IMF Reforms Financial Facilities for Low-Income CountriesPublic Information Notice (PIN) No. 09/94
July 29, 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 July 23, 2009, the Executive Board of the International Monetary Fund (IMF) approved wide-ranging modifications to upgrade its concessional financial facilities for low-income countries (LICs). The changes will help LICs overcome the impact of the global financial crisis. The Fund’s facilities provide financing and support policies aimed at supporting a stable macroeconomic environment and promoting growth and poverty alleviation in the world’s poorest countries. The decision adopted by the Executive Board establishes a Poverty Reduction and Growth Trust (PRGT), replacing and expanding the previous PRGF-ESF Trust. The changes to the Trust’s facilities will take effect once all lenders to the Loan Account, and contributors to the Subsidy Accounts, of the PRGF-ESF Trust consent to these changes.
The IMF keeps its facilities under regular review to ensure that they meet the evolving needs of its members. Over the past eighteen months, LICs were hit first by sharp increases in the prices of food and fuel, and then by the global financial crisis. These events have threatened the remarkable economic achievements many LICs have made over the past decade, and threaten to drive millions further back into poverty. The IMF has responded to the growing international consensus, reflected in calls from its LIC members and from the G-20 heads of state, for swift policy action to meet the needs of the developing world.
In recent months, the IMF has taken steps to increase substantially its assistance to low-income countries, while making the conditionality attached to these loans more flexible and streamlined. The result has been programs targeting higher levels of pro-poor spending, and accommodating higher overall spending levels and fiscal deficits.
The decisions taken on July 23, 2009, build on these measures, fundamentally reforming the structure and financial terms of the Fund’s financial facilities for LICs. These decisions are expected to become effective later this year, when donor countries have given their final consent. Taken together, these reforms will achieve:
Scaled-up concessional financial assistance to LICs. Concessional lending to LICs is expected to reach up to US$4 billion per year in each of 2009 and 2010, compared with US$1.2 billion in 2008, thereby exceeding the G20 call for additional lending of US$6 billion over the next two to three years. A total of up to US$17 billion could be provided over the period through 2014. For individual countries, the amount of financing they could obtain from the IMF on an annualized basis has been roughly doubled.
A more effective structure of LIC facilities. The decisions taken on July 23 will make the Fund’s concessional lending instruments for LICs more flexible and tailored to the increasing diversity of LICs. These changes recognize that while many LICs will continue to require sustained program relationships with the IMF to address their economic challenges, an increasing number of countries may need IMF financial support only during particularly difficult episodes (such as the current crisis), or may feel that it is prudent to pre-qualify for assistance now in the event that it is needed later. The new structure of facilities also establishes a single instrument that provides limited financing to countries facing a range of emergency situations. This new structure, established within the Fund’s newly created PRGT, consists of:
The Extended Credit Facility (ECF). This facility, the successor to the PRGF, will allow the Fund to provide sustained program engagement and financing for countries facing protracted balance of payments difficulties.
The Standby Credit Facility (SCF). Similar to the Stand-By Arrangement (SBA) widely used by emerging markets, the SCF will provide financial assistance and policy support to LICs with shorter-term or episodic financing needs emanating from a range of sources. It also allows for precautionary use, in cases where there is a potential rather than an actual financing need.
The Rapid Credit Facility (RCF). This will rapidly provide a limited amount of financing in response to urgent needs, with reduced conditionality particularly appropriate to the transitory nature of the financing need or instances in which policy implementation capacity is constrained.
Enhanced focus on poverty reduction and growth. All facilities will place a strong emphasis on poverty alleviation and growth, and countries seeking any kind of Fund financial assistance, including under the SCF and RCF, will indicate how the program would advance poverty reduction and growth. Country-owned poverty reduction strategies will remain the basis of sustained program relationships with the Fund under the ECF. Programs will include specific targets to safeguard social and other priority spending, wherever possible.
Greater concessionality. In response to the particularly serious economic dislocations resulting from the current crisis, LICs will receive exceptional relief of all interest payments on outstanding concessional loans due to the IMF through the end of 2011—effectively, an interest rate of zero on these loans for this period. The interest rate on the Fund’s three concessional facilities for LICs will be reviewed regularly thereafter under a mechanism designed to preserve a higher level of concessionality than previously, when the interest rate on borrowing from all of the IMF’s concessional facilities was 0.5 percent.
Financing. Consistent with the new LIC architecture of lending facilities, all concessional lending will be consolidated in the PRGT. General and facility-specific loan and subsidy accounts will be established to allow more flexible use of resources, while accommodating donors’ preferences. Additional loan resources of SDR 9 billion will be mobilized from bilateral contributions as under the previous framework. New subsidy resources of SDR 1.5 billion in end-2008 net present value terms will be mobilized from the IMF’s internal resources, including the use of resources linked to the envisaged gold sales, and through bilateral contributions.
Executive Board Assessment
Executive Directors noted that low-income countries have been severely affected by the global economic crisis. Swift policy action and stepped-up financial support are critically needed, as widely recognized within the international community and highlighted by the G-20 Heads of State at the London Summit in April 2009. The Fund has already responded by more than doubling its financial assistance, and providing additional liquidity through the proposed general SDR allocation. The reforms adopted today mark a further important milestone in the Fund’s engagement with low-income countries, and are all the more urgent given countries’ increased exposure to global volatility.
The reforms encompass:
• A comprehensive overhaul of the Fund’s concessional facilities to close gaps and tailor Fund support to the diverse needs of low-income countries;
• Increased concessionality of Fund financial support;
• Interest relief for low-income countries through end-2011 to help them cope with the global crisis;
• Increased flexibility of the Fund’s concessional financing framework; and
• A strategy to mobilize resources needed to boost the Fund’s concessional lending capacity to US$8 billion in the first two years, and US$17 billion through the medium term, including by using resources linked to gold sales.
As part of the reform package, the Executive Board endorsed the following proposals:
Reform of Facilities for Low-Income Countries
Directors welcomed the streamlined new concessional facilities under the umbrella of a single Poverty Reduction and Growth Trust (PRGT). The Extended Credit Facility (ECF) preserves the Fund’s capacity to provide flexible medium-term support, while the Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF) will better meet countries’ short-term, precautionary, and emergency needs.
Directors underscored that all three facilities aim to assist low-income countries in achieving stable and sustainable macroeconomic positions consistent with strong and durable poverty reduction and growth. To this end, Directors stressed the centrality of countries’ own poverty reduction and growth strategies in Fund-supported programs, and supported the linkages set out in the staff paper. With the new facility names, Directors emphasized the importance of clearly communicating these strong linkages.
Directors noted that the new access policies broadly preserve the recent doubling in access limits and norms, while making the policies more flexible and consistent across facilities. They supported the proposed access norms under the ECF and SCF, the procedural safeguards applicable to high-access financing requests aimed at promoting debt sustainability, and the proposed modification of policies for blending concessional and GRA financing. Directors welcomed the increased grant element of Fund lending to low-income countries, including temporary interest relief to help them cope with the global crisis, with some Directors suggesting that even larger increases could be appropriate. Directors supported periodic reviews of the applicable interest rates to limit fluctuations in concessionality and subsidy costs when world interest rates change. Some Directors noted that these reviews should also consider the appropriateness of interest rate differentiation among facilities.
Reform of the Concessional Financing Framework
With respect to the financing framework for concessional lending, Directors agreed that the establishment of both general and facility-specific loan and subsidy accounts, alongside a single reserve account, will allow resources to be used more flexibly, while accommodating donors’ preferences. Contributors and lenders will be encouraged to provide new resources to general accounts. Directors agreed that new Fund contributions will be placed in the General Subsidy Account. Existing subsidy resources in the PRGF-ESF Trust will be transferred to the ECF Subsidy Account unless otherwise requested by contributors.
Turning to financing issues, the Executive Board supported the proposals presented, which respond to calls from the international community, including the G-20 Heads of State.
Directors noted that demand for concessional lending is projected at SDR 11.5 billion through 2014, though subject to a high degree of uncertainty. They stressed the need to mobilize additional loan resources promptly, and called on existing and potential lenders to be forthcoming with additional contributions. Directors agreed that, to accommodate the additional loan resources, the current borrowing limit of the PRGT of SDR 20 billion should be raised to SDR 30 billion, and that the loan commitment and drawdown periods should be extended to end-2015 and end-2018, respectively. They asked staff to initiate consultations with lenders regarding the increase of the borrowing limit.
Most Directors supported the proposed financing package to secure additional subsidy resources of SDR 1.5 billion (end-2008 NPV terms) by (i) seeking bilateral contributions through a broad-based fundraising effort; (ii) temporarily delaying reimbursement of the GRA for PRGT administrative expenses; (iii) using resources from the PRGT Reserve Account while maintaining its annual self-sustained lending capacity; and (iv) using resources of SDR 0.5-0.6 billion (end-2008 NPV terms) linked to gold sales. Directors called for regular reviews of the efforts to obtain the needed subsidy resources.
Regarding gold sales, most Directors agreed that the strategy for subsidy financing would involve the use of windfall profits arising from gold sales at an average price in excess of US$850 per ounce in the first instance. To the extent that the realized windfall profits fall short of the required contribution, the difference will be generated through investment income from the gold endowment. This strategy would provide some flexibility on how the resources would be generated, and allow the Fund to preserve the corpus of the gold sales proceeds and thus the Fund’s ability to implement the new income model. A number of Directors would have preferred the transfer of a pre-determined amount of resources linked to gold sales. Some other Directors continued to hold the view that any use of resources linked to gold sales as subsidy resources for low-income countries or the distribution of dividends from the GRA before precautionary balances are at an adequate level would not be consistent with the new income model.
Directors noted that the strategy agreed upon today regarding the use of gold sales-linked resources for financing subsidy needs will guide future Board decisions to be taken after the completion of the gold sales. These decisions will provide for the transfer of such resources from the Investment Account to the General Resources Account, to be followed by the distribution of an equivalent amount to members in proportion to quotas. Directors expressed their expectation that members would then allocate this distribution, or broadly equivalent amounts, as subsidy contributions to the PRGT. Directors emphasized that the feasibility of the reform of the Fund’s facilities for low-income countries and associated financing framework is dependent on the implementation of the above described strategy for the use of resources linked to gold sales.
Directors agreed to review experience with the new facilities and financing framework under the PRGT no later than three years after the effective date of the decision.