What Was General Agreements to Borrow (GAB)?

The term "General Agreements to Borrow" (GAB) refers to a terminated lending medium for members of the Group of Ten (G-10). The program was established in 1962, allowing the International Monetary Fund (IMF) to borrow funds from the central banks of these advanced countries. The capital was advanced as temporary loans to countries experiencing economic distress so they could avoid crisis situations. The GAB was phased out at the end of 2018 after member countries agreed its usefulness was "diminished and limited."

Key Takeaways

  • The General Agreements to Borrow was a lending medium offered through the International Monetary Fund by the G-10 countries.
  • The program was established in 1962.
  • G-10 member countries deposited funds into the IMF for a nation in economic distress to access.
  • Participants agreed to allow the program to lapse at the end of 2018 because it was no longer useful.
  • The New Arrangements to Borrow became the primary fundraising facility for IMF loans.

Understanding the General Agreements to Borrow (GAB)

The General Agreements to Borrow is a program that was established by the International Monetary Fund in 1962. It relied on the cooperation of the G-10, which is composed of 11 of the world's strongest economies, including Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States and Switzerland, which plays a minor role.

The GAB was a standing agreement that allowed the IMF to borrow money from these countries in order to assist other nations in economic distress. Countries that faced financial difficulties that threatened to stall economic growth or harm the international monetary system, were able to turn to the IMF for supplemental liquidity. The IMF, in turn, relied on funds offered through the GAB to help those in need of capital.

As of mid-2018, the GAB permitted the IMF to provide supplemental loans of up to $24 billion (this figure remained as such as of December 2017) to members in need. Under the IMF's arrangements, plenty more was made available to help stave off events posing a threat to the stability of the financial system. The need for programs like GAB arose from the balance of payments (BOP) issues that arose in the U.K. and the U.S. in the 1960s and more recently from hurdles faced by emerging market economies, notably those in Latin America and Asia.

The GAB was only activated ten times since it was first established. Its size didn't change since 1983. Although it was routinely renewed, its participants noted that the GAB's importance declined while the IMF's executive board indicated the program's usefulness diminished over the years. Given all of this, the executive board decided not to renew the GAB in 2017, allowing it to phase out on Dec. 25, 2018.

Only the 11 countries that formed the G-10 could take part in the GAB until 1983 when it was expanded to nonparticipating countries.

Advantages and Disadvantages of the GAB

Proponents argued that all a small country needs from time to time is a shot of added liquidity to implement the right policies to jump-start its local economy back into expansion. Through the GAB, the IMF helped member countries restore exports after natural catastrophes and investor confidence, when necessary. It also enabled the IMF to restrict problems related to instability that might spread to other countries if left unchecked.

Not everyone agrees that IMF loans have a positive impact, though. Some argue the organization empowers poor policy decisions and serves as a backstop for incompetent governmental leadership. Another criticism is that the loans wind up flowing to financial institutions in industrialized countries, reimbursing bankers for their poor, risky bets in emerging markets.

The conditions attached to the loans have also been questioned. The IMF, as it did with its three bailouts for Greece, demands austerity measures that, at best, do not help citizens in struggling countries directly. Some argue that these terms prolong economic suffering, exacerbate poverty, and reproduce the structures of colonialism.

Pros
  • Gives smaller countries a boost of liquidity

  • Allows participating nations to jump-start their economies

  • Restricts instability, preventing it from spreading to other countries

Cons
  • Empowers poor policy decisions while enabling incompetent governmental leadership

  • Rewards bankers in developed nations for poor, risky bets

  • Accompanies terms and conditions that may prolong economic suffering

GAB vs. NAB

The New Arrangements to Borrow (NAB) became the primary fundraising facility for IMF loans when it was introduced in the late 1990s. It was first proposed in 1995, following the Mexican financial crisis. There were growing concerns during this period that significantly more resources would be needed in the future to adequately respond to economic downturns.

As a result, the IMF got in contact with the G-10 and other financially strong countries about developing a new financing arrangement that would double the amount available under the GAB. The NAB was officially launched in 1998, the same year that the GAB was last activated. From that point forward, the GAB could only be activated if access to the better-funded NAB was refused.

Like the GAB, the NAB is a set of credit arrangements between the IMF and certain countries. What mainly sets them apart is the membership numbers. The GAB had a limited number of participants while the NAB has 40 that take part. The total amount of the NAB was set at $521 billion between 2021 and 2025.