IMF Support for Low-Income Countries
April 11, 2017
In 2009, the IMF strengthened its support for low-income countries to respond to the changing nature of economic conditions in these countries and their increased vulnerabilities due to the effects of the global economic crisis. Since then, the IMF has overhauled its lending instruments to address more directly countries’ needs for short-term and emergency support. In 2015, the IMF’s support for its poorest members was boosted by increasing by 50 percent their access to concessional resources, and by permanently setting a zero interest rate on loans to LICs hit by severe exogenous shocks (e.g., natural disasters) These measures were complemented by enhanced IMF support for LICs under the 2030 development agenda in a number of areas. The Fund has adopted a strategy to support concessional lending of about US$1.7 billion a year over the longer term, financed in part by contributions linked to the distribution of gold sales profits.
LIC challenges and IMF support
Low-income countries (LICs) have made great strides toward stable and sustainable macroeconomic positions consistent with strong and durable poverty reduction and growth. Many are becoming more open and integrated into the global economy and international capital markets, attracting foreign investment, and nurturing their own private financial sectors. Nonetheless, several LICs that are heavily dependent on commodity exports are grappling with renewed economic and financial challenges associated with lower commodity prices since 2014. This is pushing back the prospect of achieving the strong medium-term growth needed to reach emerging market status. Achieving and maintaining a stable macroeconomic position, building resilience to economic shocks, and ensuring that growth is inclusive remain key policy priorities for LICs. The Fund, in 2015, committed to several new initiatives to boost its support for developing countries —notably through expanding access to Fund resources and capacity-building efforts. Key areas for intensified capacity-building support include boosting domestic revenue mobilization, strengthening public investment management, and designing policies to promote economic inclusion.
Changes in lending instruments
To make its financial support more flexible and tailored to the diversity of low-income countries, the IMF established in 2010 a Poverty Reduction and Growth Trust, which has three concessional lending windows:
The Extended Credit Facility (ECF): Provides sustained engagement over the medium to long term, in case of protracted balance of payments problems;
The Standby Credit Facility (SCF): Provides financing to low-income countries with actual or potential short-term balance of payments and adjustment needs caused by domestic or external shocks, or policy slippages; the SCF can also be used on a precautionary basis in periods of increased risk and uncertainty.
The Rapid Credit Facility (RCF): Provides rapid financial support without conditionality in a single, up-front payout for low-income countries facing urgent balance of payments needs, and offers repeated disbursements over a (limited) period in case of recurring or ongoing balance of payments needs.
All these facilities provide financing suitable to the diverse needs of LICs and on concessional terms. On October 3, 2016, the Executive Board approved a modification of the mechanism governing interest rate setting of PRGT facilities and kept 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 2015, the interest rate on RCF financing was set permanently at zero to further enhance support for PRGT-eligible countries in fragile situations and those hit by natural disasters.
For policy advice and signaling, countries can request non-financial assistance under the Policy Support Instrument (PSI), which
- Supports low-income countries that are in a broadly stable macroeconomic position at the time of the approval and thus do not need IMF financial assistance;
- Can provide accelerated access to the SCF in case of subsequent financial needs.
In response to the increased financial needs of low-income countries during and after the global financial crisis, IMF concessional lending commitments increased significantly and totaled US$11 billion during 2009–14.
In addition, more than US$18 billion of the US$250 billion allocation of IMF Special Drawing Rights (SDRs) went to low-income countries. These countries can benefit by either counting the SDRs as extra assets in their reserves, or selling their SDRs for hard currency to meet balance of payments needs.
In September 2012, the Executive Board approved a partial distribution of the Fund’s general reserves attributed to gold sales profits as part of a strategy to make the PRGT sustainable in the longer term. This strategy is expected to be robust under a wide range of demand scenarios and rests on three pillars: (i) a base envelope of about SDR 1¼ billion (about US$1.7 billion) in annual lending capacity; (ii) contingent measures that can be activated when average financing needs exceed the base envelope by a substantial margin for an extended period; and (iii) the expectation that all modifications to LIC facilities should be consistent with maintaining self-sustainability.
In February 2015, the IMF transformed the Post-Catastrophe Debt Relief Trust (PCDR), which allows the IMF to join international debt relief efforts for very poor countries that are hit by the most catastrophic of natural disasters into the Catastrophe Containment and Relief (CCR) Trust. The new trust allows the Fund to join international debt relief efforts when poor countries are hit by the most catastrophic of natural disasters and to assist poor countries battling with public health disasters—such as epidemics of infectious diseases—with grants for debt service relief. Three Ebola-afflicted countries (Guinea, Liberia, and Sierra Leone) requested assistance from this new trust, totaling about US$100 million in February-March 2015.
In July 2015, the IMF adopted a number of new initiatives, within its mandate, to support its member countries as they embark on pursuing the new Sustainable Development Goals (SDGs). In this context, the IMF further strengthened the financial safety net for low-income countries by increasing access to all its concessional facilities by 50 percent. In addition, the use of concessional resources was targeted more towards poorer and more vulnerable countries while the mix of financial support for better-off countries would be rebalanced from concessional to non-concessional resources. Finally, efforts to secure additional loan resources of about US$15 billion (SDR 11 billion) to support the IMF’s concessional lending activities are relatively advanced with about half of the targeted level of new loan resources secured to date.