What Are General Agreements to Borrow (GAB)?

General Agreements to Borrow (GAB) was a lending medium for members of the Group of Ten (G-10). Under GAB, G-10 countries deposited funds into the International Monetary Fund (IMF) for a nation in economic distress to access. Usually, the loans made through GAB were temporary and designed to help address potential crisis situations.

Participants agreed unanimously for the GAB to lapse at the end of 2018, due to its "diminished and limited usefulness."

Key Takeaways

  • Under General Agreements to Borrow (GAB), members of the Group of Ten (G-10) countries deposited funds into the International Monetary Fund (IMF) for a nation in economic distress to access.
  • Generally, the loans were temporary and designed to help address potential crisis situations.
  • Participants agreed unanimously for the General Arrangements to Borrow (GAB) to lapse at the end of 2018, due to its "diminished and limited usefulness."

Understanding General Agreements to Borrow (GAB)

One of the IMF's core responsibilities is to assist nations in economic distress. If a country is facing financial difficulties that threaten to stall economic growth or harm the international monetary system, it can turn to the IMF for supplemental liquidity. Through the GAB, members and institutions offered funds to the IMF to be distributed to countries in need of capital.

The GAB enabled the IMF to borrow specific amounts of currencies from G-10 nations, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States, under certain circumstances. Switzerland was also a participant, albeit playing a minor role.

As of mid-2018, the GAB permitted the IMF to provide supplemental loans of up to $26 billion to members in need. In addition, under the IMF's new arrangements, plenty more was made available to help stave off events posing a threat to the stability of the financial system.

The IMF's overall lending capacity stands at about $1 trillion.

The New Arrangements to Borrow (NAB) became the primary fundraising facility for IMF loans when it was introduced in the late 1990s. From that point forward, the GAB could only be activated if access to the better-funded NAB had been refused.

Advantages and Disadvantages of General Agreements to Borrow (GAB)

Proponents argue that at times, all a small country needs is a shot of added liquidity to implement the right policies to jump-start its local economy back into expansion. Through GAB, the IMF helped member countries restore exports after natural catastrophes and investor confidence, when necessary. It also enabled the IMF to stanch 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 that it empowers poor policy decisions and serves as a backstop for incompetent government leadership. Another criticism is that the loans wind up flowing to financial institutions (FI) 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.

General Agreements to Borrow (GAB) vs. New Arrangements to Borrow (NAB)

The GAB had only been activated ten times since first being established in 1962, the last of which occurred back in 1998. That year also happened to mark the official introduction of the NAB fundraising platform.

The NAB was first accessed in Dec. 1998 by Brazil and between April 2011 to Feb. 2016 had already been activated ten times.

The NAB was first proposed in 1995, following the Mexican financial crisis. During that period, there were growing concerns that significantly more resources would be needed in 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.

Like GAB, the NAB is a set of credit arrangements between the IMF and certain countries. What mainly sets them apart is membership numbers: the NAB has 40 participants, according to the IMF.