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Tuesday, 22 June 2010
Page: 6134

Mr CRAIG THOMSON (5:27 PM) —I rise to support the International Monetary Agreements Amendment Bill (No. 1) 2010. The purpose of this bill is to amend the International Monetary Agreements Act 1947 to allow Australia to accept the changes to the International Monetary Fund’s New Arrangements to Borrow adopted by the IMF executive board on 12 April 2010. The bill would authorise the proposed increase in the IMF’s existing line of credit from Australia under the New Arrangements to Borrow from special drawing rights 801 million, or around A$1.4 billion, to SDR4.37 billion, or around A$5.7 billion, and would also reflect changes to the New Arrangements to Borrow to make it more flexible in a number of ways and a more effective crisis management tool.

On 2 April 2009, G20 leaders agreed in London to an expanded and more flexible New Arrangements to Borrow, increased by up to US$500 billion. The New Arrangements to Borrow is a set of credit arrangements between the IMF and a subset of its members—currently 26 members, increasing to 39—that provides the IMF with borrowed resources to supplement its quota based resources in the event that they are insufficient. Australia has been a participant in the New Arrangements to Borrow since its inception in 1998. In his media release of 12 May 2009, the Treasurer announced that Australia will join with other countries to ensure that the IMF has resources available to maintain stability and support recovery in the global economy, announcing Australia’s increased commitment of US$7 billion to the IMF.

On 12 April 2010, the IMF Executive Board adopted a decision to modify the New Arrangements to Borrow to expand its size and increase its flexibility. The total size of credit arrangements under the New Arrangements to Borrow will increase from US$54 billion to US$589 billion, as valued at 24 November 2009. The IMF’s managing director said at the time:

The expansion and enlargement of the NAB borrowing arrangements provides a very strong multilateral foundation for the Fund’s efforts in crisis prevention and resolution, as an essential back-stop to the Fund’s quota resources. This will help ensure that the Fund has access to adequate resources to help members that are vulnerable to financial crises …

The NAB is a standing set of credit arrangements under which participants commit resources to IMF lending when these are needed to supplement quota resources. The expanded NAB will become operational when it receives formal acceptances from the required proportion of current and potential participants, which will require legislative backing in some cases.

The expansion of the New Arrangements to Borrow will make an important contribution to global financial stability, but, as the IMF has said, it is not a substitute for a general increase in the fund’s quota resources. The IMF is, and will remain, a quota based institution. The IMF also said at the time that it is important now that member countries rapidly take the necessary steps to make the increased resources available—and that is what Australia is doing through this bill.

Let us have a look at the New Arrangements to Borrow in some more detail. It is a credit arrangement between the IMF and a group of members and institutions to provide supplementary resources to the IMF when these are needed to forestall or cope with an impairment of the international monetary system. The New Arrangements to Borrow is supplementary to quota resources, which are made up of the quota subscriptions each country pays upon joining the fund, broadly based on its relative size in the world economy. IMF members’ quotas currently total SDR 217.4 billion. Like quota allocations, the New Arrangements to Borrow is reviewed on a regular basis.

To put this amount into some context, let us briefly observe what special drawing rights—SDRs—actually are. SDRs were created by the IMF in the late 1960s to supplement the supply of international reserve assets, which were in limited supply under the Bretton Woods system of fixed exchange rates. SDRs operate as an international reserve asset because they can be sold to other IMF members in return for foreign exchange—in particular, US dollars, euros, Japanese yen or British pounds. SDRs are not—as is sometimes thought—a currency, although their value is calculated as a weighted average of the above four currencies. They are best viewed as a potential claim on the foreign currency reserves of other IMF members. Beyond supporting the capacity of the IMF to lend to countries with balance of payments needs, the international community has also supported the IMF’s efforts to boost global liquidity by issuing SDRs to its members.

Shortly after the creation of SDRs, the Bretton Woods system of fixed exchange rates was abandoned, reducing the importance of SDRs. Prior to 2009, SDRs had only been issued or ‘allocated’ twice—once in the early 1970s and a second time in the late 1970s to early 1980s. When an SDR allocation takes place, countries receive an increase in their SDR holdings, an international reserve asset on which countries earn interest from the IMF, as well as an equal increase in their SDR allocation—a liability on which countries pay interest to the IMF. Five countries retain the allocation but may sell their holdings in exchange for foreign currency. Consequently, issuing SDRs enhances global liquidity because it provides countries that want to boost their foreign currency reserves with an off-market mechanism to do so. Given that an SDR transaction involves an exchange between two IMF members of SDRs for foreign currency, the transaction results in a change in the composition of both members’ official reserve assets.

The recent unprecedented shock confronting the global economy led to a sharp increase in the demand for IMF financing. To ensure that the IMF continues to have sufficient resources to meet demand, leaders of the G20 agreed in April 2009 that immediate financing from members of US$250 billion would subsequently be folded into an expanded and more flexible New Arrangements to Borrow, increased by up to $500 billion. In the years leading up to the financial crisis, strong economic growth in emerging and developing economies and the ready availability of private capital inflows to those economies resulted in a decline in demand for IMF lending. However, the financial crisis has brought renewed demand for IMF assistance. In response, the IMF has increased its traditional lending and explored new ways of providing funding to member countries.

The G20 countries and other members of the international community have supported the IMF in this regard, contributing to a sizeable increase in the IMF’s resources. In addition, the IMF has boosted global liquidity by substantially increasing its members’ holdings of special drawing rights. The call was endorsed by the International Monetary and Financial Committee. The G20 leaders reaffirmed their commitment on 25 September 2009 to a tripling of the resources available to the IMF, from a pre-crisis level of about US$250 billion. At its meeting in October 2009, the International Monetary and Financial Committee welcomed the expected agreement to expand and enhance the New Arrangements to Borrow. Pending the entering into force of the expanded New Arrangements to Borrow, member countries have pledged more than $300 billion in immediate bilateral financing, should the fund require additional resources for lending. This amount actually exceeds the G20 leaders’ commitment because of the large number of new participants.

As part of this expansion, the IMF’s existing line of credit from Australia under the New Arrangements to Borrow will increase. The New Arrangements to Borrow will also become more flexible in a number of ways to make it an effective crisis management tool. Among these changes, the predictability of the IMF’s access to the credit arrangements during crisis periods will be increased. Strong governance structures will be retained, requiring the agreement of a large majority of participants before the New Arrangements to Borrow can be activated. For Australia to accept the amendments, we are required to undertake a legislative process to amend the International Monetary Agreements Act 1947 to reflect the changes, and that is what this bill does. The current New Arrangements to Borrow, NAB arrangements, form schedule 4 to the IMA Act.

The proposed bill would allow Australia to accept the amendments to the New Arrangements to Borrow and would implement the updated arrangement for Australia when it enters into effect. The bill would authorise the proposed increase in the IMF’s existing line of credit from Australia under the New Arrangements to Borrow, denominated in special drawing rights, to SDR 4,370.41 million from SDR 801.29 million. The value of this expanded credit line in Australian dollars will vary over time depending upon prevailing exchange rates. At 28 May 2010, its value was around A$7.5 billion.

Progress on this legislation will demonstrate Australia’s commitment to ensuring the stability of the global economy and leadership in implementing G20 commitments. The passage of the bill in this sitting would strengthen our international negotiating position on IMF quota and governance reforms, particularly in arguing the need for a substantial increase in quota resources. IMF quota and governance reforms are widely seen as a litmus test of the credibility of the G20 in relation to these issues. While attention is currently focused on domestic reforms, the government also continues to press for important global reforms from our seat at the G20 table. The Australian government continues to work closely with its fellow G20 countries.

Developed countries are soberly facing the huge task of reducing debt while grappling with double-digit unemployment rates and weak growth. Fortunately, the situation for Australia could not be more in contrast. We came through the global recession in far better shape than other economies because we acted quickly and decisively. Stimulus meant we avoided recession and largely avoided the business failures and large-scale job losses that have occurred elsewhere. Our unemployment rate of 5.2 per cent is around half of that in the US and Europe, and we are getting the budget back to surplus in three years—three years early and ahead of every major advanced economy. The RBA board meeting recently confirmed our growth prospects remain sound, stating:

While the international environment facing the Australian economy had become more uncertain, members noted that the medium-term outlook remained positive.

While our recovery is on track, globally the situation is more patchy and uneven. There is strong growth in Asia but more sluggish growth in many of the world’s major developed economies. The shift in economic activity towards our region was underscored by a report put out by the IMF last week. The IMF expects that within five years Asia’s economy will be about 50 per cent larger than it is today and will account for more than one-third of global output, rivalling the US and European economies in size.

In the first three months of this year, Asian economies grew at an annualised rate of 10 per cent. This contributed to big increases in global commodity prices, with iron ore prices doubling since last year and big increases in coal prices as well. Australia is in a strong position to benefit from these trends, but we need to manage the challenges that come with them. Earlier this month the RBA Deputy Governor, Ric Battellino, said, ‘Australia is having an unprecedented mining boom at the moment.’ He went on to say, when looking at how the economy has performed in the past through those periods:

… it’s pretty clear that those sort of booms have very significant impacts on the economy and do cause a lot of stresses and strains … [T]he challenge for the Australian economy for the next few years is going to be how to accommodate this mining boom.

This government is determined to manage this boom better than our predecessors managed the last one by using the proceeds of the resource super profits tax to strengthen our economic foundations. We cannot afford to repeat the mistakes of the past and squander the opportunities of another mining boom. We only have one shot at getting a fair price for our non-renewable resources, which can only be mined once. It would have been easier to just let the old broken system of royalties continue, but getting a fairer price for our mineral wealth and investing those proceeds back into building a stronger economy is the right thing to do by our nation.

I will now sum up why this bill is needed and why it should be passed. The global recovery is fragile. In light of the tentative global recovery, urgent implementation is prudent to support confidence in the markets. We must help ensure that the IMF has a credible backstop to its normal quota-based resources, and is able to support its members should there be a need. The G20 took action to support the global economy through the recession. Last April, G20 leaders committed to trebling the IMF’s lendable resources. Australia has always been a participant in the New Arrangements to Borrow. Our standing in the G20 could be affected if we were not considered willing to do our fair share. The Treasurer announced on 12 May 2009 that Australia would join with other countries to ensure that the IMF had resources available to maintain stability and support recovery in the global economy.

This bill proposes to amend the International Monetary Agreements Act 1947 to authorise the increase in Australia’s existing line of credit under the New Arrangements to Borrow from SDR 801 million, around A$1.4 billion, to SDR 4.37 billion, around A$7.5 billion. There is no direct impact on the underlying cash balance or the fiscal balance. In the event of the IMF calling on the New Arrangements to Borrow, a drawing under Australia’s credit line would be through a loan, to be repaid to Australia in full with interest within five years, as it was on the only previous occasion on which it was required, to support Brazil in 1998. Our new commitment to the expanded New Arrangements to Borrow is of a similar order of magnitude in real terms to commitments made by the previous government during the Asian financial crisis, which included US$3 billion in contingent support to Indonesia, Thailand and Korea as well as Australia’s initial commitment to the New Arrangements to Borrow of SDR 801 million. I commend the bill to the House.