questions and answers
The IMF and Low-Income Countries in the Global Crisis
July 29, 2009
- How have low-income countries been affected by the global financial crisis?
- What are the projected needs of low-income countries for IMF financing?
- What is the IMF response to the funding needs of low-income countries?
- Where will the money for IMF lending to low-income countries come from?
- Will the IMF sell gold to meet the needs of low-income countries?
- Will the recent general allocation of Special Drawing Rights benefit low-income countries?
- Will the IMF offer low-income countries relief on interest payments?
- How will IMF provide new funding to low-income countries?
- What are the new concessional IMF financial facilities for low-income countries?
- What interest rate charges will low-income countries face in the new concessional IMF facilities?
- Will the IMF offer low-income countries higher levels of access to its concessional facilities?
- What type of conditionality will low-income countries face under the new concessional financing facilities?
- What is the IMF doing to address poverty in low-income countries in the face of the global crisis?
The global financial crisis originated in the advanced economies and has had its most visible impact on the emerging market countries. But a third wave of the crisis has threatened the remarkable economic achievements that many low-income countries have made over the past decade. An IMF paper on the impact of the crisis on low-income countries, released in March 2009, warned that the financial crisis, coupled with the sharp rise of food and fuel prices in 2007 and 2008, had created much higher financing needs that the international community would have to meet. Many LICs have been hit by lower demand for their exports, a sharp decline in remittances, and reduced foreign direct investment. The IMF now is working with these countries to help them keep millions of their citizens from sliding back into poverty. A follow-up paper on the impact of the crisis on Low-income countries will be issued later in 2009.
Because of the impact of the global financial crisis, demand from low-income countries for IMF concessional support has risen more rapidly than expected during 2009. As a result, their funding needs have been re-estimated. In April 2009, the IMF estimated that loan demand would be about $3 billion per year in 2009-10. Under the latest estimates, loan demand could reach up to $8 billion in these two years. Over the medium term, low-income country loan demand is projected at up to $17 billion through 2014.
The IMF is firmly committed to meeting the needs of low-income countries in the face of the worst global recession since the Great Depression. In the first seven months of 2009, the Fund committed new concessional lending of about $2.9 billion, compared with $1.2 billion for all of 2008. For sub-Saharan Africa alone, concessional lending has totaled $2.8 billion so far in 2009.
It is projecting lending in 2009 and 2010 could total up to $8 billion. This means the Fund would go beyond the call of the G-20 Leaders at their April 2009 London summit for the IMF to provide additional concessional lending of $6 billion in the next 2-3 years.
The IMF estimates that additional loan resources of about $13.5 billion will need to be mobilized to meet projected short-term and medium-term loan demand from low-income countries. A broad fund-raising effort focused on existing and potential new lenders will be undertaken, including through the possible use of Special Drawing Rights (SDR) that would be allocated to lenders in the forthcoming general allocation.
In addition, new resources will need to mobilized to fund the subsidized concessional interest rates under the new projected concessional lending. Resources needed to fully subsidize projected lending of $17 billion through 2014 are estimated at about $3.75 billion (end-2008 net present value terms). About $1.5 billion is now available, so an additional $2.25 billion will need to be secured to meet these projected needs.
The IMF has identified four sources that can be drawn upon to provide the additional subsidy resources: 1) new bilateral contributions from member countries; 2) delaying reimbursements to the General Resources Account from the PRGF-ESF Trust; 3) using resources currently held in the PRGF-ESF Trust Reserve Account; and 4) using resources to be derived from the proceeds of IMF gold sales, including indirect use of any windfall profits from the sales in excess of those projected at the time that the new income model was agreed in April 2008, and of investment income from the endowment that will be created with the gold sales profits if the realized windfall profits fall short of the required amount.
The IMF Executive Board will consider later this year a plan for the Fund to sell about 400 metric tons of gold in order to create an endowment in support of a new income model for the institution. In order to meet the financing needs of the low-income countries during the global crisis, some of the proceeds of those sales will be used to help generate the new subsidy resources needed for the concessional lending to those countries. The gold to be sold has not been set aside specifically for low-income countries. Rather, it is for the benefit of the Fund’s entire membership. So this will involve distribution of a portion of the gold sales’ proceeds to members after it is placed in the endowment, to be followed by members’ allocation back to the Fund of this distribution (or broadly equivalent amounts) as subsidy contributions for concessional lending.
The gold sales' proceeds could be used in two ways to generate the distribution to be used to help fund concessional lending to low-income countries. First, windfall profits when the gold sales take place could be used. Windfall profits would derive from gold sales at an average price in excess of $850 per ounce; that is, the price assumed in the new income model at the time the new model was agreed in April 2008. Second, to the extent that the realized windfall profits fall short of the required contribution, the remaining amount will be generated through the distribution of investment income from the endowment funded by the gold sales.
The IMF Executive Board in July 2009 backed a $250 billion general allocation of Special Drawing Rights (SDRs) that, following approval by the IMF Board of Governors, will be distributed to all member countries according to their quotas in the IMF. The allocation, which was originally called for by the G-20 Leaders at their April 2009 Summit in London, is intended to bolster countries’ foreign-exchange reserves and relax financing constraints as part of measures to combat the global economic crisis. The allocation will provide a total of more than $18 billion of SDRs to low-income countries. Some members may choose to sell part or all of their allocation to other members in exchange for hard currency—for example, to meet balance of payments needs—while other members will retain the allocation to boost their international reserves.
The IMF Executive Board on July 23, 2009, decided that all countries eligible for IMF concessional financing will receive exceptional relief on all interest payments through end-2011, implying zero interest payments on all outstanding credit under the IMF’s concessional instruments (including support under IMF’s emergency facilities). This initiative will provide immediate relief to low-income countries and send a strong signal to other creditors and donors about the urgent needs that these countries are facing as a result of the global crisis. This interest relief is part of the overall package of LIC reforms approved by the Executive Board at the same time, and will become effective when existing lenders and subsidy contributors to the PRGF-ESF Trust endorse the package of reforms.
The IMF Executive Board has adopted a new architecture of concessional financing facilities to meet the needs of its low-income member countries, especially at this time of global crisis. The new facilities are intended to be more flexible and specifically tailored to the increasing diversity of low-income countries. The new architecture closes gaps that existed under the previous structure of facilities and streamlines existing facilities. All of the new instruments aim to assist low-income countries in achieving a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. This package of reforms will become effective following endorsement by all current lenders and subsidy contributors to the PRGF-ESF Trust.
While many low-income countries will continue to require sustained program relationships with the IMF, an increasing number may need IMF financial support only on occasion, during particularly difficult times. For these cases, a short-term facility, the Standby Credit Facility, has been created. The facility also allows for precautionary use, to provide insurance in cases where members have a potential rather than an actual balance of payments need. The Fund has also set up a new instrument, the Rapid Credit Facility, to provide emergency support, with little conditionality. The new instruments are established under the umbrella of a new Poverty Reduction and Growth Trust.
The global financial crisis has highlighted the urgency of making the IMF’s financial support to low-income countries more flexible. The new architecture of concessional financing facilities is also intended address the increased diversity of these countries. The architecture comprises three new concessional lending facilities and one non-financial instrument. The new facilities replace the existing Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF), and will be organized under a new Poverty Reduction and Growth Trust that would replace the current PRGF-ESF Trust. The new facilities are:
- The Extended Credit Facility (ECF) succeeds the PRGF as the Fund’s main tool for providing medium-term support to low-income countries with medium-term balance of payments problems.
- The Standby Credit Facility (SCF) provides financing to low-income countries with short-term balance of payments needs, similar to the Stand-By Arrangement available in the Fund’s nonconcessional toolkit. The SCF also allows for precautionary use, to provide insurance in cases where LICs have a potential rather than an actual balance of payments need.
- The Rapid Credit Facility (RCF) provides rapid low-access financing with limited conditionality to meet urgent balance of payments needs.
In addition to these new instruments, the Policy Support Instrument (PSI) remains the Fund’s non-financial policy support tool for LICs, and can facilitate access to the SCF, if necessary.
Q. What interest rate charges will low-income countries face in the new concessional IMF facilities?
Interest rates will be reduced on a permanent basis on the IMF lending facilities established under the new architecture of concessional financing. This implies a higher level of concessionality of fund financial support to low-income countries. All interest payments for low-income countries will be reduced to zero through end-2011 for outstanding credit under the IMF’s concessional lending instruments. The interest rates will be reviewed regularly thereafter, using a new mechanism designed to establish permanently higher concessionality. Depending on global interest rates, rates will be normally set in a range of 0-0.5 percent for the ECF and RCF, and 0.25-0.75 percent for the SCF compared with the current 0.5 percent for the PRGF.
The new architecture of concessional financing facilities will broadly maintain reforms to the borrowing limits for low-income countries, announced in April 2009, that will help those countries meet the financing needs of the global financial crisis. These reforms amount to a doubling of average annual access limits. The policy is in line with the decision to increase access limits under the IMF’s non-concessional financing facilities.
Q. What type of conditionality will low-income countries face under the new concessional financing facilities?
Conditionality in all IMF programs, including for low-income countries, has been streamlined to focus on core objectives. This flexibility applies particularly to structural reforms. Such reforms will no longer be subject to the binding performance criteria under IMF programs. That means that countries will no longer be required to seek waivers if a particular structural reform is not completed by a specific date.
Q. What is the IMF doing to address poverty in low-income countries in the face of the global crisis?
The new architecture of concessional financing facilities for low-income countries places a strong emphasis on poverty alleviation and growth across all facilities.
Programs under the new concessional lending facilities are aimed at assisting low-income countries in achieving and maintaining a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. Under all facilities, any financing request or program review would be accompanied by a statement of how the program advances the country’s poverty reduction and growth objectives.
Programs under these facilities also will include specific targets to safeguard social and other priority spending.
In addition, increased IMF financial assistance to a majority of low-income countries has been in support of programs that include higher levels of pro-poor spending. Fund-supported programs have accommodated increased fiscal deficits, and often higher spending, to meet the challenges of the food and fuel and global financial crises. Recent programs have also often contained looser monetary policy and higher inflation targets.