Public Information Notice: IMF Executive Board Reviews the Fund's Financing Role
October 9, 2008
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
October 9, 2008
On September 22, 2008, the Executive Board of the International Monetary Fund (IMF) discussed the Review of the Fund's Financing Role.
The Executive Board today held preliminary discussions of the broad issues and ideas related to how the Fund provides financial assistance to its members, including possible reforms to the Fund's financing instruments. Giving confidence to members, by making the Fund's resources available to them, is and should remain a fundamental purpose of the Fund. The challenge is to modernize the Fund's set of financing instruments and policies, subject to adequate safeguards, to ensure the Fund provides relevant services to all its members, from advice and analysis to financing, and signaling and insurance, services which often the private sector cannot provide. Doing so may involve a substantial rethinking of the Fund's financing instruments and they way they are used. The IMF staff paper offered a first opportunity for the Board to discuss these issues, and which ones to move forward. A comprehensive reform agenda will follow shortly, with specific proposals developed later.
Executive Board Assessment
We have had a very constructive discussion, as the first step towards modernizing the Fund's lending role. The objective is to ensure that the Fund has the right instruments and policies to help all of its members—with appropriate safeguards of Fund resources—as they integrate into a world of growing and increasingly complex capital flows. The issues involved are important and difficult, and it was clear from our discussion that many will require further elaboration before it is possible to take a firm view on them.
Adapting to change. As the global financial system has evolved, so have members' needs for Fund support. While the Fund has a record of adapting to change and of responding quickly to members' needs, Directors shared the view that the model for the present set of lending instruments may need to be adjusted to remain suitable for the needs of the overall membership. They welcomed the opportunity to begin to address the fundamental issues about the Fund's financing role, and remained open to considering further many of the issues in the staff paper.
Tailoring conditionality. Conditionality plays a key role in helping to achieve members' policy objectives and safeguarding Fund resources. Directors reiterated that conditionality should be applied with parsimony and focused on the Fund's core areas. The rationale for the policy to streamline structural conditionality is well established and remains valid today. Nevertheless, there may be scope, within the existing Conditionality Guidelines, to go further. Furthermore, many Directors were of the view that new approaches to conditionality—including with respect to macroeconomic targets, up-front qualification tests, or reviews-based conditionality—should be explored by staff. The aim should be to make conditionality more flexible including by ensuring that conditionality is tightly focused on measures critical to achieving program objectives, while still providing adequate safeguards for Fund resources.
Balance of payments need. In light of global financial market developments and integration, Directors discussed whether the concept of balance of payments need still remains relevant as the basis for Fund lending. While views are mixed, it was recognized that the need criterion can be difficult to specify in practice, and staff was encouraged to examine and clarify this issue further.
Filling immediate gaps in the toolkit. There is broad support for advancing the work on a new liquidity instrument, and many Directors thought that this was long overdue. Some Directors remained skeptical about the usefulness of such an instrument, noting the lack of clear demand and expressing concerns about the consistency with general Fund principles. Based on Directors' comments, staff will work to develop a concrete design proposal that seeks to draw on the Rapid Access Line, Financial Stability Line, Rapid Liquidity Line, and high-access precautionary Stand-By Arrangement ideas. A few Directors suggested staff should also explore the potential for using the SDR Department as a liquidity instrument.
Instruments for low-income members. Most Directors agreed that the Poverty Reduction and Growth Facility should remain central to the Fund's engagement with these members. Directors welcomed the recent amendments to the Exogenous Shocks Facility to enhance the Fund's ability to provide rapid financial assistance in the event of a sudden and exogenous shock. While a number of Directors expressed interest in exploring a concessional facility to address shorter-term balance of payments needs, perhaps along the lines of a stand-by arrangement for low-income countries, a few others noted that the PRGF could be adapted to play this role.
Streamlining facilities. Almost all Directors saw scope for streamlining the Fund's financing instruments, and eliminating little-used facilities. A few Directors were attracted to moving toward a single-facility structure. Most Directors held the view that the Compensatory Financing Facility could be eliminated. Many Directors also considered that the Extended Fund Facility could be eliminated, although many others thought that this instrument could still be useful to members, with possible amendments. As for the Supplemental Reserve Facility (SRF), although some Directors felt that it should be retained as the main vehicle for providing exceptional access, many others were prepared to consider eliminating the SRF especially as recent crises have not been of the quick-reversing variety contemplated by the SRF. Several Directors also pointed out that the usefulness of the SRF needs to be considered in conjunction with the design of any new liquidity instrument.
Financial terms. Directors expressed preliminary views on issues relating to access and charges, two topics to which we will return shortly in a discussion of separate staff papers. Many Directors were prepared to consider an increase in access limits to partially offset the decline in the relative size of Fund resources. Such a reform would need to be designed together with an overhaul of the structure of surcharges and fees. A few Directors saw an increase in access limits as a means to promote a broad consensus for the overall reform of the Fund's lending framework. Directors also called for a simplification of the current system of surcharges while ensuring that pricing is consistent with the cooperative nature of the Fund and the revolving nature of its lending.
Other ideas for longer-term consideration. Directors discussed the idea of a new quick-disbursing short-term liquidity facility for more advanced members, where illiquid but solvent members could draw on temporary foreign exchange liquidity as a normal part of their business. Clearly, such a facility would require careful consideration of the implications for Fund liquidity and the design of safeguards for Fund resources. While most Directors were of the view that creation of such an instrument should not be a priority for now, they asked staff to provide further details on the functioning of such a short-term facility. Regarding a pure signaling instrument for middle-income members, along the lines of the Policy Support Instrument (PSI) that is available for PRGF-eligible countries, a number of Directors questioned the need for it, as they considered that precautionary arrangements have a good record of use by members and their signals are well understood by markets and others. Many others were of the view that making the PSI, or an instrument like it, available to all members would be the best way to address the needs of those who would prefer to use it instead of a precautionary arrangement in order to provide signaling, especially given the fees associated with precautionary arrangements. On the idea of a "quiet" facility, there was not much support for such a facility, as it would run counter to the general, and important, move towards transparency in the Fund and among members.
Next steps. On the basis of our discussion, a road map for reforms will be based on five building blocks: (i) to explore analytical considerations for Fund lending, looking at a range of issues such as market gaps and the coherence of the Fund's lending framework, and the balance of payments criterion for lending, as well as the scope for innovation in and streamlining of instruments, including a possible extension of a PSI-like signaling instrument; (ii) to review access limits and financing terms for using Fund resources; (iii) to re-examine conditionality; (iv) to review our lending role and facilities for low-income members; and (v) to advance the work on a new liquidity instrument. The aim is to have discussions with the Board in all these areas before the 2009 Spring Meetings and to take decisions as quickly as possible in those areas where there is a strong consensus and particular urgency. After the Spring Meetings, we will take stock and decide how to pull all these building blocks together to set the stage for decisions in the remaining areas before the 2009 Annual Meetings.