Question No 373
Notice Paper No 139 of 2012
For Written Answer

Date: For Parliament Sitting on 14 May 2012

Name and Constituency of Member of Parliament
Q373 Mr Desmond Lee, Member of Parliament for Jurong GRC

Question:
To ask the Deputy Prime Minister and Minister for Finance (a) why Singapore needs to make the US$4 billion pledge to the International Monetary Fund (IMF) as announced by MAS on 20 April 2012; (b) whether this funding is intended to be used by the IMF to bail out Eurozone countries from their debt crisis; and (c) what measures will the Ministry and MAS put in place to ensure accountable use of this loan, if called upon by the IMF, and safeguard its repayment.

Response by Mr Tharman Shanmugaratnam, Deputy Prime Minister and Chairman, MAS

1   Singapore has a clear interest in the IMF retaining its ability to ensure the stability of the international economy and monetary system. Given our role as a international  financial centre and our heavy dependence on trade, the stability and well-being of the global system is of critical importance to us. 

2   The dangers in the global economy remain significant.  In the Euro area, although progress has been made in addressing underlying fiscal problems, the risk of further market stresses and a deeper recession cannot be ruled out.   Should the Eurozone crisis escalate, there could be substantial spillovers to the rest of the world, through trade and financial channels.

3   Taking into account  these elevated risks, the international community has embarked on a  collaborative effort to enhance IMF resources. The aim is to give the IMF the strength and credibility to help prevent a worsening of the crisis and limit the risk of contagion. The enhanced resources are not specifically targeted at the Euro area, or any particular country or group of countries. They are available for use by the IMF in supporting  crisis prevention or resolution in any region of the world, and in any member country. 

4   More than 30 countries including Singapore have so far committed to provide bilateral loans to the IMF, amounting to more than US$430 billion as at end-April 2012. Singapore has committed to the IMF a contingent line of credit worth US4 billion as part of this international effort.

5   These are however temporary resources, provided to the IMF in advance of the expected increase in its permanent capital subscriptions (or quota subscriptions) that will be decided in early 2014.  Participating in the current round of bilateral contributions to the IMF will in effect bring forward part or all of Singapore’s likely share of the increase in the IMF’s capital base in 2014.

6   Singapore’s US$4 billion contingent line of credit to the IMF means that  Singapore is expected to lend the funds when the IMF considers necessary. In the event that Singapore’s commitment is tapped upon, the money will not come from the Government Budget. The loan will be part of the Official Foreign Reserves (OFR) held by the MAS. However, there will be no change in OFR if the loan is drawn on by the IMF;  what would happen is a conversion from a foreign investment asset to a loan to the IMF, which will still count towards OFR. (This is similar to how permanent quota subscriptions to the IMF remain part of OFR.)  Loans which are drawn upon by the IMF will also be repaid to contributors with interest¹.

7   Should Singapore’s loan be called on, we would be taking on the credit risk of the IMF rather than the direct credit risk of countries that the IMF lends to.  The IMF also has safeguards in place to reduce the risks that it takes in lending to countries. First, the IMF has preferred creditor status -  which means that loans granted by the IMF must be repaid ahead of all other creditors. Countries which have historically defaulted on the rest of their debts have in most instances repaid the IMF on time and in full.

8   Second, all funds disbursed by the IMF to a country that applies for financial assistance will be accompanied by access limits and strict conditionality. Access limits cap the exposure of the IMF to the country. Conditions put in place typically require the country to adjust its economic policies over both short and medium term adjustments. Loans are disbursed in tranches, and the IMF reviews a country’s progress in its adjustment programmes  before releasing each tranche of a loan.

¹ This is charged at the SDR interest rate, which is pegged to interest rates on short term treasury bills of five major economies.