Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

As the Minister for Competition Policy and Consumer Affairs identified in his second reading speech when introducing the International Monetary Agreements Amendment Bill (No. 1) 2010, this bill amends the International Monetary Agreements Act 1947 to allow Australia to accept the changes to the New Arrangements to Borrow of the International Monetary Fund adopted by the executive board of the IMF on 12 April. The recent global economic turmoil has had a dramatic effect on numerous countries, obviously. On 2 April 2009, the G20 countries agreed to increase the level of finance available to and the number of members involved in the IMF’s New Arrangements to Borrow. The New Arrangements to Borrow is a credit arrangement between the IMF and 26 members and institutions to provide supplementary resources to the IMF in times of economic turmoil. The former Treasurer, Peter Costello, worked to establish this mechanism, which came into effect on 17 November 1998 and has been renewed twice, most recently in November 2007. Australia has supported these arrangements since that time, and that support is not wavering today at all. On 12 April this year, the executive board of the IMF approved changes to the new arrangements to increase the finances available and make the system more flexible. This decision resulted in a tenfold expansion of the resources available from SDR34 billion to SDR367 billion. These rates are approximately, in Australian dollar terms, $51 billion to $617 billion at today’s exchange rate.

This bill will increase Australia’s credit line in the IMF’s currency of special drawing rights from SDR801.29 million to SDR4,370 million, so Australia’s potential exposure is approximately $7.3 billion at today’s exchange rate. Should the IMF access this credit—and we hope it will not have to—the loan would have to be repaid in full with interest in five years. The changes to the new arrangements also increase the number of participants in the mechanism. China, Russia, India, Brazil and nine other countries will now be involved in the new arrangements. In terms of flexibility, the changes require a large majority of participating members to agree before the New Arrangements to Borrow can be activated.

This bill obviously would have no direct impact on the budget, which is a relief for many and is unlike so much of what the government does. Any loans, if they are to be made, would represent monetary assets. The successful passage of this bill would mean that Australia will be supporting the New Arrangements to Borrow and therefore would provide the consent required by the executive board of the IMF to activate the changes to the terms and conditions. This bill will also confirm Australia’s commitment to that G20 agreement, as well as its strong and ongoing support for the IMF. Having been involved in the architecture of the framework, the coalition supports the bill.

Craig Thomson (Dobell, Australian Labor Party) Share this | Link to this | Hansard source

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.

Andrew Laming (Bowman, Liberal Party) Share this | Link to this | Hansard source

As the previous coalition speaker alluded to, we strongly support the International Monetary Agreements Amendment Bill (No. 1) 2010. This is also an opportunity to go through part of the history of the IMF, its important function in providing stability to developing and emerging economies and also the important role Australia plays as not only a member state but a key contributor to the fund we are debating today.

By way of history, from 1947 the IMF has played a very important role. It is sometimes criticised for being too economically austere and placing too stringent regulations on economies that have fallen into trouble, but generally there has been very strong support from nations like Australia, and this will continue with this bill. In 1997 it became obvious around the period of the Asian financial crisis that additional requirements above and beyond the General Agreement to Borrow were necessary. I recall working at the World Bank in the Human Development Network at the time that the first agreement was struck for additional requirements from member states, of which there were initially 26. It is good to see that just recently the G20 has agreed to expand that by another 13 nations, including, importantly, Russia, China, Brazil and India among nine other nation states.

That now strengthens what is effectively a great big safety net which sits under developing and emerging economies. It increases the confidence in that we can trade and engage in financial transactions between states and know that in the end there will be as little sovereign risk as possible, keeping in mind that often what goes on behind the books of many nations is not revealed often until the government changes—something we saw in Europe just recently. The IMF has the important role of raising the revenue to put it in a position to give this kind of support through the three instruments. The first component of that is the special drawing rights, which have been alluded to by previous speakers. In that respect, Australia pays according to the size of its economy—that is, around three billion SDRs, about a quarter of our contribution. We also contribute with our own currency. The IMF also has gold stores of around 3,000 tonnes, of which it is divesting itself of 12 per cent at the moment.

Finally there are the special borrowing arrangements, with the most recent ones from the last 13 years referred to as the NAB. Obviously the NAB has to be expanded and this bill fulfils the commitment made back in May 2009 by this Treasurer when in a press release he made a commitment to work with other member states to increase that from a quarter of a billion to three quarters of billion, and therein lies the additional $500 billion that needs to be committed. Australia plays its part according to the size of its GDP. It is very important that we play our role along with every other nation state, to make sure that happens. We do not really, truly and genuinely have an option to pull out on this and simply pass the burden on to other economies. That would not be responsible.

Everyone in this chamber and everyone outside hopes that the NAB is never called upon, but it is very interesting to note what happened in Greece. Greece, being two per cent of the OECD, is effectively to the EU what Australia is to the world—a fairly small player at about two per cent when you measure it in economic figures. Yet the bailout in Greece, in Australian terms, was $155 billion, larger than anyone initially imagined. That money can disappear quite quickly, even in moderately small economies where the calls upon those economies are significant. Let us just note that there are a number of economies where that is still to be priced and written to the market, still to be revealed, and we have some concerns that the NAB needs to be resilient enough to deliver in those circumstances as well.

There is a lesson for every member state. Australia is a resources based commodity based economy. We should be the island of certainty surrounded by a sea of chaos and uncertainty, given the blessings we have with our commodities and the core resources we are lucky enough to be able to exploit. I note Charlie Aitken from Southern Cross Equities wrote only two days ago that we have some of the highest cash rates in the OECD, among the lowest unemployment rate in the world and the highest prospective divided yield of any First World equity market at around 4.6 per cent.

Our equity markets should be trading far better than they are. If you look at the long-term performance of our dollar, historically it sits in the mid-70s against the US dollar. We should not be far behind Canada, when you look at the size of our economy. Canada is approaching parity with the US; Australia is not. We need to find reasons why Canada is and Australia is not. I put to you that the key discussion in the Australian community on the RSPT is the major reason Australia truly is struggling. That does not mean that individual mining companies will not be reporting small increases in their share prices, as was pointed out in question time today. Imagine where they would be trading if we did not have that sovereign induced risk which is the RSPT. We would have completely different share prices, I suspect.

So in a world where certainty is incredibly precious, it is important to remember that governments need to be doing everything they can to offer certainty to investment. Let us face it: about half of all investment coming from overseas is to fund Australian banks. Half of all the financial resources we need to lend to Australians who hope to own a house comes from overseas. We must not be fearful of foreign investment, but we also cannot afford to be twiddling these knobs as a government and raising great uncertainty.

The Financial Times again reported today—and this will be big news tomorrow—Canada saying thank you very much for all the uncertainty delivered by that mining tax because Canada stands to benefit. I remember from Canada’s mineral council a statement by one of their key spokespeople saying that Kevin Rudd should be Canada’s mining man of the year. The Prime Minister has already been named as Australia’s man of the year. I do not see why we should be debating policies in 2010 that make him somebody else’s man of the year because the key thing for him to be doing is making Australia an island of certainty for investment that maximises our opportunities to deliver to the world the commodities which are so sought after.

Why do I diverge there? Obviously the previous speaker has already talked about the three elements of the stimulus package being timely, temporary and targeted. I will concede that the Prime Minister was timely. Temporary? Absolutely not. The pedal is still to the metal and we are looking at the Australian crisis through the rear-vision mirror. Targeted? No. Splashed in every corner of our economy are people wondering just where those $900 cheques are now.  No-one said to put 4.7 per cent of our GDP into a stimulus package.

The MYEFO which came out in August 2008 said that this recession will be only half the size Treasury described it at early in 2008, but it did not help us one bit, it did not pull up the spending one bit. That is why we are now fundamentally a medium-sized debt economy trying to find the money to help other nations when we should be running a strong surplus. We have all of the antecedents to do that. I make that point because, as we seek to provide up to seven-point-something billion dollars to the IMF to do their utterly essential work, the question is: we are no longer a surplus economy, so where does the money come from? Our economy is running at deficit and will have significant government debt until at least 2013, even in the most manufactured of Treasury modelling—and we have seen a lot of it in the last three years. So where does the money come from if we get a call from the IMF between now and 2013? We borrow it. Who from? From someone else, from countries running surpluses like those in the Middle East and China. We borrow it so that we can lend it, so that the IMF can lend it to someone else.

I raise that paradox because never would we not support doing this, but the responsibility of any head of state is to put us in the strongest financial position. As I said, Charlie Aitkin can attest to that—that our currency and our share market are running nowhere near where they should be. We need to be maintaining sensible, steady state, foreign capital attracting policies, not ones that suck investment away to other nations.

Even the international trade minister from Canada has said, as reported this week, that this is great news for Canada, and we have seen international investment advisers saying that other countries will be looking at the RSPT and saying, ‘Whatever we do, make sure it is less than Australia’s so that we look more attractive compared to Australia.’ That is the savage reality; that capital chases certainty. I think anyone can see that that is what is missing at the moment in the current RSPT debate and lack of consultation.

Let me move now to the arrangements to pay it back. To pay back any money that we commit through the IMF is predominantly done by an undertaking from the IMF to pay it back within five years and with interest as an average of European, Japanese and US bond rates. That all made sense when countries did not run massive debts themselves. The IMF, very smartly towards the end of 2009, allowed themselves to do paper issuance of debts which means: ‘We can’t pay you back but we will write you a chit. That remains as a monetary asset for you but, of course, there is a possibility that that may be what we hold onto for a long time and you don’t actually see that money.’ Again, I can understand it is more important to have stability in emerging economies than to be demanding our moneys paid back within five years. So it would be important as a member of the IMF and G20 to be able to do some options appraisals to make sure that that money is achieving the stability we want.

I still raise the point: where does that money come from? The money is an opportunity cost on the Australian people. If we were running a surplus we would be in a very, very strong position to be able to help. We have seen in Greece that there will be, absolutely, a priority that sovereign states are too big to fail. If these calls come again this is exactly what the IMF has to do. I note that in the media there has been some criticism referring to the potential for global inflation by having more of this money washing around the system. In the end the obverse is actually something you would never wish to contemplate, which is that investors look upon the entire developing world as a place that is too dangerous to go because there is not an investor of last resort who can actually save administrations should that arise.

There are plenty of examples in history where administrations have not been able to repay those moneys and where they have had to go back to the World Bank and say: ‘These investment and spending decisions were made by previous administrations. It was not a democratically elected one. The people of our country should not be held to ransom nor made to pay back the exorbitant amounts of money,’ and some of this has been written off. The intention of the IMF is to intercede and intervene before we reach those points. You would never not want to see a proactive forward-leaning IMF doing everything that they can with the 186 member states to make sure that international trade and finance remains strong.

I just want to say that there is an issue here of money being provided purely as an insurance policy to the IMF and that both sides of the chamber support it. But I would also point out that the one element that makes Australia the strongest possible contributor in the international financial world is to run a strong, stable, reliable economy that does not introduce uncertainty and lead to the flight of capital. The sooner this government can resolve the RSPT, sit down in good faith negotiations and put this dreadful period of uncertainty to an end, the sooner Australia can be a strong player and do exactly what it can, both in its region and also with the IMF, to commit to those sums.

Australia will do it, and I point out that it still requires an act to actually send that money to the IMF when that call comes. There are no true budget implications here. There will obviously be another act at another time to debate when that money is moved out as an appropriation bill. There will be a time again to debate that but what should be beyond debate is the fact that we will support the IMF and the strong contribution that they make to maintaining stability in international financial arrangements.