The global economic and financial crisis highlighted the need for effective global financial safety nets to help countries cope with adverse shocks. Even before the crisis emerged, the IMF was in the process of reforming how it lends money to countries that find themselves in a cash crunch. The idea was to create different kinds of facilities for the very different needs of our 188 member countries. The Flexible Credit Line (FCL) was designed to meet the increased demand for crisis-prevention and crisis-mitigation lending for countries with very strong policy frameworks and track records in economic performance. To date, three countries, Poland, Mexico and Colombia, have accessed the FCL: due in part to the favorable market reaction, none of the three countries have so far drawn on FCL resources
Flexibility to meet countries’ needs
A key objective of the lending reform is to reduce the perceived stigma of borrowing from the IMF, and to encourage countries to ask for assistance before they face a full blown crisis. Countries with very strong economic fundamentals and policy track records can apply for the FCL when faced with potential or actual balance of payments pressures. The flexibility provided by the FCL means that the IMF can meet a broad range of country needs:
Qualified countries have flexibility to draw at any time within a pre-specified window on the credit line, or to treat it as a precautionary instrument.
Assuring qualified countries they have large and up-front access to IMF resources with no ongoing conditions.
The FCL works as a renewable credit line, which at the country’s discretion could initially be for either one- or two-years with a review of eligibility after the first year. If a country decided to draw on the credit line, repayment should take place over a 3¼ to 5 year period.
There is no cap on access to IMF resources, and the need for resources is assessed on a case-by-case basis.
Low cost to get through tough times
The cost of borrowing under the FCL is the same as that under the Fund’s traditional Stand-By Arrangement (SBA) and the newly-established Precautionary and Liquidity Line (PLL). In accessing Fund resources on a precautionary basis, countries pay a commitment fee that is refunded if they opt to draw on those resources. The commitment fee increases with the level of access available over a twelve month period, effectively ranging between 24 and 27 basis points for access between 500 and 1000 percent of quota, and higher above 1000 percent of quota.
As with other non-concessional IMF facilities, the cost of drawing under the FCL varies with the scale and duration of lending. The lending rate is tied to the IMF’s market-related interest rate, known as the basic rate of charge, which is itself linked to the Special Drawing Rights (SDR) interest rate. Large loans, with credit outstanding above 300 percent of quota, carry a surcharge of 200 basis points. If credit outstanding remains above 300 percent of quota after three years, the surcharge rises to 300 basis points. The escalation of the surcharge is designed to discourage large and prolonged use of IMF resources. Currently, the effective interest rate under the FCL (or an SBA or a PLL) for access between 500 and 1000 percent of quota—ranges between 1.9–2.5 percent, rising to about 2.3–3.2 percent after 3 years, and higher above 1000 percent of quota1. These interest rates exclude a flat 50 bps service charge, which is applied to all Fund disbursements.
Very strong performers qualify
The qualification criteria are the core of the FCL and serve to show the IMF’s confidence in the qualifying member country’s policies and ability to take corrective measures when needed. At the heart of the qualification process is an assessment that the member country:
- Has very strong economic fundamentals and institutional policy frameworks
- Is implementing—and has a sustained track record of implementing—very strong policies
- Remains committed to maintaining such policies in the future
The criteria used to assess a country’s qualification for an FCL arrangement are:
- A sustainable external position
- A capital account position dominated by private flows
- A track record of access to international capital markets at favorable terms
- A reserve position that is relatively comfortable when the FCL is requested on a precautionary basis
- Sound public finances, including a sustainable public debt position
- Low and stable inflation, in the context of a sound monetary and exchange rate policy framework
- The absence of bank solvency problems that pose an immediate threat of a systemic banking crisis
- Effective financial sector supervision
- Data integrity and transparency
1 As of March 20, 2013 with the SDR interest rate of 0.09 percent.