Signs of success

The IMF’s support for low-income countries needed an upgrade as economic conditions improved in these countries, and as they became more open and integrated into the global economy.

Many have made great strides toward macroeconomic stability. In the 1990s, the vast majority of low-income countries faced long-standing economic problems that required radical, long-term policy changes often accompanied by debt relief or cancellation. Now, however, many of these economies are becoming more open and integrated into the global economy. Many low-income countries (LICs) are joining international capital markets, entering markets for goods and services, attracting foreign investment, nurturing their own private financial sectors, and benefiting from money sent home by citizens working abroad.

But with this greater international openness and integration comes greater vulnerability and exposure to the ups and downs of the global economy. This was highlighted by the impact that sudden jumps in world food and fuel prices had on LICs in 2007 and 2008. Spillover from the global financial crisis soon followed. It was apparent that the new generation of more stable but more vulnerable low-income countries needed a new generation of IMF loan facilities to support them.

Changes in lending instruments

To make its financial support more flexible and tailored to the diversity of low-income countries, the IMF has established a new Poverty Reduction and Growth Trust, which has three new lending windows, all under highly concessional terms. The new windows, which became effective in January2010, are the following:

The Extended Credit Facility (ECF) replaces the Poverty Reduction and Growth Facility (PRGF). The ECF

• Provides sustained engagement over the medium to long term, in case of medium-term balance of payments needs;
• Offers more flexibility than before on program extensions, the timing of structural reforms, and formal poverty reduction strategy document requirements.

The Standby Credit Facility (SCF), which supersedes the Exogenous Shocks Facility’s High Access Component, is similar to the Stand-By Arrangement for middle-income countries.
The SCF

• Provides flexible support to low-income countries with short-term financing and adjustment needs caused by domestic or external shocks, or policy slippages;
• Targets countries that do not face protracted balance of payments problems but may need help from time to time
• Can also be used on a precautionary basis to provide insurance.

The Rapid Credit Facility (RCF), which

• Provides rapid financial support in a single, up-front payout for low-income countries facing urgent financing needs, and offers successive drawings for countries in post-conflict or other fragile situations;
• Provides flexible assistance without program-based conditionality when use of the other two facilities is either not necessary (limited nature of need) or not possible (institutional or capacity constraints).

All these facilities allow for significantly higher access to financing and offer more concessional terms than previously. Low-income countries will receive exceptional forgiveness through end-2011 on all interest payments due to the IMF under its concessional lending instruments. Thereafter, concessionality will be reviewed every two years.

For policy advice and signaling to donors, countries can request non-financial assistance under the existing Policy Support Instrument (PSI), which

• Supports low-income countries that have secured macroeconomic stability and thus do not need IMF financial assistance
• Can provide accelerated access to the new SCF in case of subsequent financial needs.

Increased IMF financial support for low-income countries has come at a time when these countries needed to respond to the global crisis. Changes in the design of the agreed policy packages—called programs—that accompany IMF loans allowed for countercyclical fiscal policies, including increased fiscal spending. Additional changes to program design include:

• Strengthening the focus on supporting poverty alleviation and growth,
• Protecting public spending on social and other priority areas, even as economic downswings cut revenues
• Focusing loan conditions on critical areas, such as transparent management of public resources.

More money

In response to the increasing financial needs of low-income countries during the global financial crisis, IMF concessional lending increased significantly from US$1.2 billion in 2008 to US$3.8 billion, and US$1.8 billion in 2009 and 2010, respectively. The IMF will also more than double the concessional resources available to low-income countries up to $17 billion through 2014.

In addition, more than $18 billion of the $250 billion allocation of IMF Special Drawing Rights (SDRs) went to 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.

The IMF also recently established a new 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. In July 2010, this allowed the IMF to eliminate Haiti’s entire outstanding debt to the IMF following the devastating earthquake.