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Q&A on Approval in Principle and Greece

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Question 1: What is Approval in Principle? 

Approval in Principle (AIP) is a procedure that allows the IMF’s Executive Board to approve an IMF financing arrangement for a member country based on agreement reached with the country on economic policies, but conditional on agreement being reached between the country and its creditors on debt relief or new financing. AIP allows additional time for such an agreement to be reached.

Once this agreement is reached, the IMF’s Executive Board would take a second decision (usually without a meeting), at which point the country can draw resources under the arrangement.

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Question 2: Why was the AIP procedure created? 

During the 1980s, the IMF used AIP on many occasions to catalyze agreement between IMF members and their creditors.

It was used in cases where there was agreement on the policies that would underlie an IMF arrangement, but where full agreement had not yet been reached between the country and its creditors on financing or debt relief.

Without agreement on financing or debt relief, the IMF could not approve an arrangement that made resources available, as the IMF cannot lend in situations lacking adequate assurances on debt sustainability or program financing. This created a potential stand-off: the creditors held back, awaiting approval of the IMF arrangement, but the IMF could not approve the arrangement without sufficient commitments from the creditors.

AIP addressed this problem by allowing the IMF to formally endorse the member’s policy program while making clear that the release of IMF resources would be contingent on agreement between the country and its creditors on debt relief or new financing.

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Question 3: What is the benefit for a member country from Approval in Principle? 

AIP allows the IMF to be supportive of the progress a country has made on policies, while making the release of IMF resources conditional on financing or debt relief being secured. AIP has a proven track record of helping to catalyze financing and debt relief in cases where creditors were having difficulty reaching agreement on those issues.

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Question 4: How does AIP help Greece?

The use of AIP would allow the IMF to be supportive of the progress that Greece has made on policies, even while release of IMF resources would be conditional upon Greece’s European creditors providing commitments for debt relief sufficient to secure Greece’s debt sustainability, and subject to Greece’s continued implementation of the IMF-supported program.

Use of the AIP procedure will give confidence to creditors to disburse to Greece under the ESM program in July—thus reducing a potentially serious stress on the Greek economy and the overall financial system. It will also give confidence to investors on the prospects for the Greek economy to grow and for its people to prosper.

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Question 5: Does an arrangement “Approved in Principle” still have conditionality, reviews and a Debt Sustainability Analysis (DSA)?

An arrangement that is approved in principle has the same standard elements and requirements as any IMF arrangement. The sole difference is that no resources become available until there are satisfactory assurances received from creditors on financing or debt relief.

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Question 6: Isn't the IMF backing away from its emphasis on debt relief? 

For countries with debt sustainability issues, the IMF’s emphasis on debt relief is maintained whether a financial arrangement is approved outright or approved in principle. In either case, the release of IMF resources is conditional on debt relief commitments being in place – in other words on debt being sustainable.

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Question 7: Does AIP come with a deadline?

It depends on the country and the circumstances. When the AIP procedure was used in the 1980s, there was often a 30-day deadline for the arrangement to become effective. However, there were also a number of cases in which there was no deadline, the deadline was longer than 30 days, or the deadline was extended.

In the case of the proposed use of AIP for Greece, the deadline will be a modality to be discussed and decided by the IMF Executive Board.

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Question 8: Are there any IMF guidelines governing AIP?

The AIP procedure was initially used in several cases without guidelines. The IMF’s Executive Board subsequently adopted Guidelines in 1984 that set out general principles for the use of AIP. These guidelines are no longer applicable, however, as they were designed to address the specific context of the 1980’s debt crisis — which differ from current circumstances in a number of important respects. The IMF’s Executive Board will discuss and decide on the exact modalities of the AIP for Greece.

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Question 9: Approval in Principle has not been used in a long time, why is the IMF putting it back on the table now?

AIP is a procedure that the IMF has used in the past in cases where there was agreement on the policies that would underlie an IMF arrangement, but where full agreement had not yet been reached between the country and its creditors on financing or debt relief. It was used a total of 19 times during the 1980’s debt crisis to help catalyze financing or debt relief in the context of IMF-supported programs for the following countries: Sudan, Ecuador, Zaire, Madagascar, Jamaica, Zambia, Côte d’Ivoire, Kenya, Somalia, Chile, Republic of Congo, Mexico, Nigeria, Argentina, Yugoslavia, and Brazil (for Sudan, Zaire and Cote D’Ivoire, the AIP procedure was used twice each).

Over time, AIP fell into disuse as it was no longer needed. This reflected in large part a new willingness by Paris Club official creditors to signal debt relief commitments in advance of a IMF arrangement. In addition, for private creditors, AIP was also no longer needed once the IMF became able to “lend into arrears”.

While the procedure has not been used recently, it can be used for cases like the one here, where there is agreement on the policies that would underlie an IMF arrangement, but where full agreement has not yet been reached between the country and its creditors on financing or debt relief, and the IMF’s role can be helpful in catalyzing financing and debt relief from creditors.