The Fund’s Mandate—Future Financing RolePublic Information Notice (PIN) No. 10/51
April 22, 2010
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 April 15, 2010, the Executive Board of the International Monetary Fund (IMF) conducted an initial discussion of a staff paper on the Future Financing Role of the IMF, which formed part of broader ongoing work on reform the mandate of the institution.
Last year’s major reforms of the IMF’s lending instruments, such as the introduction of the Flexible Credit Line (FCL), together with the commitment to triple its resources, made a significant contribution to global economic stabilization as IMF lending created room for policy accommodation and helped countries weather the worst of the recent crisis. While these reforms have yielded positive results, it is appropriate to ask whether there is scope to build on this experience by drawing on the lessons of the recent crisis, as perceived by policymakers and other stakeholders with whom IMF staff has consulted extensively.
The acute volatility and fierce contagion in the crisis focused attention on the need to enhance the IMF’s role in preventing crises and dampening contagion effects from shocks. The preliminary ideas in the staff paper discussed by the Executive Board included:
• Refinements of the FCL—which would remain dedicated to countries with very strong fundamentals and policies—principally by extending its duration, increasing the predictability of qualification, and removing the informal cap on access amounts.
• Adaptation of the existing high access precautionary arrangement into a more attractive Precautionary Credit Line (PCL) targeted at countries with sound policies but which do not qualify for the FCL. The PCL would have streamlined policy conditionality focused on addressing any residual vulnerabilities.
• Development of a Multi-Country Swap Line (MSL) mechanism to enable the IMF to offer liquidity lines to a limited set of countries with sound policies and track records that could have systemic effects. This mechanism would complement the role played by central banks and other institutions by helping contain contagion stemming from a systemic shock.
The staff paper also covered a broad range of innovative reform ideas (e.g., IMF provision of pure insurance payouts or collateralized lending as an alternative to policy conditionality) that might require changes to the IMF’s Articles of Agreement, or the adoption of a more flexible financing structure.
In light of the Executive Board’s discussion, and additional outreach and consultation with country authorities, academics, and civil society, a more detailed set of proposals will be developed by staff in the coming months.
Executive Board Assessment
Executive Directors welcomed staff’s thought-provoking ideas for further strengthening the financing role of the Fund to help prevent future crises and mitigate contagion from systemic shocks. A stronger global financial safety net would help countries better manage volatility, complementing their own efforts to strengthen policy frameworks. Given concerns about moral hazard and financial risks to the Fund, Directors stressed the need for a thorough analysis of the various options for the Fund’s financing role from which to draw a balanced set of specific reform proposals.
Directors agreed that the recent crisis points, once again, to the Fund’s ability to respond swiftly and flexibly to new challenges, and that further changes should be based on a careful evaluation of the effectiveness of recently-implemented lending instruments and lessons learnt. Directors also generally considered that further reforms of lending instruments would only in part reduce countries’ incentives for accumulation of reserves, which remain countries’ first line of defense. Directors emphasized that new instruments should be consistent with the unique role of Fund financing, and should ensure adequate safeguards and appropriate policy conditionality as required under the Articles. Some Directors noted that there is scope for the Fund to better support countercyclical policies in case of shocks to low-income countries and asked staff to explore options for expanding the scope of the precautionary instruments on concessional terms.
Directors agreed that the major overhaul of the lending instruments in the midst of the crisis, combined with the approval of additional resources, contributed to limiting the impact of the crisis, creating space for countercyclical policies. Directors recognized that the Flexible Credit Line had provided insurance against heightened contagion risks to members with very strong fundamentals, complementing the enhanced crisis resolution role of the Stand-By Arrangement. While emphasizing that strong domestic policy frameworks and enhanced Fund surveillance are at the core of the membership’s efforts to strengthen crisis prevention, Directors considered that the remaining shortcomings in the current financing toolkit need to be addressed to fully meet the crisis prevention needs of the membership and enhance the Fund’s capacity to handle systemic events.
Directors were generally supportive of improving the design of the FCL, including doubling the duration of purchase rights to one year. Some Directors also called for removing the expectation that access under FCL arrangements would not normally exceed 1000 percent of quota, though others thought this was a key safeguard. While there was sympathy for increasing predictability of qualification, most Directors did not support maintaining a running list of counties qualifying for the FCL and preferred the flexibility embedded in the current approach of making assessments when arrangements are requested. Directors also asked for further work on exit strategies. Some Directors emphasized that the limited experience with the FCL provides an uncertain basis for considering amendments at this stage.
Directors were open to consider ways to strengthen the attractiveness of precautionary instruments available to members that do not meet the FCL’s qualification bar. A number of Directors felt that the PCL would enable the Fund to address precautionary financing needs of countries with moderate vulnerabilities. Some Directors expressed concern that the introduction of the PCL could considerably reduce the attractiveness of High Access Precautionary Arrangements (HAPAs) for those qualifying for the PCL, while increasing the complexity of the toolkit. Some other Directors did not see a need for a PCL as it could create tiering of members.
A number of Directors supported a dedicated instrument to mitigate contagion in a systemic crisis. A few Directors saw considerable potential for the unilateral and multi-country nature of the MSL to be effective in addressing first-mover problems. A number of other Directors, however, had reservations about having an identified set of qualified countries, and many expressed concerns about the operational complexity of the MSL and its uncertain resource requirements.
Directors saw considerable scope for further strengthening the Fund’s engagement with Regional Financial Arrangements, and requested proposals by staff on the operational aspects of lending options.
Most Directors welcomed the opportunity to consider more pioneering ideas put forth by staff, but noted that their implementation required amending the Articles of Agreement or mobilizing non-General Resources Account resources. Some Directors nonetheless asked staff to continue work on the most promising innovative instruments and report back on progress in the coming months.
In light of today’s discussion, staff will give further consideration to these issues and come back to the Board with specific proposals on FCL refinements and the design of the PCL before the 2010 Annual Meetings. Staff will concurrently undertake further work on MSL design and discuss with relevant authorities how to define the Fund’s potential role in strengthening regional safety nets so as to be in a position to finalize proposals in these areas as well by the time of the Annual Meetings.