas on that date, in exchange for their own currencies at the historical cost.

The IMF values its gold holdings at historical cost using the specific identifi-cation method. The carrying value of the Fund’s gold holdings is derived from quota subscriptions prior to the Second Amendment and the settlement of financial obligations by members in 1992 and 1999 (see Note 7).

Other assets

Other assets primarily include fixed assets, net pension plan assets, and net assets for other post-retirement benefits.

Fixed assets with a cost in excess of a threshold amount are capitalized at cost and depreciated over the estimated useful lives of the assets, using the straight-line method. Buildings, equipment, and furniture are depreciated over 30, 3, and 7 years, respectively. Software is amortized over 3 to 5 years.

The IMF operates two defined-benefit pension plans and provides post-retirement benefits to staff. The pension plans are funded by payments from staff and the IMF, taking into account the recommendations of independent actuaries. Assets of the pension plans are held in separate trustee-managed funds. The IMF also established a Retired Staff Benefits Investment Account (RSBIA) to hold and invest funds set aside to finance the cost of post-retirement employee benefits. The assets of the RSBIA are administered by the IMF. Pension plans and other post-retirement assets are measured at fair value as of the balance sheet date. Pension costs and expected costs of the post-retirement medical and life insurance benefits are determined using the Projected Unit Credit Method, which measures the present value of the estimated future cash outflows, using yields on high-quality corporate bonds that have maturities approximating the terms of the pension liabilities and accrued over the period of employment. Valuations of these obligations are carried out annually by independent actuaries.

Special Disbursement Account

Investments

Investments held in the SDA and the MDRI-I Trust are made in short-term deposits denominated in SDRs with maturities of less than one year and are classified as fair-value-through-profit-and-loss securities. Investments are recorded on the settlement date at cost and the carrying value of the invest-ments approximate their fair value. Investment income comprises interest earned on investments.

The investments in the MDRI-I Trust are set aside for grant assistance to qualifying members under the MDRI.

Contributions to Administered Accounts

In connection with the implementation of the MDRI, the IMF transferred the resources of the SDA to the MDRI-I Trust, the PRGF-ESF Trust Subsidy

Account, and the PRGF-HIPC Trust. Since the transfers were intended to ben-efit these trusts and there is no expectation of repayment, the IMF adopted a change in the method of accounting for the transfers and is now treating them as contributions. The change in accounting policy was adopted with retrospective effect as of May 1, 2004. The impact of the change in account-ing policy on the income statements was to reduce the income of the SDA by SDR 1,100 million for the year ended April 30, 2006 (SDR 205 million for the year ended April 30, 2005).

SAF Loans

SAF loans provided financial assistance to low-income members at an inter-est rate of of 1 percent per annum for a period of 10 years. Repayments of all SAF loans are transferred to the PRGF-ESF Trust Reserve Account when received. Allowances for loan losses would be established if and when there is objective evidence that an impairment loss on loans has been incurred.

Reserve tranche position

A member has a reserve tranche in the IMF when the IMF’s holdings of its currency, excluding holdings that reflect the member’s use of IMF credit, are less than the member’s quota. Reserve tranches result from quota payments, part of which are to be made in reserve assets, and the use of the member’s currency in the IMF’s transactions or operations. A member’s reserve tranche is considered a part of its external reserves and a liquid claim against the IMF. The member may draw on the reserve tranche at any time when it rep-resents that it has a balance of payments need. Reserve tranche purchases are not subject to repurchase obligations or charges.

Quotas

Each member is assigned a quota that forms the basis of its financial and organizational relationship with the IMF. A member’s quota is related to, but not strictly determined by, economic factors such as national income, the value of external trade and payments, and the level of official reserves. Quo-tas determine members’ subscriptions to the IMF, their relative voting power, access to financing, and their share in SDR allocations. Should a member withdraw from the Fund, quota subscriptions are repayable to the extent they are not needed to settle other net obligations of the member to the IMF.

Reserves of the General Resources Account

The IMF’s reserves, consisting of the General Reserve and the Special Reserve, provide it with protection against financial risk of a general nature. The IMF determines annually what part of its net income will be retained and placed to the General Reserve or the Special Reserve, and what part, if any, will be distributed. The General Reserve may be used to meet capital losses or operational deficits or for distribution. The Articles of Agreement permit the IMF to use the Special Reserve for any purpose for which it may use the General Reserve, except distribution. After meeting the cost of administering the PRGF-ESF Trust, net operational income generated from surcharges on purchases under the SRF, the credit tranches, and the EFF has been placed to the General Reserve. All other income (losses) has been placed to (have been charged against) the Special Reserve.

SDR interest rate

The SDR interest rate is determined weekly by reference to a combined mar-ket interest rate, which is a weighted average of yields on short-term instru-

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ments in the capital markets of the euro area, Japan, the United Kingdom, and the United States.

Charges

The IMF levies periodic charges on members’ use of GRA credit. The basic rate of charge is set at the beginning of each financial year as the SDR inter-est rate plus a margin expressed in basis points determined by the Executive Board (a proportion of the SDR interest rate in financial year ended April 30, 2005). Under the burden-sharing mechanism (see Note 13), the basic rate of charge is increased (i) to offset the effect on the IMF’s income of the non-payment of charges and (ii) to finance the additions to the SCA-1.

A surcharge progressing from 300 to 500 basis points above the rate of charge applies to the use of credit under the Supplemental Reserve Facil-ity (SRF). In addition, credit outstanding exceeding 200 percent of quota, resulting from purchases in the credit tranches and under the Extended Fund Facility (EFF) (other than those under the SRF) after November 28, 2000, is subject to a surcharge of 100 basis points, and credit in excess of 300 per-cent of quota, to a surcharge of 200 basis points. Special charges are levied on members’ currency holdings that are not repurchased when due and on overdue charges. Special charges do not apply to members that are six months or more overdue to the IMF. A service charge is levied by the IMF on all purchases, except reserve tranche purchases. A refundable commitment fee is charged on Stand-By and Extended Arrangements. At the expiration or cancellation of an arrangement, the unrefunded portion of the commitment fee is recognized as current income.

Remuneration

The IMF pays interest, referred to as remuneration, on a member’s reserve tranche position. A portion of the reserve tranche is unremunerated and is equal to 25 percent of the member’s quota on April 1, 1978 (that part of the quota that was paid in gold prior to the Second Amendment of the Fund’s Articles). For a member that joined the Fund after that date, the unremu-nerated reserve tranche is the same percentage of its initial quota as the average unremunerated reserve tranche was as a percentage of the quotas of all other members when the new member joined the Fund. The unremuner-ated reserve tranche remains fixed for each member in nominal terms, but, because of subsequent quota increases, it is now significantly lower when expressed as a percentage of quota. The average is equal to 3.8 percent of quota at April 30, 2006, and 2005, but the actual percentage is different for each member.

The rate of remuneration, which is equivalent to the effective interest rate, is equal to the SDR interest rate, adjusted downward to finance a share of the nonpayment of charges and additions to the SCA-1 under the burden-sharing mechanism (see Note 13).

Adoption of New International Financial Reporting Standards

In December 2004, the International Accounting Standards Board issued an amendment to IAS 19, “Employee Benefits, Actuarial Gains and Losses, Group Plans, and Disclosures.” The amended IAS 19 provides an additional option for recognizing actuarial gains and losses and requires additional disclosures on the plan assets held by the employee benefit plans as well as further disclosure on the net periodic cost and reconciliation of the funded status. The revised standard will become effective for financial year 2007.

The implementation of this amended standard will result in additional disclo-sures in the notes to the General Department’s financial statements.

Comparatives

When necessary, comparative figures have been reclassified to conform with changes in the presentation of the current year.

3. Financial risk management

In providing financial assistance to member countries and conducting its operations, the IMF is exposed to various types of risks, including credit, interest rate, exchange rate, liquidity, and operational risks. Because of its unique role in the international monetary system, the principal risk facing the IMF is credit risk.

Credit risk

Credit risk refers to potential losses on the credit outstanding owing to the inability, or unwillingness, of member countries to make repurchases. While the IMF is accorded preferred creditor status, i.e., the claims of other credi-tors are subordinate to those of the IMF, credit risk is inherent since the IMF generally provides financing when other sources are not available to a mem-ber and has limited ability to diversify its loan portfolio. As a result, credit concentration is high (see Note 4).

The IMF’s credit-risk-mitigating measures comprise policies on access lim-its; program design and monitoring, including conditionality attached to its financing; early repurchase policies; and preventative, precautionary, and remedial measures to cope with the financial consequences of protracted arrears.

The IMF has established access limits, including limits on overall access to resources in the GRA, as well as limits on access to the credit tranches under the Extended Fund Facility. The overall limit is currently set at an annual limit of 100 percent of a member’s quota, with a cumulative limit of 300 percent of a member’s quota. Access in excess of these limits can be granted in exceptional circumstances (exceptional access cases) subject to certain procedural requirements and substantive criteria that have been adopted by the Executive Board.

The IMF generally provides financial assistance to members in the context of a program that is designed to help the member overcome its balance of payments difficulties during the program period. IMF assistance is normally disbursed in tranches and subject to conditionality in the form of performance criteria and periodic reviews. To ensure the integrity of data provided to the Fund in the context of access to Fund resources and compliance with performance criteria, the IMF may apply remedies for misreporting by member countries by expecting early repurchases for non-complying purchases.

In accordance with the Articles of Agreement, member countries using IMF resources are expected to make early repurchases as their balance of pay-ments and reserve positions improve. Moreover, members are expected to make repurchases resulting from purchases in the credit tranches or under the Compensatory Financing Facility made after November 20, 2000, under predetermined expectation schedules ahead of the obligation date to pre-serve the revolving character of the IMF’s resources and reduce the duration of IMF credit exposure. The IMF maintains precautionary balances consisting of its reserves and the SCA-1 to cover possible overdue principal and losses

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in income, and to preserve the IMF’s reputation as a prudent financial orga-nization. A target level of precautionary balances is determined by taking into consideration the amount of credit in protracted arrears and a margin for risk associated with credit in good standing. The Executive Board decided that, in the current circumstances, the IMF should aim at precautionary balances in an amount of SDR 10 billion. In addition, the burden-sharing arrangement for overdue charges is another risk-mitigating mechanism unique to the IMF whereby the financial risk from such charges is passed on to creditor and debtor members and allows for the strengthening of the IMF’s overall finan-cial position.

Interest rate risk

Interest rate risk is the risk that future cash flows will fluctuate because of changes in market interest rates. The IMF’s cost structure and its income position are interest-rate driven. Fluctuations in interest rates could widen or narrow the spread between the rate of charge on credit outstanding and the rate of remuneration paid to member countries with remunerated reserve tranche positions. To minimize the effect of interest rate fluctuations on income, the IMF links the rate of charge directly to the SDR interest rate (which is equal to the rate of remuneration).

Exchange rate risk

Exchange rate risk is the exposure to the effects of fluctuations in the pre-vailing foreign currency exchange rates on an entity’s financial position and cash flows. The IMF uses the SDR as the unit of account and conducts its transactions in terms of the SDR. It has no exchange rate risk exposure on its holdings of members’ currencies since, under the Articles of Agreement, members are required to maintain the value of such holdings in terms of the SDR. Any depreciation/appreciation in their currency vis-à-vis the SDR gives rise to a currency valuation adjustment receivable or payable that must be settled on an annual basis and that is included in the stock of the IMF’s cur-rency holdings. Therefore, the value of the IMF’s currency holdings does not fluctuate in SDR terms.

Exchange rate risk on IMF investments is managed by investing in securities denominated in SDRs or in the constituent currencies of the SDR valuation basket. The IMF also has other assets and liabilities, such as trade receiv-ables and payables, denominated in currencies other than SDRs and makes administrative payments largely in U.S. dollars, but the exchange rate risk exposure is very limited.

Liquidity risk

Liquidity risk is the risk of non-availability of resources to meet the IMF’s financing needs and obligations. The IMF must have usable resources avail-able to meet members’ demand for credit. While the IMF’s sources are revolving, uncertainties in timing and amount of credit extended to members during financial crises expose the IMF to liquidity risk. Moreover, the IMF must also stand ready to meet the potential demands from members draw-ing upon their reserve tranche positions, which have no fixed maturity and are part of members’ reserves.

The IMF manages its liquidity risk not by matching the maturity of assets and liabilities but by closely scrutinizing developments in its liquidity posi-tion, especially as they relate to the adequacy of quota-based resources to meet liquidity needs. The Articles of Agreement require the IMF to conduct a general review of members’ quotas at intervals of no more than five years in

order to assess the adequacy of quota-based resources to meet members’ demand for IMF financing. There have been eight quota increases, including an ad hoc increase, as a result of the reviews. The last general review (the twelfth) was completed in January 2003 with no proposed quota increase. Should the available quota-based resources be inadequate to meet financ-ing needs, the IMF may activate its standing credit lines totaling SDR 34 bil-lion under the General Arrangements to Borrow and the New Arrangements to Borrow, and its associated agreement with Saudi Arabia for an additional SDR 1.5 billion. The IMF also monitors its liquidity position over a shorter term, using objective criteria such as the forward commitment capacity for the next twelve-month period. (Schedule 2 provides the IMF’s available resources and liquidity position.)

Operational risk

Operational risk includes risk of loss attributable to errors or omissions because of failures in executing or processing transactions, inadequate con-trols, human factors, and/or failures in underlying support systems.

The IMF mitigates operational risk by (i) identifying key operational risks, (ii) maintaining a system of internal controls, (iii) documenting policies and procedures on administrative and accounting and reporting processes, and (iv) conducting internal audits to ensure accurate processing of transac-tions and minimize the possibility of undetected errors. The design and effectiveness of controls are evaluated continuously and improvements are implemented on a timely basis. The results of the internal evaluation of the effectiveness of internal controls are reported by the Office of Internal Audit and Inspection to the External Audit Committee, which also exercises over-sight over the external audit of the IMF’s accounts and its controls.

The IMF has adopted a Code of Ethics to promote the highest standards of ethics among its staff, including senior management and members of the Executive Board. The enforcement of the Code of Ethics is supplemented by procedures for the reporting and investigation of irregularities and impropri-eties, including fraudulent acts.

4. Credit and loans outstanding

Credit outstanding in the GRA and SAF loans in the SDA are carried at amor-tized cost.

Changes in the outstanding use of IMF credit under the various facilities of the GRA were as follows:

April 30, Repur- April 30, Repur- April 30,2004 Purchases chases 2005 Purchases chases 2006

(In millions of SDRs)Credit tranches 41,730 1,445 (7,717) 35,458 1,967 (26,108) 11,317Extended Fund Facility 13,751 163 (4,549) 9,365 189 (2,077) 7,477Supplemental Reserve

Facility 6,028 — (1,459) 4,569 — (4,569) —Systemic Transformation

Facility 154 — (136) 18 — (18) —Enlarged access 276 — (5) 271 — (3) 268Compensatory and

Contingency Financing Facility 120 — (36) 84 — — 84

Supplementary Financing Facility 94 — (5) 89 — (8) 81______ _____ _______ ______ _____ _______ ______

Total credit outstanding 62,153 1,608 (13,907) 49,854 2,156 (32,783) 19,227______ _____ _______ ______ _____ _______ ____________ _____ _______ ______ _____ _______ ______

The following repurchases were made by members during the financial years ended April 30:

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2006 2005

(In millions of SDRs)

Early repurchases 21,968 2,645Repurchase expectations 2,910 5,854Repurchase obligations 7,905 5,408______ ______Total repurchases 32,783 13,907______ ____________ ______

Repurchases for the year ended April 30, 2006, include Bolivia’s repurchase of SDR 90 million that was part of its stock of debt eligible for debt relief under the MDRI (see Note 5). In addition, two members with total outstand-ing credit from the GRA of SDR 19 million as of April 30, 2006, are eligible for MDRI debt relief upon reaching the completion point under the HIPC Initiative.

The IMF approved the following members’ requests to extend repurchases from the expectation to the obligation schedule during the financial years ended April 30:

Repurchase expectations extended_____________________________2006 2005

(In millions of SDRs)

Argentina 1,683 779Dominica 1 1Dominican Republic — 11Ecuador — 33Macedonia, FYR 18 —Sri Lanka — 74Turkey 2,521 —Uruguay 541 434

Subsequent to the extension of its repurchase expectations, Argentina made repurchases of all of its outstanding credit to the GRA in January 2006.

As of April 30, 2006, and 2005, outstanding SAF loans amounted to SDR 9 million and SDR 46 million, respectively.

Scheduled repurchases in the GRA and repayment of SAF loans in the SDA are summarized below:

Financial year General Resources Special Disbursementending April 30 Account Account

(In millions of SDRs)

2007 8,019 —2008 4,816 —2009 3,439 —2010 1,831 —2011 427 —2012 and beyond 101 —Overdue 594 9______ ___Total 19,227 9______ _________ ___

The use of credit in the GRA by the largest users was as follows at April 30:

2006 2005

(In millions of SDRs and as a percentage of total GRA credit outstanding)

Largest user of credit 8,898 46.3% 15,356 30.8%Three largest users of credit 15,347 79.8% 36,539 73.3%Five largest users of credit 16,738 87.1% 44,190 88.6%

The five largest users of credit as of April 30, 2006, were Turkey, Indonesia, Uruguay, Ukraine, and Serbia and Montenegro. Outstanding credit by member is provided in Schedule 1.

The concentration of GRA outstanding credit by region was as follows as of April 30:

2006 2005

(In millions of SDRs and as a percentage of total GRA credit outstanding)

Africa 667 3.5% 1,168 2.3%Asia and Pacific 5,616 29.2% 6,760 13.6%Europe 1,934 10.0% 2,701 5.4%Latin America and the Caribbean 1,648 8.6% 25,617 51.4%Middle East and Turkey 9,362 48.7% 13,608 27.3%______ _____ ______ _____

Total 19,227 100% 49,854 100% ______ _____ ______ _____ ______ _____ ______ _____

Overdue obligations

At April 30, 2006, three members (four members as of April 30, 2005) were six months or more overdue in settling their financial obligations to the Gen-eral Department.

GRA repurchases, GRA charges, SAF loan repayments, and SAF interest that are six or more months overdue were as follows:

Repurchases and Charges and SAF loans SAF interest______________ ________________

2006 2005 2006 2005

(In millions of SDRs)

Total overdue 603 732 1,039 1,030Overdue for six months or more 603 730 1,026 1,018Overdue for three years or more 603 661 984 970

The type and duration of the overdue amounts in the General Department were as follows as of April 30, 2006:

Repurchases Charges and Total Longest overdueand SAF loans SAF interest obligation obligation

(In millions of SDRs)

Liberia 201 262 463 May 1985Somalia 105 102 207 July 1987Sudan 297 675 972 August 1985____ _____ _____

Total 603 1,039 1,642____ _____ _________ _____ _____

5. Multilateral Debt Relief Initiative

Under the MDRI, debt relief is provided to Heavily Indebted Poor Countries (HIPCs) and non-HIPCs with annual per capita income of $380 or less, and to HIPCs with an annual per capita income of more than $380. Grant assistance from the MDRI Trusts (together with assistance under the HIPC Initiative) provides debt relief to cover the full stock of debt owed to the IMF as of December 31, 2004, that remains outstanding at the time the member qualifies for such relief.

During the financial year ended April 30, 2006, debt relief under the MDRI was granted to 20 members amounting to SDR 2,503 million, consisting of outstanding credit in the GRA of SDR 90 million and PRGF-ESF Trust loans of SDR 2,413 million. MDRI grant assistance provided from resources held in the MDRI-I Trust amounted to SDR 1,120 million. All HIPCs will receive MDRI assistance upon reaching the completion point under the HIPC Initia-tive. Since the stock of debt owed to the IMF as of December 31, 2004, decreases over time, the actual debt eligible for MDRI assistance for the remaining members depends on the timing of their completion points. The IMF periodically reviews the qualification of members for MDRI debt relief as these members make progress toward reaching the completion point under the HIPC Initiative.

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MDRI grant assistance to the remaining eligible members is subject to the availability of resources and is accrued when it is probable that a liability has been incurred and the amount of such grant assistance can be rea-sonably estimated. The liability recorded in the MDRI-I Trust amounted to SDR 380 million as of April 30, 2006, and is based on the evaluation of currently available facts with respect to each individual eligible member and includes factors such as progress made toward reaching the completion point under the HIPC Initiative and the capacity to meet the macroeconomic performance and other objective criteria after reaching the completion point. As the qualification of members for MDRI debt relief is assessed, the amounts recorded are reviewed periodically and adjusted to reflect addi-tional information that becomes available.

6. Currencies

Net changes in the IMF’s holdings of members’ currencies for the years ended April 30, 2006, and 2005 were as follows:

April 30, Net April 30, Net April 30,2004 change 2005 change 2006

(In millions of SDRs)

Members’ quotas 212,794 684 213,478 — 213,478Members’ outstanding use of

IMF credit in the GRA 62,153 (12,299) 49,854 (30,627) 19,227Members’ reserve tranche

positions in the GRA (62,856) 13,007 (49,849) 28,023 (21,826)Administrative currency

balances (5) 8 3 (3) —_______ _____ _______ ______ _______Total currencies 212,086 1,400 213,486 (2,607) 210,879_______ _____ _______ ______ ______________ _____ _______ ______ _______

Receivables and payables arising from valuation adjustments at April 30, 2006, when all holdings of currencies of members were last revalued, amounted to SDR 4,103 million and SDR 7,074 million, respectively (SDR 8,521 million and SDR 5,435 million, respectively, at April 30, 2005). Settle-ments of these receivables or payables are required to be made by members promptly after the end of each financial year.

7. Gold holdings

At April 30, 2006, and 2005, the IMF held 3,217,341 kilograms of gold, equal to 103,439,916 fine ounces of gold, at designated depositories. Gold holdings were valued at a historical cost of SDR 5,852 million as of April 30, 2006, and 2005.

Cost____________________Ounces Per ounce Total

(In millions (In millions) (In SDRs) of SDRs)

Gold acquired from quota subscriptions 90.474 35 3,167Gold acquired from Cambodia in 1992 .021 241 5Gold acquired through off-market

transaction in 1999 12.944 207 2,680_______ _____Total 103.439 5,852_______ ____________ _____

As of April 30, 2006, the market value of the IMF’s holdings of gold was SDR 45.3 billion (SDR 29.7 billion at April 30, 2005).

8. Interest and charges

As of April 30, 2006, the total holdings on which the IMF levies charges amounted to SDR 19,227 million (SDR 49,854 million as of April 30, 2005). For financial year 2006, the basic rate of charge was set at a fixed margin of 108 basis points above the SDR interest rate (for financial year 2005, it was set at 154 percent of the SDR interest rate for the first half of the year and 136 percent for the second half). The average adjusted rate of charge before applicable surcharges for financial year 2006 was 4.18 percent (3.10 percent for financial year 2005).

Charges and other receivables as of April 30 were as follows:

2006 2005

(In millions of SDRs)

Periodic charges 1,308 1,598Amount paid through burden sharing (859) (848)Unpaid charges (186) (187)_____ _____ 263 563Other receivables 32 5_____ _____

Total receivables 295 568_____ __________ _____

Interest and periodic charges consisted of the following for the years ended April 30:

2006 2005

(In millions of SDRs)

Interest and periodic charges 1,667 2,259Amounts paid through burden-sharing

adjustments, net of refunds 5 11_____ _____Total interest and charges 1,672 2,270_____ __________ _____

Interest earned on SAF loans for the years ended April 30, 2006, and 2005 amounted to SDR 0.1 million and SDR 0.3 million, respectively.

Service charges and commitment fees on cancelled or expired arrangements, which amounted to SDR 23 million (SDR 34 million for the year ended April 30, 2005), are included in Other Charges and Income.

9. Other assets—fixed assets

Other assets include fixed assets, which at April 30, 2006, and 2005 amounted to SDR 313 million and SDR 311 million, respectively, and con-sisted of land, buildings, construction in progress, and equipment.

Land Buildings Other Total

(In millions of SDRs)Cost

Beginning of the year 96 215 152 463Additions — 5 15 20Disposals — — (14) (14)Reclassification 75 (75) —___ ___ ___ ___

End of the year 96 295 78 469

Accumulated depreciationBeginning of the year — 114 38 152

Additions — 8 10 18Disposals — — (14) (14)___ ___ ___ ___

End of the year — 122 34 156___ ___ ___ ___Net book value as at April 30, 2006 96 173 44 313___ ___ ___ ______ ___ ___ ___Net book value as at April 30, 2005 96 101 114 311___ ___ ___ ______ ___ ___ ___

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10. Special Disbursement Account

Investments

As at April 30, 2006, there were no investments in the SDA. Investments in the MDRI-I Trust consisted of short-term fixed-term deposits with maturities of less than one year and amounted to SDR 384 million. As at April 30, 2005, the investments in the SDA consisted of short-term fixed-term depos-its with maturities of less than one year and amounted to SDR 2,519 million.

Investment income of the SDA and the MDRI-I Trust for the years ended April 30, 2006, and 2005 was SDR 49 million and SDR 52 million, respectively.

Contributions to Administered Accounts

Assets in the SDA can be used for special purposes authorized in the Arti-cles, including providing financial assistance on special terms to low-income member countries.

Proceeds from the repayment of SAF loans are transferred from the SDA to the Reserve Account of the PRGF-ESF Trust as contributions. During the finan-cial years ended April 30, 2006, and 2005, such contributions amounted to SDR 37 million and SDR 41 million, respectively.

In addition, the accumulated investment earnings in the SDA are available for financing the PRGF-HIPC Trust on an as-needed basis. During the financial year ended April 30, 2006, the SDA contributed SDR 63 million to the PRGF-HIPC Trust (SDR 164 million during the financial year ended April 30, 2005).

Following the implementation of the MDRI, effective January 5, 2006, the resources held in the SDA were contributed to other accounts as follows:

(In millions of SDRs)PRGF-HIPC Trust Account 530MDRI-I Trust 1,500PRGF-ESF Trust Subsidy Account 470_____

Total 2,500__________

Trust Fund

The IMF is the Trustee of the Trust Fund, which was established in 1976 to provide balance of payments assistance on concessional terms to eligible members that qualify for assistance. The Trust Fund is in liquidation.

In 1980, the IMF, as Trustee, decided that, upon the completion of the final loan disbursements, the Trust Fund would be terminated as of April 30, 1981. Since that date, the activities of the Trust Fund have been confined to the conclusion of its affairs. The Trust Fund has no assets other than claims receivable, including interest and special charges, from Liberia, Somalia, and Sudan amounting to SDR 118 million at April 30, 2006, and 2005. All interest is deferred. Cash receipts on these loans are to be transferred to the Special Disbursement Account.

11. Borrowings

Under the General Arrangements to Borrow (GAB) and an associated agree-ment with Saudi Arabia, the IMF may borrow up to SDR 18.5 billion when supplementary resources are needed, in particular, to forestall or to cope with an impairment of the international monetary system. The GAB became effective on October 24, 1962, and has been renewed through December 25, 2008. Interest on borrowings under the GAB is set at a rate equal to the SDR interest rate.

Under the New Arrangements to Borrow (NAB), the IMF may borrow up to SDR 34 billion of supplementary resources. The NAB is the facility of first and principal recourse, but it does not replace the GAB, which will remain in force. Outstanding drawings and commitments under these two borrowing arrangements are limited to a combined total of SDR 34 billion. The NAB became effective for a five-year period on November 17, 1998, and has been renewed through November 16, 2008. Interest on borrowings under the NAB is payable to the participants at the SDR interest rate or any such higher rate as may be agreed between the IMF and participants representing 80 percent of the total credit arrangements. There was no balance outstand-ing as at April 30, 2006, and 2005 under the GAB or the NAB.

12. Arrangements

An arrangement is a decision of the IMF that gives a member the assurance that the IMF stands ready to provide SDRs or usable currencies during a specified period and up to a specified amount, in accordance with the terms of the arrangement. At April 30, 2006, the undrawn balances under the 11 arrangements that were in effect in the GRA amounted to SDR 7,539 million (SDR 7,927 million under 12 arrangements at April 30, 2005).

13. Burden sharing and the Special Contingent Account

Under the burden-sharing mechanism, the basic rate of charge is increased and the rate of remuneration is adjusted downward to offset the effect on the IMF’s income of the nonpayment of charges and also to finance the addi-tions to the SCA-1.

Cumulative charges, net of settlements, that have resulted in adjustments to charges and remuneration since May 1, 1986 (the date the burden-sharing mechanism was adopted) amounted to SDR 859 million at April 30, 2006, (SDR 848 million at April 30, 2005). The cumulative refunds for the same period, resulting from the settlements of overdue charges for which burden-sharing adjustments have been made, amounted to SDR 1,080 million and SDR 1,073 million, at April 30, 2006, and 2005, respectively.

The SCA-1 is financed by adjustments to the rate of charge and the rate of remuneration. Balances in the SCA-1 are to be distributed to the members that shared the cost of its financing when there are no outstanding overdue repurchases and charges, or at such earlier time as the IMF may decide. Amounts collected from members for the SCA-1 are akin to refundable cash deposits and are recorded as collections of cash and as a liability to those who paid it. Losses arising from overdue obligations, if realized, would be shared by members in proportion to their cumulative contributions to the SCA-1. For the financial years ended April 30, 2006, and 2005, the annual addition to the SCA-1 amounted to SDR 94 million.

14. Remuneration

At April 30, 2006, total creditor positions on which the IMF paid remunera-tion amounted to SDR 15,051 million (SDR 43,209 million at April 30, 2005). The average adjusted rate of remuneration for the financial year ended April 30, 2006, was 2.68 percent (1.98 percent for the financial year ended April 30, 2005). Remuneration consisted of the following for the years ended April 30:

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2006 2005

(In millions of SDRs)

Remuneration 833 1,045Amount withheld for burden-sharing adjustment,

net of refunds (5) (11)____ _____ 828 1,034____ _________ _____

15. Administrative expenses

Administrative expenses, the majority of which were incurred in U.S. dollars, were as follows for the years ended April 30:

2006 2005

(In millions of SDRs)Personnel 355 343Pension and other long-term employee benefits 153 160Travel 67 62Exchange gains and losses — 2Other 118 106____ ____

Total administrative expenses, net of reimbursements 693 673____ ________ ____

16. Pension and other post-retirement benefits

The IMF has a defined-benefit Staff Retirement Plan (SRP) that covers substantially all eligible staff and a Supplemental Retirement Benefits Plan (SRBP) for selected participants of the SRP. Participants contribute 7 percent of their pensionable remuneration and the IMF contributes the remainder of the cost of funding the plans and pays certain administrative costs of the plans. In addition, the IMF provides other employment and post-retirement benefits, including medical and life insurance, and other long-term benefits. In 1995, the IMF established a separate account, the Retired Staff Benefits Investment Account (RSBIA), to hold and invest resources set aside to fund the cost of the post-retirement benefits.

The defined benefit obligations are valued annually by independent actuar-ies. The latest actuarial valuations were carried out as at April 30, 2006, using the Projected Unit Credit Method.

The amounts recognized in the balance sheet are determined as follows:

2006 2005_________________________SRP SRBP Other Total Total

(In millions of SDRs)

Fair value of plan assets 4,003 7 458 4,468 3,504Present value of the defined

benefit obligation (2,982) (279) (573) (3,834) (3,720)Unrecognized actuarial losses/(gains) (271) 50 (120) (341) 560Unrecognized prior service cost — — 7 7 9_____ ____ ____ _____ _____

Net balance sheet asset/(liability) 750 (222) (228) 300 353_____ ____ ____ _____ __________ ____ ____ _____ _____

The movement in the net balance sheet asset is reconciled as follows:

2006 2005_________________________SRP SRBP Other Total Total

(In millions of SDRs)

Beginning of year 758 (182) (223) 353 443Expense recognized in the income

statement (57) (49) (47) (153) (175)Contributions paid 49 9 42 100 85____ ____ ____ ____ ____End of year 750 (222) (228) 300 353____ ____ ____ ____ ________ ____ ____ ____ ____

The pension and other post-retirement benefits expenses recognized in the income statement include the amortization, over the estimated aver-age remaining service lives of IMF staff, of actuarial gains and losses in excess of a corridor. The corridor is the higher of 10 percent of either the defined benefit obligation or the fair value of assets at the beginning of the financial year.

The amounts recognized in the income statements are as follows:

2006 2005_________________________SRP SRBP Other Total Total

(In millions of SDRs)

Current service cost 106 31 42 179 172Interest cost 169 15 34 218 210Expected returns on assets (236) — (27) (263) (244)Amortization of actuarial (gain)/loss 18 3 (4) 17 34Prior service cost — — 2 2 3 ____ ___ ___ ____ ____Total expense recognized in income

statement 57 49 47 153 175____ ___ ___ ____ ____Actual return on assets 773 — 82 855 380____ ___ ___ ____ ________ ___ ___ ____ ____

The principal actuarial assumptions used in the actuarial valuations were as follows:

2006 2005

(In percent)

Discount rate 6.25 5.7Expected return on plan assets 7.5 7.5Future salary increases 6.4–10.8 6.4–10.8Ultimate health-care-costs growth rates 4.0 4.0

17. Related-party transactions

The GRA conducts its transactions with the SDR Department on the same terms and conditions applicable to participants in the SDR Department. During the financial years ended April 30, 2006, the receipts (consisting of repurchases, charges, and interest on SDR holdings) and uses (con-sisting of purchases and remuneration) of SDRs by the GRA amounted to SDR 5,867 million (SDR 3,100 million for the financial year ended April 30, 2005) and SDR 2,801 million (SDR 3,032 million for the financial year ended April 30, 2005), respectively. As of April 30, 2006, and 2005, the GRA’s SDR holdings amounted to SDR 3,641 million and SDR 574 million, respectively.

The administrative expenses of operating the SDR Department, the PRGF-ESF Trust, the PRGF-HIPC Trust, and the MDRI-I and MDRI-II Trusts are paid by the GRA. The SDR Department reimbursed the GRA SDR 1.2 million and SDR 1.5 million for the financial years ended April 30, 2006, and 2005, respectively. The MDRI-I Trust will reimburse the GRA SDR 4.1 mil-lion for the financial year ended April 30, 2006. The IMF decided to forgo the reimbursements by the PRGF-ESF Trust to the GRA, amounting to SDR 50.9 million and SDR 54.4 million for the financial years ended April 30, 2006, and 2005, respectively. The PRGF-HIPC Trust and the MDRI-II Trust do not reimburse the GRA.

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Schedule 1

General Department Quotas, IMF’s holdings of currencies, reserve tranche positions,

and outstanding credit and loans as at April 30, 2006

(In thousands of SDRs)

General Resources Account_____________________________________________ IMF’s holdings Outstanding credit and loans________________________________________________________ of currencies1 Reserve GRA PRGF-ESF______________________ Percent tranche Amount Percent2 SDA3 Trust4 Total5_____________________Member Quota Total of quota position (A) + (B) + (C) = (D)

Afghanistan, Islamic Republic of 161,900 161,916 100.0 — — — — — — Albania 48,700 46,568 95.6 3,355 1,218 0.01 — 63,702 64,919Algeria 1,254,700 1,169,619 93.2 85,082 — — — — — Angola 286,300 286,445 100.1 — — — — — — Antigua and Barbuda 13,500 13,499 100.0 6 — — — — —

Argentina 2,117,100 2,116,919 100.0 195 — — — — — Armenia 92,000 92,005 100.0 — — — — 116,263 116,263Australia 3,236,400 2,833,494 87.6 403,156 — — — — — Austria 1,872,300 1,692,531 90.4 179,778 — — — — — Azerbaijan 160,900 179,576 111.6 10 18,676 0.10 — 85,713 104,389

Bahamas, The 130,300 124,041 95.2 6,260 — — — — — Bahrain 135,000 63,843 47.3 71,203 — — — — — Bangladesh 533,300 533,079 100.0 230 — — — 283,060 283,060Barbados 67,500 62,144 92.1 5,348 — — — — — Belarus 386,400 386,400 100.0 20 — — — — —

Belgium 4,605,200 4,069,818 88.4 535,402 — — — — — Belize 18,800 14,562 77.5 4,239 — — — — — Benin 61,900 59,720 96.5 2,188 — — — 880 880Bhutan 6,300 5,280 83.8 1,020 — — — — — Bolivia 171,500 172,298 100.5 8,875 9,660 0.05 — — 9,660

Bosnia and Herzegovina 169,100 205,505 121.5 06 36,400 0.19 — — 36,400Botswana 63,000 55,892 88.7 7,109 — — — — — Brazil 3,036,100 3,036,538 100.0 — — — — — — Brunei Darussalam 215,200 190,827 88.7 24,576 — — — — — Bulgaria 640,200 900,215 140.6 33,045 293,042 1.52 — — 293,042

Burkina Faso 60,200 52,858 87.8 7,346 — — — 13,760 13,760Burundi 77,000 76,641 99.5 360 — — — 40,700 40,700Cambodia 87,500 87,500 100.0 — — — — — — Cameroon 185,700 184,998 99.6 707 — — — 2,650 2,650Canada 6,369,200 5,649,903 88.7 719,307 — — — — —

Cape Verde 9,600 9,593 99.9 16 — — — 8,640 8,640Central African Republic 55,700 68,079 122.2 159 12,533 0.07 — 17,888 30,421Chad 56,000 55,719 99.5 282 — — — 52,856 52,856Chile 856,100 759,608 88.7 96,493 — — — — — China 6,369,200 5,629,974 88.4 739,273 — — — — —

Colombia 774,000 488,202 63.1 285,803 — — — — — Comoros 8,900 8,358 93.9 544 — — — — — Congo, Democratic Republic of the 533,000 533,000 100.0 — — — — 553,467 553,467Congo, Republic of 84,600 84,070 99.4 536 — — — 17,110 17,110Costa Rica 164,100 144,113 87.8 20,000 — — — — —

Côte d’Ivoire 325,200 324,556 99.8 646 — — — 130,476 130,476Croatia 365,100 364,943 100.0 159 — — — — — Cyprus 139,600 123,582 88.5 16,033 — — — — — Czech Republic 819,300 728,233 88.9 91,072 — — — — — Denmark 1,642,800 1,513,202 92.1 129,602 — — — — —

Djibouti 15,900 14,800 93.1 1,100 — — — 12,540 12,540Dominica 8,200 10,652 129.9 9 2,460 0.01 — 5,366 7,826Dominican Republic 218,900 488,154 223.0 3 269,255 1.40 — — 269,255Ecuador 302,300 322,899 106.8 17,153 37,750 0.20 — — 37,750Egypt 943,700 943,723 100.0 — — — — — —

El Salvador 171,300 171,303 100.0 — — — — — — Equatorial Guinea 32,600 32,605 100.0 — — — — — — Eritrea 15,900 15,900 100.0 5 — — — — — Estonia 65,200 65,195 100.0 6 — — — — — Ethiopia 133,700 126,474 94.6 7,241 — — — — —

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Fiji 70,300 54,934 78.1 15,372 — — — — — Finland 1,263,800 1,142,006 90.4 121,863 — — — — — France 10,738,500 9,765,045 90.9 973,646 — — — — — Gabon 154,300 201,726 130.7 219 47,640 0.25 — — 47,640Gambia, The 31,100 29,618 95.2 1,485 — — — 13,882 13,882

Georgia 150,300 150,300 100.0 10 — — — 159,335 159,335Germany 13,008,200 11,208,829 86.2 1,799,457 — — — — — Ghana 369,000 369,004 100.0 06 — — — 26,350 26,350Greece 823,000 745,918 90.6 77,095 — — — — — Grenada 11,700 17,190 146.9 — 5,489 0.03 — 1,560 7,049

Guatemala 210,200 210,206 100.0 — — — — — — Guinea 107,100 107,026 99.9 75 — — — 57,570 57,570Guinea-Bissau 14,200 14,200 100.0 —6 — — — 7,364 7,364Guyana 90,900 90,902 100.0 — — — — 27,810 27,810Haiti 81,900 102,308 124.9 68 20,475 0.11 — 3,035 23,510

Honduras 129,500 120,874 93.3 8,627 — — — 20,342 20,342Hungary 1,038,400 917,148 88.3 121,254 — — — — — Iceland 117,600 99,014 84.2 18,589 — — — — — India 4,158,200 3,642,215 87.6 515,990 — — — — — Indonesia 2,079,300 7,122,583 342.5 145,499 5,188,779 26.99 — — 5,188,779

Iran, Islamic Republic of 1,497,200 1,497,204 100.0 — — — — — — Iraq 1,188,400 1,314,413 110.6 171,100 297,100 1.55 — — 297,100Ireland 838,400 764,230 91.2 74,177 — — — — — Israel 928,200 823,017 88.7 105,191 — — — — — Italy 7,055,500 6,175,154 87.5 880,367 — — — — —

Jamaica 273,500 273,550 100.0 — — — — — — Japan 13,312,800 11,829,008 88.9 1,485,034 — — — — — Jordan 170,500 314,229 184.3 144 143,858 0.75 — — 143,858Kazakhstan 365,700 365,700 100.0 5 — — — — — Kenya 271,400 258,655 95.3 12,747 — — — 107,733 107,733

Kiribati 5,600 5,601 100.0 4 — — — — — Korea 1,633,600 1,449,576 88.7 184,035 — — — — — Kuwait 1,381,100 1,223,043 88.6 158,077 — — — — — Kyrgyz Republic 88,800 88,800 100.0 5 — — — 116,773 116,773Lao People’s Democratic Republic 52,900 52,900 100.0 —6 — — — 19,880 19,880

Latvia 126,800 126,762 100.0 55 — — — — — Lebanon 203,000 184,168 90.7 18,833 — — — — — Lesotho 34,900 31,324 89.8 3,601 — — — 24,500 24,500Liberia 71,300 271,854 381.3 31 200,573 1.04 — — 223,463Libya 1,123,700 728,202 64.8 395,505 — — — — —

Lithuania 144,200 144,185 100.0 16 — — — — — Luxembourg 279,100 252,306 90.4 26,805 — — — — — Macedonia, former Yugoslav

Republic of 68,900 99,763 144.8 —6 30,861 0.16 — 11,725 42,587Madagascar 122,200 122,174 100.0 27 — — — 11,348 11,348Malawi 69,400 80,124 115.5 2,290 13,013 0.07 — 40,820 53,833

Malaysia 1,486,600 1,310,695 88.2 175,911 — — — — — Maldives 8,200 10,746 131.1 1,554 4,100 0.02 — — 4,100Mali 93,300 84,114 90.2 9,194 — — — 3,993 3,993Malta 102,000 61,741 60.5 40,261 — — — — — Marshall Islands 3,500 3,500 100.0 1 — — — — —

Mauritania 64,400 64,404 100.0 — — — — 44,475 44,475Mauritius 101,600 89,843 88.4 11,758 — — — — — Mexico 2,585,800 2,293,040 88.7 292,808 — — — — — Micronesia, Federated States of 5,100 5,100 100.0 1 — — — — — Moldova 123,200 155,908 126.5 5 32,708 0.17 — 27,720 60,428

Mongolia 51,100 50,967 99.7 136 — — — 22,784 22,784Morocco 588,200 517,756 88.0 70,447 — — — — — Mozambique 113,600 113,600 100.0 7 — — — 4,860 4,860Myanmar 258,400 258,402 100.0 — — — — — — Namibia 136,500 136,438 100.0 71 — — — — —

Schedule 1 (continued)

General Resources Account_____________________________________________ IMF’s holdings Outstanding credit and loans______________________________________________________ of currencies1 Reserve GRA PRGF-ESF______________________ Percent tranche Amount Percent2 SDA3 Trust4 Total5____________________Member Quota Total of quota position (A) + (B) + (C) = (D)

Financial statements | VII

185

Nepal 71,300 71,311 100.0 — — — — 14,260 14,260Netherlands 5,162,400 4,513,858 87.4 648,588 — — — — — New Zealand 894,600 792,157 88.5 102,463 — — — — — Nicaragua 130,000 130,010 100.0 — — — — 13,930 13,930Niger 65,800 57,193 86.9 8,611 — — — 11,750 11,750

Nigeria 1,753,200 1,753,121 100.0 143 — — — — — Norway 1,671,700 1,554,108 93.0 117,604 — — — — — Oman 194,000 176,981 91.2 17,067 — — — — — Pakistan 1,033,700 1,080,976 104.6 118 47,393 0.25 — 975,150 1,022,543Palau 3,100 3,100 100.0 1 — — — — —

Panama 206,600 210,585 101.9 11,860 15,833 0.08 — — 15,833Papua New Guinea 131,600 131,163 99.7 438 — — — — — Paraguay 99,900 78,428 78.5 21,475 — — — — — Peru 638,400 665,183 104.2 — 26,750 0.14 — — 26,750Philippines 879,900 1,001,594 113.8 87,486 209,171 1.09 — — 209,171

Poland 1,369,000 1,258,351 91.9 110,654 — — — — — Portugal 867,400 786,165 90.6 81,268 — — — — — Qatar 263,800 233,403 88.5 30,398 — — — — — Romania 1,030,200 1,161,094 112.7 — 130,889 0.68 — — 130,889Russian Federation 5,945,400 5,808,295 97.7 137,141 — — — — —

Rwanda 80,100 80,113 100.0 — — — — 1,142 1,142St. Kitts and Nevis 8,900 8,819 99.1 82 — — — — — St. Lucia 15,300 15,295 100.0 7 — — — — — St. Vincent and the Grenadines 8,300 7,800 94.0 500 — — — — — Samoa 11,600 10,918 94.1 693 — — — — —

San Marino 17,000 12,900 75.9 4,101 — — — — — São Tomé and Príncipe 7,400 7,403 100.0 —6 — — — 2,653 2,653Saudi Arabia 6,985,500 6,005,958 86.0 979,546 — — — — — Senegal 161,800 160,228 99.0 1,582 — — — 17,330 17,330Serbia and Montenegro 467,700 1,123,964 240.3 — 656,250 3.41 — — 656,250

Seychelles 8,800 8,798 100.0 3 — — — — — Sierra Leone 103,700 103,685 100.0 24 — — — 133,375 133,375Singapore 862,500 765,329 88.7 97,196 — — — — — Slovak Republic 357,500 357,505 100.0 — — — — — — Slovenia 231,700 205,383 88.6 26,324 — — — — —

Solomon Islands 10,400 9,852 94.7 550 — — — — — Somalia 44,200 140,907 318.8 — 96,701 0.50 8,840 — 112,004South Africa 1,868,500 1,867,671 100.0 843 — — — — — Spain 3,048,900 2,709,066 88.9 339,839 — — — — — Sri Lanka 413,400 531,865 128.7 47,855 166,303 0.87 — 38,390 204,693

Sudan 169,700 466,300 274.8 11 296,580 1.54 — — 355,808Suriname 92,100 85,976 93.4 6,125 — — — — — Swaziland 50,700 44,147 87.1 6,562 — — — — — Sweden 2,395,500 2,098,121 87.6 297,382 — — — — — Switzerland 3,458,500 3,075,149 88.9 383,388 — — — — —

Syrian Arab Republic 293,600 293,603 100.0 5 — — — — — Tajikistan 87,000 87,000 100.0 2 — — — 29,400 29,400Tanzania 198,900 188,903 95.0 9,999 — — — 8,400 8,400Thailand 1,081,900 960,301 88.8 121,607 — — — — — Timor-Leste 8,200 8,200 100.0 1 — — — — —

Togo 73,400 73,069 99.5 332 — — — 7,602 7,602Tonga 6,900 5,189 75.2 1,712 — — — — — Trinidad and Tobago 335,600 298,198 88.9 37,408 — — — — — Tunisia 286,500 266,276 92.9 20,249 — — — — — Turkey 964,000 9,748,963 1,011.3 112,775 8,897,735 46.28 — — 8,897,735

Turkmenistan 75,200 75,200 100.0 5 — — — — — Uganda 180,500 180,506 100.0 —6 — — — 6,000 6,000Ukraine 1,372,000 2,106,268 153.5 3 734,268 3.82 — — 734,268United Arab Emirates 611,700 541,977 88.6 70,324 — — — — — United Kingdom 10,738,500 9,511,432 88.6 1,227,173 — — — — —

Schedule 1 (continued)

General Resources Account_____________________________________________ IMF’s holdings Outstanding credit and loans______________________________________________________ of currencies1 Reserve GRA PRGF-ESF______________________ Percent tranche Amount Percent2 SDA3 Trust4 Total5____________________Member Quota Total of quota position (A) + (B) + (C) = (D)

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United States 37,149,300 32,236,917 86.8 4,907,329 — — — — — Uruguay 306,500 1,567,265 511.3 — 1,260,758 6.56 — — 1,260,758Uzbekistan 275,600 275,600 100.0 5 — — — — — Vanuatu 17,000 14,506 85.3 2,496 — — — — — Venezuela, República

Bolivariana de 2,659,100 2,337,199 87.9 321,902 — — — — —

Vietnam 329,100 329,100 100.0 5 — — — 136,280 136,280Yemen, Republic of 243,500 266,488 109.4 13 23,000 0.12 — 168,150 191,150Zambia 489,100 489,101 100.0 18 — — — 22,009 22,009Zimbabwe 353,400 353,075 99.9 328 — — — 75,013 75,013___________ ___________ __________ __________ ______ _______ _________ __________Total 213,478,400 210,879,381 21,826,022 19,227,219 100.00 8,840 3,819,760 23,144,400___________ ___________ __________ __________ ______ _______ _________ _____________________ ___________ __________ __________ ______ _______ _________ __________

1Includes nonnegotiable, non-interest-bearing notes that members are entitled to issue in substitution for currencies, and outstanding currency valuation adjustments.2Represents the percentage of total use of GRA resources (column A).3The Special Disbursement Account (SDA) of the General Department had financed loans under Structural Adjustment Facility (SAF) and Poverty Reduction and Growth Facility (PRGF) arrangements.

4For information purposes only. The PRGF-ESF Trust provides financing under PRGF arrangements and is not a part of the General Department.5Includes outstanding Trust Fund loans to Liberia (SDR 22.9 million), Somalia (SDR 6.5 million), and Sudan (SDR 59.2 million). 6Less than SDR 500.

Schedule 1 (concluded)

General Resources Account_____________________________________________ IMF’s holdings Outstanding credit and loans______________________________________________________ of currencies1 Reserve GRA PRGF-ESF______________________ Percent tranche Amount Percent2 SDA3 Trust4 Total5____________________Member Quota Total of quota position (A) + (B) + (C) = (D)

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Schedule 2

General DepartmentFinancial resources and liquidity position

in the General Resources Account as at April 30, 2006, and 2005

(In thousands of SDRs)

2006 2005

Total resourcesCurrencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,879,381 213,486,377SDR holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,640,792 574,310Gold holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,851,771 5,851,771Other assets1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 744,968 879,028___________ __________

Total resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,116,912 220,791,486___________ __________

Less: Non-usable resources2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,343,632 97,828,711of which: Credit outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,227,219 49,853,664___________ __________

Equals: Usable resources3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,773,280 122,962,775___________ __________

Less: Undrawn balances under GRA arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,539,069 7,926,545___________ __________ Equals: Uncommitted usable resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,234,211 115,036,230

Plus: Repurchases one year forward4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,005,607 13,320,313Less: Prudential balance 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,162,440 34,017,800___________ __________ Equals: One-year forward commitment capacity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,077,378 94,338,743___________ __________

Memorandum items:Resources available under borrowing arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,000,000 34,000,000Quotas of members that finance IMF transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,812,200 170,089,000Net uncommitted usable resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,652,914 99,882,010Liquid liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,826,022 49,848,798Liquidity ratio6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603.2% 200.4%

1Other assets reflect current assets (charges, interest, and other receivables) and other assets (which include capital assets such as land, buildings, and equipment), net of other liabilities including remuneration payable.

2Resources are regarded as non-usable if they cannot be used in the financing of the IMF’s ongoing operations and transactions. These resources include (1) gold holdings, (2) currencies of members that are using IMF credit, (3) currencies of other members with relatively weak external positions, and (4) other assets.

3Usable resources consist of (1) holdings of currencies of members considered by the IMF as having balance of payments and reserve positions sufficiently strong for their currencies to be used in transfers, (2) SDR holdings, and (3) any unused amounts under credit lines that have been activated.

4Repurchases by member countries during the coming one-year period. It is assumed that repurchases would be made on an expectation basis for the SRF, and on an obligation basis under all other facilities.

5Prudential balance is set at 20 percent of quotas of members that issue the currencies that are used in the financing of IMF transactions and any amounts activated under borrowing arrangements.

6The liquidity ratio is a measure of the IMF’s liquidity position, represented by the ratio of its net uncommitted usable resources to its liquid liabilities (i.e., members’ reserve tranche positions plus outstanding borrowing).

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Schedule 3

General DepartmentStatus of arrangements in the General Resources Account

as at April 30, 2006(In thousands of SDRs)

Total amount UndrawnMember Date of arrangement Expiration agreed balance

Stand-By ArrangementsBulgaria August 6, 2004 September 5, 2006 100,000 100,000Colombia May 2, 2005 November 2, 2006 405,000 405,000Croatia August 4, 2004 November 15, 2006 99,000 99,000Dominican Republic January 31, 2005 May 31, 2007 437,800 288,940Iraq December 23, 2005 March 22, 2007 475,360 475,360

Macedonia, former Yugoslav Republic of August 31, 2005 August 30, 2008 51,675 41,175Peru June 9, 2004 August 16, 2006 287,279 287,279Romania July 7, 2004 July 6, 2006 250,000 250,000Turkey May 11, 2005 May 10, 2008 6,662,040 4,996,530Uruguay June 8, 2005 June 7, 2008 766,250 588,480_________ _________

Total Stand-By Arrangements 9,534,404 7,531,764_________ _________

Extended ArrangementsAlbania February 1, 2006 January 31, 2009 8,523 7,305_________ _________

Total Extended Arrangements 8,523 7,305_________ _________ Total General Resources Account 9,542,927 7,539,069_________ _________ _________ _________

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Deloitte & Touche LLPSuite 500555 12th Street, NWWashington, DC 20004-1207USATel: +1 202 879 5600Fax: +1 202 879 5309www.deloitte.com

Member ofDeloitte Touche Tohmatsu

Independent Auditors’ Report

To the Board of Governorsof the International Monetary FundWashington, DC

We have audited the accompanying balance sheets of the SDR Department of the International Monetary Fund (the “Department”) as of April 30, 2006, and 2005, and the related statements of income and cash flows for the years then ended. These financial statements are the responsibility of the Department’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with International Standards on Auditing and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Department’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the SDR Department of the International Monetary Fund at April 30, 2006, and 2005, and the results of its operations and its cash flows for the years then ended in conformity with International Financial Reporting Standards.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules listed on pages 194 to 199 are presented for the purpose of additional analysis and are not a required part of the basic financial statements. These schedules are the responsibility of the Department’s management. Such schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole.

June 12, 2006

SDR DepartmentBalance sheets

as at April 30, 2006, and 2005(In thousands of SDRs)

2006 2005 2006 2005

AssetsNet charges receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,217 49,889

Overdue assessments and charges (Note 3) . . . . . . . . . . . . . . . . . . . . . . 37,875 35,968

Participants with holdings below allocations (Note 2)Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,477,679 12,133,536Less: SDR holdings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,253,303 4,006,504__________ _________

Allocations in excess of holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,224,376 8,127,032__________ _________

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,332,468 8,212,889__________ ___________________ _________

LiabilitiesNet interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,419 50,090

Participants with holdings above allocations (Note 2)SDR holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,280,520 16,617,864 Less: allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,955,651 9,299,794 __________ _________Holdings in excess of allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,324,869 7,318,070__________ _________Holdings by the General Resources Account. . . . . . . . . . . . . . . . . . . . . . . 3,640,792 574,310Holdings of SDRs by prescribed holders 296,388 270,419__________ _________

Total liabilities 8,332,468 8,212,889__________ ___________________ _________

The accompanying notes are an integral part of these financial statements.

/s/ Michael G. Kuhn /s/ Rodrigo de Rato Director, Finance Department Managing Director

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Financial statements | VII

191

SDR DepartmentIncome statements

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

2006 2005

RevenueNet charges from participants with holdings below allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,826 173,782Assessment on SDR allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 1,500_______ _______ 247,026 175,282_______ _______

ExpensesInterest on SDR holdings

Net interest to participants with holdings above allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,686 149,673General Resources Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,340 16,322Prescribed holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800 7,787_______ _______

245,826 173,782Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 1,500_______ _______ 247,026 175,282_______ _______Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — _______ ______________ _______

The accompanying notes are an integral part of these financial statements.

SDR DepartmentStatements of cash flows

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

2006 2005

Cash flows from operating activitiesReceipts of SDRs

Transfers among participants and prescribed holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,336,675 4,499,083Transfers from participants to the General Resources Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,867,261 3,100,437Transfers from the General Resources Account to participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800,779 3,032,157 __________ _________

Total receipts of SDRs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,004,715 10,631,677 __________ _________ __________ _________

Uses of SDRsTransfers among participants and prescribed holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,142,521 4,356,089Transfers from participants to the General Resources Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,835,916 3,085,510Transfers from the General Resources Account to participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800,779 3,032,157Charges paid in the SDR Department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,593 210,741 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,906 (52,820) __________ _________

Total uses of SDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,004,715 10,631,677 __________ _________ __________ _________

The accompanying notes are an integral part of these financial statements.

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SDR DepartmentNotes to the financial statements

as at April 30, 2006, and 2005

1. Nature of operations

The International Monetary Fund (the IMF) conducts its operations and transactions through the General Department and the Special Drawing Rights Department (the SDR Department). The Special Drawing Right (SDR) is an international interest-bearing reserve asset created by the IMF following the First Amendment of the Articles of Agreement in 1969. All transactions and operations involving SDRs are conducted through the SDR Department. The SDR may be allocated by the IMF, as a supplement to existing reserve assets, to members participating in the SDR Department. Its value as a reserve asset derives, essentially, from the commitments of participants to hold and accept SDRs and to honor various obligations connected with its proper functioning as a reserve asset.

The resources of the SDR Department are held separately from the assets of all the other accounts of, or administered by, the IMF. They may not be used to meet the liability, obligations, or losses of the Fund incurred in the opera-tions of the General Department or other accounts, except that the SDR Department reimburses the General Department for expenses incurred in conducting the business of the SDR Department.

At April 30, 2006, all members of the IMF were participants in the SDR Department. SDRs have been allocated by the IMF to members that are par-ticipants in the SDR Department at the time of the allocation in proportion to their quotas in the IMF. Six allocations have been made (in 1970, 1971, 1972, 1979, 1980, and 1981) for a total of SDR 21.4 billion. A proposed amendment of the IMF’s Articles of Agreement was approved by the Board of Governors in January 1998 to allow for a special one-time allocation of SDRs equal to SDR 21.4 billion. The amendment will enter into force after three-fifths of the members, having 85 percent of the total voting power, have accepted it. Upon termination of participation or liquidation of the SDR Department, the IMF will provide to holders the currencies received from the participants in settlement of their obligations. The IMF is empowered to prescribe certain official entities as holders of SDRs; at April 30, 2006, 15 institutions were prescribed as holders (14 institutions at April 30, 2005). Prescribed holders do not receive allocations.

The SDR is also used by a number of international and regional organiza-tions as a unit of account or as the basis for their units of account. Several international conventions also use the SDR as a unit of account, notably those expressing liability limits for the international transport of goods and services.

Uses of SDRs

Participants and prescribed holders can use and receive SDRs in transac-tions and operations by agreement among themselves. Participants can also use SDRs in operations and transactions involving the General Resources Account, such as the payment of charges and repurchases. By designating participants to provide freely usable currency in exchange for SDRs, the IMF ensures that a participant can use its SDRs to obtain an equivalent amount of currency if it has a need because of its balance of payments, its reserve position, or developments in its reserves.

General allocations and cancellations of SDRs

The IMF has the authority to provide unconditional liquidity through general allocations of SDRs to participants in the SDR Department in proportion to their quotas in the IMF. The IMF cannot allocate SDRs to itself or to other holders it prescribes. The Articles also provide for the cancellation of SDRs, although to date there have been no cancellations. In its decisions on gen-eral allocations of SDRs, the IMF, as prescribed under its Articles, has sought to meet the long-term global need to supplement existing reserve assets in such a manner as will promote the attainment of the IMF’s purposes and avoid economic stagnation and deflation, as well as excess demand and inflation.

2. Summary of significant accounting policies

Basis of accounting

The financial statements of the SDR Department are prepared in accordance with International Financial Reporting Standards (IFRS). Specific accounting principles and disclosure practices are explained further below.

Use of estimates

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could dif-fer from those estimates.

Unit of account

The financial statements are expressed in terms of SDRs. The value of the SDR is determined by the IMF each day by summing the values in U.S. dol-lars, based on market exchange rates, of the currencies in the SDR valuation basket. The IMF reviews the SDR valuation basket every five years. The latest review was completed in November 2005 and the new composition of the SDR valuation basket became effective on January 1, 2006.

The currencies in the basket as of April 30, 2006, and 2005 and their amounts were as follows:

Currency Amount

2006 2005___________________________Euro 0.4100 0.4260Japanese yen 18.4000 21.0000Pound sterling 0.0903 0.0984U.S. dollar 0.6320 0.5770

As of April 30, 2006, one SDR was equal to 1.47106 U.S. dollars (one SDR was equal to 1.51678 U.S. dollars as of April 30, 2005).

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193

Allocations and holdings

At April 30, 2006, and 2005, IMF net cumulative allocations to participants totaled SDR 21.4 billion. Participants with holdings in excess of their alloca-tions have established a net claim on the SDR Department, which is repre-sented on the balance sheet as a liability. Participants with holdings below their allocations have used part of their allocations, which results in a net obligation to the SDR Department and is presented as an asset of the SDR Department. Participants’ net SDR positions as of April 30, 2006, and 2005 were as follows:

2006 2005___________________________ _________________________Below Above Below Above

Total allocations allocations Total allocations allocations

(In millions of SDRs)

Cumulative allocations 21,433.3 12,477.7 8,955.6 21,433.3 12,133.5 9,299.8Holdings of SDRs

by participants 17,533.8 4,253.3 13,280.5 20,624.4 4,006.5 16,617.9________ _______ ________ ________ _______ ________Net SDR positions 3,899.5 8,224.4 (4,324.9) 808.9 8,127.0 (7,318.1)________ _______ ________ ________ _______ ________________ _______ ________ ________ _______ ________

A summary of SDR holdings is provided below:

2006 2005

(In millions of SDRs)

Participants 17,533.8 20,624.4General Resources Account 3,640.8 574.3Prescribed holders 296.5 270.4________ ________ 21,471.1 21,469.1Less: Overdue charges receivable 37.8 35.8________ ________Total holdings 21,433.3 21,433.3________ ________________ ________

Interest and charges

Interest is paid on holdings of SDRs. Charges are levied on each participant’s net cumulative allocations plus any allocations in excess of holdings of the participant and unpaid charges. Interest on SDR holdings is paid quarterly. Charges on net cumulative allocations are also collected quarterly. Interest and charges are levied at the same rate and are settled by crediting and debiting individual holdings accounts on the first day of the subsequent quarter. The SDR Department is required to pay interest to each holder, whether or not sufficient SDRs are received to meet the payment of interest. If sufficient SDRs are not received because charges are overdue, additional SDRs are temporarily created.

The rate of interest on the SDR is determined by reference to a combined market interest rate, which is a weighted average of yields or rates on short-term instruments in the capital markets of the euro area, Japan, the United Kingdom, and the United States. The combined market interest rate used to determine the SDR interest rate is calculated each Friday, using the yields or rates of that day. The SDR interest rate, which is set equal to the combined

market interest rate, enters into effect on the following Monday and applies through the following Sunday. The average SDR interest rate was 2.92 per-cent for the year ended April 30, 2006 (2.08 percent for the year ended April 30, 2005).

Administrative expenses

The expenses of conducting the business of the SDR Department are paid by the IMF from the General Resources Account, which is reimbursed in SDRs by the SDR Department at the end of each financial year. For this purpose, the SDR Department levies an assessment on all participants in proportion to their net cumulative allocations.

Overdue obligations

An allowance for losses resulting from overdue SDR obligations would be cre-ated if the IMF expected a loss to be incurred; no losses have been incurred to date.

Comparatives

When necessary, comparative figures have been reclassified to conform with changes in the presentation of the current year.

3. Overdue assessments and charges

At April 30, 2006, assessments and charges amounting to SDR 37.8 million were overdue to the SDR Department (SDR 36.0 million at April 30, 2005). At April 30, 2006, and 2005, three members were six months or more over-due in meeting their financial obligations to the SDR Department.

Assessments and charges due from members that are six months or more overdue to the SDR Department were as follows as of April 30:

2006 2005

(In millions of SDRs)

Total 37.8 36.0Overdue for six months or more 36.8 35.2Overdue for three years or more 33.5 32.1

The amount and duration of arrears as of April 30, 2006, were as follows:

Longest overdueTotal obligation

(In millions of SDRs)

Liberia 26.3 April 1986Somalia 11.4 February 1991Sudan 0.1 April 1991____

Total 37.8________

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Schedule 1

SDR DepartmentStatements of changes in SDR holdings

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

General Resources Prescribed Total__________________________

Participants Account holders 2006 2005

Total holdings, beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,624,368 574,310 270,419 21,469,097 21,521,916 __________ _________ _______ __________ __________

Receipts of SDRsTransfers among participants and prescribed holders

Transactions by agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,394,768 — 102,675 3,497,443 3,039,600Operations

Settlement of financial obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,200 — 33,582 43,782 152,413IMF-related operations

SAF/PRGF loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,473 — — 38,473 238,394SAF repayments and interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,549 1,549 2,639PRGF contributions and payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,914 — 47,713 180,627 332,906PRGF repayments and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 367,069 367,069 584,772PRGF-HIPC contributions and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 933 — 1,373 2,306 4,949Emergency Assistance subsidy payments. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,572 — — 4,572 416

Net interest on SDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,060 — 7,094 194,154 142,994MDRI grant assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,700 — — 6,700 —

Transfers from participants to the General Resources AccountRepurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 3,791,600 — 3,791,600 739,803Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,043,118 — 2,043,118 2,344,061Assessment on SDR allocation (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,198 — 1,198 1,646Interest on SDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 31,345 — 31,345 14,927

Transfers from the General Resources Account to participantsPurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437,046 — — 437,046 501,091In exchange for currencies of other members

Acquisitions to pay charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,393,573 — — 1,393,573 1,577,043Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 903,429 — — 903,429 950,317Other

Refunds and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,731 — — 66,731 3,706 __________ ________ _______ __________ __________

Total receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,576,399 5,867,261 561,055 13,004,715 10,631,677 __________ _________ _______ __________ __________ __________ _________ _______ __________ __________

Financial statements | VII

195

Uses of SDRsTransfers among participants and prescribed holders

Transactions by agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,156,149 — 341,294 3,497,443 3,039,600Operations

Settlement of financial obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,582 — 10,200 43,782 152,413IMF-related operations

SAF/PRGF Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 38,473 38,473 238,394SAF repayments and interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,549 — — 1,549 2,639PRGF contributions and payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,713 — 132,914 180,627 332,906PRGF repayments and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367,069 — — 367,069 584,772PRGF-HIPC contributions and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,373 — 933 2,306 4,949Post-conflict subsidy payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 4,572 4,572 416MDRI grant assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 6,700 6,700 —

Transfers from participants to the General Resources AccountRepurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,791,600 — — 3,791,600 739,803Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,043,118 — — 2,043,118 2,344,061Assessment on SDR allocation (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,198 — — 1,198 1,646

Transfers from the General Resources Account to participantsPurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 437,046 — 437,046 501,091In exchange for currencies of other membersAcquisitions to pay charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,393,573 — 1,393,573 1,577,043Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 903,429 — 903,429 950,317Other

Refunds and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 66,731 — 66,731 3,706

Charges paid in the SDR DepartmentNet charges due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,499 — — 225,499 157,921 __________ ________ _______ __________ __________

Total uses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,668,850 2,800,779 535,086 13,004,715 10,631,677Charges not paid when due. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,021 — — 2,021 2,805Settlement of unpaid charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (115) — — (115) (55,625) __________ ________ _______ __________ __________

Total holdings, end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,533,823 3,640,792 296,388 21,471,003 21,469,097 __________ ________ _______ __________ __________ __________ ________ _______ __________ __________

The ending balances contain rounding differences.

Schedule 1 (concluded)

SDR DepartmentStatements of changes in SDR holdings

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

General Resources Prescribed Total__________________________

Participants Account holders 2006 2005

IMF ANNUAL REPORT | 2006

196

Schedule 2

SDR DepartmentAllocations and holdings of participants

as at April 30, 2006(In thousands of SDRs)

Holdings_____________________________________________________________Net Percent of (+) Above

cumulative cumulative (–) BelowParticipant allocations Total allocations allocations

Afghanistan, Islamic Republic of 26,703 23 0.1 (26,680)Albania — 9,475 — 9,475Algeria 128,640 1,273 1.0 (127,367)Angola — 151 — 151Antigua and Barbuda — 6 — 6

Argentina 318,370 192,026 60.3 (126,344)Armenia — 9,034 — 9,034Australia 470,545 135,933 28.9 (334,612)Austria 179,045 103,891 58.0 (75,154)Azerbaijan — 432 — 432

Bahamas, The 10,230 107 1.0 (10,123)Bahrain 6,200 2,143 34.6 (4,057)Bangladesh 47,120 448 1.0 (46,672)Barbados 8,039 67 0.8 (7,972)Belarus — 23 — 23

Belgium 485,246 210,677 43.4 (274,569)Belize — 1,798 — 1,798Benin 9,409 148 1.6 (9,261)Bhutan — 304 — 304Bolivia 26,703 25,917 97.1 (786)

Bosnia and Herzegovina 20,481 933 4.6 (19,548)Botswana 4,359 35,888 823.3 31,529Brazil 358,670 13,798 3.8 (344,872)Brunei Darussalam — 10,483 — 10,483Bulgaria — 4,160 — 4,160

Burkina Faso 9,409 97 1.0 (9,312)Burundi 13,697 132 1.0 (13,565)Cambodia 15,417 149 1.0 (15,268)Cameroon 24,463 750 3.1 (23,713)Canada 779,290 632,766 81.2 (146,524)

Cape Verde 620 12 1.9 (608)Central African Republic 9,325 3,079 33.0 (6,246)Chad 9,409 250 2.7 (9,159)Chile 121,924 36,896 30.3 (85,028)China 236,800 927,840 391.8 691,040

Colombia 114,271 122,525 107.2 8,254Comoros 716 11 1.5 (705)Congo, Democratic Republic of the 86,309 809 0.9 (85,500)Congo, Republic of 9,719 312 3.2 (9,407)Costa Rica 23,726 172 0.7 (23,554)

Côte d’Ivoire 37,828 456 1.2 (37,372)Croatia 44,205 488 1.1 (43,718)Cyprus 19,438 2,932 15.1 (16,506)Czech Republic — 9,238 — 9,238Denmark 178,864 71,687 40.1 (107,177)

Djibouti 1,178 265 22.5 (913)Dominica 592 57 9.7 (535)Dominican Republic 31,585 4,140 13.1 (27,445)Ecuador 32,929 5,517 16.8 (27,412)Egypt 135,924 75,056 55.2 (60,868)

El Salvador 24,985 24,978 100.0 (7)Equatorial Guinea 5,812 440 7.6 (5,372)Eritrea — — — — Estonia — 56 — 56Ethiopia 11,160 144 1.3 (11,016)

Financial statements | VII

197

Fiji 6,958 5,666 81.4 (1,292)Finland 142,690 98,991 69.4 (43,699)France 1,079,870 622,235 57.6 (457,635)Gabon 14,091 703 5.0 (13,388)Gambia, The 5,121 136 2.7 (4,985)

Georgia — 1,521 — 1,521Germany 1,210,760 1,340,859 110.7 130,099Ghana 62,983 799 1.3 (62,184)Greece 103,544 20,466 19.8 (83,078)Grenada 930 1,567 168.5 637

Guatemala 27,678 4,397 15.9 (23,281)Guinea 17,604 3,150 17.9 (14,454)Guinea-Bissau 1,212 392 32.4 (820)Guyana 14,530 9,504 65.4 (5,026)Haiti 13,697 8,536 62.3 (5,161)

Honduras 19,057 169 0.9 (18,888)Hungary — 46,002 — 46,002Iceland 16,409 103 0.6 (16,306)India 681,170 3,805 0.6 (677,365)Indonesia 238,956 74,275 31.1 (164,681)

Iran, Islamic Republic of 244,056 274,877 112.6 30,821Iraq 68,464 293,105 428.1 224,641Ireland 87,263 62,289 71.4 (24,974)Israel 106,360 13,393 12.6 (92,967)Italy 702,400 176,077 25.1 (526,323)

Jamaica 40,613 492 1.2 (40,121)Japan 891,690 1,810,377 203.0 918,687Jordan 16,887 2,503 14.8 (14,384)Kazakhstan — 815 — 815Kenya 36,990 3,174 8.6 (33,816)

Kiribati — 10 — 10Korea 72,911 32,287 44.3 (40,625)Kuwait 26,744 131,270 490.8 104,525Kyrgyz Republic — 12,071 — 12,071Lao People’s Democratic Republic 9,409 9,859 104.8 450

Latvia — 102 — 102Lebanon 4,393 22,254 506.6 17,861Lesotho 3,739 302 8.1 (3,437)Liberia 21,007 — — (21,007)Libya 58,771 501,034 852.5 442,263

Lithuania — 63 — 63Luxembourg 16,955 11,704 69.0 (5,251)Macedonia, former Yugoslav Republic of 8,379 2,247 26.8 (6,132)Madagascar 19,270 235 1.2 (19,035)Malawi 10,975 721 6.6 (10,254)

Malaysia 139,048 138,796 99.8 (252)Maldives 282 323 114.4 41Mali 15,912 191 1.2 (15,721)Malta 11,288 32,525 288.1 21,237Marshall Islands — — — —

Mauritania 9,719 128 1.3 (9,591)Mauritius 15,744 18,081 114.8 2,337Mexico 290,020 314,656 108.5 24,636Micronesia, Federated States of — 1,257 — 1,257Moldova — 496 — 496

Schedule 2 (continued)

SDR DepartmentAllocations and holdings of participants

as at April 30, 2006(In thousands of SDRs)

Holdings_____________________________________________________________Net Percent of (+) Above

cumulative cumulative (–) BelowParticipant allocations Total allocations allocations

IMF ANNUAL REPORT | 2006

198

Mongolia — 14 — 14Morocco 85,689 46,722 54.5 (38,967)Mozambique — 163 — 163Myanmar 43,474 525 1.2 (42,949)Namibia — 18 — 18

Nepal 8,105 6,131 75.7 (1,973)Netherlands 530,340 508,542 95.9 (21,798)New Zealand 141,322 23,990 17.0 (117,332)Nicaragua 19,483 216 1.1 (19,267)Niger 9,409 178 1.9 (9,231)

Nigeria 157,155 1,678 1.1 (155,477)Norway 167,770 201,044 119.8 33,274Oman 6,262 10,578 168.9 4,316Pakistan 169,989 150,384 88.5 (19,605)Palau — — — —

Panama 26,322 562 2.1 (25,760)Papua New Guinea 9,300 91 1.0 (9,209)Paraguay 13,697 88,905 649.1 75,208Peru 91,319 1,616 1.8 (89,703)Philippines 116,595 3,746 3.2 (112,849)

Poland — 56,179 — 56,179Portugal 53,320 73,051 137.0 19,731Qatar 12,822 25,823 201.4 13,001Romania 75,950 2,819 3.7 (73,131)Russian Federation — 4,433 — 4,433

Rwanda 13,697 15,162 110.7 1,465St. Kitts and Nevis — 2 — 2St. Lucia 742 1,530 206.2 788St. Vincent and the Grenadines 354 3 0.9 (350)Samoa 1,142 2,473 216.6 1,331

San Marino — 686 — 686São Tomé and Príncipe 620 447 72.0 (173)Saudi Arabia 195,527 396,485 202.8 200,959Senegal 24,462 781 3.2 (23,681)Serbia and Montenegro 56,665 41,684 73.6 (14,981)

Seychelles 406 11 2.6 (396)Sierra Leone 17,455 22,010 126.1 4,555Singapore 16,475 202,090 1,226.6 185,615Slovak Republic — 907 — 907Slovenia 25,431 8,259 32.5 (17,172)

Solomon Islands 654 10 1.6 (644)Somalia 13,697 — — (13,697)South Africa 220,360 222,874 101.1 2,514Spain 298,805 216,316 72.4 (82,489)Sri Lanka 70,868 3,114 4.4 (67,754)

Sudan 52,192 547 1.0 (51,645)Suriname 7,750 1,014 13.1 (6,736)Swaziland 6,432 2,483 38.6 (3,949)Sweden 246,525 108,840 44.1 (137,685)Switzerland — 14,428 — 14,428

Syrian Arab Republic 36,564 36,575 100.0 11Tajikistan — 3,851 — 3,851Tanzania 31,372 303 1.0 (31,069)Thailand 84,652 577 0.7 (84,075)Timor-Leste — — — —

Schedule 2 (continued)

SDR DepartmentAllocations and holdings of participants

as at April 30, 2006(In thousands of SDRs)

Holdings_____________________________________________________________Net Percent of (+) Above

cumulative cumulative (–) BelowParticipant allocations Total allocations allocations

Financial statements | VII

199

Togo 10,975 129 1.2 (10,846)Tonga — 296 — 296Trinidad and Tobago 46,231 2,622 5.7 (43,609)Tunisia 34,243 942 2.8 (33,301)Turkey 112,307 155,317 138.3 43,010

Turkmenistan — — — — Uganda 29,396 589 2.0 (28,807)Ukraine — 9,595 — 9,595United Arab Emirates 38,737 7,301 18.8 (31,436)United Kingdom 1,913,070 218,733 11.4 (1,694,337)

United States 4,899,530 5,790,474 118.2 890,944Uruguay 49,977 24,070 48.2 (25,907)Uzbekistan — 10 — 10Vanuatu — 1,011 — 1,011Venezuela 316,890 2,620 0.8 (314,270)

Vietnam 47,658 713 1.5 (46,945)Yemen, Republic of 28,743 6,439 22.4 (22,304)Zambia 68,298 10,607 15.5 (57,691)Zimbabwe 10,200 102 1.0 (10,098)__________ __________ _____ _________

Above allocations 8,955,651 13,280,520 148.3 4,324,869Below allocations 12,477,679 4,253,303 34.1 (8,224,376)__________ __________ _____ ______________ _________

Total participants 21,433,330 17,533,823General Resources Account 3,640,792Prescribed holders 296,388Overdue charges 37,673__________ __________

21,471,003 21,471,003__________ ____________________ __________

Schedule 2 (concluded)

SDR DepartmentAllocations and holdings of participants

as at April 30, 2006(In thousands of SDRs)

Holdings_____________________________________________________________Net Percent of (+) Above

cumulative cumulative (–) BelowParticipant allocations Total allocations allocations

IMF ANNUAL REPORT | 2006

200

Deloitte & Touche LLPSuite 500555 12th Street, NWWashington, DC 20004-1207USATel: +1 202 879 5600Fax: +1 202 879 5309www.deloitte.com

Member ofDeloitte Touche Tohmatsu

Independent Auditors’ Report

To the Board of Governorsof the International Monetary FundWashington, DC

We have audited the accompanying combined balance sheets of the Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust (formerly known as Poverty Reduction and Growth Facility Trust) (the “Trust”) as of April 30, 2006, and 2005, and the related combined statements of income and changes in resources and of cash flows for the years then ended. These combined financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with International Standards on Auditing and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the combined financial position of the Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust at April 30, 2006, and 2005, and the combined results of their operations and their cash flows for the years then ended in conformity with International Financial Reporting Standards.

Our audits were conducted for the purpose of forming an opinion on the basic combined financial statements taken as a whole. The supplemental schedules listed on pages 208 to 212 are presented for the purpose of additional analysis and are not a required part of the basic combined financial statements. These schedules are the responsibility of the Trust’s management. Such schedules have been subjected to the auditing procedures applied in our audits of the basic combined financial statements and, in our opinion, are fairly stated in all material respects when considered in relation to the basic combined financial statements taken as a whole.

June 12, 2006

Financial statements | VII

201

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Combined balance sheets as at April 30, 2006, and 2005

(In thousands of SDRs)

2006 2005

AssetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747,326 1,945,902Investments (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,882,395 3,900,371Loans receivable (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,819,760 6,588,065Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,333 25,669_________ __________

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,478,814 12,460,007_________ __________ _________ __________

Liabilities and resourcesBorrowings (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,979,466 7,411,651Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,507 47,477Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,126 6,399_________ __________

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,030,099 7,465,527_________ __________ Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,448,715 4,994,480_________ __________

Total liabilities and resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,478,814 12,460,007_________ __________ _________ __________

The accompanying notes are an integral part of these financial statements.

/s/ Michael G. Kuhn /s/ Rodrigo de RatoDirector, Finance Department Managing Director

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Combined statements of income and changes in resources for the years ended April 30, 2006, and 2005

(In thousands of SDRs)

2006 2005

Balance, beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,994,480 4,925,784 __________ _________ Investment income (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,407 98,373Interest on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,936 32,961Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (154,379) (126,912)Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,886) (2,986) __________ _________ Operational income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,078 1,436Contributions

Bilateral contributions (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,048 26,668Special Disbursement Account (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507,109 40,592

Contributions to MDRI-II Trust (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,120,000) — __________ _________ Net (loss) income/changes in resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (545,765) 68,696 __________ _________

Balance, end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,448,715 4,994,480 __________ _________ __________ _________

The accompanying notes are an integral part of these financial statements.

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Poverty Reduction and Growth Facility and Exogenous Shocks Facility TrustCombined statements of cash flows

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

2006 2005

Cash flows from operating activitiesNet (loss)/income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (545,765) 68,696Adjustments to reconcile net income to cash generated by operations

Changes in interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,664) (4,754)Changes in interest payable and other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,243) 14,875

Cash from credit to membersLoan disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (402,743) (770,672)Loan repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,171,048 882,335__________ _________Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,215,633 190,480

Cash flows from investment activitiesNet acquisition of investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (982,024) (865,243)__________ _________

Net cash used in investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (982,024) (865,243)

Cash flows from financing activitiesBorrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412,029 769,614Repayment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,844,214) (870,619)__________ _________

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,432,185) (101,005)

Cash and cash equivalents, beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,945,902 2,721,670__________ _________

Cash and cash equivalents, end of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747,326 1,945,902__________ ___________________ _________

The accompanying notes are an integral part of these financial statements.

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Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Notes to the combined financial statements as at April 30, 2006, and 2005

1. Nature of operations

The Poverty Reduction and Growth Facility Trust (the PRGF Trust), for which the IMF is Trustee, was established in December 1987 to provide loans on concessional terms to qualifying low-income country members. Assistance under the Poverty Reduction and Growth Facility (PRGF) is made available under three-year arrangements in support of macroeconomic and adjustment programs. Effective January 5, 2006, the PRGF Trust was renamed the Pov-erty Reduction and Growth Facility and Exogenous Shocks Facility Trust (the Trust) to also support programs under the Exogenous Shocks Facility (ESF) to facilitate member countries’ adjustment to sudden and exogenous shocks. Programs under the ESF range from one to two years.

The operations of the Trust are conducted through the Loan Account, the Reserve Account, and three Subsidy Accounts—the PRGF-ESF Subsidy Account, the PRGF Subsidy Account, and the ESF Subsidy Account. The resources of the Trust are held separately from the assets of all other accounts of, or administered by, the IMF and may not be used to discharge liabilities or to meet losses incurred in the administration of other accounts. Combining balance sheets and statements of income and changes in resources for the Trust are provided in Note 13 of these financial statements.

Loan Account

The resources of the Loan Account consist of the proceeds from borrowings, repayments of principal, and interest payments on loans extended by the Trust.

Reserve Account

The resources of the Reserve Account consist of amounts transferred by the IMF from the Special Disbursement Account and net earnings from invest-ment of resources held in the Reserve Account.

The resources held in the Reserve Account are to be used by the Trustee, in the event that borrowers’ principal repayments and interest payments, together with the authorized interest subsidy, are insufficient to repay loan principal and interest on borrowings of the Loan Account. The Trustee reviews the adequacy of the Reserve Account semiannually to determine whether sufficient resources are available to meet all obligations to the lenders to the Loan Account.

Subsidy Accounts

The resources held in the Subsidy Accounts consist of bilateral contributions to the Trust, including transfers of net earnings from the PRGF Administered Accounts, contributions by the IMF from the Special Disbursement Account, net earnings on loans made to the Trust for the Subsidy Accounts, and net earnings from investment of Subsidy Accounts resources.

The resources available in the Subsidy Accounts are drawn by the Trustee to pay the difference, with respect to each interest period, between the interest due from the borrowers under the Trust and the interest due on Loan Account borrowings.

The resources in the PRGF Subsidy Account are earmarked for PRGF loans only, while the resources in the ESF Subsidy Account are earmarked for ESF loans only. The PRGF-ESF Subsidy Account can be used for both PRGF and ESF loans.

To the extent that resources in the PRGF-ESF Subsidy Account and the PRGF Subsidy Account are insufficient for PRGF subsidy operations, the Trustee will transfer to the PRGF Subsidy Account resources in the PRGF-HIPC Trust Account not earmarked for debt relief under the HIPC Initiative.

2. Summary of significant accounting policies

Basis of accounting

The financial statements of the PRGF-ESF Trust are prepared in accordance with International Financial Reporting Standards (IFRS). Specific accounting principles and disclosure practices are explained further below.

Use of estimates

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could dif-fer from those estimates.

Unit of account

The financial statements are expressed in terms of SDRs. The value of the SDR is determined by the IMF each day by summing the values in U.S. dol-lars, based on market exchange rates, of the currencies in the SDR valuation basket. The IMF reviews the SDR valuation basket every five years. The latest review was completed in November 2005, and the new composition of the SDR valuation basket became effective on January 1, 2006. The currencies in the basket as of April 30, 2006, and 2005 and their amounts were as follows:

Currency Amount

2006 2005___________________________Euro 0.4100 0.4260Japanese yen 18.4000 21.0000Pound sterling 0.0903 0.0984U.S. dollar 0.6320 0.5770

As of April 30, 2006, one SDR was equal to 1.47106 U.S. dollars (one SDR was equal to 1.51678 U.S. dollars as of April 30, 2005).

Foreign currency translation

Foreign currency transactions are recorded at the rate of exchange on the date of the transaction. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are reported using the closing

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exchange rates. Exchange differences arising from the settlement of transac-tions at rates different from those at the originating date of the transaction and unrealized foreign exchange differences on unsettled foreign currency monetary assets and liabilities are included in the determination of net income.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Investments

Investments are made in fixed-term deposits; domestic government bonds of the euro area, Japan, the United Kingdom, and the United States; and obligations of multilateral organizations. For deposits, the Trust may invest only in obligations issued by institutions with a credit rating of A and above. For other investments, the Trust may invest only in obligations issued by an agency of a government and a multilateral organization with a minimum credit rating of AA.

Investments in debt securities, classified as securities at fair-value-through-profit-and-loss, are measured initially at cost. Subsequent to initial recogni-tion, all fair-value-through-profit-and-loss assets are remeasured to fair value based on the quoted market price at the balance sheet date. Gains and losses arising from a change in the fair value are recognized in the statement of income.

Investment income comprises interest income and realized and unrealized gains and losses on investments, including currency valuation differences arising from exchange rate movements against the SDR.

Loans

Loans in the Trust are initially recorded at the amount disbursed provided that the present value of the cash flows from stated interest due and the Subsidy Accounts is equal to or exceeds the disbursed amount. Thereafter, the carrying value of the loans is amortized cost.

Both PRGF and ESF loans are repayable in 5 to 10 years in semiannual installments. Interest on loans accrues at the stated interest rate of of 1 percent per annum. It is the Trust’s policy to exclude from income interest on loans that are six months or more overdue. At each balance sheet date, the loans are reviewed to determine whether there is objective evidence of loan impairment. If any such evidence exists, an impairment loss is recog-nized to the extent that the present value of estimated future cash flows falls below the carrying amount.

Contributions

Contributions are reflected as increases in resources after the achievement of specified conditions and are subject to bilateral agreements stipulating how the resources are to be used.

Transfers

Internal transfers of resources within the Trust are accounted for under the accrual method of accounting.

Administrative costs

The expenses of conducting the activities of the Trust are paid by the General Resources Account of the IMF. In financial years 2006 and 2005, the IMF decided to forgo reimbursements for these costs.

Comparatives

When necessary, comparative figures have been reclassified to conform with changes in the presentation of the current year.

Accounting and reporting developments

In December 2003, the International Accounting Standards Board revised International Accounting Standard 39, “Financial Instruments: Recognition and Measurement,” which became effective for financial year 2006. Upon adoption of the revised standard, and as permitted by the transition provi-sions, investments previously classified as available-for-sale were reclassified as securities at fair-value-through-profit-and-loss. After the reclassification, changes in fair value of the investments continued to be recognized in the income statement.

3. Financial risk management

In providing financial assistance to eligible country members and conducting its operations, the Trust is exposed to various types of risks, including credit, interest rate, exchange rate, and liquidity risks.

Credit risk refers to potential losses on credit outstanding owing to the inability, or unwillingness, of member countries to make loan repayments. To mitigate credit risk, the amounts that eligible member countries may borrow under the PRGF and ESF are limited to 140 percent and 50 percent of their IMF quota, respectively. Disbursements under PRGF and ESF arrangements are linked to performance criteria, and the IMF, as Trustee, conducts periodic reviews to ensure that such criteria are met. To protect the lenders to the Trust, resources are accumulated in the Reserve Account. These resources are available to repay the lenders in the event of delays in repayment or non-payment by borrowers.

Interest rate risk is the risk that future cash flows will fluctuate because of changes in market interest rates. Interest rate risk on the Trust’s investments is managed by limiting the investment portfolio to a weighted-average effec-tive duration that does not exceed three years.

Exchange rate risk is the exposure to the effects of fluctuations in the prevail-ing foreign currency exchange rates on the Trust’s financial position and cash flows. Exchange rate risk on the Trust’s investments is managed by investing in securities denominated in SDRs or in the constituent currencies, with the same composition, of the SDR valuation basket.

Liquidity risk is the risk of non-availability of resources to meet the Trust’s financing needs and obligations. The Trust conducts semiannual reviews to determine the adequacy of the resources accumulated in the Subsidy and Reserve accounts to meet liquidity needs. Resources in the Subsidy Accounts are expected to exceed estimated needs based on the present level of loans outstanding, and the balance in the Reserve Account is projected to increase until it reaches the level sufficient to cover all outstanding PRGF-ESF Trust obligations to lenders.

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4. Investments

Investments consisted of the following at April 30:

2006 2005

(In thousands of SDRs)

Fixed-term deposits 1,838,961 1,185,595Debt securities 3,043,434 2,714,776_________ _________

Total 4,882,395 3,900,371_________ __________________ _________

The maturities of the investments are as follows at April 30:

2006 2005

(In thousands of SDRs)

Less than 1 year 4,571,089 3,635,0601–3 years 298,294 228,8113–5 years 2,257 36,500Over 5 years 10,755 —_________ _________

Total 4,882,395 3,900,371_________ __________________ _________

5. Loans receivable

Resources of the Loan Account of the PRGF-ESF Trust are committed to qualifying members for a three-year period, upon approval by the Trustee of three-year PRGF arrangements or ESF arrangements with durations of one to two years in support of the members’ macroeconomic and structural adjust-ment programs. Interest on the outstanding loans, which is repayable in 10 equal semi-installments beginning 5 years after disbursement, is set at the rate of of 1 percent per annum.

At April 30, 2006, and 2005, the resources of the Loan Account included cumulative advances from the Reserve Account of SDR 75 million resulting from the nonpayment of principal by Zimbabwe.

PRGF-ESF Trust loan repayments for the year ended April 30, 2006, include repayments totaling SDR 2,413 million made to the Loan Account by mem-bers that received MDRI debt relief on January 6, 2006, and April 28, 2006 (see Schedule 5).

Scheduled repayments of loans by borrowers, including Zimbabwe’s overdue obligations, are summarized below:

Period of repayment, financial year ending April 30

(In thousands of SDRs)

2007 65,1892008 214,6072009 185,7402010 117,8132011 209,7862012 and beyond 2,951,612Overdue 75,013_________

Total 3,819,760__________________

As of April 30, 2006, scheduled repayments of loans include loans totaling SDR 1,164 million due from members, including potentially HIPC-eligible members under the sunset clause, that are potentially eligible for MDRI debt relief.

As of April 30, use of credit in the Trust by the largest users was as follows:

2006 2005

(In millions of SDRs and percent of total PRGF-ESF credit)

Largest user of credit 975.1 25.5% 1,028.2 15.6%Three largest users of credit 1,811.7 47.4% 2,095.4 31.8%Five largest users of credit 2,139.2 56.0% 2,655.9 40.3%

The five largest users of credit as of April 30, 2006, were Pakistan, the Democratic Republic of the Congo, Bangladesh, the Republic of Yemen, and Georgia.

6. Borrowings

The Trust borrows on such terms and conditions as agreed between the Trustee and the lenders. Interest rates on borrowings as at April 30, 2006, were at a weighted average rate of 2.38 percent per annum (1.69 percent per annum as at April 30, 2005). The principal amounts of the borrowings are repayable between 5 and 16 years after the first drawing.

During the year ended April 30, 2006, the PRGF-ESF Trust made early repay-ments of SDR 1,438 million to lenders following the repayment of Trust loans by members that received MDRI debt relief.

Scheduled repayments of borrowings are summarized below:

Period of repayment, financial year ending April 30

(In thousands of SDRs)

2007 345,3442008 249,6912009 338,5432010 318,6772011 302,0542012 and beyond 3,425,157_________

Total 4,979,466__________________

The following summarizes the borrowing agreements concluded as of April 30:

Amount undrawn

2006 2005____________________________

(In thousands of SDRs)

Loan Account 3,690,736 4,092,456Subsidy Accounts 49,148 58,435

7. Multilateral Debt Relief Initiative

Under the Multilateral Debt Relief Initiative (MDRI), the IMF administers resources to provide debt relief to Heavily Indebted Poor Countries (HIPCs) and non-HIPCs with annual per capita income of $380 or less and to HIPCs with annual per capita income of more than $380. Qualifying members at or below the per capita income threshold receive grant assistance from the MDRI-I Trust, which was funded initially by resources transferred from the Special Disbursement Account (SDR 1.5 billion). Grant assistance to the HIPCs with per capita income above the threshold is provided from the MDRI-II Trust by resources contributed by individual members. The initial contribu-tions to the MDRI-II Trust were received through the transfer of a portion of members’ contributions to the PRGF-ESF Trust Subsidy Account (SDR 1.12 bil-lion). Grant assistance from the MDRI Trusts (together with assistance under the HIPC Initiative) provides debt relief to cover the full stock of debt owed to the IMF (including the PRGF-ESF Trust) as of December 31, 2004, that remains outstanding at the time the member qualifies for such relief.

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During the financial year ended April 30, 2006, debt relief under the MDRI was provided to 18 members that had already reached the completion point under the enhanced HIPC Initiative and two non-HIPCs (a total amount of SDR 2,503 million, of which SDR 90 million was for debt owed to the GRA and SDR 2,413 million was for debt owed to the PRGF-ESF Trust). No impair-ment loss has been recognized in the Loan Account. Since the stock of debt owed to the IMF as of December 31, 2004, decreases over time, the actual debt eligible for MDRI assistance for the remaining potentially eligible mem-bers depends on the timing of their completion points. The qualification of members for MDRI debt relief is reviewed periodically as progress by these members toward reaching the completion point under the HIPC Initiative is being made.

8. Investment income

Investment income comprised the following for the financial years ended April 30:

2006 2005

(In thousands of SDRs)

Interest income 161,763 142,021Realized gains/(losses), net 16,620 (7,915)Unrealized losses, net (37,848) (35,427)Exchange rate losses, net (128) (306)_______ _______

Total 140,407 98,373_______ ______________ _______

9. Contributions

The Trustee accepts contributions for the Subsidy Accounts of the PRGF-ESF Trust on such terms and conditions as agreed between the Trustee and the contributors. At April 30, 2006, cumulative contributions amounted to SDR 2,983 million (SDR 2,457 million as of April 30, 2005).

10. Commitments under loan arrangements

An arrangement under the PRGF-ESF is a decision of the IMF, as Trustee, that gives a member the assurance that the Trust stands ready to provide foreign exchange or SDRs during a specified period and up to a specified amount in accordance with the terms of the decision. At April 30, 2006, undrawn balances under 27 loan arrangements amounted to SDR 736 million (SDR 1,315 million under 31 arrangements at April 30, 2005).

11. Related-party transactions

The expenses of conducting the business of the Trust are paid by the General Resources Account of the IMF and reimbursed by the Trust through the Spe-cial Disbursement Account. However, in financial years 2006 and 2005, the Executive Board of the IMF decided to forgo the reimbursement, which would have amounted to SDR 51 million and SDR 54 million, respectively.

The cumulative contributions from the IMF, through the Special Disbursement Account, as of April 30, 2006, and April 30, 2005, were as follows:

2006 2005

(In millions of SDRs)PRGF-ESF Trust:

Reserve Account 2,667 2,630Subsidy Accounts 870 400______ ______

Total 3,537 3,030______ ____________ ______

The PRGF-ESF Subsidy Account also receives contributions from member countries that had placed deposits in the Poverty Reduction and Growth Facility Administered Accounts at low interest rates. Net investment income transferred from the Poverty Reduction and Growth Facility Administered Accounts to the PRGF-ESF Subsidy Account amounted to SDR 0.1 million and SDR 0.3 million for financial years 2006 and 2005, respectively.

12. Loans under the Saudi Fund for Development Special Account

The Saudi Fund for Development (SFD) Special Account was established at the request of the SFD to provide supplementary financing in association with loans under the PRGF-ESF Trust. The SFD makes funds available after a bilateral agreement between it and a recipient country has been effected. The SFD places funds, denominated in SDRs, in the SFD Special Account for disbursement to a recipient country simultaneously with disbursements under a PRGF arrangement. These loans are repayable in 10 equal semian-nual installments commencing 5 years after the date of disbursement and interest on these loans is set at a rate of of 1 percent per annum.

The cumulative receipts and uses of resources for the Saudi Fund for Devel-opment Special Account were SDR 101 million as of April 30, 2006, and 2005.

13. Combining balance sheets and statements of income and changes in resources

The balance sheets and statements of income and changes in resources of the PRGF-ESF Trust are presented below:

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Note 13

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Combining balance sheets as at April 30, 2006, and 2005

(In thousands of SDRs)

Loan Account Reserve Account Subsidy Accounts Combined_______________________ ________________________ ______________________ ________________________2006 2005 2006 2005 2006 2005 2006 2005

AssetsCash and cash equivalents 274,873 — 178,230 888,457 294,223 1,057,445 747,326 1,945,902Investments 944,080 885,595 3,077,307 2,252,108 861,008 762,668 4,882,395 3,900,371Loans receivable 3,819,760 6,588,065 — — — — 3,819,760 6,588,065Accrued account transfers 15,450 23,275 58,412 56,196 (73,862) (79,471) — — Interest receivable 22,114 23,827 5,123 1,789 2,096 53 29,333 25,669_________ _________ _________ _________ _________ _________ _________ _________

Total assets 5,076,277 7,520,762 3,319,072 3,198,550 1,083,465 1,740,695 9,478,814 12,460,007_________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________

Liabilities and resourcesBorrowings 4,950,249 7,391,721 — — 29,217 19,930 4,979,466 7,411,651Interest payable 41,454 47,407 — — 53 70 41,507 47,477Other liabilities 9,105 6,399 — — 21 — 9,126 6,399_________ _________ _________ _________ _________ _________ _________ _________

Total liabilities 5,000,808 7,445,527 — — 29,291 20,000 5,030,099 7,465,527_________ _________ _________ _________ _________ _________ _________ _________ Resources 75,469 75,235 3,319,072 3,198,550 1,054,174 1,720,695 4,448,715 4,994,480_________ _________ _________ _________ _________ _________ _________ _________

Total liabilities and resources 5,076,277 7,520,762 3,319,072 3,198,550 1,083,465 1,740,695 9,478,814 12,460,007_________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________

Note 13 (concluded)

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Combining statements of income and changes in resources for the years ended April 30, 2006, and 2005

(In thousands of SDRs)

Loan Account Reserve Account Subsidy Accounts Combined_____________________ ______________________ ______________________ _______________________2006 2005 2006 2005 2006 2005 2006 2005

Balance, beginning of the year 75,235 74,698 3,198,550 3,098,340 1,720,695 1,752,746 4,994,480 4,925,784 _______ ________ _________ _________ _________ _________ _________ _________ Investment income 10,754 - 85,151 61,646 44,502 36,727 140,407 98,373Interest on loans 27,936 32,961 - - - - 27,936 32,961Interest expense (154,255) (126,828) - - (124) (84) (154,379) (126,912)Other expenses - - (1,640) (1,491) (1,246) (1,495) (2,886) (2,986) _______ ________ _________ _________ _________ _________ _________ _________

Operational (loss)/income (115,565) (93,867) 83,511 60,155 43,132 35,148 11,078 1,436Contributions

Bilateral contributions - - - - 56,048 26,668 56,048 26,668Special Disbursement Account - - 36,789 40,592 470,320 - 507,109 40,592

Contributions to MDRI-II Trust - - - - (1,120,000) - (1,120,000) - Transfers between:

Loan and Reserve Accounts (222) 537 222 (537) - - - - Loan and Subsidy Accounts 116,021 93,867 - - (116,021) (93,867) - - _______ ________ _________ _________ _________ _________ _________ _________ Net income (loss)/changes in resources 234 537 120,522 100,210 (666,521) (32,051) (545,765) 68,696 _______ ________ _________ _________ _________ _________ _________ _________

Balance, end of the year 75,469 75,235 3,319,072 3,198,550 1,054,174 1,720,695 4,448,715 4,994,480 _______ ________ _________ _________ _________ _________ _________ _________ _______ ________ _________ _________ _________ _________ _________ _________

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Schedule 1

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Schedule of outstanding loans as at April 30, 2006

(In thousands of SDRs)

PRGF Loans Structural Adjustment Facility1________________________________ _________________________________Member Balance Percent Balance Percent

Albania 63,702 1.67 — — Armenia 116,262 3.04 — — Azerbaijan 85,713 2.24 — — Bangladesh 283,060 7.41 — — Benin 880 0.02 — —

Burkina Faso 13,760 0.36 — Burundi 40,700 1.07 — — Cameroon 2,650 0.07 — — Cape Verde 8,640 0.23 — — Central African Republic 17,888 0.47 — —

Chad 52,856 1.38 — — Congo, Democratic Republic of the 553,467 14.49 — — Congo, Republic of 17,110 0.45 — — Côte d’Ivoire 130,476 3.42 — — Djibouti 12,540 0.33 — —

Dominica 5,366 0.14 — — Gambia, The 13,882 0.36 — — Georgia 159,335 4.17 — — Ghana 26,350 0.69 — — Grenada 1,560 0.04 — —

Guinea 57,570 1.51 — — Guinea-Bissau 7,364 0.19 — — Guyana 27,810 0.73 — — Haiti 3,035 0.08 — — Honduras 20,342 0.53 — —

Kenya 107,732 2.82 — — Kyrgyz Republic 116,772 3.06 — — Lao People’s Democratic Republic 19,880 0.52 — — Lesotho 24,500 0.64 — — Macedonia, former Yugoslav Republic of 11,725 0.31 — —

Madagascar 11,348 0.30 — — Malawi 40,820 1.07 — — Mali 3,993 0.10 — — Mauritania 44,474 1.16 — — Moldova 27,720 0.73 — —

Mongolia 22,784 0.60 — — Mozambique 4,860 0.13 — — Nepal 14,260 0.37 — — Nicaragua 13,930 0.36 — — Niger 11,750 0.31 — —

Pakistan 975,150 25.53 — — Rwanda 1,142 0.03 — — São Tomé and Príncipe 2,653 0.07 — — Senegal 17,330 0.45 — — Sierra Leone 133,375 3.49 — —

Somalia — — 8,840 100.00Sri Lanka 38,390 1.01 — — Tajikistan 29,400 0.77 — — Tanzania 8,400 0.22 — — Togo 7,602 0.20 — —

Uganda 6,000 0.16 — — Vietnam 136,280 3.57 — — Yemen, Republic of 168,150 4.40 — — Zambia 22,009 0.58 — — Zimbabwe 75,013 1.96 — — _________ ______ _____ ______

Total loans outstanding 3,819,760 100.00 8,840 100.00 _________ ______ _____ ______ _________ ______ _____ ______

1Since Structural Adjustment Facility (SAF) loans have been disbursed in connection with PRGF arrangements, the above list includes these loans, as well as loans disbursed to members under SAF arrangements. These loans are held by the Special Disbursement Account, and repayments of all SAF loans are transferred to the PRGF-ESF Reserve Account when received.

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Schedule 2

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Cumulative contributions to and resources of the Subsidy Accounts as at April 30, 2006

(In thousands of SDRs)

Subsidy Accounts_______________________________________________________________________________Contributor1 PRGF-ESF PRGF ESF Total

Direct contributions to the Subsidy AccountsArgentina 27,068 — — 27,068Australia 9,246 — — 9,246Bangladesh 578 — — 578Canada 198,268 — — 198,268China 9,900 — — 9,900

Czech Republic 10,004 — — 10,004Denmark 38,299 — — 38,299Egypt 10,002 — — 10,002Finland 22,684 — — 22,684Germany 132,832 — — 132,832

Iceland 3,200 — — 3,200India 8,580 — — 8,580Ireland 5,802 — — 5,802Italy 158,982 — — 158,982Japan 506,997 — — 506,997

Korea 33,856 — — 33,856Luxembourg 9,642 5 — 9,647Morocco 7,284 — — 7,284Netherlands 99,278 — — 99,278Norway 28,074 — — 28,074

Oman 2,243 — — 2,243Sweden 110,887 — — 110,887Switzerland 41,205 — — 41,205Turkey 8,000 — — 8,000United Kingdom 345,280 — — 345,280

United States 126,079 — — 126,079__________ ________ ___ __________ Total direct contributions to the Subsidy Accounts 1,954,270 5 — 1,954,275__________ ________ ___ __________

Net income transferred to the Subsidy AccountsAustria 40,451 — — 40,451Belgium 77,953 — — 77,953Botswana 1,352 — — 1,352Chile 2,910 — — 2,910Greece 25,941 — — 25,941

Indonesia 5,003 — — 5,003Iran, Islamic Republic of 1,346 — — 1,346Portugal 3,402 — — 3,402Spain (ICO) 168 — — 168__________ ________ ___ __________

Total net income transferred to the Subsidy Accounts 158,526 — — 158,526__________ ________ ___ __________ Total bilateral contributions received 2,112,796 5 — 2,112,801

Contributions from Special Disbursement Account 870,320 — — 870,320__________ ________ ___ __________ Total contributions received 2,983,116 5 — 2,983,121

Cumulative net income of the Subsidy Accounts 939,316 403 — 939,719Contributions to MDRI-II Trust (1,120,000) — — (1,120,000)Transfers to PRGF Subsidy Account (95,042) 95,042 — — Transfers to ESF Subsidy Account (35) — 35 — Resources disbursed to subsidize Trust lending (1,718,926) (29,740) — (1,748,666)__________ ________ ___ __________

Total resources of the Subsidy Accounts 988,429 65,710 35 1,054,174__________ ________ ___ __________ __________ ________ ___ __________

1In addition to direct contributions, a number of members also make loans available to the Loan Account on concessional terms. See Schedule 3.

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Schedule 3

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Schedule of borrowing agreements as at April 30, 2006

(In thousands of SDRs)

Interest rate Amount of Amount OutstandingMember (in percent) agreement drawn balance

Loan AccountPrior to enlargement of PRGF

France 0.501 800,000 800,000 15,870Germany Variable2 700,000 700,000 14,999Japan Variable2 2,200,000 2,200,000 53,995________ ________ ________

Total prior to enlargement of PRGF 3,700,000 3,700,000 84,864________ ________ ________

For enlargement of PRGFBelgium Variable2 350,000 242,331 150,211Canada Variable2 400,000 400,000 218,991China Variable2 200,000 155,052 74,195Denmark Variable2 100,000 100,000 68,070Egypt Variable2 155,600 100,000 38,910France Variable1 2,100,000 1,197,827 592,559Germany Variable2 2,050,000 1,032,730 568,262Italy Variable2 1,010,000 707,944 434,484Japan Variable2 2,934,800 2,450,282 2,057,034Korea Variable2 27,700 27,700 14,982Netherlands Variable2 450,000 153,416 98,237Norway Variable2 60,000 60,000 25,951OPEC Fund for International Development Variable2 33,9893 36,990 20,167Spain—Bank of Spain Variable2 425,000 144,234 102,824Spain—Government of Spain (ICO) Fixed 67,000 67,000 47,819Switzerland Variable2 401,700 199,547 89,609__________ __________ _________

Total for enlargement of PRGF 10,765,789 7,075,053 4,602,305__________ __________ _________ Resources held pending repayment 4 — — 263,0804__________ __________ _________

Total—Loan Account 14,465,789 10,775,053 4,950,249__________ __________ _________ __________ __________ _________

PRGF-ESF Subsidy AccountMalta 0.50 1,365 1,365 1,365Spain—Government of Spain (ICO) 0.50 67,000 19,181 19,181Pakistan 0.50 10,000 8,671 8,671__________ __________ _________

Total—Subsidy Accounts 78,365 29,217 29,217__________ __________ _________ __________ __________ _________

1The agreement with France made before the enlargement of PRGF (SDR 800 million) provides that the interest rate shall be 0.5 percent on the first SDR 700 million drawn, and for variable, market-related rates of interest thereafter. The agreement with France made for the enlargement of the PRGF (SDR 2.1 billion) provides that the interest rate shall be 0.5 percent until the cumulative implicit interest subsidy reaches SDR 250 million, and at variable, market-related rates of interest thereafter.

2The loans under these agreements are made at variable, market-related rates of interest.3The agreement with the OPEC Fund for International Development is for the amount of $50 million, converted at the exchange rate of April 30, 2006.4This amount represents principal repayments held and invested on behalf of a lender.

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Schedule 4

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Status of loan arrangements as at April 30, 2006

(In thousands of SDRs)

Member Date of arrangement Expiration date Amount agreed Undrawn balance

Albania Feb. 1, 2006 Jan. 31, 2009 8,523 7,305Armenia May 25, 2005 May 24, 2008 23,000 16,440Bangladesh Jun. 20, 2003 Dec. 31, 2006 400,330 117,270Benin Aug. 5, 2005 Aug. 4, 2008 6,190 5,310Burkina Faso Jun. 11, 2003 Sep. 30, 2006 24,080 3,440

Burundi Jan. 23, 2004 Jan. 22, 2007 69,300 28,600Cameroon Oct. 24, 2005 Oct. 23, 2008 18,570 15,920Chad Feb. 16, 2005 Feb. 15, 2008 25,200 21,000Congo, Republic of Dec. 6, 2004 Dec. 5, 2007 54,990 39,270Dominica Dec. 29, 2003 Dec. 28, 2006 7,688 2,322

Georgia Jun. 4, 2004 Jun. 3, 2007 98,000 42,000Ghana May 9, 2003 Oct. 31, 2006 184,500 79,100Grenada Apr. 17, 2006 Apr. 16, 2009 10,530 8,970Guyana Sep. 20, 2002 Sep. 12, 2006 54,550 9,250Honduras Feb. 27, 2004 Feb. 26, 2007 71,200 30,516

Kenya Nov. 21, 2003 Nov. 20, 2006 225,000 150,000Kyrgyz Republic Mar. 15, 2005 Mar. 14, 2008 8,880 6,350Malawi Aug. 5, 2005 Aug. 4, 2008 38,170 27,827Mali Jun. 23, 2004 Jun. 22, 2007 9,330 4,007Mozambique Jul. 6, 2004 Jul. 5, 2007 11,360 4,880

Nepal Nov. 19, 2003 Nov. 18, 2006 49,910 35,650Nicaragua Dec. 13, 2002 Dec. 12, 2006 97,500 27,850Niger Jan. 31, 2005 Jan. 30, 2008 26,320 14,570Rwanda Aug. 12, 2002 Jun. 11, 2006 4,000 571São Tomé and Príncipe Aug. 1, 2005 Jul. 31, 2008 2,960 2,114

Tanzania Aug. 16, 2003 Aug. 15, 2006 19,600 2,800Zambia Jun. 16, 2004 Jun. 15, 2007 220,095 33,014_________ _______ 1,769,776 736,346_________ _______ _________ _______

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Schedule 5

Poverty Reduction and Growth Facility and Exogenous Shocks Facility Trust

Disbursed Multilateral Debt Relief Initiative assistance as of April 30, 2006

(in thousands of SDRs)

Eligible debt Sources of grant assistance_________________________________________________ ________________________________________________________Member PRGF-ESF GRA Total MDRI-I Trust MDRI-II Trust PRGF-HIPC Trust

Benin 36,060 — 36,060 — 34,111 1,949 Burkina Faso 62,120 — 62,120 57,053 — 5,067 Bolivia 71,154 89,780 160,934 — 154,819 6,115 Cameroon 173,260 — 173,260 — 149,169 24,091 Ethiopia 112,073 — 112,073 79,645 — 32,428

Ghana 265,389 — 265,389 220,020 — 45,369 Guyana 45,058 — 45,058 — 31,572 13,486 Honduras 107,457 — 107,457 — 98,240 9,217 Cambodia 56,829 — 56,829 56,829 — —Madagascar 137,286 — 137,286 128,492 — 8,794

Mali 75,066 — 75,066 62,434 — 12,632 Mozambique 106,560 — 106,560 83,039 — 23,521 Niger 77,554 — 77,554 59,815 — 17,739 Nicaragua 140,481 — 140,481 — 91,762 48,719 Rwanda 52,743 — 52,743 20,174 — 32,569

Senegal 100,323 — 100,323 — 94,762 5,561 Tajikistan 69,308 — 69,308 69,308 — —Tanzania 234,031 — 234,031 206,990 — 27,041 Uganda 87,728 — 87,728 75,845 — 11,883 Zambia 402,592 — 402,592 — 398,471 4,121 _________ ______ _________ _________ _________ _______Total 2,413,072 89,780 2,502,852 1,119,644 1,052,906 330,302_________ ______ _________ _________ _________ ________________ ______ _________ _________ _________ _______

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Deloitte & Touche LLPSuite 500555 12th Street, NWWashington, DC 20004-1207USATel: +1 202 879 5600Fax: +1 202 879 5309www.deloitte.com

Member ofDeloitte Touche Tohmatsu

Independent Auditors’ Report

To the Board of Governorsof the International Monetary FundWashington, DC

We have audited the accompanying balance sheets as of April 30, 2006, and 2005, and the related statements of income and changes in resources and of cash flows for the years then ended of the following entities:

Poverty Reduction and Growth Facility Administered Accounts (the “Accounts”)

AustriaIndonesiaIslamic Republic of IranPortugal

These financial statements are the responsibility of Accounts management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with International Standards on Auditing and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Accounts’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Poverty Reduction and Growth Facility Adminis-tered Accounts at April 30, 2006, and 2005, and the results of their operations and their cash flows for the years then ended in conformity with International Financial Reporting Standards.

June 12, 2006

••••

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Poverty Reduction and Growth Facility Administered Accounts Balance sheets

as at April 30, 2006, and 2005(In thousands of SDRs)

Austria Indonesia Iran, I. R. of Portugal ________________ ____________________ _______________ _________________ 2006 2005 2006 2005 2006 2005 2006 2005

AssetsCash and cash equivalents — 1,399 — — — — 4,382 1,838Investments (Note 4) — 3,601 25,000 25,000 — — — 4,735Advance payments to the PRGF-ESF Trust Subsidy Account — 31 — — — — 21 32Interest/other receivable — — 399 192 — — — — ___ _____ ______ ______ ___ ___ _____ _____

Total assets — 5,031 25,399 25,192 — — 4,403 6,605___ _____ ______ ______ ___ ___ _____ ________ _____ ______ ______ ___ ___ _____ _____

Liabilities and resourcesDeposits (Note 5) — 5,000 25,000 25,000 — — 4,382 6,573Interest payable — 31 193 28 — — 21 32___ _____ ______ ______ ___ ___ _____ _____

Total liabilities — 5,031 25,193 25,028 — — 4,403 6,605___ _____ ______ ______ ___ ___ _____ _____Resources — — 206 164 — — — — ___ _____ ______ ______ ___ ___ _____ _____

Total liabilities and resources — 5,031 25,399 25,192 — — 4,403 6,605___ _____ ______ ______ ___ ___ _____ ________ _____ ______ ______ ___ ___ _____ _____

The accompanying notes are an integral part of these financial statements.

/s/ Michael G. Kuhn /s/ Rodrigo de RatoDirector, Finance Department Managing Director

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Poverty Reduction and Growth Facility Administered AccountsStatements of income and changes in resources

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

Austria Indonesia Iran, I. R. of Portugal_________________ __________________ __________________ ___________________ 2006 2005 2006 2005 2006 2005 2006 2005

Balance, beginning of the year — — 164 1 — — — — ___ ____ ____ ____ ___ ___ ____ ____ Investment income (Note 4) 35 207 706 510 — 7 129 136Other expenses (1) (6) — — — — (1) (4)Interest expense on deposits (7) (51) (206) (28) — (2) (22) (33)___ ____ ____ ____ ___ ___ ____ ____

Operational income 27 150 500 482 — 5 106 99Transfers to the

PRGF-ESF Trust Subsidy Account (27) (150) — (67) — (5) (106) (99)PRGF-HIPC Trust — — (458) (252) — — — — ___ ____ ____ ____ ___ ___ ____ ____ Net income/changes in resources — — 42 163 — — — — ___ ____ ____ ____ ___ ___ ____ ____

Balance, end of the year — — 206 164 — — — — ___ ____ ____ ____ ___ ___ ____ ____ ___ ____ ____ ____ ___ ___ ____ ____

The accompanying notes are an integral part of these financial statements.

Poverty Reduction and Growth Facility Administered AccountsStatements of cash flows

for the years ended April 30, 2006, and 2005 (In thousands of SDRs)

Austria Indonesia Iran, I. R. of Portugal_________________ _________________ ________________ _________________ 2006 2005 2006 2005 2006 2005 2006 2005

Cash flows from operating activitiesNet income — — 42 163 — — — — Adjustments to reconcile net income to cash generated by operations

Changes in interest payable (31) (36) 165 28 — (23) (11) (10)Changes in interest receivable and other assets 31 36 (207) (191) — 23 11 10______ _______ ____ _______ ___ ______ ______ ______Net cash used in operating activities — — — — — — — —

Cash flow from investment activitiesNet disposal/(acquisition) of investments 3,601 6,686 — (25,000) — 3,429 4,735 1,275______ _______ ____ _______ ___ ______ ______ ______

Net cash provided by/(used in) investment activities 3,601 6,686 — (25,000) — 3,429 4,735 1,275

Cash flow from financing activitiesRepayment of deposits (5,000) (10,000) — — — (5,000) (2,191) (2,191)______ _______ ____ _______ ___ ______ ______ ______

Net cash used by financing activities (5,000) (10,000) — — — (5,000) (2,191) (2,191)

Cash and cash equivalents, beginning of year 1,399 4,713 — 25,000 — 1,571 1,838 2,754______ _______ ____ _______ ___ ______ ______ ______Cash and cash equivalents, end of year — 1,399 — — — — 4,382 1,838______ _______ ____ _______ ___ ______ ______ ____________ _______ ____ _______ ___ ______ ______ ______

The accompanying notes are an integral part of these financial statements.

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Poverty Reduction and Growth Facility Administered AccountsNotes to the financial statements

as at April 30, 2006, and 2005

1. Nature of operations

At the request of certain member countries, the IMF established the Poverty Reduction and Growth Facility Administered Accounts (“PRGF Administered Accounts” or “Administered Accounts”) for the benefit of the PRGF-ESF Sub-sidy Account of the PRGF-ESF Trust and PRGF-HIPC Trust Account. The IMF is the Trustee of each of the Administered Accounts. The Administered Accounts comprise deposits made by contributors. The difference between interest earned by the Administered Accounts and the interest payable on deposits is transferred to the PRGF-ESF Subsidy Account of the PRGF-ESF Trust and PRGF-HIPC Trust Account.

The resources of each Administered Account are held separately from the assets of all other accounts of, or administered by, the IMF and may not be used to discharge liabilities or to meet losses incurred in the administration of other accounts.

2. Summary of significant accounting policies

Basis of accounting

The financial statements of the Administered Accounts are prepared in accordance with International Financial Reporting Standards (IFRS). Specific accounting principles and disclosure practices are explained further below.

Use of estimates

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could dif-fer from those estimates.

Unit of account

The financial statements are expressed in terms of SDRs. The value of the SDR is determined by the IMF each day by summing the values in U.S. dol-lars, based on market exchange rates, of the currencies in the SDR valuation basket. The IMF reviews the SDR valuation basket every five years. The latest review was completed in November 2005 and the new composition of the SDR valuation basket became effective on January 1, 2006.

The currencies in the basket as of April 30, 2006, and 2005 and their amounts were as follows:

Currency Amount

2006 2005___________________________Euro 0.4100 0.4260Japanese yen 18.4000 21.0000Pound sterling 0.0903 0.0984U.S. dollar 0.6320 0.5770

As of April 30, 2006, one SDR was equal to 1.47106 U.S. dollars (1.51678 U.S. dollars as of April 30, 2005).

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Investments

Investments in debt securities, classified as securities at fair-value-through-profit-and-loss, are measured initially at cost. Subsequent to initial recogni-tion, all fair-value-through-profit-and-loss assets are remeasured to fair value, based on the quoted market price at the balance sheet date. Gains and losses arising from a change in the fair value are recognized in the state-ment of income.

Administrative costs

The expenses of conducting the activities of the Administered Accounts are incurred and borne by the General Department of the IMF.

Accounting and reporting developments

In December 2003, the International Accounting Standards Board revised International Accounting Standard 39, “Financial Instruments: Recognition and Measurement,” which became effective for financial year 2006. Upon adoption of the revised standard, and as permitted by the transition provi-sions, investments previously classified as available-for-sale were reclassified as securities at fair-value-through-profit-and-loss. After the reclassification, changes in the fair value of the investments continued to be recognized in the income statement.

Comparatives

When necessary, comparative figures have been reclassified to conform with changes in the presentation of the current year.

3. Financial risk management

In conducting their operations, the PRGF Administered Accounts are exposed to various types of risks, including interest rate and exchange rate risks.

Interest rate risk is the risk that future cash flows will fluctuate because of changes in market interest rates. Interest rate risk on the PRGF Administered Accounts’ investments is managed by limiting the investment portfolio to a weighted-average effective duration that does not exceed three years.

Exchange rate risk is the exposure to the effects of fluctuations in the prevail-ing foreign currency exchange rates on the PRGF Administered Accounts’

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financial position and cash flows. Exchange rate risk on the investments is managed by investing in securities denominated in SDRs or in the constitu-ent currencies, with the same composition of the SDR valuation basket.

4. Investments

Investments consisted of the following at April 30:

2006 2005

(In thousands of SDRs)

Fixed-term deposits 25,000 25,000Debt securities — 8,336______ ______

Total 25,000 33,336______ ____________ ______

The maturities of the Administered Accounts’ investments are as follows at April 30:

2006 2005

(In thousands of SDRs)

Less than 1 year 25,000 32,8331–3 years — 503______ ______

Total 25,000 33,336______ ____________ ______

Investment income comprised the following for the financial years ended April 30:

2006 2005

(In thousands of SDRs)

Interest income 888 1,094Realized gains/(losses), net 51 (115)Unrealized losses, net (69) (119)____ _____

Total 870 860____ _________ _____

5. Deposits

Austria

The Administered Account Austria was established on December 27, 1988, for the administration of resources deposited in the account by the Austrian National Bank. Two deposits (SDR 60.0 million made on December 30, 1988, and SDR 50.0 million on August 10, 1995) are to be repaid in 10 equal semiannual installments beginning five and a half years after the date of each deposit and ending at the end of the tenth year after the date of each deposit. The deposits bear interest at a rate of of 1 percent a year. Both deposits from Austria have been repaid in full.

Indonesia

The Administered Account Indonesia was established on June 30, 1994, for the administration of resources deposited in the account by Bank Indonesia. The deposit, totaling SDR 25.0 million, is to be repaid in one installment 10 years after the date the deposit was made. The interest payable on the deposit is equivalent to that obtained for the investment of the deposit less 2 percent a year. Upon maturity in June 2004, the deposit was reinvested for another 10 years (according to the amendment of the instrument), and investment income of 2 percent per annum (or any lesser amount if invest-ment returns are below 2 percent) is to be transferred to the PRGF-HIPC Trust.

Islamic Republic of Iran

The Administered Account Islamic Republic of Iran was established on June 6, 1994, for the administration of resources deposited in the account by the Central Bank of the Islamic Republic of Iran (CBIRI). The CBIRI has made five annual deposits, each of SDR 1.0 million. All of the deposits are to be repaid at the end of 10 years after the date of the first deposit. Each deposit bears interest at a rate of of 1 percent a year. All deposits have been repaid in full.

Portugal

The Administered Account Portugal was established on May 16, 1994, for the administration of resources deposited in the account by the Banco de Portu-gal (BdP). The BdP has made six annual deposits, each of SDR 2.2 million. Each deposit is to be repaid in five equal annual installments beginning six years after the date of the deposit and will be completed at the end of the tenth year after the date of the deposit. Each deposit bears interest at a rate of of 1 percent a year.

6. Related-party transactions

The difference between the income earned by the Administered Accounts on the amounts invested and the interest payable on the deposits of the Administered Accounts, net of any cost, is contributed to the PRGF-ESF Subsidy Account of the PRGF-ESF Trust and PRGF-HIPC Trust Account. For the financial years ended April 30, 2006, and 2005, net investment income contributed from the Administered Accounts to the PRGF-ESF Subsidy Account amounted to SDR 0.1 million and SDR 0.3 million, respectively; contributions to the PRGF-HIPC Trust amounted to SDR 0.5 million and SDR 0.3 million, respectively.

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Deloitte & Touche LLPSuite 500555 12th Street, NWWashington, DC 20004-1207USATel: +1 202 879 5600Fax: +1 202 879 5309www.deloitte.com

Member ofDeloitte Touche Tohmatsu

Independent Auditors’ Report

To the Board of Governorsof the International Monetary FundWashington, DC

We have audited the accompanying combined balance sheets of the Poverty Reduction and Growth Facility-Heavily Indebted Poor Countries Trust and Related Accounts (the “Trust”) as of April 30, 2006, and 2005, and the related combined statements of income and changes in resources and of cash flows for the years then ended. These combined financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with International Standards on Auditing and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the combined financial position of the Poverty Reduction and Growth Facility-Heavily Indebted Poor Countries Trust and Related Accounts at April 30, 2006, and 2005, and the combined results of their operations and their cash flows for the years then ended in conformity with International Financial Reporting Standards.

Our audits were conducted for the purpose of forming an opinion on the basic combined financial statements taken as a whole. The supplemental schedules listed on pages 226 to 229 are presented for the purpose of additional analysis and are not a required part of the basic combined financial statements. These schedules are the responsibility of the Trust’s management. Such schedules have been subjected to the auditing procedures applied in our audits of the basic combined financial statements and, in our opinion, are fairly stated in all material respects when considered in relation to the basic combined financial statements taken as a whole.

June 12, 2006

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PRGF-HIPC Trust and Related AccountsCombined balance sheets

as at April 30, 2006, and 2005(In thousands of SDRs)

2006 2005

AssetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346,630 503,226Investments (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897,128 705,406Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,759 2,272_________ _________

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250,517 1,210,904_________ _________ _________ _________

Liabilities and resourcesBorrowings (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609,723 610,324Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,241 1,277_________ _________

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610,964 611,601_________ _________ Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 639,553 599,303_________ _________

Total liabilities and resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250,517 1,210,904_________ _________ _________ _________

The accompanying notes are an integral part of these financial statements.

/s/ Michael G. Kuhn /s/ Rodrigo de Rato Director, Finance Department Managing Director

PRGF-HIPC Trust and Related AccountsCombined statements of income and changes in resources

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

2006 2005

Balance, beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599,303 546,700________ ________ Investment income (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,345 22,408Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,775) (2,053)Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (209) (254)________ ________

Operational income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,361 20,101

ContributionsBilateral contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,479 24,456Special Disbursement Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 593,000 164,097

Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (590,590) (156,051)________ ________ Net income/changes in resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,250 52,603________ ________

Balance, end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 639,553 599,303________ ________ ________ ________

The accompanying notes are an integral part of these financial statements.

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PRGF-HIPC Trust and Related AccountsCombined statements of cash flows

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

2006 2005

Cash flows from operating activitiesNet income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,250 52,603Adjustments to reconcile net income to cash generated by operations

Change in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,487) (961)Change in interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36) (42)Foreign currency translation: Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601 (9,406)

Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (601) 9,406 ________ ________Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,727 51,600 ________ ________

Cash flows from investment activitiesNet acquisition of investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (192,323) (126,987) ________ ________

Net cash used in investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (192,323) (126,987) ________ ________Cash flows from financing activitiesBorrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 3,000Repayment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (15,000) ________ ________

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (12,000) ________ ________Cash and cash equivalents, beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503,226 590,613 ________ ________Cash and cash equivalents, end of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346,630 503,226 ________ ________ ________ ________

The accompanying notes are an integral part of these financial statements.

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PRGF-HIPC Trust and Related AccountsNotes to the combined financial statements

as at April 30, 2006, and 2005

1. Nature of operations

The Trust for Special PRGF Operations for the Heavily Indebted Poor Countries and for Interim PRGF Subsidy Operations (the PRGF-HIPC Trust, or the Trust) and Related Accounts comprise the PRGF-HIPC Trust Account, the Umbrella Account for HIPC Operations, and the Post-SCA-2 Administered Account. The IMF is the Trustee of the Trust and the related accounts. The PRGF-HIPC Trust Account comprises three subaccounts: the PRGF-HIPC, PRGF, and HIPC sub-accounts. Combining balance sheets and income statements and changes in resources for each of these accounts are provided in Note 10. Transactions between the above accounts are eliminated on combination in the combined balance sheets and combined income statements and changes in resources.

PRGF-HIPC Trust

The PRGF-HIPC Trust was established on February 4, 1997, to provide bal-ance of payments assistance to low-income developing members by making grants or loans to eligible members for the purpose of reducing their external debt burden and for interim PRGF subsidy purposes. The resources of the PRGF-HIPC Trust are held separately from the assets of all other accounts of, or administered by, the IMF and may not be used to discharge liabilities or to meet losses incurred in the administration of other accounts.

The operations of the PRGF-HIPC Trust are conducted through the PRGF-HIPC Trust Account and the Umbrella Account for HIPC Operations.

PRGF-HIPC Trust Account and related accounts

The resources of the PRGF-HIPC Trust Account consist of grant contributions, borrowings, and other types of investments made by contributors; amounts transferred by the IMF from the Special Disbursement Account (SDA) and the General Resources Account; and net earnings from investment of resources held in the PRGF-HIPC Trust Account.

The PRGF-HIPC subaccount holds resources that can finance either HIPC operations or interim PRGF subsidy operations; the PRGF subaccount holds resources earmarked for interim PRGF subsidy operations, while the HIPC subaccount holds resources earmarked for HIPC operations. PRGF-HIPC subaccount resources used to finance HIPC operations through the HIPC subaccount gave rise to interest-bearing balances between the two subac-counts, which were eliminated following the MDRI-related transfers (Note 7). The investment earnings in the SDA were transferred to the HIPC subaccount on an as-needed basis.

The resources held in the PRGF-HIPC Trust Account are to be used by the Trustee to make grants or loans to eligible members that qualify for assis-tance under the HIPC Initiative and for subsidizing the interest rate on interim PRGF operations to PRGF-eligible members.

Umbrella Account for HIPC Operations

The Umbrella Account for HIPC Operations (the Umbrella Account) receives and administers the proceeds of grants or loans made to eligible members that qualify for assistance under the terms of the PRGF-HIPC Trust. Within

the Umbrella Account, resources received are administered through the establishment of subaccounts for each eligible member upon the approval of disbursements under the PRGF-HIPC Trust.

The resources of a subaccount of the Umbrella Account consist of (1) amounts disbursed from the PRGF-HIPC Trust Account as grants or loans for the benefit of a member, and (2) net earnings from investment of the resources held in the subaccount.

The resources held in a subaccount of the Umbrella Account are to be used to repay the member’s existing debt to the IMF, or accounts administered by it, in accordance with the schedule for using the proceeds of the Trust grants or loans agreed by the Trustee and the member.

Post-SCA-2 Administered Account

The Post-SCA-2 Administered Account, which is administered by the IMF on behalf of members, was established on December 8, 1999, for the tempo-rary administration of resources transferred by members following the ter-mination of the second Special Contingent Account (SCA-2) in the General Department of the IMF, prior to the final disposition of those resources.

Resources received from a member’s cumulative SCA-2 contributions, together with the member’s pro rata share of investment returns, shall be transferred to the PRGF-HIPC Trust or to the member, in accordance with the member’s instructions. The assets held in the Post-SCA-2 Administered Account are held separately from the assets and property of all other accounts of, or administered by, the IMF and may not be used to discharge liabilities or to meet losses incurred in the administration of other accounts.

2. Summary of significant accounting policies

Basis of accounting

The financial statements of the PRGF-HIPC Trust and Related Accounts are prepared in accordance with International Financial Reporting Standards (IFRS). Specific accounting principles and disclosure practices are explained further below.

Use of estimates

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could dif-fer from those estimates.

Unit of account

The financial statements are expressed in terms of SDRs. The value of the SDR is determined by the IMF each day by summing the values in U.S. dol-lars, based on market exchange rates, of the currencies in the SDR valuation

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basket. The IMF reviews the SDR valuation basket every five years. The latest review was completed in November 2005 and the new composition of the SDR valuation basket became effective on January 1, 2006. The currencies in the basket as of April 30, 2006, and 2005 and their amounts were as follows:

Currency Amount

2006 2005_______________________Euro 0.4100 0.4260Japanese yen 18.4000 21.0000Pound sterling 0.0903 0.0984U.S. dollar 0.6320 0.5770

As of April 30, 2006, one SDR was equal to 1.47106 U.S. dollars (one SDR was equal to 1.51678 U.S. dollars as of April 30, 2005).

Foreign currency translation

Foreign currency transactions are recorded at the rate of exchange on the date of the transaction. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are reported using the closing exchange rates. Exchange differences arising from the settlement of transac-tions at rates different from those at the originating date of the transaction and unrealized foreign exchange differences on unsettled foreign currency monetary assets and liabilities are included in the determination of net income.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Investments

Investments are made in fixed-term deposits; domestic government bonds of the euro area, Japan, the United Kingdom, and the United States; and obligations of multilateral organizations. For deposits, the Trust may invest only in obligations issued by institutions with a credit rating of A and above. For other investments, the Trust may invest only in obligations issued by an agency of a government and a multilateral organization with a minimum credit rating of AA.

Investments in debt securities, classified as securities at fair-value-through-profit-and-loss, are measured initially at cost. Subsequent to initial recogni-tion, all fair-value-through-profit-and-loss assets are remeasured to fair value based on the quoted market price at the balance sheet date. Gains and losses arising from a change in the fair value are recognized in the statement of income.

Investment income comprises interest income and realized and unrealized gains and losses on investments, including currency valuation differences arising from exchange rate movements against the SDR.

Contributions

Bilateral contributions are reflected as increases in resources and are sub-ject to bilateral agreements stipulating how the resources are to be used.

Transfers

Internal transfers of resources within the Trust are accounted for under the accrual method of accounting.

Administrative costs

The expenses of conducting activities of the Trust and related accounts were paid for by the General Resources Account of the IMF.

Comparatives

When necessary, comparative figures have been reclassified to conform with changes in the presentation of the current year.

Accounting and reporting developments

In December 2003, the International Accounting Standards Board revised International Accounting Standard 39, “Financial Instruments: Recognition and Measurement,” which became effective for financial year 2006. Upon adoption of the revised standard, and as permitted by the transition provi-sions, investments previously classified as available-for-sale were reclassified as securities at fair-value-through-profit-and-loss. After the reclassification, changes in the fair value of the investments continued to be recognized in the income statement.

3. Financial risk management

In providing financial assistance to eligible country members and conducting its operations, the Trust is exposed to various types of risks, including interest rate and exchange rate risks.

Interest rate risk is the risk that future cash flows will fluctuate because of changes in market interest rates. Interest rate risk on the Trust’s investments is managed by limiting the investment portfolio to a weighted-average effec-tive duration that does not exceed three years.

Exchange rate risk is the exposure to the effects of fluctuations in the prevail-ing foreign currency exchange rates on the Trust’s financial position and cash flows. Exchange rate risk on the Trust’s investments is managed by investing in securities denominated in SDRs or in the constituent currencies, with the same composition, of the SDR valuation basket.

4. Investments

Investments consisted of the following at April 30:

2006 2005

(In thousands of SDRs)

Fixed-term deposits 897,128 414,213Debt securities — 291,193_______ _______

Total 897,128 705,406_______ ______________ _______

The maturities of the investments are as follows at April 30:

2006 2005

(In thousands of SDRs)

Less than 1 year 897,128 687,8391–3 years — 17,567_______ _______

Total 897,128 705,406_______ ______________ _______

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5. Borrowings

The Trust borrows on such terms and conditions as agreed between the Trust and the lenders. Interest rates on borrowings at April 30, 2006, and 2005 varied between 0 percent and 2 percent a year. The principal amounts of the borrowings are repayable in one installment at their maturity dates. Sched-uled repayments of borrowings are summarized below:

Financial year ending April 30

(In thousands of SDRs)

2007 3102008 20,0662009 25,0002010 276,8162011 70,8422012 and beyond 216,689_______

Total 609,723______________

There were no borrowings, net of the effect of foreign currency fluctuations, or repayments during the financial year ended April 30, 2006 (borrowings and repayments for the financial year ended April 30, 2005, amounted to SDR 3 million and SDR 15 million, respectively).

6. Investment income

Investment income comprised the following for the financial years ended April 30:

2006 2005

(In thousands of SDRs)

Interest income 33,489 27,873Realized losses, net (15,865) (3,418)Unrealized gains/(losses), net 14,720 (2,087)Exchange rate gains, net 1 40______ ______

Total 32,345 22,408______ ____________ ______

7. Transfers receivable and payable

The HIPC subaccount had been accumulating a negative balance to the PRGF-HIPC subaccount arising from past disbursements to the Umbrella Account under the HIPC Initiative. Following the implementation of the MDRI during the financial year ended April 30, 2006, the resources of the SDA were no longer available to finance operations in the HIPC subaccount. Consequently, the inter-subaccount balance of SDR 1,182 million, including accrued interest, was eliminated.

8. Related-party transactions

The expenses of conducting the business of the Trust were paid by the Gen-eral Resources Account of the IMF.

Cumulative transfers from the SDA of the IMF to the PRGF-HIPC Trust amounted to SDR 1,167 million as of April 30, 2006 (SDR 573 million as of April 30, 2005). The PRGF-HIPC Trust also receives contributions from member countries that had placed deposits in the Poverty Reduction and Growth Facility Administered Accounts. Net investment income transferred from the Poverty Reduction and Growth Facility Administered Account to the PRGF-HIPC Trust amounted to SDR 0.5 million for financial year 2006 (SDR 0.3 million for financial year 2005).

9. Multilateral Debt Relief Initiative

Effective January 5, 2006, the IMF adopted the Multilateral Debt Relief Initia-tive (MDRI) to provide debt relief to Heavily Indebted Poor Countries (HIPC) and non-HIPC members with an annual per capita income of $380 or less and to HIPCs with an annual per capita income of more than $380, and for this purpose established the MDRI-I and MDRI-II Trusts, respectively. Grant assistance from the MDRI Trusts (together with assistance under the HIPC Initiative) provides debt relief to cover the full stock of debt owed to the IMF (including the PRGF-ESF Trust) as of December 31, 2004, that remains out-standing at the time the member qualifies for such relief.

During the financial year ended April 30, 2006, debt relief under the MDRI was provided to 18 members that had already reached the completion point under the enhanced HIPC Initiative and two non-HIPCs (for a total amount of SDR 2,503 million, of which SDR 90 million for debt owed to the GRA and SDR 2,413 million for debt owed to PRGF-ESF Trust). Since the stock of debt owed to the IMF as of December 31, 2004, decreases over time, the actual debt eligible for MDRI assistance for the remaining potentially eligible members depends on the timing of their completion points. The IMF periodi-cally reviews the qualification of members for MDRI debt relief as progress by these members toward reaching the completion point under the HIPC Initia-tive is being made.

10. Combining balance sheets and statements of income and changes in resources

The balance sheets and statements of income and changes in resources for the accounts and subaccounts in the PRGF-HIPC Trust and Related Accounts are presented below.

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4

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4

Note 10

PRGF-HIPC Trust and Related AccountsCombining balance sheets

as at April 30, 2006, and 2005(In thousands of SDRs)

2006 2005_______________________________________________________________________________________ ____________________________________________________ Umbrella Umbrella PRGF-HIPC Trust Account Account Post-SCA-2 PRGF-HIPC Account Post-SCA-2 Subaccount for HIPC Administered Combined Trust for HIPC Administered Combined_____________________________________________

PRGF-HIPC PRGF HIPC Combined Operations Account total Account Operations Account total

AssetsCash and cash equivalents 158,734 16,004 124,050 298,788 5,527 42,315 346,630 123,564 338,460 41,202 503,226Investments 496,977 15,151 385,000 897,128 — — 897,128 555,406 150,000 — 705,406Interest receivable 2,375 — 4,031 6,406 — 353 6,759 529 1,501 242 2,272 _______ ______ _______ _________ _____ ______ _________ _______ _______ ______ _________

Total assets 658,086 31,155 513,081 1,202,322 5,527 42,668 1,250,517 679,499 489,961 41,444 1,210,904 _______ ______ _______ _________ _____ ______ _________ _______ _______ ______ _________ _______ ______ _______ _________ _____ ______ _________ _______ _______ ______ _________

Liabilities and resourcesBorrowings 609,723 — — 609,723 — — 609,723 610,324 — — 610,324Interest payable 1,241 — — 1,241 — — 1,241 1,277 — — 1,277 _______ ______ _______ _________ _____ ______ _________ _______ _______ ______ _________

Total liabilities 610,964 — — 610,964 — — 610,964 611,601 — — 611,601 _______ ______ _______ _________ _____ ______ _________ _______ _______ ______ _________ Accumulated resources 47,122 31,155 513,081 591,358 5,527 42,668 639,553 67,898 489,961 41,444 599,303 _______ ______ _______ _________ _____ ______ _________ _______ _______ ______ _________

Total liabilities and resources 658,086 31,155 513,081 1,202,322 5,527 42,668 1,250,517 679,499 489,961 41,444 1,210,904 _______ ______ _______ _________ _____ ______ _________ _______ _______ ______ _________ _______ ______ _______ _________ _____ ______ _________ _______ _______ ______ _________

Financial statements

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Financial statements

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Note 10 (concluded)

PRGF-HIPC Trust and Related AccountsCombining statements of income and changes in resources

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

2006 2005_____________________________________________________________________________________ _________________________________________________ Umbrella Umbrella PRGF-HIPC Trust Account Account Post-SCA-2 PRGF-HIPC Account Post-SCA-2 Subaccount for HIPC Administered Combined Trust for HIPC Administered Combined_________________________________

PRGF-HIPC PRGF HIPC Combined Operations Account total Account Operations Account total

Balance, beginning of the year 1,357,658 26,540 (1,316,300) 67,898 489,961 41,444 599,303 152,623 353,487 40,590 546,700__________ _______ __________ ________ ________ _______ ________ ________ ________ _______ ________ Investment income 33,647 842 5,498 23,4161 7,705 1,224 32,345 14,264 7,290 854 22,408Interest expense (1,775) — (16,571) (1,775)1 — — (1,775) (2,053) — — (2,053)Other expenses (196) (13) — (209) — — (209) (254) — — (254)__________ _______ __________ ________ ________ _______ ________ ________ ________ _______ ________

Operational income/(loss) 31,676 829 (11,073) 21,432 7,705 1,224 30,361 11,957 7,290 854 20,101

ContributionsBilateral contributions 3,693 3,786 — 7,479 — — 7,479 24,456 — — 24,456Special Disbursement Account (164,097) — 757,097 593,000 — — 593,000 164,097 — — 164,097

Grants — — (98,451) (98,451) 98,451 — — (285,235) 285,235 — — Disbursements — — — — (590,590) — (590,590) — (156,051) — (156,051)Reversal of subaccount transfers (Note 7) (1,181,808) — 1,181,808 — — — — — — — — __________ _______ __________ ________ ________ _______ ________ ________ ________ _______ ________

Net (losses) income/changes in resources (1,310,536) 4,615 1,829,381 523,460 (484,434) 1,224 40,250 (84,725) 136,474 854 52,603__________ _______ __________ ________ ________ _______ ________ ________ ________ _______ ________ Balance, end of the year 47,122 31,155 513,081 591,358 5,527 42,668 639,553 67,898 489,961 41,444 599,303__________ _______ __________ ________ ________ _______ ________ ________ ________ _______ ________ __________ _______ __________ ________ ________ _______ ________ ________ ________ _______ ________

1Interest payable between subaccounts amounting to SDR 16.6 million (SDR 19.1 million at April 30, 2005) has been eliminated in the combined totals.

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Schedule 1

Post-SCA-2 Administered AccountHoldings, interest, and transfers for the year ended April 30, 2006

(In thousands of SDRs)

Balance Transfers to BalanceMember beginning of year Interest earned PRGF-HIPC Trust end of year

Argentina 5,630 166 — 5,796Dominican Republic 1,042 31 — 1,073Jordan 1,183 35 — 1,218Trinidad and Tobago 2,542 75 — 2,617Vanuatu 50 1 — 51Venezuela 30,997 916 — 31,913______ _____ ___ ______ 41,444 1,224 — 42,668______ _____ ___ ____________ _____ ___ ______

Schedule 2

PRGF-HIPC Trust AccountContributions and transfers

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

Subaccount____________________________________________________________PRGF-HIPC PRGF HIPC Combined

Period ended April 30, 2005Belgium 3,731 — — 3,731Belize 20 — — 20Mexico 8,119 — — 8,119Netherlands — 3,790 — 3,790Norway 1,089 — — 1,089

Indonesia 251 — — 251Poland 258 — — 258South Africa 4,000 — — 4,000St. Vincent and the Grenadines 11 — — 11Switzerland 3,187 — — 3,187________ _____ _______ _______ 20,666 3,790 — 24,456Contributions from SDA 164,097 — — 164,097________ _____ _______ _______ 184,763 3,790 — 188,553________ _____ _______ _______ ________ _____ _______ _______

Period ended April 30, 2006Belize 20 — — 20Indonesia 458 — — 458Netherlands — 3,786 — 3,786St. Vincent and the Grenadines 11 — — 11Switzerland 3,204 — — 3,204________ _____ _______ _______ 3,693 3,786 — 7,479Contributions from SDA (164,097) — 757,097 593,000________ _____ _______ _______ (160,404) 3,786 757,097 600,479________ _____ _______ _______ ________ _____ _______ _______

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Schedule 3

Umbrella Account for HIPC OperationsGrants, interest, disbursements, and changes in resources

for the years ended April 30, 2006, and 2005(In thousands of SDRs)

Grants from Opening PRGF-HIPC Interest EndingMember balance Trust Account earned Disbursements balance

Period ended April 30, 2005Benin 5,256 — 75 2,885 2,446Bolivia 23,647 — 362 11,294 12,715Burkina Faso 10,883 11,595 229 10,485 12,222Cameroon 1,989 — 18 1,984 23Chad 492 1,375 5 808 1,064

Congo, Democratic Republic of the 573 1,131 16 1,138 582Ethiopia 17,252 19,364 359 3,603 33,372Gambia, The 1 — — 1 — Ghana 181 69,239 900 13,866 56,454Guinea 28 — 1 1 28

Guinea-Bissau 5 — — — 5Guyana 25,809 17 434 8,744 17,516Honduras 4,341 13,860 68 6,899 11,370Madagascar 628 10,804 86 2,115 9,403Malawi 1,828 — 10 1,810 28

Mali 25,385 — 429 9,133 16,681Mauritania 10,155 — 163 3,827 6,491Mozambique 39,026 — 678 9,313 30,391Nicaragua 67,200 — 1,202 13,883 54,519Niger 15,343 12,205 297 6,118 21,727

Rwanda 80 23,843 82 3,918 20,087Senegal 19,528 4,602 301 13,181 11,250Sierra Leone 5,369 — 51 5,357 63Tanzania 40,642 — 678 9,879 31,441Uganda 36,369 — 543 15,183 21,729

Zambia 1,477 117,200 303 626 118,354_______ _______ ______ _______ _______ 353,487 285,235 7,290 156,051 489,961_______ _______ ______ _______ _______ _______ _______ ______ _______ _______

Period ended April 30, 2006Benin 2,446 — 33 2,479 —Bolivia 12,715 — 165 12,880 —Burkina Faso 12,222 — 159 12,381 —Burundi — 87 1 42 46Cameroon 23 28,118 76 28,217 —

Chad 1,064 — 12 1,063 13Congo, Democratic Republic of the 582 1,132 20 1,141 593Ethiopia 33,372 366 637 34,375 —Gambia, The — — 1 — 1Ghana 56,454 — 1,002 57,456 —

Guinea 28 — — 1 27Guinea-Bissau 5 — — — 5Guyana 17,516 — 276 17,792 —Honduras 11,370 3,697 197 15,264 —Madagascar 9,403 — 177 9,580 —

Malawi 28 4,628 66 3,327 1,395Mali 16,681 — 256 16,937 —Mauritania 6,491 — 140 3,222 3,409Mozambique 30,391 — 475 30,866 —Nicaragua 54,519 — 918 55,437 —

Niger 21,727 198 370 22,295 —Rwanda 20,087 16,752 494 37,333 —Senegal 11,250 — 153 11,403 —Sierra Leone 63 4,000 30 4,055 38Tanzania 31,441 — 507 31,948 —

Uganda 21,729 — 273 22,002 —Zambia 118,354 39,473 1,267 159,094 —_______ _______ ______ _______ _______ 489,961 98,451 7,705 590,590 5,527_______ _______ ______ _______ _______ _______ _______ ______ _______ _______

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Schedule 4

PRGF-HIPC Trust AccountCumulative contributions and transfers

as at April 30, 2006(In thousands of SDRs)

Subaccount_________________________________________________________________Member PRGF-HIPC PRGF HIPC Combined

Algeria 412 — — 412Australia — — 17,019 17,019Austria — — 9,981 9,981Bangladesh 1,163 — — 1,163Barbados 250 — — 250

Belgium 25,930 — — 25,930Belize 160 — — 160Brazil 11,033 — — 11,033Brunei Darussalam 4 — — 4Cambodia 27 — — 27

Canada 32,929 — — 32,929China 13,132 — — 13,132Colombia 13 — — 13Croatia 31 — — 31Cyprus 544 — — 544

Denmark 13,068 — — 13,068Egypt 37 — — 37Estonia 372 — — 372Fiji 21 — — 21Finland 2,583 — — 2,583

France 55,892 — — 55,892Gabon 458 — — 458Greece 2,200 — — 2,200Iceland 643 — — 643India 390 — — 390

Indonesia 833 — — 833Ireland 3,937 — — 3,937Israel 1,189 — — 1,189Italy 43,309 — — 43,309Jamaica 1,800 — — 1,800

Japan 98,355 — — 98,355Korea 10,625 — — 10,625Kuwait 108 — — 108Latvia 710 — — 710Luxembourg 488 — — 488

Malaysia 478 — — 478Malta 706 — — 706Mauritius 40 — — 40Mexico 39,977 — — 39,977Morocco 49 — — 49

Netherlands — 27,595 16,347 43,942New Zealand 1,158 — — 1,158Nigeria 6,150 — — 6,150Norway 12,942 — — 12,942Oman 73 — — 73

Pakistan 105 — — 105Philippines 4,500 — — 4,500Poland 5,000 — — 5,000Portugal 4,430 — — 4,430Russian Federation 10,200 — — 10,200

Samoa 3 — — 3San Marino 32 — — 32Saudi Arabia 978 — — 978Singapore 249 — — 249Slovak Republic 2,669 — — 2,669

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Slovenia 311 — — 311South Africa 20,895 — — 20,895Spain 16,550 — — 16,550Sri Lanka 12 — — 12St. Vincent and the Grenadines 66 — — 66

Swaziland 20 — — 20Sweden 5,322 — — 5,322Switzerland 19,219 — — 19,219Thailand 350 — — 350Tonga 3 — — 3

Tunisia 136 — — 136United Arab Emirates 353 — — 353United Kingdom 23,551 — 33,837 57,388United States — — 221,932 221,932Vietnam 10 — — 10_______ ______ _________ _________ 499,183 27,595 299,116 825,894_______ ______ _________ _________ Contributions from SDA 409,697 — 757,097 1,166,794Contributions from GRA 72,456 — — 72,456_______ ______ _________ _________ 482,153 — 757,097 1,239,250_______ ______ _________ _________ 981,336 27,595 1,056,213 2,065,144_______ ______ _________ _________ _______ ______ _________ _________

Schedule 4 (concluded)

PRGF-HIPC Trust AccountCumulative contributions and transfers

as at April 30, 2006(In thousands of SDRs)

Subaccount_________________________________________________________________Member PRGF-HIPC PRGF HIPC Combined

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Deloitte & Touche LLPSuite 500555 12th Street, NWWashington, DC 20004-1207USATel: +1 202 879 5600Fax: +1 202 879 5309www.deloitte.com

Member ofDeloitte Touche Tohmatsu

Independent Auditors’ Report

To the Board of Governorsof the International Monetary FundWashington, DC

We have audited the accompanying balance sheet of the Multilateral Debt Relief Initiative-II Trust (the “Trust”) as of April 30, 2006, and the related statements of income and changes in resources and of cash flows for the period from January 5, 2006 (date of inception) to April 30, 2006. These financial statements are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such 2006 financial statements present fairly, in all material respects, the financial position of the Multilateral Debt Relief Initiative-II Trust at April 30, 2006, and the results of its operations and its cash flows for the above stated period in conformity with International Financial Reporting Standards.

June 12, 2006

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Multilateral Debt Relief Initiative-II TrustBalance sheet

as at April 30, 2006(In thousands of SDRs)

AssetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,941Investments (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305_______

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,246_______ _______

Liabilities and resourcesAccrued MDRI grant assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,246_______

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,246_______ Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — _______

Total liabilities and resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,246_______ _______

The accompanying notes are an integral part of these financial statements.

/s/ Michael G. Kuhn /s/ Rodrigo de Rato Director, Finance Department Managing Director

Multilateral Debt Relief Initiative-II TrustStatement of income and changes in resources from inception to April 30, 2006

(In thousands of SDRs)

Investment income (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,153_________ Operational income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,153

Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,120,000MDRI grant assistance (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,122,153)_________

Net income/changes in resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — _________ Balance, end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — _________ _________

The accompanying notes are an integral part of these financial statements.

Multilateral Debt Relief Initiative-II TrustStatement of cash flows

from inception to April 30, 2006(In thousands of SDRs)

Cash flows from operating activitiesNet income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Adjustments to reconcile net income to cash generated by operations

Change in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (305)Change in accrued MDRI grant assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,246_______Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,941 _______

Cash flows from investment activitiesNet acquisition of investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,000)_______

Net cash used in investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,000)_______

Cash flows from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — _______Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — _______

Cash and cash equivalents, end of the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,941______________

The accompanying notes are an integral part of these financial statements.

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Multilateral Debt Relief Initiative-II TrustNotes to the financial statements as at April 30, 2006

1. Nature of operations

Effective January 5, 2006, the IMF adopted the Multilateral Debt Relief Ini-tiative (MDRI) to provide full debt relief to qualifying low-income countries. For this purpose, the IMF established the Multilateral Debt Relief Initiative-I (MDRI-I) Trust and the Multilateral Debt Relief Initiative-II (MDRI-II) Trust. The IMF acts as Trustee for both trusts.

Under the MDRI, the IMF provides debt relief to HIPC and non-HIPC members with annual per capita income of $380 or less and to HIPCs with annual per capita income of more than $380. Qualifying members at or below the per capita income threshold receive grant assistance from the MDRI-I Trust, which was initially funded by resources transferred from the Special Disbursement Account (SDR 1.5 billion). Grant assistance to the remaining HIPC members with per capita income above the threshold is provided from the MDRI-II Trust by resources contributed by individual members. The initial contributions to the MDRI-II Trust were received through the transfer of a portion of members’ contributions to the PRGF-ESF Trust Subsidy Account (SDR 1.12 billion). Grant assistance from the MDRI Trusts (together with assistance under the HIPC Initiative) provides debt relief to cover the full stock of debt owed to the IMF (including the PRGF-ESF Trust) as of December 31, 2004, that remains outstanding at the time the member qualifies for such relief.

2. Summary of significant accounting policies

Basis of accounting

The financial statements of the MDRI-II Trust (the Trust) are prepared in accordance with International Financial Reporting Standards (IFRS). Specific accounting principles and disclosure practices are explained further below.

Use of estimates

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Unit of account

The financial statements are expressed in terms of SDRs. The value of the SDR is determined by the IMF each day by summing the values in U.S. dol-lars, based on market exchange rates, of the currencies in the SDR valuation basket. The IMF reviews the SDR valuation basket every five years. The latest review was completed in November 2005, and the new composition of the SDR valuation basket became effective on January 1, 2006. The currencies in the basket as of April 30, 2006, were as follows:

Currency Amount

Euro 0.4100Japanese yen 18.4000Pound sterling 0.0903U.S. dollar 0.6320

As of January 5, 2006, and April 30, 2006, one SDR was equal to 1.44408 and 1.47106 U.S. dollars, respectively.

Foreign currency translation

Foreign currency transactions are recorded at the rate of exchange on the date of the transaction. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are reported using the closing exchange rates. Exchange differences arising from the settlement of transac-tions at rates different from those at the originating date of the transaction and unrealized foreign exchange differences on unsettled foreign currency monetary assets and liabilities are included in the determination of net income.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Investments

Investments are made in fixed-term deposits. For these deposits, the Trust may invest only in obligations issued by institutions with a credit rating of A and above. The Trust may invest only in obligations issued by an agency of a government and a multilateral organization with a minimum credit rating of AA.

Investment income comprises interest income and currency valuation differ-ences arising from exchange rate movements against the SDR.

Contributions

Contributions are reflected as increases in resources and are subject to bilat-eral agreements stipulating how the resources are to be used.

MDRI grant assistance

During the financial year ended April 30, 2006, the IMF provided debt relief under the MDRI to 18 members that had already reached the completion point under the enhanced HIPC Initiative and two non-HIPCs (for a total amount of SDR 2,503 million, of which SDR 1,053 million was provided by the MDRI-II Trust).

MDRI grant assistance to the remaining eligible members is subject to the availability of resources and is accrued when it is probable that a liability has been incurred and the amount of such grant assistance can be reason-

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ably estimated. The amount of liability recorded (SDR 69 million) is based on the evaluation of currently available facts with respect to each individual eligible member and includes factors such as progress made toward reach-ing the completion point under the HIPC Initiative, and the capacity to meet the macroeconomic performance and other objective criteria after reaching the completion point. As the qualification of members for MDRI debt relief is assessed, the amounts recorded are reviewed periodically and adjusted to reflect additional information that becomes available.

Administrative costs

The expenses of conducting the business of the MDRI-II Trust were paid by the General Resources Account.

3. Financial risk management

In providing grant assistance to eligible country members and conducting its operations, the Trust is exposed to various types of risks, including exchange rate and liquidity risks.

Exchange rate risk is the exposure to the effects of fluctuations in the prevail-ing foreign currency exchange rates on the Trust’s financial position and cash flows. Exchange rate risk on the Trust’s investments is managed by investing in securities denominated in SDRs or in the constituent currencies, with the same composition, of the SDR valuation basket.

Liquidity risk is the risk of non-availability of resources to meet the Trust’s obligations. The Trust conducts periodic reviews to determine the adequacy of the resources accumulated to meet liquidity needs.

4. Investments and investment income

Investments at April 30, 2006, consisted of fixed-term deposits maturing in one year or less, and investment income comprised interest income (SDR 2.19 million) and exchange rate losses (SDR 0.04 million).

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Deloitte & Touche LLPSuite 500555 12th Street, NWWashington, DC 20004-1207USATel: +1 202 879 5600Fax: +1 202 879 5309www.deloitte.com

Member ofDeloitte Touche Tohmatsu

Independent Auditors’ Report

To the Board of Governorsof the International Monetary FundWashington, DC

We have audited the accompanying balance sheets as of April 30, 2006, and 2005, and the related statements of income and changes in resources and of cash flows for the years then ended of the following entities:

Other Administered Accounts (the “Accounts”)

Administered Account JapanAdministered Account for Selected Fund Activities—JapanFramework Administered Account for Technical Assistance ActivitiesSupplementary Financing Facility Subsidy AccountThe Post-Conflict and Natural Disaster Emergency Assistance Subsidy Account

We have also audited the accompanying balance sheets of Administered Account—Spain as of April 28, 2006, and April 30, 2005, and the related statements of income and changes in resources and of cash flows for the years then ended.

These financial statements are the responsibility of the Accounts’ management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with International Standards on Auditing and auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Accounts’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Other Administered Accounts at April 30, 2006, and 2005, and the results of their operations and their cash flows for the years then ended in conformity with International Financial Reporting Standards.

June 12, 2006

•••••

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Financial statements

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Other Administered AccountsBalance sheets

as at April 30, 2006, and 2005

Administered Framework The Post-Conflict and Account for Administered Account Supplementary Natural Disaster Administered Selected Fund for Technical Administered Financing Facility Emergency Assistance Account Japan Activities—Japan Assistance Activities Account—Spain Subsidy Account Subsidy Account_____________________ _____________________ _____________________ ___________________ ____________________ ___________________

2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005

—————–––————————————————————— (In thousands of U.S. dollars) ————————————–———————––——————— —–––––––––— (In thousands of SDRs) ——––––––——

AssetsCash and cash equivalents 127,127 122,402 24,266 21,691 29,642 23,948 — — 2,345 2,283 12,547 18,684Investments — — — — — — — — — — 12,000 — Interest/other receivables — — — — — — — 40 19 13 56 — _______ _______ ______ ______ ______ ______ ___ ___ _____ _____ ______ ______

Total assets 127,127 122,402 24,266 21,691 29,642 23,948 — 40 2,364 2,296 24,603 18,684_______ _______ ______ ______ ______ ______ ___ ___ _____ _____ ______ ______ _______ _______ ______ ______ ______ ______ ___ ___ _____ _____ ______ ______

LiabilitiesOther liabilities — — — — — — — 40 — — — — _______ _______ ______ ______ ______ ______ ___ ___ _____ _____ ______ ______

Total liabilities — — — — — — — 40 — — — — _______ _______ ______ ______ ______ ______ ___ ___ _____ _____ ______ ______ _______ _______ ______ ______ ______ ______ ___ ___ _____ _____ ______ ______

ResourcesTotal resources 127,127 122,402 24,266 21,691 29,642 23,948 — — 2,364 2,296 24,603 18,684_______ _______ ______ ______ ______ ______ ___ ___ _____ _____ ______ ______ _______ _______ ______ ______ ______ ______ ___ ___ _____ _____ ______ ______

The accompanying notes are an integral part of these financial statements.

/s/ Michael G. Kuhn /s/ Rodrigo de Rato Director, Finance Department Managing Director

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6

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6

Other Administered AccountsStatements of income and changes in resources

for the years ended April 30, 2006, and 2005

Administered Framework The Post-Conflict and Account for Administered Account Supplementary Natural Disaster Administered Selected Fund for Technical Administered Financing Facility Emergency Assistance Account Japan Activities—Japan Assistance Activities Account—Spain Subsidy Account Subsidy Account____________________ ____________________ _____________________ __________________ ____________________ ___________________

2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005

—————–––—————————————————— (In thousands of U.S. dollars) —————————–———————––——————— —–––––––––— (In thousands of SDRs) ——–––––——

Balance, beginning of the year 122,402 120,235 21,691 22,699 23,948 18,912 — — 2,296 2,249 18,684 7,850 ________ ________ _______ _______ _______ _______ _____ _____ _____ _____ _____ _____ Interest and investment income 4,725 2,167 624 562 1,024 438 — — 68 47 615 199Contributions received — — 22,133 20,849 21,634 24,407 — 40 — — 9,877 11,051Payments to and on behalf of beneficiaries — — (20,182) (22,419) (16,964) (19,809) — (40) — — (4,573) (416) ________ ________ _______ _______ _______ _______ _____ _____ _____ _____ _____ _____ Operational income/(loss) 4,725 2,167 2,575 (1,008) 5,694 5,036 — — 68 47 5,919 10,834 ________ ________ _______ _______ _______ _______ _____ _____ _____ _____ _____ _____ Net income (loss)/changes in resources 4,725 2,167 2,575 (1,008) 5,694 5,036 — — 68 47 5,919 10,834 ________ ________ _______ _______ _______ _______ _____ _____ _____ _____ _____ _____

Balance, end of the year 127,127 122,402 24,266 21,691 29,642 23,948 — — 2,364 2,296 24,603 18,684 ________ ________ _______ _______ _______ _______ _____ _____ _____ _____ _____ _____ ________ ________ _______ _______ _______ _______ _____ _____ _____ _____ _____ _____

The accompanying notes are an integral part of these financial statements.

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Financial statements

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Other Administered AccountsStatements of cash flows

for the years ended April 30, 2006, and 2005

Administered Framework The Post-Conflict and Account for Administered Account Supplementary Natural Disaster Administered Selected Fund for Technical Administered Financing Facility Emergency Assistance Account Japan Activities—Japan Assistance Activities Account—Spain Subsidy Account Subsidy Account____________________ ____________________ ____________________ ___________________ ___________________ ____________________

2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005

—————–––——————————————————— (In thousands of U.S. dollars) —————————–———————––——————— —––––––––– (In thousands of SDRs) —–––––——Cash flows from operating activitiesNet income/(loss) 4,725 2,167 2,575 (1,008) 5,694 5,036 — — 68 47 5,919 10,834Adjustments to reconcile net income to cash

generated by operationsChanges in other liabilities — — — — — — — 40 — — — — Changes in interest receivable and other assets — — — — — — — (40) (6) (4) (56) — _______ ________ _______ _______ _______ _______ ______ _____ _____ _____ ______ ______ Net cash provided by/(used in) operating activities 4,725 2,167 2,575 (1,008) 5,694 5,036 — — 62 43 5,863 10,834

Cash flow from investment activities — — — — — — — — — — (12,000) — _______ ________ _______ _______ _______ _______ ______ _____ _____ _____ ______ ______ Net cash provided by/(used in) investment activities — — — — — — — — — — (12,000) —

Cash flow from financing activities — — — — — — — — — — — — Net cash used by financing activities — — — — — — — — — — — —

Cash and cash equivalents, beginning of year 122,402 120,235 21,691 22,699 23,948 18,912 — — 2,283 2,240 18,684 7,850_______ ________ _______ _______ _______ _______ ______ _____ _____ _____ ______ ______ Cash and cash equivalents, end of year 127,127 122,402 24,266 21,691 29,642 23,948 — — 2,345 2,283 12,547 18,684_______ ________ _______ _______ _______ _______ ______ _____ _____ _____ ______ ______ _______ ________ _______ _______ _______ _______ ______ _____ _____ _____ ______ ______

The accompanying notes are an integral part of these financial statements.

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Other Administered AccountsNotes to the financial statements

as at April 30, 2006, and 2005

1. Nature of operations

At the request of members, the IMF has established special purpose accounts to administer contributed resources and to perform financial and technical services consistent with the purposes of the IMF. The IMF is the Trustee of each account. The assets of each account and each subaccount are separate from the assets of all other accounts of, or administered by, the IMF and are not to be used to discharge liabilities or to meet losses incurred in the administration of other accounts.

Administered Account Japan

At the request of Japan, the IMF established an account on March 3, 1989, to administer resources made available by Japan or other countries with Japan’s concurrence that are to be used to assist certain members with over-due obligations to the IMF. The resources of the account are to be disbursed in amounts specified by Japan and to members designated by Japan.

Administered Account for Selected Fund Activities—Japan

At the request of Japan, the IMF established the Administered Technical Assistance Account—Japan on March 19, 1990, to administer resources contributed by Japan to finance technical assistance to member countries. On July 21, 1997, the account was renamed the Administered Account for Selected Fund Activities—Japan and amended to include the administration of resources contributed by Japan in support of the IMF’s Regional Office for Asia and the Pacific (OAP). The resources of the account designated for tech-nical assistance activities are used with the approval of Japan and include the provision of scholarships. The resources designated for the OAP are used as agreed between Japan and the IMF for certain activities of the IMF with respect to Asia and the Pacific through the OAP. Disbursements can also be made from the account to the General Resources Account to reimburse the IMF for qualifying technical assistance projects and OAP expenses.

Framework Administered Account for Technical Assistance Activities

The Framework Administered Account for Technical Assistance Activities (the Framework Account) was established by the IMF on April 3, 1995, to receive and administer contributed resources that are to be used to finance techni-cal assistance consistent with the purposes of the IMF. The financing of technical assistance activities is implemented through the establishment and operation of subaccounts within the Framework Account. Resources are to be used in accordance with the written understandings between the contribu-tor and the Managing Director. Disbursements can also be made from the Framework Account to the General Resources Account to reimburse the IMF for its costs incurred on behalf of technical assistance activities financed by resources from the Framework Account.

As of April 30, 2006, the Framework Account comprised the following subaccounts:

Subaccount for Japan Advanced Scholarship Program

At the request of Japan, this subaccount was established on June 6, 1995, to finance the cost of studies and training of nationals of member countries in macroeconomics and related subjects at selected universities and institu-tions. The scholarship program focuses primarily on the training of nationals of Asian member countries, including Japan.

Rwanda—Macroeconomic Management Capacity Subaccount

At the request of Rwanda, this subaccount was established on December 20, 1995, to finance technical assistance to rehabilitate and strengthen Rwanda’s macroeconomic management capacity.

Australia—IMF Scholarship Program for Asia Subaccount

At the request of Australia, this subaccount was established on June 5, 1996, to finance the cost of studies and training of government and central bank officials in macroeconomic management so as to enable them to con-tribute to their countries’ achievement of sustainable economic growth and development. The program focuses primarily on the training of nationals of Asian countries.

Switzerland Technical Assistance Subaccount

At the request of Switzerland, this subaccount was established on August 27, 1996, to finance the costs of technical assistance activities of the IMF that consist of policy advice and training in macroeconomic management.

French Technical Assistance Subaccount

At the request of France, this subaccount was established on September 30, 1996, to cofinance the costs of training in economic fields for nationals of certain member countries.

Denmark Technical Assistance Subaccount

At the request of Denmark, this subaccount was established on August 25, 1998, to finance the costs of technical assistance activities of the IMF that consist of advising on policy and administrative reforms in the fiscal, mon-etary, and related statistical fields.

Australia Technical Assistance Subaccount

At the request of Australia, this subaccount was established on March 7, 2000, to finance the costs of technical assistance activities of the IMF that consist of advising on the design of policy and administrative reforms in the fiscal, monetary, and related statistical fields, as well as to provide training in the formulation and implementation of macroeconomic and financial policies.

The Netherlands Technical Assistance Subaccount

At the request of the Netherlands, this subaccount was established on July 27, 2000, to finance projects that seek to enhance the capacity of the members to formulate and implement policies in the macroeconomic, fiscal,

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monetary, financial, and related statistical fields, including training programs and projects that strengthen the legal and administrative framework in these core areas.

The United Kingdom Department for International Development (DFID) Technical Assistance Subaccount

At the request of the United Kingdom, this subaccount was established on June 29, 2001, to finance projects that seek to enhance the capacity of the members to formulate and implement policies in the macroeconomic, fiscal, monetary, financial, and related statistical fields, including training programs and projects that strengthen the legal and administrative framework in these core areas.

Italy Technical Assistance Subaccount

At the request of Italy, this subaccount was established on November 16, 2001, to finance projects that seek to enhance the capacity of certain mem-bers to formulate and implement policies related to fiscal, financial, and sta-tistical standards and codes, including training programs and projects that strengthen the legal and administrative framework in these core areas.

Pacific Financial Technical Assistance Centre Subaccount

At the request of Australia and New Zealand, this subaccount was estab-lished on May 22, 2002, to finance activities of the Pacific Financial Techni-cal Assistance Centre that seek to enhance the capacity of Pacific island countries and territories to formulate and implement policies related to macroeconomic, fiscal, monetary, financial, and statistical fields, including training and activities that strengthen the legal and administrative framework in these core areas.

Africa Regional Technical Assistance Centers Subaccount

At the request of France, Germany, Italy, the Netherlands, Norway, Sweden, and the United Kingdom, this subaccount was established on August 9, 2002, to finance activities of the Africa Regional Technical Assistance Centers that seek to support the Poverty Reduction Strategy Paper process in sub-Saharan African countries by fostering the capacity for sound mac-roeconomic management, strong fiscal institutions and financial systems, and timely and accurate collection and dissemination of economic data, including training and activities that strengthen the legal and administra-tive framework in these core areas. The resources of this subaccount are contributed by the above governments and other governments or official agencies, including those of China, Luxembourg, the Russian Federation, and Switzerland, that reached an understanding with the IMF subsequent to the establishment.

Sweden Technical Assistance Subaccount

At the request of Sweden, this subaccount was established on November 25, 2002, to finance projects that seek to enhance the capacity of members to formulate and implement policies in the macroeconomic, fiscal, monetary, financial, and related statistical fields, including training programs and proj-ects that strengthen the legal and administrative framework in these core areas.

China Technical Assistance Subaccount

At the request of the People’s Republic of China, this subaccount was estab-lished on May 23, 2003, to finance projects that seek to enhance the capac-

ity of members to formulate and implement policies in the macroeconomic, fiscal, monetary, financial, and related statistical fields, including training programs and projects that strengthen the legal and administrative frame-work in these core areas.

Technical Assistance Subaccount for Iraq

At the request of Australia, Canada, Italy, and the United Kingdom, this sub-account was established on July 22, 2003, to finance technical assistance activities that seek to enhance the capacity of Iraq to formulate and imple-ment policies in the macroeconomic, fiscal, monetary, financial, and related statistical fields, including training programs and activities that strengthen the legal and administrative framework in these core areas. The resources of this subaccount are contributed by the above governments and the Govern-ment of Sweden, which reached an understanding with the IMF subsequent to the establishment.

Canada Technical Assistance Subaccount

At the request of Canada, this subaccount was established on January 28, 2004, to finance projects that seek to enhance the capacity of members to formulate and implement policies in the macroeconomic, fiscal, monetary, financial, and related statistical fields, including training programs and proj-ects that strengthen the legal and administrative framework in these core areas.

Middle East Regional Technical Assistance Center Subaccount

At the request of France and Lebanon, this subaccount was established on August 20, 2004, to finance the technical assistance activities of the Middle East Regional Technical Assistance Center (METAC). METAC seeks to support the efforts of the participating countries/territories to achieve effective macroeconomic management, strong fiscal institutions and financial systems, and timely and accurate collection and dissemination of economic data, including training and activities that strengthen the legal and administrative framework in these areas. The current METAC’s participating countries/territories include the Islamic Republic of Afghani-stan, Iraq, Jordan, Lebanon, Libya, Sudan, Syria, West Bank and Gaza, and Yemen. The resources of this subaccount are contributed by the above governments and other governments or official agencies, including Egypt and Kuwait, that reached an understanding with the IMF subsequent to the establishment.

Technical Assistance Subaccount to Support Macroeconomic and Financial Policy Formulation and Management

At the request of Norway, this subaccount was established on September 29, 2004, to finance projects that seek to enhance the capacity of members to formulate and implement policies in the macroeconomic, fiscal, monetary, financial, and related statistical fields, including training programs and projects that strengthen the legal and administrative framework in these core areas. The activities to be financed from the subaccount will seek in the first instance to enhance the capacity of Poverty Reduction and Growth Facility–eligible countries to formulate and implement the strategies needed to achieve the goals described in their Poverty Reduction Strategy Papers in those core areas of competence of the Fund, including strengthening their anti-money-laundering and countering the financing of terrorism legislation and implementation capacity, and improving central bank functions and operations in low-income countries.

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Spain Technical Assistance Subaccount

At the request of Spain, this subaccount was established on March 2, 2005, to finance projects that seek to enhance the capacity of members to formu-late and implement policies in the macroeconomic, fiscal, monetary, finan-cial, and related statistical fields, including training programs and projects that strengthen the legal and administrative framework in these core areas.

European Commission Technical Assistance Subaccount for the Middle East Regional Technical Assistance Center

At the request of European Commission, this subaccount was established on June 13, 2005, to finance technical assistance activities of the Middle East Regional Technical Assistance Center.

European Investment Bank Technical Assistance Subaccount

At the request of European Investment Bank, this subaccount was estab-lished on June 29, 2005, to finance projects that seek to enhance the capacity of members to formulate and implement policies in the macro-economic, fiscal, monetary, financial, and related statistical fields, including training programs and projects that strengthen the legal and administrative framework in these core areas.

Administered Account—Spain

At the request of Spain, the IMF established an account on March 20, 2001, to receive and disburse resources up to $1 billion contributed by Spain for Argentina. The resources of this account are to be used to assist Argentina in the implementation of the adjustment program supported by the IMF under the Stand-By Arrangement for Argentina approved on March 10, 2000, and augmented on January 12, 2001. The account was terminated on April 28, 2006, as agreed between Spain and the IMF.

Supplementary Financing Facility Subsidy Account

The Supplementary Financing Facility Subsidy Account administered by the IMF was established in December 1980 to assist low-income develop-ing country members to meet the costs of using resources made available through the IMF’s Supplementary Financing Facility and under the policy on exceptional use. All repurchases due under these policies were scheduled for completion by January 31, 1991, and the final subsidy payments were approved in July 1991. However, two members (Liberia and Sudan), overdue in the payment of charges, remain eligible to receive previously approved subsidy payments of SDR 2.2 million when their overdue charges are settled. Accordingly, the Account remains in operation and has retained amounts for payment to these members after the overdue charges are paid.

The Post-Conflict and Natural Disaster Emergency Assistance Subsidy Account

The Post-Conflict Emergency Assistance Subsidy Account for PRGF-Eligible Members was established in May 2001 to administer contributed resources for the purpose of providing assistance to PRGF-eligible members in support of their adjustment efforts. The account was amended on January 21, 2005, to provide for the subsidization of emergency assistance for natural disasters for PRGF-eligible members. Contributions to this account will be used to provide grants to PRGF-eligible members that have made post-conflict and natural disaster emergency assistance purchases under the IMF General Resources Account, effectively subsidizing the basic rate of charge on these

purchases to 0.5 percent per annum. The subsidy to each eligible member would be prorated if resources are insufficient to reduce the basic rate of charge to 0.5 percent.

Austria-II Administered Account

At the request of the Austrian National Bank, the IMF established this account on April 3, 2006, to provide resources to subsidize charges due by PRGF-eligible countries on purchases under the policy on emergency assistance for natural disasters (“ENDA”). The account has no assets or liabilities as of April 30, 2006. The Austrian National Bank made a deposit of SDR 7 million on May 2, 2006, for a period of five years at an interest rate of

of 1 percent per annum. The resources in the account are to be invested, and the difference between the investment earnings and the interest due on the deposit is to be transferred to the ENDA subaccount of the Post-Conflict and Natural Disasters Emergency Assistance Subsidy Account for PRGF-eligible members.

2. Summary of significant accounting policies

Basis of accounting

The financial statements of the Other Administered Accounts are prepared in accordance with International Financial Reporting Standards (IFRS). Specific accounting principles and disclosure practices are explained further below.

Use of estimates

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could dif-fer from those estimates.

Unit of account

Administered Account Japan, Administered Account for Selected Fund Activities—Japan, Framework Administered Account for Technical Assistance Activities, and Administered Account—Spain

These accounts are expressed in U.S. dollars. All transactions and opera-tions of these accounts, including the transfers to and from the accounts, are denominated in U.S. dollars, except for transactions and operations in respect of the OAP, which are denominated in Japanese yen, or transactions in other currencies as agreed between Japan and the IMF. Contributions denominated in other currencies are converted into U.S. dollars upon receipt of the funds.

The Supplementary Financing Facility Subsidy Account, the Post-Conflict and Natural Disaster Emergency Assistance Subsidy Account, and Austria-II Administered Account

These accounts are expressed in terms of SDRs. The value of the SDR is determined by the IMF each day by summing the values in U.S. dollars, based on market exchange rates, of the currencies in the basket. The IMF reviews the SDR valuation basket every five years. The latest review was com-pleted in November 2005 and the composition of the SDR valuation basket

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became effective from January 1, 2006. The currencies in the basket as of April 30, 2006, and 2005 and their amounts were as follows:

Currency Amount

2006 2005___________________________Euro 0.4100 0.4260Japanese yen 18.4000 21.0000Pound sterling 0.0903 0.0984U.S. dollar 0.6320 0.5770

As of April 30, 2006, one SDR was equal to 1.47106 U.S. dollars (one SDR was equal to 1.51678 U.S. dollars as of April 30, 2005).

Transactions and operations of the accounts are denominated in SDRs. Contributions denominated in other currencies are converted into SDRs upon receipt of the funds.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Investments

As at April 30, 2006, the investments in the Post-Conflict and Natural Disaster Emergency Assistance Subsidy Account consisted of short-term fixed-term deposits with maturities of less than one year and amounted to SDR 12 million.

Contributions

Bilateral contributions are reflected as increases in resources after the achievement of specified conditions and are subject to bilateral agreements stipulating how the resources are to be used.

Payments to and on behalf of beneficiaries

Payments to and on behalf of beneficiaries are recognized when the speci-fied conditions in the respective agreements are achieved.

Transfers

Internal transfers of resources within the IMF are accounted for under the accrual method of accounting.

Foreign currency translation

Foreign currency transactions are recorded at the rate of exchange on the date of the transaction. At the balance sheet date, monetary assets and liabilities denominated in foreign currencies are reported using the closing exchange rates. Exchange differences arising from the settlement of transac-tions at rates different from those at the date of the transactions and unreal-ized foreign exchange differences on unsettled foreign currency monetary assets and liabilities are included in the determination of net income.

Administrative expenses

The expenses of conducting the activities of the Other Administered Accounts are incurred and borne by the General Department of the IMF. To help defray the expenses incurred by the IMF in the administration of the Administered Account for Selected Fund Activities—Japan and the Framework Admin-istered Account for Technical Assistance Activities, reimbursement equal to 13 percent of the expenses financed from the accounts is paid to the General Resources Account from these accounts. As at April 30, 2006, the administrative costs for the Administered Account for Selected Fund Activi-ties—Japan amounted to $2.1 million ($2.3 million at April 30, 2005), and, for the Framework Administered Account for Technical Assistance Activities, $1.9 million ($2.2 million at April 30, 2005). These amounts are included in payments to and on behalf of beneficiaries on the statements of income and changes in resources.

Comparatives

When necessary, comparative figures have been reclassified to conform with changes in the presentation of the current year.

3. Cumulative contributions and disbursements

The cumulative contributions to and disbursements from these Administered Accounts are as follows:

April 30, 2006 April 30, 2005_____________________ _____________________Cumulative Cumulative Cumulative Cumulative

Account contributions1 disbursements2 contributions disbursements2

(In millions of U.S. dollars)

Administered Account Japan 135.2 72.5 135.2 72.5

Administered Account for SelectedFund Activities—Japan 267.4 251.9 245.3 231.7

Technical Assistance 235.3 223.3 217.7 207.2Scholarships 21.0 18.4 18.3 15.8Office of Asia and Pacific 11.1 10.2 9.3 8.7

Framework Administered Account forTechnical Assistance Activities 104.3 77.5 82.7 60.6

Subaccount for Japan Advanced Scholarship Program 14.8 13.8 13.2 12.3

Rwanda—Macroeconomic Management Capacity Subaccount 1.5 1.6 1.5 1.6

Australia—IMF Scholarship Programfor Asia Subaccount 3.9 3.5 3.4 3.0

Switzerland Technical Assistance Subaccount 17.5 13.2 16.1 12.1

French Technical Assistance Subaccount 1.2 0.7 1.2 0.5Denmark Technical Assistance Subaccount 6.8 4.8 5.6 3.9Australia Technical Assistance Subaccount 0.3 0.2 0.3 0.1The Netherlands Technical Assistance

Subaccount 4.6 4.4 5.1 4.3The United Kingdom DFID Technical

Assistance Subaccount 8.1 7.3 6.6 5.4Italy Technical Assistance Subaccount 3.7 1.8 2.8 1.0Pacific Financial Technical Assistance

Centre Subaccount 4.4 3.6 2.8 2.6Africa Regional Technical Assistance

Centers Subaccount 20.8 15.0 14.9 10.0Sweden Technical Assistance Subaccount 1.3 0.9 1.1 0.5China Technical Assistance Subaccount 0.2 0.2 0.2 0.1Canada Technical Assistance Subaccount 1.9 0.8 1.5 0.6Technical Assistance Subaccount for Iraq 5.8 2.9 4.5 2.1Middle East Regional Technical

Assistance Center Subaccount 3.2 2.6 1.3 0.5Technical Assistance Subaccount to

Support Macroeconomic and Financial Policy Formulation and Management 0.6 0.1 0.6 —

Spain Technical Assistance Subaccount 2.0 — — —

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European Commission Technical Assistance Subaccount for METAC 1.1 — — —

European Investment Bank Technical Assistance Subaccount 0.6 0.1 — —

Administered Account—Spain 835.5 835.6 835.5 835.6

The Post-Conflict and NaturalDisaster Emergency AssistanceSubsidy Account 30.5 6.9 20.6 2.3

1Net of refunds of contributions to donors due to termination of projects financed by resources in the Administered Account.

2Disbursements had been made from resources contributed to these accounts as well as from interest earned on these resources.

4. Transfer of resources

Resources of the Supplementary Financing Facility Subsidy Account in excess of the remaining subsidy payments are to be transferred to the Spe-cial Disbursement Account. At April 30, 2006, and 2005, subsidy payments totaling SDR 2.2 million had not been made to Liberia and Sudan and were being held pending the payment of overdue charges by these members.

5. Accounts termination

Administered Account Japan

The account can be terminated by the IMF or by Japan at any time. Any remaining resources in the account at termination are to be returned to Japan.

Administered Account for Selected Fund Activities—Japan

The account can be terminated by the IMF or by Japan at any time. Any resources that may remain in the account at termination, net of accrued liabilities under technical assistance projects or in respect of the OAP, are to be returned to Japan.

Framework Administered Account for Technical Assistance Activities

The Framework Account or any subaccount thereof may be terminated by the IMF at any time. The termination of the Framework Account shall terminate each subaccount thereof. A subaccount may also be terminated by the con-tributor of the resources to the subaccount or, in the case of a subaccount comprising resources from more than one contributor, by all the contributors participating in the subaccount at the time of termination, provided that a contributor to such a subaccount may cease its own participation in the sub-account at any time without termination of the subaccount. Termination shall be effective on the date that the IMF or the contributor, as the case may be, receives notice of termination. The disposition of any balances, net of con-tinuing liabilities and commitments under the activities financed, is governed by the conditions agreed between the IMF and the contributor, or contribu-tors in the case of a subaccount with more than one contributor. Absent such agreement, the balances are returned to the contributor(s).

The Post-Conflict and Natural Disaster Emergency Assistance Subsidy Account

The account can be terminated by the IMF at any time. Any balance remain-ing in the account after discharge of all obligations of the account upon its termination are to be transferred to each contributor in the proportion that the SDR equivalent of its respective contribution bears to the total contribu-tions. In the case of earmarked contributions that have been fully used, no such transfer shall be made. A contributor may also designate its share or a specified portion for such other purposes as may be mutually agreed between the contributor and the IMF.

Austria-II Administered Account

The account will be terminated upon completion of its operation. Any assets remaining after the repayment of the deposit and interest due thereon will be transferred to the Natural Disaster Emergency Assistance subaccount of the Post-Conflict and Natural Disaster Emergency Assistance Subsidy Account for PRGF-eligible members.

(concluded)

April 30, 2006 April 30, 2005_____________________ _____________________Cumulative Cumulative Cumulative Cumulative

Account contributions1 disbursements2 contributions disbursements2

(In millions of U.S. dollars)

Acronyms and abbreviations

AfDF African Development FundAFRITAC Africa Regional Technical Assistance CenterAMF Arab Monetary FundAML/CFT Anti-money-laundering/combating the financing of terrorismAPEC Asia-Pacific Economic CooperationAPR Annual Progress ReportASEAN Association of South East Asian NationsBCEAO Central Bank of West African StatesBEAC Bank of Central African StatesBIS Bank for International SettlementsCAC Collective action clauseCAFTA-DR Central American–Dominican Republic–United States Free

Trade AgreementCDO Collateralized debt obligationsCEMAC Central African Economic and Monetary CommunityCFF Compensatory Financing FacilityCMCG Capital Markets Consultative GroupDfID U.K. Department for International DevelopmentDQAF Data Quality Assessment FrameworkDSBB Dissemination Standards Bulletin BoardDSF Debt sustainability frameworkECB European Central BankECCB Eastern Caribbean Central BankECCU Eastern Caribbean Currency UnionEFF Extended Fund FacilityEMBI JPMorgan Emerging Markets Bond IndexEMBIG Emerging Markets Bond Index GlobalENDA Emergency Natural Disaster AssistanceEPCA Emergency Post-Conflict AssistanceERM, ERM II European Monetary System’s exchange rate mechanismESAF Enhanced Structural Adjustment FacilityESF Exogenous Shocks FacilityEU European UnionEXR External Relations DepartmentFAD Fiscal Affairs DepartmentFAO Food and Agriculture Organization (United Nations)FATF Financial Action Task ForceFCC Forward commitment capacityFSAP Financial Sector Assessment ProgramFSF Financial Stability ForumFSI Financial soundness indicatorFSSA Financial System Stability AssessmentFY Financial yearGAB General Arrangements to BorrowGDDS General Data Dissemination SystemGDP Gross domestic productGFSM Government Finance Statistics ManualGFSR Global Financial Stability ReportGMR Global Monitoring ReportGNP Gross national productGRA General Resources AccountHIPC Heavily Indebted Poor CountriesIA Investment AccountICM International Capital Markets DepartmentIDA International Development Association (World Bank Group)IEO Independent Evaluation OfficeIF Integrated Framework for Trade-Related Technical Assistance

IFRS International Financial Reporting StandardsIFS International Financial StatisticsIIF Institute for International FinanceIMFC International Monetary and Financial CommitteeJEDH Joint External Debt HubJSAN Joint Staff Advisory NoteJVI Joint Vienna InstituteMDG Millennium Development GoalMDRI Multilateral Debt Relief InitiativeMETAC Middle East Technical Assistance CenterMFD Monetary and Financial Systems DepartmentMTBF Medium-term budget frameworkMTS Medium-Term StrategyNAB New Arrangements to BorrowNPV Net present valueOAP IMF’s Regional Office for Asia and the PacificODA Official development assistanceOECD Organization for Economic Cooperation and DevelopmentOFC Offshore financial centerOIA Office of Internal Audit and InspectionOIE Organization for Animal HealthOTM Office of Technical Assistance ManagementPDR Policy Development and Review DepartmentPIN Public Information NoticePPM Post-program monitoringPPP Public-private partnershipPRGF Poverty Reduction and Growth FacilityPRSP Poverty Reduction Strategy PaperPSI Policy Support InstrumentPSIA Poverty and Social Impact AnalysisQEDS Quarterly External Debt StatisticsRAP Rights Accumulation ProgramROSC Report on the Observance of Standards and CodesRTAC Regional technical assistance centerSAF Structural Adjustment FacilitySCA-1 First Special Contingent AccountSDA Special Disbursement AccountSDDS Special Data Dissemination StandardSDMX Statistical Data and Metadata ExchangeSDR Special drawing rightSMP Staff-monitored programSRF Supplemental Reserve FacilitySRP Staff Retirement PlanSTA Statistics DepartmentSTI IMF–Singapore Regional Training InstituteS&P Standard and Poor’sTA Technical assistanceTAIMS Technical Assistance Information Management SystemTFP Total factor productivityTRS Time-reporting systemUFR Use of Fund resourcesUN United NationsVAT Value-added taxWAEMU West African Economic and Monetary UnionWEO World Economic OutlookWHO World Health OrganizationWTO World Trade Organization

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This report was compiled and edited by a staff team led by Graham Hacche, deputy director of the IMF's External Relations Department, and including, from the department's Editorial and Publications Division, Jeanette Morrison (division chief), Sandy Donaldson, and Asimina Caminis.

It was designed by Lai Oy Louie and Massoud Etemadi and typeset by Choon Lee, all from the Multimedia Services Divisionof the IMF's Technology and General Services Department.

Photography Page

Romeo Ranoco/Reuters/Landov 30Sean Gallup/Liaison/Getty Images 33John Cogill/Bloomberg News/Landov 49Iván Franco/EPA/Corbis 54Achim Pohl/Das Fotoarchiv 63Liz Gilbert/Corbis Sygma/Corbis 64Issouf Sanogo/AFP/Getty Images 71David Mdzinarishvili/Reuters/Landov 72Tara Todras-Whitehill/Reuters/Landov 84Klaus Nigge/National Geographic Image Collection 85

The photographs that open the chapters show aspects of the IMF's work, both at its headquarters and in member countries.

Printed on Forest Stewardship Council certified paper.

ISSN 0250-7498ISBN 1-58906-561-1