Rapid Reaction Lending Helps Cushion the Impact of 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 and food), 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.

Greater Flexibility and Higher Financing

Modifications to the ESF approved in September 2008 and April 2009 made it faster to access, easier, more flexible to use, and capable of providing more financing. The key features are outlined below.

The modified ESF has two components:

• A rapid-access component under which a country can access fairly quickly, up to 50 percent of its quota for each exogenous shock, with resources normally being provided in a single disbursement. This component can be used on a stand-alone basis or as a first step towards higher access.



• A high-access component with access up to 150 percent of quota for each arrangement in normal circumstances. Resources are provided in phased disbursements based on reviews, and programs are one-to-two years in length. This component can be used following a rapid-access component or on a stand-alone basis.

The country's economic program should be focused 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.

Access is determined on a case-by-case basis. 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 shocks may need additional concessional donor assistance, which IMF support can help catalyze.

The conditionality associated with the ESF is tailored to members' needs and circumstances. Under the rapid access component, the member will only need to commit to appropriate policies to address the shock, and in exceptional cases, to take targeted up-front measures. Under the high-access component, an economic program of the same standard as programs under the PRGF will be needed.

Other requirements have been streamlined and made more flexible:

• The requirement for a member to have a Poverty Reduction Strategy has been dropped, but the ESF retains a focus on the impact on the poor of the shock and related policies.



• The ESF can be used flexibly in conjunction with other IMF facilities and instruments. The rapid-access component can be used concurrently with the Policy Support Instrument (PSI), Emergency Post Conflict Assistance (EPCA), Staff Monitored Programs (SMPs) or, in rare cases, an off-track PRGF. The high-access component can be used concurrently with a PSI. This will assist countries that wish to exit, or "graduate", from continuous engagement under PRGF programs but maintain the positive signal of a non-financial PSI; the ESF can serve as a safety net.

ESF loans are on terms equivalent to the PRGF. They carry an annual interest rate of 0.5 percent, with repayments made semiannually, beginning 5½ years and ending 10 years after the disbursement.

Lending Tailored to Countries' Needs

All IMF member countries can access emergency loans under the Emergency Assistance policy. Assistance can be provided 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 is also 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 can be provided in a more streamlined manner than under a PRGF arrangement.

Lower Rates

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.