The IMF's Trade Integration Mechanism (TIM)
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The Trade Integration Mechanism (TIM) was introduced in April 2004 to assist member countries to meet balance of payments shortfalls that might result from multilateral trade liberalization. The TIM is not a special lending facility, but rather a policy designed to make resources more predictably available under existing IMF facilities. |
How might trade liberalization impact a country’s balance of payments?
Multilateral trade liberalization has been a major contributor to the world economy’s unprecedented growth over the past half century. In tackling remaining restrictions on trade, the Doha Development Agenda of the World Trade Organization (WTO) has the potential to benefit all countries. Yet, while overwhelmingly positive in its impact over time, opening the world trading environment further would require countries to adjust. And under certain circumstances, these adjustments could temporarily reduce export revenues, increase import bills, or cause other shortfalls in the external balance of payments.
Some of the potential adjustment pressures derive from more competitive conditions in a country’s export markets. For example, the erosion of tariff preferences could lead to a reduction in the demand for a country’s exports because other suppliers can now compete on more equal terms. Similarly, the expiration (in 2005) of quotas under the WTO’s textiles agreement could lead to more intense competition in textiles and clothing markets—resulting in higher imports and/or lower exports in some countries. Another possible adjustment pressure relates to cuts in agricultural subsidies in the OECD countries. While of course benefiting the vast number of farmers in the developing world, such measures could nevertheless increase the price of food imports (relative to food exports) in some countries.
According to Fund research, balance of payments shortfalls are unlikely to be large for most countries, and would eventually be dominated by the positive impact of more open trade. Nevertheless, they could be significant in the short run for some countries.
How the TIM can help countries to make trade-related adjustments
The IMF’s Trade Integration Mechanism (TIM) aims to mitigate concerns—particularly in developing countries—about financing such balance of payments shortfalls.
The TIM is not a special facility that will provide new resources under special terms. Financial support for balance of payments difficulties arising from trade-related adjustments is already provided under the Fund’s existing lending facilities. Rather, the TIM is a policy designed to increase the predictability of resources that are available under existing facilities.
The TIM is expected to create a modest increase in IMF financing, for two reasons. First, the explicit emphasis on trade adjustments will ensure that their impact is carefully estimated and incorporated into Fund-supported programs. Second, the TIM contains a “deviation feature” which provides countries with a greater degree of certainty that IMF financing will be available to assist with larger-than-anticipated adjustments.
How the TIM works
A member country can request consideration under the TIM if it expects a net balance of payments shortfall as a result of measures implemented by other countries that lead to more open market access for goods and services. Such measures would typically be introduced either under a WTO agreement or in some other way that treats all countries on a nondiscriminatory basis.
The TIM details how the Fund would provide access to its resources to meet a balance of payments need associated with such trade-related adjustments. In particular, the IMF would:
- stand ready to discuss with countries facing such balance of payments shortfalls, new arrangements within its existing lending facilities (i.e., upper credit tranches, the Extended Fund Facility (EFF), or the Poverty Reduction and Growth Facility (PRGF));
- take into account the anticipated impact of the trade adjustment on the member’s balance of payments in determining the appropriate size of access under both new and existing arrangements (the “baseline feature”); and
- be prepared to augment arrangements under simplified procedures if the actual balance of payments effect turns out to be larger than anticipated (the “deviation feature”).
The TIM does not cover the implications of "own liberalization" measures—for example, any deterioration in a country's balance of payments that results from a reduction in its own import tariffs. However, the Fund will continue to assist its members in anticipating and managing the implications of domestic reforms that may be associated with Doha Round commitments or that are undertaken unilaterally, including through financing under the Fund's existing policies.
Three member countries (Bangladesh, the Dominican Republic, and the Republic of Madagascar) have so far requested and obtained support in accordance with the TIM.
Other IMF support for trade liberalization
Fund experts provide significant and long-standing technical assistance for data improvements, customs reform, and tax and tariff reform—including to mitigate the revenue implications of liberalization. In its areas of expertise, the Fund also contributes actively to the Integrated Framework process, which aims to strengthen the incorporation of trade reforms in national poverty reduction strategies and to coordinate trade-related technical assistance. The activities of the Integrated Framework, and Aid-for-Trade more generally, can support countries’ efforts to take greater advantages of the opportunities provided by the global trading system. As part of the process of Article IV surveillance, Fund staff engage with country authorities in identifying areas of opportunity and risk, and in devising appropriate policy responses to the challenges of international integration. The Fund has also strengthened its research capacity in the trade area, and is helping to develop methodologies for assessing the impact of trade reforms on member countries.