IMF Executive Board Adopts Decisions to Enhance the Financial Safety Net for Developing CountriesPress Release No. 15/324
July 8, 2015
The Executive Board of the International Monetary Fund (IMF), on July 1, 2015, adopted a set of proposals to enhance the access of developing countries to IMF financial support. These proposals, and the case for adopting them, are contained in the staff paper “Financing for Development: Enhancing the Financial Safety Net for Developing Countries.”
The staff paper makes proposals to strengthen the financial safety net for developing countries by increasing access to concessional Fund resources for all Poverty Reduction and Growth Trust (PRGT)-eligible countries and to fast-disbursing support under the Rapid Financing Instrument (RFI) for all members when faced with urgent balance of payments needs. Developing countries’ efforts to achieve sustained and inclusive growth remain vulnerable to global volatility in the form of external shocks, unpredictable sudden stops and reversals of capital inflows, and significant commodity price volatility. Enhanced access to Fund financing provides countries with greater flexibility to meet balance of payments needs as they pursue inclusive growth and poverty reduction.
The proposals aim to provide developing countries with greater access to Fund resources while better targeting access to concessional resources towards the poorest and most vulnerable countries. The proposals include: i) increasing access to Fund concessional resources for all countries eligible for the Fund’s PRGT; ii) rebalancing the mix of concessional to non-concessional financing towards more use of non-concessional resources for better-off PRGT-eligible countries that currently receive “blended” financial support from the Fund; iii) increasing access to fast-disbursing concessional and non-concessional resources for countries in fragile situations, hit by conflict, or natural disasters, and (iv) setting the interest rate on loans under the Rapid Credit Facility (RCF) at zero percent.
Executive Board Assessment1
Executive Directors welcomed the opportunity to consider the staff’s proposals to strengthen the financial safety net for developing countries. Directors concurred that developing countries’ efforts to achieve sustainable and inclusive growth remain vulnerable to global volatility, and that enhanced access to Fund financing would provide these countries with greater flexibility to meet their balance-of-payments needs.
Directors broadly supported a set of proposals to: (i) enhance access to all concessional facilities; (ii) better target concessional financing to the poorest and most vulnerable members eligible for support from the Poverty Reduction and Growth Trust (PRGT), while also boosting access for better-positioned members through greater use of financing from the General Resources Account (GRA); (iii) complement increased access under the Rapid Credit Facility (RCF) for PRGT-eligible countries with a parallel increase of fast-disbursing support under the Rapid Financing Instrument (RFI) to assist all countries in fragile situations or hit by conflict or natural disasters; and (iv) to set the interest rate on RCF loans at zero percent. Directors emphasized the importance of safeguarding the self-sustaining nature of the PRGT. Some Directors noted that these proposals could have been more ambitious, and could have sought to mobilize additional PRGT subsidy resources, as well as go beyond focusing primarily on low-income countries.
On access, Directors broadly agreed that PRGT access norms and limits have eroded relative to economic indicators since these norms and limits were last increased in 2010. Accordingly, Directors supported raising all access norms, and annual and cumulative access limits, by 50 percent for the RCF, the Standby Credit Facility (SCF), and the Extended Credit Facility (ECF), in line with staff proposals. They noted that access norms or limits should not be considered an entitlement and that actual access should be determined on a case-by-case basis, guided by the current policy on determination of access. A number of Directors requested that staff give further thought to policy changes to more effectively assist small member countries affected by severe natural disasters and states in fragile situations.
Directors generally supported rebalancing the funding mix of concessional and non-concessional resources provided to countries that receive Fund support in the form of a blend of concessional and non-concessional resources from 1:1 to 1:2. Directors agreed that such rebalancing would help conserve scarce resources, is consistent with the self-sustainability of the PRGT financing framework, and is warranted in light of the significantly greater market access in some blender countries than had been previously envisaged. The need to ensure that the increase in blending is consistent with limiting risks of higher borrowing costs and preserving countries’ debt sustainability was underscored.
Directors broadly supported increasing the RFI annual and cumulative access limits in line with the increase in access limits for the RCF to enhance its usefulness in providing support to all members with urgent balance-of-payments needs. Many Directors agreed that, in blended cases, any purchases under the RFI should count toward the applicable RCF annual and cumulative limits to eliminate an anomaly in the current rules and guidelines that allows some PRGT-eligible countries to “double dip” in PRGT and GRA resources. Directors took note of the safeguards in place under the RCF and RFI to avoid Fund support of countries with continued weak policies and unwarranted diversion of demand away from upper credit tranche facilities. Some Directors cautioned about the risks of “facility shopping” and the scope for repeated use of the RCF, which has no ex post conditionality.
Directors generally agreed that, when the quota increases under the 14th General Review of Quotas (GRQ) come into effect, access limits and norms as a percentage of quota and the quota levels that determine the application of procedural safeguards would be reduced by half to broadly preserve the higher access in Special Drawing Rights (SDR) terms. A number of Directors had reservations about the automatic reduction in access norms and limits and argued in favor of delinking change in access levels from the date of effectiveness of the GRQ.
Directors broadly supported the proposal—intended to further enhance support for PRGT-eligible countries in fragile situations, or those affected by conflict or natural disasters—to make drawings under the RCF more concessional by setting the interest rate at zero percent, while preserving the PRGT interest rate mechanism for the SCF and ECF. They emphasized the importance of allowing this interest rate mechanism to function as intended to safeguard the self-sustaining capacity of the PRGT and, in this context, looked forward to the next review of the PRGT interest rate structure. A number of Directors noted potential risks from setting the RCF interest rate at zero, as it could set a precedent for other PRGT facilities, ultimately straining the self-sustainability of the PRGT.
With regard to the case for general and special allocations of SDRs as a mechanism for assisting developing countries, some Directors saw merit in exploring such allocations. Other Directors did not see a compelling case for SDR allocations, and noted that a general allocation must be guided by a long-term global need to supplement existing reserves assets.
1 An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.