The Fund's Support for Low-Income Member Countries: Considerations on Instruments and Financing
February 24, 2004
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IMF Concludes Discussion on the Fund's Support of Low-Income Member Countries: Considerations on Instruments and Financing
On March 31, 2004 the Executive Board of the International Monetary Fund (IMF) concluded its discussion of The Fund's Support for Low-Income Member Countries: Considerations on Instruments and Financing.1
On August 27, 2003, the Executive Board discussed The Role of the Fund in Low-Income Member Countries Over the Medium Term-Issues Paper for Discussion 2 and how the Fund could best support these members and contribute to the intensified international effort towards the achievement of the Millennium Development Goals. That discussion set out the strategy for the Fund's engagement in low-income member countries as framed by the broader principles of the comprehensive, two-pillar development strategy adopted by the international community as part of the Monterrey Consensus.
Executive Directors reaffirmed the need for the Fund to remain engaged in assisting low-income countries over the long term and underscored that the Fund should continue to assist these countries in (i) establishing macroeconomic frameworks that can support high sustained growth and poverty reduction; (ii) identifying and managing macroeconomic risks and vulnerabilities; and (iii) strengthening institutions and policies that underpin sound macroeconomic management. Directors also acknowledged the need to consider more carefully how the Fund's instruments might be better tailored to the diverse needs of its low-income country members.
The staff paper on The Fund's Support for Low-Income Member Countries: Considerations on Instruments and Financing follows up on earlier discussions and sets out various options for the use of the Fund's financial instruments to support low-income members and for the continued financing of facilities to meet their needs:
Options on Instruments
To more effectively address the differing needs of members eligible for financing under the Poverty Reduction and Growth Facility (PRGF), the staff paper sets out the following options for the use of the Fund's instruments:
• To strengthen the efficient use of PRGF financing for members with continuing balance of payments needs, staff proposes to (i) establish norms for access to PRGF resources under successive arrangements; and (ii) strengthen Fund policy and guidelines on the blended use of resources from both the PRGF and the General Resource Account (GRA).
• To assist countries facing limited balance of payments needs, several alternatives are considered: (i) clearer guidelines on low-access PRGF arrangements; (ii) precautionary PRGFs; (iii) an enhanced monitoring policy, whereby closer monitoring by the Fund to members with a strong track record could serve as a positive signal to donors and creditors, while providing access to Fund resources in case of need; and (iv) the extension of post-program monitoring to PRGF-eligible countries.
• To address the needs of members emerging from conflicts, the paper proposes to provide for the possibility of longer duration and more tapered access to emergency post-conflict assistance. This would allow more time for these members to strengthen policy design and implementation capacity before embarking on adjustment programs that could be supported by PRGF arrangements.
• To respond better to the adverse impact of exogenous shocks, staff considers the following options: (i) establishing principles for PRGF augmentation; (ii) subsidization of emergency assistance for natural disasters, as is currently the case with emergency post-conflict assistance; (iii) creating a new facility within the PRGF Trust that would provide lending on PRGF terms but with the program duration and design features of a stand-by arrangement; and (iv) subsidization of stand-by arrangements. A review of another existing facility that would provide financing for certain temporary shocks, the Compensatory Financing Facility, is being conducted in parallel with this Board discussion (PIN No. 04/35, April 7, 2004).
The staff paper provides a preliminary assessment of the potential magnitude of the financial resources required to support the Fund's continued involvement in low-income countries. Staff's analysis indicates that: (i) for 2004-05, the remaining period of the interim PRGF, available PRGF resources are likely to be sufficient to cover projected requirements; (ii) for 2006-10, which is the main focus of this paper, the projected financing needs would require a PRGF lending capacity of SDR 0.8-1.2 billion (about US$1.2-1.8 billion) per year, broadly in line with lending levels of the recent past. This would likely involve a declining trend in commitments for "regular" PRGF operations, but a rising trend in lending in response to exogenous shocks; and (iii) beyond 2010, many factors point to a decline in financing requirements, though, at this stage, it would be difficult to make projections with confidence. It will be important for the Fund to maintain a significant financing capacity to address low-income members' balance of payments needs and in support of their efforts to achieve the Millennium Developments Goals by 2015. The precise options for using that financing capacity beyond 2010 will need to be examined closer to that time.
The paper presents the following financing scenarios for consideration:
• Three options—the self-sustained PRGF, sun-setting of the PRGF, and grants—that rely solely on the resources accumulating in the Reserve Account of the PRGF Trust are considered. These alternatives would not provide sufficient financing to meet the projected annual requirements of SDR 0.8-1.2 billion in 2006-10.
• Options that involve using the Reserve Account resources for the subsidization of the rate of charge on GRA credit under Extended Fund Facility (EFF) like arrangements could accommodate the projected level of financing requirements, but would represent a break with the current funding structure of the Fund's concessional operations through trust arrangements.
• An option that allows a self-sustained PRGF to begin operations in 2006 while supplementing its lending capacity by new bilateral loan resources would provide sufficient flexibility to meet the projected financing requirements in 2006-10. This option would also provide for the continuation of self-sustained PRGF operations beyond 2010 at a significant level.
Executive Board Assessment
Executive Directors welcomed the opportunity to consider further how the Fund could best support low-income member countries and contribute to intensified international efforts toward achieving the Millennium Development Goals. They emphasized that the Fund had an important role in low-income member countries in terms of surveillance, policy advice, financing, and technical assistance. Directors considered that Fund assistance to these countries should aim at strengthening their macroeconomic frameworks as a foundation for sustainable growth. They discussed the alternative lending instruments for, and the financing of, the Fund's future involvement in these countries.
Directors considered a set of alternatives to address better the differing needs of low-income member countries. They agreed that for members with continuing balance of payments needs, it would be appropriate to adopt the norms for tapered access to Poverty Reduction and Growth Facility resources under successive arrangements, as set out in the Fund staff paper. While agreeing, some Directors felt that the norms should be applied flexibly. Directors also agreed that Fund policy and guidelines on blended use of PRGF/General Resources Account resources should be clarified and strengthened, along the lines proposed in the paper, taking into account the need for some degree of flexibility and consistency with the World Bank and the framework for debt sustainability. Directors noted that the staff plans to prepare guidance notes on the implementation of these proposals.
Concerning member countries where there is limited balance of payments need for the Fund's concessional resources, Directors considered the four options discussed in the paper: low-access PRGF arrangements, precautionary PRGF arrangements, an Enhanced Monitoring Policy (EMP), and Post Program Monitoring (PPM).
Most Directors agreed that low-access PRGF arrangements should continue to be used for members where, despite the limited balance of payments need in the near term, the economy is still vulnerable to exogenous shocks. This type of arrangement would offer a familiar form of Fund endorsement of policies, with a framework for quick augmentation should a significant balance of payments need emerge. Most Directors supported standardization of the access level to help clarify that these arrangements are a standard response to these members' limited balance of payments needs for PRGF resources. In addition to the staff's proposal of a 10 percent access level, a few Directors suggested access levels of 5 percent or less. A few Directors considered that the size of a Fund arrangement was also a relevant signal of support for a program, and saw drawbacks to standardizing the access level.
Many Directors did not support precautionary PRGF arrangements, as they saw them having several disadvantages, including the incentives members had to draw on resources committed under such arrangements, the need to set aside resources for subsidies, and the associated legal complications. However, a number of Directors did not believe such arrangements would create an incentive to draw unnecessarily, and supported them as a means to ensure a smooth transition from reliance on the PRGF to a surveillance relationship.
Directors generally did not endorse the proposed Enhanced Monitoring Policy. Many supported, instead, further consideration by the staff of a proposal for a strengthened process of surveillance, which would have frequent monitoring and Board-approved reports. Such an approach could streamline the staff's interaction with the authorities and promote ownership. In this regard, Directors indicated a need to ensure that this approach would provide a credible framework, and that it merited further consideration with donors. Directors asked the staff to come back with a proposal for such a surveillance-based approach to providing appropriate signals after consultations with donors and member country authorities.
Regarding Post-Program Monitoring (PPM), most Directors felt that its extension to cover the use of PRGF resources would enhance the comparability of treatment across members and help safeguard scarce PRGF resources, although some considered that its usefulness in providing a macroeconomic framework or a signal to donors was limited. Directors asked the staff to propose a decision to extend PPM to the use of PRGF resources.
Directors welcomed the proposed changes for Emergency Post Conflict Assistance (EPCA), which would allow for both a longer duration for a member emerging from a conflict to build capacity with the support of EPCA, prior to moving to a Fund-supported program, and more frequent assessments of the member country's policy performance.
Directors also considered the proposed alternatives to help countries better address exogenous shocks. They agreed that PRGF augmentation remains an effective tool when a PRGF arrangement is in place and agreed that the proposed principles for PRGF augmentation provided a useful clarification. A few Directors suggested that the proposed principles required further consideration and refinement. Most Directors also saw the benefits of subsidizing emergency assistance for natural disasters, provided resources are available, and asked that staff prepare specific proposals on implementation.
Directors noted that the needs of other low-income members without a PRGF arrangement and with low capacity to bear debt remained to be addressed. Most Directors observed that subsidizing charges on credit tranche purchases under stand-by arrangements would not be an effective approach; even with the subsidy, the level of concessionality of such an instrument would still be considerably lower than that under a PRGF arrangement and would therefore not significantly ease the debt burden for these countries. Directors noted that access to the credit tranches under stand-by arrangements on standard terms is available to all members, but considered that for those low-income countries without a PRGF arrangement at the time of an exogenous shock, such access was only suitable for members with the capacity to service debt on GRA terms. Many Directors concurred that a stand-by-like window within the PRGF Trust would be more appropriate under these circumstances. Several Directors, however, did not support this approach, expressing concerns that such a facility would erode PRGF program design. Directors asked staff to prepare a further paper with specific proposals. A few Directors suggested splitting the PRGF Trust into two units, one with funds solely dedicated for debt relief under the HIPC Initiative, so that it is known in advance what are the resources dedicated for PRGF financing.
Most Directors agreed that a financing capacity on the order of SDR 0.8-1.2 billion annually would provide a reasonable basis for PRGF lending operations during 2006-2010, although some asked for further clarification of the factors involved in arriving at these projections. Directors concurred that, beyond 2010, financing requirements for PRGF operations may decline, but it would remain important for the Fund to maintain a significant financing capacity to address low-income members' balance of payments needs. Directors noted that the precise PRGF financing requirements beyond 2010 will need to be examined closer to that time.
Nearly all Directors agreed that the three financing options that would rely solely on the resources in the Reserve Account of the PRGF Trust—self-sustained PRGF, sun-setting PRGF, and grants—would be insufficient to meet the projected financing needs in 2006-10. They considered that using grants or the sun-setting option would effectively close the door on the Fund's future concessional operations by depleting the resources in the Reserve Account over the medium term. While recognizing that PRGF grants would help to address low-income countries' limited repayment capacities, most Directors did not support the proposal for PRGF grants, as it was not consistent with the Fund's role.
Most Directors agreed that using the Fund's GRA for financing the principal of future PRGF-type operations would not be consistent with the monetary character of the Fund, would compromise the short-run revolving nature of GRA resources, could increase the Fund's risk exposure, and would depart from the current institutional framework for providing concessional financing. A few Directors felt that GRA resources could be considered for financing PRGF-type operations.
Most Directors supported the staff's proposal to pursue the option that would allow a self-sustained PRGF to begin operations in 2006, while supplementing its lending capacity with new bilateral loans. They highlighted the flexibility inherent in this option both to meet the projected financing requirements in 2006-10 and to allow for the continuation of self-sustained PRGF operations beyond 2010 at a significant level. Moreover, it maintains the current approach of conducting PRGF lending outside the GRA.
Finally, Directors agreed that it would be appropriate to continue the non-reimbursement of the GRA for PRGF operational expenses throughout the remaining life of the interim PRGF and asked that staff prepare a decision to that effect.
1 The report forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Acting Managing Director, as Chairman of the Board, summarizes the views of Executive Directors.
2 See Public Information Notice (PIN No. 03/117, September 10, 2003) IMF Executive Board Reviews the Role of the Fund in Low-Income Countries Over the Medium Term
IMF EXTERNAL RELATIONS DEPARTMENT