IMF Executive Board Discusses FCL, PLL, and RFI ReviewPress Release No. 14/84
March 5, 2014
On February 14, 2014, the Executive Board of the International Monetary Fund (IMF) met to discuss the staff paper on the Review of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument.
Following the onset of the 2008 global crisis, the Fund embarked on a reform process to strengthen the GRA lending toolkit. The Flexible Credit Line (FCL) was created in 2009, and the Precautionary and Liquidity Line (PLL) in 2011 as a more flexible successor to the Precautionary Credit Line (PCL). The primary aim of these reforms was to strengthen the Fund’s crisis prevention instruments for members with very strong or sound policy frameworks. The RFI was created in 2011 with the aim of broadening the Fund’s rapid financing assistance.
This paper builds on the analysis developed in the 2011 review of the FCL and PCL. The review finds that although the use of the FCL and PLL has been relatively modest, these instruments have bolstered confidence in the members using them, and moderated balance of payments pressures during the recent period of heightened systemic risk. While the rigorous qualification framework has generally worked relatively well and access decisions have broadly reflected the evolution of systemic risks facing users of these instruments, difficulties have also been experienced in identifying members with generally sound policies but also some moderate remaining vulnerabilities, as well as in accurately assessing external risk. . In this regard, the review calls for making qualification more predictable and transparent, and linking access requests more closely to measures of external risk.
Executive Board Assessment
Executive Directors welcomed discussion of the review of the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL), and the Rapid Financing Instrument (RFI). They considered that the FCL and the PLL have both provided valuable insurance to members against external shocks and helped boost market confidence during a period of heightened risks. They broadly agreed that the FCL, PLL, and RFI should remain in the Fund’s lending toolkit, which is an important component of the strengthened global financial safety net. At the same time, they saw scope for further refinements, and welcomed efforts to enhance their effectiveness, transparency, and attractiveness while also preserving the revolving nature of the Fund’s limited resources.
Directors noted that the relatively modest use of the FCL and the PLL reflected a continued preference for self-insurance, including through reserve accumulation, by many members and remaining perceptions of stigma associated with Fund financing in general. They generally agreed that effective communication, through outreach to a broader group of stakeholders, would help improve the public perception of the Fund. As regards other options to address the perceived stigma problem, there was interest in further work on modalities for Fund engagement with other providers of international liquidity support, although some skepticism remained. Additional work in these areas, if pursued, would need to examine carefully the benefits and the practicality of each approach.
Directors generally concurred that FCL qualification decisions in individual cases to date have been broadly satisfactory, but recognized the inherent challenge in identifying the minimum standard needed to meet the PLL qualification requirements in practice. For the purpose of comparability across arrangements, most Directors saw merit in aligning the areas for qualification assessments between the FCL and the PLL, while maintaining the different qualification standards for each of these instruments as under the current policies. In doing so, however, they stressed the need to preserve the high standards of the FCL, and for this reason many preferred to enhance the richness and granularity of PLL qualification assessments along the lines of FCL qualification criteria. A number of Directors were not convinced that unifying the qualification areas would help improve the predictability and transparency of assessments between the two instruments. A few also noted that the intrinsic difficulty in differentiating between PLL and high access precautionary Stand-By Arrangements warrants further consideration.
Most Directors were open to the idea of developing selected indicators of institutional strength to complement existing quantitative indicators of qualification, while also emphasizing that judgment should continue to play a central role in all qualification assessments. However, others saw difficulties in establishing an index and cautioned against ranking countries based on a quantitative index in areas where the Fund has little expertise. Directors reaffirmed the importance of concluding Article IV consultations prior to FCL and PLL arrangements’ approvals or reviews so as to incorporate the Board’s most recent assessment of a member’s economic performance in the relevant qualification assessments.
Regarding conditionality in PLL arrangements, many Directors saw scope for greater use of targeted ex post conditionality to address remaining vulnerabilities of PLL users, in accordance with the Guidelines on Conditionality. A few Directors expressed a concern that increased use of ex post conditionality could undermine the signaling effect of the PLL and further weaken its attractiveness.
Directors reiterated that FCL and PLL support provides a temporary supplement to reserves during periods of heightened external risks, and that countries making use of these resources are expected to exit in a timely manner. Many Directors, concerned about undue repeated use of the FCL, saw merit in further work on stronger incentives to encourage timely exit, such as time-based commitment fees, with a few suggesting also a time limit on the use of the FCL or the PLL. Many other Directors saw no compelling evidence of problems with exit, noting that countries should be allowed access to FCL and PLL resources as long as they meet the qualification criteria and that decisions to exit should depend on the state of the external environment facing the member. Directors concurred that one way to address concerns about exit stigma is by clearly articulating exit strategies in staff reports, laying out the authorities’ specific measures to strengthen resilience together with a communication plan.
Directors underscored that assessing external risks remains an important aspect in access and exit discussions. In this regard, most Directors considered that an indicator of external stress, along the lines proposed by staff, would be a useful innovation to strengthen the discussion of a country’s external risks in staff reports for requests for, or reviews under, FCL and PLL arrangements, which would help inform decisions. A few Directors were not in favor of a mechanistic approach to assessing risks, stressing that the focus should continue to be on qualitative and forward-looking factors. Some Directors stressed the need to build up strong buffers, including a prudent accumulation of reserves where needed, as part of the exit process. Directors looked forward to additional work in these areas, as well as further elaboration in the staff guidance note on the use of reserves in adverse scenarios. In this context, some Directors called for caution when applying the reserve adequacy metric in access discussions.
With regard to the RFI, most Directors supported keeping the current access limits unchanged. A number of Directors could consider raising the limits to make the instrument more useful to Fund members experiencing large shocks.
Directors generally agreed that the current approach of full scoring of precautionary arrangements in the forward commitment capacity remains appropriate, providing important assurance that committed resources will be available to the membership in all circumstances. A few others were open to considering some flexibility in their treatment, given the low probability of drawing under these arrangements.
In light of discussion, staff will return to the Board in coming months with further analysis and proposals to enhance transparency and predictability in qualification assessments and access and exit discussions, including the unification of the criteria for assessing FCL and PLL qualification, as well as indicators of institutional strength and external stress. Directors will take stock in three years’ time, or sooner if necessary, of experience with the use of the FCL, PLL, and RFI, and assess the need for a comprehensive review of each of these instruments, including a review of commitment fees, at that time.