The Exogenous Shocks Facility (ESF)
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The Exogenous Shocks Facility (ESF) provides policy support and financial assistance to low-income countries facing exogenous shocks. It is available to countries eligible for the Poverty Reduction and Growth Facility (PRGF)—the IMF's main instrument for financial assistance to low-income countries—but that do not have a PRGF program in place. Financing terms are equivalent to a PRGF arrangement and more concessional than under other IMF emergency lending facilities. |
Why protect against exogenous shocks?
An exogenous shock is an event that has a significant negative impact on the economy and that is beyond the control of the government. That could include commodity price changes (including oil), natural disasters, and conflicts and crises in neighboring countries that disrupt trade.
Low-income countries have a higher incidence of shocks than other developing countries and tend to suffer larger damages when they occur. At the same time, these countries have limited capacity to build up cushions of foreign currency reserves and government revenues to protect against shocks, and market insurance tends to be inordinately expensive or unavailable.
External assistance can help reduce the effects of shocks, but the assistance needs to be available quickly. It should also include incentives for good economic policies and measures to reduce vulnerability to future shocks. The IMF can offer assistance in the form of quick-disbursing loans to meet immediate balance of payments needs, and by providing a signal on the adequacy of policies. IMF lending also can help to attract more concessional assistance from donors.
How does the ESF relate to other IMF emergency lending?
All IMF member countries can access emergency loans under the Emergency Assistance policy. The IMF provides assistance to countries in post-conflict situations (Emergency Post-Conflict Assistance, or EPCA) and countries afflicted by natural disasters (Emergency Natural Disaster Assistance, or ENDA). Assistance also is provided under the Compensatory Financing Facility (CFF), which assists countries experiencing either a sudden shortfall in export earnings or an increase in the cost of cereal imports caused by fluctuating world commodity prices; this facility has been little used in recent years.
For low-income countries with a PRGF arrangement in place, Fund assistance to members facing shocks can be made available by augmenting the resources available under that arrangement. What distinguishes ESF financing is that it is more concessional than under the Emergency Assistance Policy and the CFF, and is similar to a PRGF arrangement. It also requires the formulation of a comprehensive economic program.
Key Features of the ESF
ESF economic programs focus on adjustment to the underlying shock, with less emphasis on the broad structural adjustment that often characterizes other IMF-supported programs, including those supported by the PRGF. As a result, ESF programs are one to two years in length—shorter than under the PRGF. At the same time, conditionality in ESF programs meets the same standard as programs under the PRGF. In view of the prevalence of poverty in low-income countries, the ESF requires that a poverty reduction strategy be in place. In exceptional cases, the authorities should provide assurances that the strategy will be launched during the program. It is not expected that this requirement would unduly delay approval of an ESF program.
For countries that wish to exit, or "graduate", from continuous engagement in PRGF programs, the ESF can serve as a safety net. In the event of a shock, an on-track Policy Support Instrument (PSI)—another new facility that establishes a policy framework without Fund financing—would facilitate access under the ESF because it would reduce the time normally required to design an appropriate program. Although the link would not be automatic, access would be facilitated if adjustments to the program endorsed and assessed under a PSI would be limited to those needed to correct the balance of payments need arising from a shock.
Assistance under the ESF may be front-loaded, given the importance of an immediate response. Access will be determined on a case-by-case basis. Given the relative scarcity of concessional IMF resources, the norm for annual access is set at 25 percent of the member's quota in the Fund, Barring exceptional circumstances, total outstanding balances from this facility are subject to a cumulative access limit of 50 percent of quota. Similar to the PRGF, loans under the ESF carry an annual interest rate of 0.5 percent, with repayments made semiannually, beginning 5½ years and ending 10 years after the disbursement. In most cases, the impact of an exogenous shock is likely to be larger than the assistance available from the IMF. Therefore, even with appropriate policy adjustment, many low-income countries experiencing such shocks may need additional concessional donor assistance.
How is the ESF financed?
Concessional lending under the ESF is administered by the IMF, as trustee, through the PRGF-ESF Trust. The Trust borrows from central banks, governments, and official institutions generally at market-related interest rates, and lends them on a pass-through basis to PRGF-eligible countries. The difference between the market-related interest rate paid to PRGF-ESF Trust lenders and the rate of interest paid by the borrowing members is financed by contributions from bilateral donors and the IMF's own resources. Bilateral donors can earmark contributions of subsidy resources. The ESF financial structure includes an ESF Subsidy Account, which holds resources used exclusively to subsidize ESF loans, and a joint PRGF-ESF Subsidy Account, which contains resources available to subsidize either ESF or PRGF loans.