IMF Executive Board Discusses Reforms of Lending Instruments for Low-Income CountriesPublic Information Notice (PIN) No. 09/38
March 30, 2009
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.
On March 20, 2009, the Executive Board of the International Monetary Fund (IMF) held preliminary discussions of staff findings and proposals set forth in a paper entitled: “The Fund’s Facilities and Financing Framework for Low-Income Countries.”
The Fund is undertaking a broad review of all of its lending instruments to ensure that they keep pace with a changing world. The staff paper on low-income country facilities reviews past experience and proposes reform options aimed at ensuring that the Fund’s lending instruments are sufficiently flexible to meet the increasingly diverse needs of its low-income members as many are being severely affected by the global economic crisis.
Among the proposals for consideration is a redesign of lending facilities for low-income countries to strengthen the Fund’s capacity to provide concessional short-term and emergency financing, as well as precautionary support. The paper also discusses the merits of raising access limits, revising financing terms, and making conditionality more flexible. With demand for the Fund’s low-interest loans projected to increase significantly, the paper discusses the need for additional financial resources and sets out options for strengthening the concessional financing framework.
The discussion offered an opportunity for the Board to exchange views and give guidance to Fund staff on how best to move forward.
Executive Board Assessment
Context. Executive Directors considered that the Fund’s instruments for low-income countries (LICs)—with the PRGF at the center—have served its low-income members well. Taking note of the staff’s analysis, they welcomed the marked improvements in economic performance achieved by low-income countries over the past decade, particularly those with PRGF-supported programs. However, the global economic crisis is spilling over to low-income countries and is jeopardizing their hard-won gains. Moreover, their economies have also become increasingly diverse in recent years, with some still in fragile situations, and others having gained market access. Directors therefore welcomed today’s discussion of reforms to the Fund’s financing instruments for low-income countries to reflect better their more diverse circumstances and heightened exposure to global volatility as well as to complete the broader modernization of the Fund’s facilities.
The need for change. Directors broadly agreed that the Fund should adapt its LIC toolkit to close the three gaps identified by staff, related to provision of: (i) short-term financing; (ii) precautionary financing; and (iii) emergency financing. Directors agreed that any adaptations should preserve the central role of the PRGF as the Fund’s instrument for medium- and long-term engagement with LICs. Some Directors were not convinced that precautionary LIC financing is needed in view of the Policy Support Instrument (PSI) and the Exogenous Shocks Facility (ESF). Any reform of the Fund’s facilities for LICs should also serve to reduce overlaps, especially related to financing shocks and emergencies. Effective support of LICs also requires that the Fund continue to focus on its core expertise, while coordinating its activities with other agencies that are primarily responsible for providing development assistance. Directors also recognized that PRGF access limits and norms have declined significantly relative to GDP and trade, and that the Fund’s concessional financing capacity would need to be raised if it was to fall within the staff’s projected range for demand.
Facilities architecture. Most Directors found, on balance, that Option 2 seems to be the most promising way to move toward a more simplified and flexible toolkit, and a number of Directors offered suggestions for further refinements. This option would maintain the PRGF for protracted balance of payments problems, adding a concessional Stand-By Arrangement (SBA)-like instrument, and unifying concessional facilities for emergency assistance. Some Directors sought additional safeguards to ensure that the new SBA-like instrument would not be used excessively or in cases where PRGF financing would be more appropriate. Directors considered that a poverty reduction strategy continues to be essential in most circumstances for LICs.
Access. Directors recognized that the gradual erosion of PRGF access limits and norms in relation to GDP and trade could hamper the Fund’s ability to assist its low-income members effectively. Most Directors favored urgent action to increase access limits and norms, with a number of Directors supporting a doubling in them. Some other Directors preferred a more cautious approach to raising access limits in light of the Fund’s scarce concessional resources and the temporary crisis-related increase in demand. More generally, Directors recognized the importance of ensuring that actual program access would be compatible with debt sustainability, especially for countries with a high risk of debt distress.
Financing terms. Most Directors supported unifying the financing terms for all concessional facilities based on the existing PRGF-ESF terms. Some Directors felt that the proposed SBA-like instrument should have less concessional financing terms than the PRGF, particularly given the scarce nature of subsidy resources and the wish of many contributors to focus on the poorest. A few Directors suggested increasing the concessionality of PRGF financing. Directors supported staff’s proposal to revisit the rules for blending, including explicit recognition of debt sustainability considerations.
Eligibility and qualification. Most Directors reaffirmed that the standard of a protracted balance of payments problem remains appropriate for PRGF financing. Directors also agreed that financing for all other concessional facilities should be based on actual balance of payments needs. Directors generally supported an early review of PRGF eligibility and relevant criteria, followed by reviews on a fixed cycle.
Conditionality. Directors stressed the need for the Fund to apply conditionality evenhandedly across the membership and looked forward to the upcoming discussion on modernizing conditionality, including through a move to a review-based approach for structural conditionality for all Fund lending instruments including for low-income countries. A few Directors stressed that, given the explicit focus on structural reform in Fund-supported programs with low-income countries, structural conditionality will remain critical. All Directors supported continued efforts to tailor conditionality to a country’s circumstances.
Concessional financing capacity. Directors underscored the importance of ensuring that the Fund has adequate financing capacity to meet the needs of low-income countries in a timely manner. Many Directors broadly agreed with staff’s projected ranges for the demand for the Fund’s concessional financing in both the short and medium terms. A few Directors considered these projections too high, while a few others thought that they might be too low. In particular, it is difficult to project demand, given the uncertainties associated with the current crisis. Directors broadly recognized that based upon the staff’s analysis, sustained higher demand for Fund concessional financing would have serious implications for the Fund’s ability to transition to a self-sustained PRGF/ESF Trust. In this context, Directors noted that additional loan resources would need to be mobilized, and also asked staff to explore options for securing additional subsidy resources.
Concessional financing framework. Directors supported strengthening the financing framework for the Fund’s concessional lending by allowing concessional resources to be used more flexibly. Most Directors agreed that, on balance, it would be more practical to create a general subsidy account outside the PRGF-ESF Trust, which could receive new contributions and provide subsidy financing for all concessional facilities. Some Directors noted, however, that the existing contributions for the PRGF and ESF should be preserved. Many Directors also supported a more structured and periodic approach to fund-raising, while others considered the current approach appropriate. A few Directors also stressed that the Fund should not lose sight of the goal of a self-sustained PRGF-ESF over the medium term.
Next steps. Directors sought to proceed expeditiously with the second stage of the review, requesting that a set of papers, drawing on Directors’ suggestions today, be prepared to allow them to take decisions on a reformed architecture for low-income country facilities, a review of financing terms for all LIC facilities, clarification of blending rules, the establishment of a new general subsidy account, and modalities for fund-raising. Pending these decisions, a proposed decision on higher access limits and norms for existing facilities will be brought to the Board for consideration before the Spring Meetings.