Summing Up by the Acting Chairman of the IMF's Executive Board
Summing Up by the Acting Chairman of the IMF's Executive Board
Executive Directors welcomed the opportunity to begin discussions on how Fund facilities might be modified in light of changes in the world economy. Today’s preliminary discussion is part of the broader debate on reform of the architecture of the global financial system, which spans various issues, including private sector involvement in crisis resolution. This discussion surfaced many of the complex issues involved, but it has also helped us to understand the diversity of views within the Board, and it will help us to formulate priorities for a work program on these issues for the next several months. Directors observed that, as the debate continues, greater clarity will be needed on the role of the Fund, as a basis for concrete decisions on key issues.
Directors found the brief historical retrospective in the first chapter of the staff paper useful. They welcomed the portrayal in the second chapter of recent developments in the use of Fund resources. Directors took note, in particular, of the fact that the bulk of Fund financing in recent years was in support of countries hit by financial market crises and, to a lesser degree, in support of transition economies.
As regards “house-cleaning,”—eliminating facilities that are not being used or no longer serve members’ needs—Directors agreed that the policies on Currency Stabilization Funds (CSF) and on Fund support for commercial bank Debt and Debt Service Reduction (DDSR) operations could be eliminated. The staff will circulate draft decisions to this effect shortly, for approval on a lapse of time basis. This will take to four—including the Buffer Stock Financing Facility (BSFF) and the contingency element of the Compensatory and Contingency Financing Facility (CCFF) eliminated in February—the number of facilities that have been eliminated in an effort to streamline and simplify the Fund’s financing facilities. At the same time, Directors thought that it was appropriate to retain current policies on the first credit tranche and on emergency assistance for natural disasters and post-conflict cases.
There was a somewhat greater divergence of views on the CFF (the remaining element of the CCFF). A few Directors would have preferred that the CFF be eliminated entirely, but a few others indicated that no such decision should be made absent an overall review of access limits. Most Directors favored adopting a streamlined CFF along the lines discussed in January (as described in Annex V of the staff paper) for a period of two years, at which time it could be reviewed again in the light of experience with, and of developments in, other facilities. In particular, most Directors agreed that the CFF should be limited to cases where an upper credit tranche arrangement is in place—with simplified access provisions and with phasing—or where the balance of payments position is deemed satisfactory apart from the temporary export shortfall or cereal import excess. They also considered that the cereal import element should be made subject to the same review provisions as the remainder of the CFF. The staff will circulate a short paper with draft decisions to this effect, for consideration in the near future.
There was a lively discussion on the more fundamental issues involved in ensuring that the Fund’s facilities effectively meet the needs of the membership, against the backdrop of a changing world economy. Most Directors thought that at least some elements of the Fund’s facilities needed to be revisited to ascertain whether the spectrum of facilities still meets today’s needs and whether the terms of the facilities remain appropriate. A few other Directors suggested exploring further the option of a single flexible facility that could be used in varying circumstances and could serve multiple objectives.
Directors emphasized that the globalization of capital markets raised important issues about the role of the Fund. They recognized that large-scale Fund financing in the crises of capital market confidence that had occurred in recent years embodied an element of moral hazard. They emphasized the importance of efforts to stem this effect, including through many of the steps being considered in the debate on architecture, and in particular the involvement of the private sector in relevant cases in the resolution of such crises. Directors recalled that the Supplemental Reserve Facility (SRF) had been created in response to the distinct nature of these new crises—notably, the likelihood that they could be reversed relatively quickly—and its design had been importantly influenced by concerns about moral hazard. These considerations were behind the SRF’s shorter maturities and higher charges. Directors noted that the SRF appeared to have proven itself to be an appropriate tool since its creation in 1997, and that the expectation that members would be able to repurchase relatively quickly was generally well-founded. While a number of Directors made suggestions on how some elements of this facility could be modified, it is not proposed that modifications be made to the SRF at this juncture; but we need to keep these suggestions in mind, and the issues could be revisited at a later stage.
Directors stressed the importance of continued efforts to strengthen the Fund’s policies in the area of crisis prevention, including by exploring the potential for adjusting the design of its facilities in such a way as to encourage members’ efforts in this area. The idea that large precautionary arrangements could perhaps substitute for the Contingent Credit Line (CCL) was raised in this context. Many Directors, however, noted that a separate CCL facility brought greater flexibility, particularly in terms of maturity and charges, and that the signaling role of the CCL would be difficult to replicate in the context of precautionary arrangements. Most Directors thus favored additional experimentation with the design of the CCL. While some Directors believed that members’ lack of interest in the CCL reflected mainly the present relative calm in financial markets and the untested nature of the facility, some others believed that the CCL was inherently flawed.
Many Directors thought that a number of suggestions were worth considering in adjusting the design of the CCL—in particular, lowering the surcharge for the use of CCL resources, reducing the commitment fee, and reducing the Fund’s discretion in its activation—with a view to increasing the incentives for members to make use of it rather than relying on access to the SRF should a crisis hit. A few Directors cautioned against any weakening in CCL conditionality. A few others suggested that modification of the CCL, as well as possible change in the SRF, should await progress on private sector involvement in the resolution of crises.
Many Directors saw merit in permitting precautionary arrangements to be larger than they have typically been in the past, even as experimentation with the design of the CCL continues. Nevertheless, most precautionary arrangements should continue to be relatively small, with high access limited to a small number of cases.
There was a variety of views on the degree to which the use of Fund resources by members with ongoing access to capital markets is warranted. Directors recognized that, under the Articles of Agreement, members with access to capital markets can represent that they have a balance of payments need that justifies the use of Fund resources. At the same time, they took note of the fact that the Fund does have instruments through which it can limit access to its resources by those members that have a balance of payments need, and through which it can influence their incentives to use Fund resources.
Most Directors, however, did not see access to Fund resources by members with access to capital markets as a source of concern. They did not believe that such access either discouraged members from, or substituted for, access to capital markets; rather, it helped catalyze private financing. Some of these Directors argued that, given the moderate amounts of Fund financing not related to financial crises or to the support of transition economies, and the relatively low and stable contribution of Fund financing to total financing requirements, there was little evidence that members are substituting financing from the Fund for borrowing in financial markets. These Directors emphasized the way in which a Fund arrangement strengthens discipline on policy-making, and thus brings important positive externalities to the world economy. At the same time, a number of other Directors were concerned that some members may rely unduly on Fund financial assistance in place of seeking market financing, and saw a need to review the Fund’s policies in this connection. These Directors emphasized that Fund financial support should be available, where it is required, to help a member avoid “excessive” adjustment, but they cautioned against the possibility that members might use Fund resources only in order to reduce their borrowing costs. They believed that countries should make significant efforts to meet their own financing needs, and stressed that the structure of Fund facilities is a key element in the degree to which the Fund helps market disciplines work and supports countries in working with capital markets.
Noting that the rate of charge was a key incentive in determining whether and for how long members make use of Fund resources, a few Directors argued that the rate of charge on credit tranche and/or Extended Fund Facility (EFF) resources should be raised—in particular to reduce the incentive for members to substitute financing from the Fund for reliance on financial markets, and to induce advance repurchases. However, some Directors argued that a “subsidy” element in the rate of charge could be justified based on the positive externalities for the world economy from stronger economic policies. A number of Directors, moreover, indicated that there were other “costs” involved in using Fund resources not captured by the rate of charge, and emphasized the co-operative nature of the Fund. Some Directors thought that there might be a case for a system of graduated charges according to the amount and/or length of time resources are outstanding, noting in particular that all resources within the access limits were currently subject to the same basic rate of charge. However, a few others indicated that such differentiation would run counter to the objective of achieving greater simplicity and transparency in Fund facilities. All in all, Directors wished to consider the issue of the rate of charge, and possible differentiation of charges between facilities, further.
Directors discussed what should be the maximum maturities offered by the Fund, consistent with the revolving character of Fund resources, and with members’ evolving needs. Directors agreed that it was important for the Fund’s resources to be used in support of the resolution of temporary balance of payments problems, but they recognized that there could be different interpretations as to what constitutes a “temporary” need. Most Directors argued that, within this framework, there continues to be an important role for the EFF, and that it should be retained. They stressed that certain balance of payments problems require a long period to resolve, and mentioned, by way of example, the transition economies with limited access to capital markets and some of the lower income members that are not eligible for the Poverty Reduction and Growth Facility. In this context, many of these Directors considered that the ten year maturity of the EFF remained appropriate. However, a number of other Directors questioned whether ten-year maturities were consistent with the revolving nature of Fund facilities, and the degree to which the Fund should be providing financing for structural reforms. They observed that primary responsibility for such policies should remain with the World Bank and other development institutions. Some Directors also observed that the distinctions between extended and stand-by arrangements had become less clear, as many stand-by arrangements have come to feature important structural reforms, and as multi-year stand-by arrangements have become more common. A few Directors proposed that successive stand-by arrangements could be a more effective way to address balance of payments problems of a longer-term nature. Directors agreed that it was important to ensure that access to the EFF was granted only in circumstances where balance of payments difficulties were expected to be of a longer-term nature, and where an ambitious structural reform program was being pursued. A number of Directors indicated that precautionary extended arrangements should be discontinued, as it was unlikely that a potential balance of payments need would ever be of an extended nature. This discussion will need to continue in the light of the many ideas tabled today to modify the terms of the EFF.
Directors noted that the question of tailoring of maturities, under both the credit tranches and the EFF, would become a less pressing issue if the Fund had a well-functioning early repurchase policy. Many Directors thought that there was a need to strengthen that policy, although they recognized the difficulty of doing so. Some of these Directors thought that one possibility would be to make more use of repurchase expectations that fall due before the respective obligations, as is the case under the SRF.
While noting that few members seemed to make purchases in the General Resources Account year after year, a number of Directors were concerned about repeated Fund arrangements for a relatively large number of members. In particular, Directors were concerned about the prevalence of arrangements going off-track, and thought that this issue warranted further investigation. Many Directors observed there was room for the Fund to strengthen its procedures for the review of country programs where there have been successive arrangements, including of the degree to which implementation capacity had constrained performance. Some Directors also emphasized the need for front-loading of policy actions and back-loading of financing in cases where previous Fund-supported programs have not been successful or have gone off-track. A few Directors suggested reducing access under successive arrangements.
With an eye on the revolving character of Fund resources, Directors also touched on a few other issues related to conditionality. There was limited enthusiasm for shortening maturities, as a way of lengthening the period for which the member would be subject to conditionality (under a follow-up arrangement). There was more interest in strengthening the Fund’s procedures for post-program monitoring: while a number of Directors believed that the consultation clause in arrangements already provided a sufficient basis for such monitoring, some Directors saw a case for strengthening procedures in this area.
The issues we have discussed today are far ranging and go to the core of how this institution can best fulfill its mandate and serve its membership. I believe that we have made substantial progress today in understanding, and narrowing, the differences of view within the Board on many points. The area of “house-cleaning” proved relatively uncontroversial; there was general agreement that the policies on CSFs and Fund support for DDSR operations should be terminated, and that the CFF should be streamlined. On more fundamental issues, there was a broad consensus that the SRF represents an important tool, and that we must continue to make strong efforts to limit moral hazard and to involve the private sector in the resolution of crises. There was also fairly broad agreement that we should reconsider the design of the CCL with a view to strengthening its potential contribution to our efforts at crisis prevention. There was a variety of views on the EFF, but wide agreement that we need to be careful to grant access to this facility only where the balance of payments difficulties are expected to be of an extended nature and where the structural reform content is substantial. There was a strong sense that the stand-by arrangement in the credit tranches would remain the Fund’s principal instrument, but many Directors felt that there was a need to ensure that there was no undue reliance on Fund resources, particularly by members that have ongoing access to capital markets. There was also a concern that we need to do more to prevent repeated arrangements, and to monitor better members’ performance after their Fund-supported programs end. The staff will reflect on Directors’ views on all these issues and will come back to the Board after the meeting of the International Monetary and Financial Committee with specific proposals for follow up.
Directors agreed that, although the policy discussion is still ongoing, it would nevertheless be useful that these preliminary documents, with appropriate changes to clarify a few specific issues and remove references to specific countries, be published along with the summing-up.