Financing the IMF's Concessional Lending to Low-Income Countries
October 3, 2016
To strengthen its support for low-income countries (LICs) and to meet demand for financing from LICs in need, the IMF reformed its concessional lending facilities in 2010. In September 2012, the Fund also adopted a strategy to establish long-term concessional lending capacity of about SDR 1¼ billion ($2 billion) a year on average, financed, in part, by the use of resources linked to windfall profits from gold sales.
In July 2009, the IMF’s Executive Board agreed on reforms to tailor the Fund’s concessional lending facilities to the changing needs of LICs, and approved a new concessional financing framework, transforming the PRGF-ESF Trust to the Poverty Reduction and Growth Trust (PRGT). These reforms became effective on January 7, 2010.
Key elements of the new LIC facilities architecture include:
- The PRGT has three facilities—the Extended Credit Facility (ECF) to provide flexible medium-term support; the Standby Credit Facility (SCF) to address short-term and precautionary needs; and the Rapid Credit Facility (RCF) to provide emergency support.
- The structure of concessional interest rates on PRGT lending is linked to the SDR interest rate with regular reviews. Additionally, exceptional interest relief of zero percent interest rate on concessional loans for all LICs through end-2016 has provided relief for LICs. On October 3, 2016, the Executive Board approved a modification of the mechanism governing interest rate setting of PRGT facilities and set interest rates to zero on all Fund concessional loans under the PRGT for at least the next two years through end-December 2018. Moreover, PRGT interest rates will remain at zero for as long and whenever global market rates are very low. In July 2015, interest rate on the assistance under the RCF was set permanently at zero.
- Amounts needed to finance PRGT lending are obtained from bilateral loan agreements at market interest rates. Subsidy resources make up the difference between the market rates received by lenders and the concessional interest rates paid by low-income country borrowers. Resources in the General Loan Account and the General Subsidy Account are available to finance all PRGT facilities, while special loan and subsidy accounts were established for contributions to specific facilities. The Reserve Account provides security to lenders for all outstanding PRGT loans.
A financing package of loan and subsidy resources to boost the concessional lending capacity to SDR 11.3 billion from 2009 through 2014 was also approved in 2009. The financing package sought new loan resources from members of SDR 10.8 billion (including SDR 1.8 billion for a voluntary encashment regime under which the participating lenders may ask for a ready repayment of loans in case of balance of payments needs) and new subsidy resources of SDR 1.5 billion (end-2008 in net present value terms). Most of the additional subsidies were to be financed from a combination of the Fund’s internal resources and the use of resources linked to windfall profits from gold sales. Bilateral subsidy contributions of SDR 0.2–0.4 billion were also sought from the membership to complete the financing package.
The 2009 financing package is now complete. Fourteen members provided loan resources totaling SDR 9.8 billion and twenty-six members pledged bilateral subsidy contributions totaling SDR 214 million. In February 2012, the Executive Board approved a partial distribution from the IMF’s general reserve to the membership of SDR 0.7 billion, attributed to windfall profits from the recent gold sales. This distribution, which was part of the 2009 LIC financing package, became effective in October 2012 when members representing over 90 percent of the distribution (SDR 0.63 billion) provided satisfactory assurances regarding the availability of new PRGT subsidy contributions.
Establishing a self-sustaining lending capacity
In September 2012, the Executive Board approved a strategy to establish the PRGT as financially self sustaining in the longer term. This strategy rests on three pillars: (i) a base annual average lending capacity of about SDR 1¼ billion; (ii) contingent measures activated when average financing needs exceed the base envelope by a substantial margin for an extended period; and (iii) the expectation that future modifications to LIC facilities would also support self-sustainability. The lending capacity of SDR 1¼ billion is supported by resources linked to a second distribution of the Fund’s general reserves (SDR 1.75 billion) attributed to the remaining windfall gold sales profits. The second distribution became effective in October 2013 when members representing over 90 percent of the distribution (SDR 1.65 billion) had provided satisfactory assurances regarding the availability of new PRGT subsidy contributions. To date, a total of 157 countries have pledged 95.1 percent of this second distribution and 139 members had paid their shares (86.6 percent of the total distribution).In April 2014, the Executive Board approved amendments to the PRGT instrument necessary to implement the strategy for the self-sustained PRGT. The necessary consents from lenders to the PRGT to the amendments were received by end-2014, allowing the strategy to fully take effect.
The framework for self-sustained lending is robust under a number of demand scenarios. The framework can temporarily accommodate demand at a higher level than the estimated self-sustained long-term capacity. However, the self-sustained capacity could be significantly affected if demand were to remain elevated for extended periods. Under these circumstances and in line with the three-pillar strategy, new subsidy resources would need to be sought or other contingent measures taken to restore the self-sustained lending capacity.
While the self-sustained framework does not envisage the need for regular infusions of subsidy resources, the PRGT will continue to require renewal of loan agreements. To ensure adequate loan resources through the medium term, twelve members have agreed to extend the terms of their existing borrowing agreements. With these extensions, loan resources are sufficient for projected needs through at least mid-2017. In addition, a new fundraising round for loan resources is underway with the objective of obtaining sufficient loan resources to allow PRGT lending into the next decade.
During 2009–15, average annual lending commitments were about SDR 1.25 billion, peaking in 2009 at SDR 2.5 billion with 18 new arrangements. Reflecting partly the recovery of many LICs after the global financial crisis, demand for financing in 2010 and 2011 moderated to SDR 1.2 billion each year. New commitments picked up in 2012 and 2015 to SDR 1.5 billion each year. For 2010–15, commitments including augmentations were SDR 5.1 billion under the ECF, SDR 0.75 billion under SCF, and SDR 0.44 billion under RCF.