The Policy Support Instrument (PSI) supports low-income countries that do not want—or need—Fund financial assistance but seek to consolidate their economic performance with IMF monitoring and support. This non-financial instrument is a valuable complement to the IMF's lending facilities under the Poverty Reduction and Growth Trust. The PSI helps countries design effective economic programs that, once approved by the IMF's Executive Board, deliver clear signals to donors, multilateral development banks, and markets of the Fund's endorsement of the strength of a member's policies.
Better policies by working closely together
Purpose. The PSI is designed to promote a close policy dialogue between the IMF and a member country. It provides more frequent Fund assessments of a member's economic and financial policies than is available through the regular annual checkup of a country’s economic health, known as surveillance. This support from the IMF also delivers clear signals to donors, creditors, and the general public on the strength of a country’s policies.
Eligibility. The PSI is available to all PRGT-eligible countries that have broadly achieved and maintained a stable and sustainable macroeconomic position, including debt sustainability, consistent with strong and durable poverty reduction and growth.
Duration and repeated use. A PSI will be approved for one to three years, and may be extended up to a maximum period of four years. After the expiration or cancellation of a PSI, a successor PSI may be requested as long as the qualification criteria continue to be met. There is no limit on the number of successor PSIs.
Relation with financial instruments. The PSI cannot be used concurrently with the Extended Credit Facility (ECF). In contrast, if short-term financing needs arise, the PSI can be used flexibly in conjunction with the Rapid Credit Facility (RCF) or Standby Credit Facility (SCF). While there is no automatic link between a PSI and access to the RCF or SCF, a successfully-implemented PSI, would reduce the time normally required to design an SCF-supported program. PSI users can also request concurrent precautionary support under the SCF, which may be useful in periods of increased uncertainty or risk.
Streamlined and focus conditionality
Under the PSI, member countries agree to implement a set of policies designed to maintain macroeconomic and financial stability, and accelerate growth, with sustainable domestic and external debt. These commitments, including specific conditions, are described in the country’s letter of intent - a document that spells out a country’s commitments under the PSI.
The IMF has streamlined program conditionality to focus on policy actions that are critical for achieving the program’s objectives. PSI-supported policies should be consistent with the country's poverty reduction and growth objectives and should meet the same high quality standards as under Fund financial arrangements such as the ECF and SCF. Documentation requirements allow countries until the second program review to complete their poverty reduction strategy paper.
Quantitative conditions are used to monitor macroeconomic policy variables such as monetary aggregates, international reserves, fiscal balances, or external borrowing, based on the country’s program objectives. PSI-supported programs aim to safeguard social and other priority spending, including through explicit quantitative targets where possible.
Structural benchmarks help monitor critical reforms to achieve program goals; progress against these benchmarks is assessed in the context of program reviews. These measures vary across programs but could, for example, include measures to improve financial sector operations, build up social safety nets, or strengthen public financial management. Legally binding structural conditions have been abolished.
Program reviews by the IMF’s Executive Board play a critical role in assessing performance under the program and allowing the program to adapt to economic developments. The timing of the reviews follows a fixed schedule (normally semiannually) so as to ensure the strength and consistency of the Fund’s signal and to provide donors timely information to help them make independent judgments about their financing.
To date, the Executive Board has approved PSIs for seven members: Nigeria on October 17, 2005; Uganda on February 1, 2006, December 15, 2006, and May 12, 2010; Cape Verde on August 1, 2006 and November 22, 2010; Tanzania on February 16, 2007 and June 4, 2010; Mozambique on June 26, 2007 and June 14, 2010; Senegal on November 2, 2007 and December 3, 2010; and Rwanda on June 16, 2010.