A new tool to meet countries’ crisis-prevention needs

During the recent global financial crisis, countries had access to two IMF crisis-prevention facilities: the FCL, with no ex post conditionality, and the High-Access Precautionary Stand-By Arrangement (HAPA), with focused conditionality to achieve the program objectives. The newly established PCL bridges the gap between the FCL and the HAPA for those countries with sound fundamentals and policy track records, but facing moderate vulnerabilities that may not yet meet the high FCL qualification standards. The PCL combines a qualification process (similar to that for the FCL) with focused ex-post conditionality aimed at addressing vulnerabilities identified during qualification. Its qualification requirements signal policy strength to consolidate market confidence in the country’s policy plans.

The PCL works as a renewable credit line, with duration between one and two years. Countries that qualify under the PCL have large frontloaded access, with up to 500 percent of quota made available on approval of the arrangement and up to a total of 1000 percent of quota after 12 months upon satisfactory progress in reducing their vulnerabilities.

As a dedicated credit line for crisis-prevention, the PCL is only available to countries that do not face an actual balance of payments need at the time of approval. But the PCL can also play a crisis-resolution role: if a large balance of payments need arises unexpectedly, access to resources can be brought forward.

Sound performers qualify

The qualification process is essential to the PCL’s capacity to signal policy strength. The core standard of the PCL qualification process is that the member country:

• Has sound economic fundamentals and institutional policy frameworks;
• Is implementing—and has a track record of implementing—sound policies; and
• Remains committed to maintaining such sound policies in the future.

The criteria used to assess whether a country qualifies for the PCL are the five broad areas encompassed in the FCL qualification criteria, namely: (i) external position and market access; (ii) fiscal policy; (iii) monetary policy; (iv) financial sector soundness and supervision; and (v) data adequacy. While requiring strong performance in most of these areas, the PCL permits access to precautionary resources to members that may still have moderate vulnerabilities in one or two of these areas.

Countries suffering any of the following problems at approval cannot access the PCL: (i) sustained inability to access international capital markets; (ii) the need to undertake large macroeconomic or structural policy adjustment; (iii) a public debt position that is not sustainable in the medium term with a high probability; or (iv) widespread bank insolvencies.

Focused program to reduce remaining vulnerabilities

Countries using the PCL commit to a focused set of policies aimed at reducing the remaining vulnerabilities identified in the qualification process. Since these countries have sound policies, policy actions will be more focused, with streamlined conditionality under the PCL. Prior actions and performance criteria will only be used when they are critical for the program’s success. A quantified macroeconomic framework underpinned by indicative targets provides a context to assess a country’s progress toward meeting its program objectives. The policy program under the PCL is monitored through semi-annual reviews.

Low cost to get through tough times

The PCL is subject to the same charges, surcharges, commitment fees, and repurchase period (3¼ to 5 years) as the FCL and Stand-By Arrangements (SBA). If funding needs do not materialize, countries pay only a commitment fee which 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.

The cost of drawing under the PCL varies with the scale and duration of financing. 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 under the PCL (or an FCL or SBA) for access between 500 and 1000 percent of quota—ranges between 2.2–2.8 percent, and about 2.6–3.5 percent after 3 years. These interest rates exclude a flat 50 bps service charge, which is applied to all Fund disbursements.

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¹As of August 30, 2011 with the SDR interest rate of 0.37 percent.