Public Information Notice: The Fund's Financing Role—Reform Proposals on Liquidity and Emergency Assistance and the Review of the Flexible Credit Line and Precautionary Credit Line
December 7, 2011
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December 7, 2011
On November 21, 2011 the Executive Board of the International Monetary Fund (IMF) reviewed the Flexible Credit Line (FCL) and the Precautionary Credit Line (PCL) instruments and approved a set of reforms to bolster the flexibility and scope of the General Resources Account (GRA) lending toolkit. The key reforms include: (i) consolidation of the current GRA emergency assistance tools under a single instrument to support more flexibly countries facing urgent balance of payments (BoP) needs, including those stemming from exogenous shocks, called the Rapid Financing Instrument (RFI); and (ii) replacement of the PCL with the Precautionary and Liquidity Line (PLL), which would allow PLL arrangements to be approved both in the absence of an actual BoP need, as insurance against future shocks, and also in cases of actual BoP need, including through six-month arrangements to deal with short-term liquidity shocks.
Since the start of the 2008 global crisis, the Fund has embarked on a reform process to strengthen the GRA lending toolkit with the objectives of increasing the usefulness of Fund instruments in meeting members’ financing needs, while preserving the simplicity and coherence of the lending framework and safeguarding Fund resources. The FCL was created in 2009 and the PCL in 2010, at which time the FCL was also further enhanced. These reforms significantly improved the Fund’s ability to provide financing for crisis prevention and resolution.
The review of the FCL and PCL finds that these instruments have bolstered confidence and moderated balance of payments pressures during periods of heightened systemic risk since early 2009. The rigorous qualification framework has worked well and access decisions have reflected the evolution of systemic risks facing users of these instruments. The low subscription to these instruments reflects a preference for self-insurance, remaining perceived stigma linked to the use of Fund instruments, and residual concerns over the perceived lack of instrument flexibility. The review calls for focusing qualification discussions more on qualitative and forward looking aspects of policies and policy frameworks, and more transparently linking access requests to relevant factors, including well-anchored adverse scenarios.
The Review paper also identified gaps in the overall instrument flexibility building on more recent staff work. Specifically, in the paper Analytics of Systemic Crises and the Role of Global Financial Safety Nets and its background paper Mapping Cross-Border Financial Linkages—A Supporting Case for Global Financial Safety Nets, gaps were identified in the Fund’s lending toolkit to respond quickly to meet the liquidity needs of members with relatively strong fundamentals affected during systemic crises (the crisis bystanders). The paper on Macroeconomic and Operational Challenges in Countries in Fragile Situations also identified gaps in the Fund’s ability to address urgent financing needs arising in a broader range of circumstances than natural disasters and post-conflict situations.
Following its discussion, the Executive Board approved the following reforms to the GRA lending toolkit:
- Broadening coverage of emergency assistance: Creation of a single instrument in the credit tranches—called the Rapid Financing Instrument or RFI—to provide GRA emergency assistance on a broader basis similar to the Rapid Credit Facility under the Poverty Reduction and Growth Trust. The RFI would support the full range of urgent balance of payments needs, including those arising from exogenous shocks (e.g., commodity price shocks and natural disasters), post-conflict and other fragile situations, or from other disruptive situations. Financing would be in the form of outright purchases, with an annual access limit of 50 percent of quota and a cumulative access limit of 100 percent of quota. Although upper-credit tranche-quality policies would not be required for approval, the member would need to outline its policy plans and commitments in a letter of intent, and the Fund would need to assess that the member would cooperate with the Fund in an effort to find solutions for its financing difficulties.
- Enhancing liquidity provision: The PCL is to be replaced with a more flexible instrument called the Precautionary and Liquidity Line or PLL, that will allow (i) its use by members with an actual balance of payments need at time of approval (rather than only a potential financing need, as currently required under the PCL), and (ii) six-month duration arrangements to meet short-term balance of payments needs. The PLL is designed to flexibly provide room for the Fund to deal with rapidly evolving crises, and is expected to enhance the effectiveness of the toolkit by allowing qualifying members to get financing in a wider range of situations, enabling them to benefit from the positive signaling effect linked with PLL qualification. Establishing a liquidity window that allows shorter-duration arrangements also provides a platform to meet the needs of crisis bystanders in periods of heightened regional or global stress.
Executive Board Assessment
The Executive Board today adopted decisions to further strengthen the Fund’s General Resources Account (GRA) lending toolkit, by establishing the Rapid Financing Instrument (RFI) and the Precautionary and Liquidity Line (PLL), the latter in place of the Precautionary Credit Line (PCL). The decisions were informed by the first review of the Flexible Credit Line (FCL) and PCL, which was also completed by Executive Directors today.
Review of the FCL and PCL
Most Directors endorsed the main findings of the review of the FCL and PCL. They welcomed, in particular, that these instruments have provided valuable insurance and helped boost market confidence during a period of heightened risks. The limited use of these instruments reflects in part a preference for self-insurance, remaining perceptions of stigma associated with Fund financing, and concerns over perceived lack of flexibility. Directors welcomed staff recommendations that could help address these concerns.
Directors supported the staff’s proposals to enhance transparency in the assessments of access under FCL and PLL arrangements, which would facilitate comparison and evenhandedness across arrangements. At the same time, they recognized that there would need to be a degree of judgment in determining the level of access, with due consideration of country-specific factors. In this context, Directors saw merit in linking the assessment of balance of payments needs in each case more closely with adverse scenarios, which would, among others, help guide reserve use assumptions—carefully anchored on measures of reserve needs that are relevant for the particular country.
With regard to qualification, Directors generally supported the proposed greater focus on qualitative and forward-looking factors embedded in the FCL/PLL qualification frameworks, including through increased reliance on the most recent Article IV consultations and Financial Sector Assessment Program assessments. Directors also noted that in-house vulnerability analyses could provide a useful input into the process, and called for care to be taken to ensure transparency and clarity in the qualification analysis.
Directors noted that access under the FCL and PLL instruments is a temporary supplement to reserves during periods of heightened risks. They reaffirmed the normal expectation of reduced access under successor FCL arrangements as set forth in BUFF/10/125, and agreed that the same expectation would also be applicable to successor PLL arrangements. Discussing the country’s external risks and exit expectations in staff reports requesting FCL and PLL arrangements should help promote timely exit. A number of Directors nevertheless preferred more clearly articulated exit strategies, while a few others cautioned that excessive rigidity could undermine the objectives of these instruments. A number of Directors saw scope for considering stronger price-based incentives to discourage prolonged and large precautionary arrangements, with some requesting that staff develop concrete proposals for Board consideration.
Rapid Financing Instrument
Directors supported the establishment of the RFI, replacing the current emergency assistance policy for post-conflict situations and natural disasters with a streamlined and more flexible instrument within the credit tranches, consistent with the spirit of the recent GRA reforms. They underscored that, in the absence of a requirement for upper credit tranche-quality policies, the safeguards embedded in the RFI’s design would need to be strictly implemented. Directors confirmed that members could obtain RFI financing to address urgent balance of payments needs that, if not addressed, would result in an immediate and severe economic disruption, so long as the other requirements for RFI financing were met. They noted that they would expect this instrument to be used mainly to address exogenous shocks, and in post-conflict and other fragile situations.
Directors noted that, despite the repeal of Emergency Natural Disasters Assistance (ENDA) and Emergency Post-Conflict Assistance (EPCA), existing holdings of the member’s currency resulting from purchases under these instruments would remain subject to their current financing terms. Some Directors expressed concern about the potential impact on vulnerable members of credit tranche surcharges that could be applied when access under the RFI is combined with large access under another instrument or facility, whereas surcharges were not applicable to purchases under the ENDA and EPCA. They welcomed the intention to monitor and address this issue, if necessary, at the time of the first review of the RFI decision.
Precautionary and Liquidity Line
Directors considered the PLL proposal to allow Fund financing of members with an actual balance of payments need at the time of approval of the arrangement, and allow six-month arrangements to meet short-term balance of payments needs. A range of views were expressed, including on the limited experience with the PCL, the risk of tiering of the Fund’s membership, the appropriate access levels, and the similarity to Stand-by Arrangements. Nevertheless, in a spirit of compromise, most Directors viewed the reform as a practical step to enhance the flexibility, usefulness, and coherence of the toolkit, while preserving adequate safeguards.
Directors underlined the importance of appropriate ex ante and ex post conditionality. They emphasized that the specific type of ex post conditionality under a PLL arrangement with a duration of one year or longer should be determined on a case-by-case basis in accordance with the Guidelines on Conditionality, taking into account the country’s remaining vulnerabilities.
Directors urged careful qualification assessments, including explicit consideration of the suitability of the duration of the arrangement relative to the member’s balance of payments need and remaining vulnerabilities. With regard to six-month arrangements, the requirement is that the 250 percent access limit would not be exceeded except in exceptional circumstances where the member faces a balance of payments need that is of a short-term nature and results from the impact of exogenous shocks, including heightened regional or global stress conditions whose occurrence would be expected to be rare. Directors noted that determining, as well as communicating, the impact of heightened stress conditions would require extra care. A few Directors also noted that a member drawing on a six-month PLL arrangement would be expected normally, as its balance of payments and reserve position improves, to effect an early repayment of these drawings. Directors welcomed the procedures for early Board involvement hat would be applicable to all PLL arrangements, irrespective of access or duration.
Directors noted the staff’s assessment that the proposed reforms may increase upfront calls on Fund resources, but that the net effect is likely to be relatively limited. They looked forward to a timely discussion of the adequacy of Fund resources and greater clarity on the Fund resource envelope that would be required to meet potential financing needs across the membership.