Yemen blacksmith in Sanaa: Yemen recently received an emergency loan under the Rapid Credit facility (photo: Mohamed al-Sayaghi/Reuters)
Consultation process
Low-income countries (LICs) are becoming more integrated and exposed to global markets and their needs for IMF support are increasingly diverse. The IMF is reviewing its toolkit of lending instruments for poorer countries and its policy on debt limits in IMF programs with a view to ensure continued effectiveness in supporting LICs.
Reform of LIC lending
In 2009, the IMF undertook a comprehensive reform of its facilities for low-income countries to make its financial support more flexible and tailored to the diverse needs of LICs, as part of the IMF’s overall response to the global crisis.
Access to concessional resources was doubled, interest rates lowered to zero, and new flexible facilities introduced to help countries deal with volatility and shocks, in particular through the creation of a Rapid Credit Facility (RCF) and the Standby Credit Facility (SCF).
The IMF quadrupled its concessional financial support in 2009, which helped low-income countries navigate the crisis, including through a countercyclical policy response that allowed them to preserve vital spending at the height of the crisis.
At the same time, the IMF adopted a new, more flexible, policy on external debt limits in IMF-supported programs aimed at balancing the need to ensure debt sustainability with adequate external financing for growth-enhancing investment. In contrast to the previous approach, which allowed only exceptional recourse to nonconcessional borrowing, the new framework adopts a more flexible approach, based on a menu of options, which takes better account of the diversity of situations faced by LICs. Currently, 22 out of the 35 low-income countries with a Fund-supported program in place are eligible for the more flexible options provided under the new policy.
Ensuring effectiveness of IMF’s toolkit
In view of the protracted turbulence and uncertainty in the global economy, the review of the IMF’s facilities for low-income countries provides a timely opportunity to assess the experience with the new architecture, including during the global crisis, and identify any areas where the IMF’s toolkit could be refined to better meet the evolving needs of LICs.
“Having used up some of their fiscal and external buffers during the crisis, many LICs are now less prepared to deal with future shocks. So we need to ensure that we have appropriate tools to insure the poorest countries against spillovers from global shocks” says Christian Mumssen who is leading the staff team on the facilities review.
Given constraints on donor financing and the evolving landscape of available financing options, designing an appropriate financing strategy to meet development needs is a central policy issue in many low-income countries.
Two years after the introduction of the new debt limits policy, the ongoing review will to take stock of experience with the policy to date, identify areas where further improvements could be considered and more generally assess whether the policy continues to strike the right balance between facilitating growth-enhancing investment and maintaining debt sustainability.
In this context, the IMF is seeking feedback from key stakeholders through a dedicated webpage. The deadline is May 22.
Post-reform LIC architecture
The 2009 reform created a new architecture comprising three new concessional financing facilities alongside the nonfinancial (pre-existing) Policy Support Instrument (PSI).
The ECF, which replaced the Poverty, Reduction and Growth Facility (PRGF), provides flexible medium-term support to countries facing protracted balance of payments problems.
The SCF helps countries to deal with short-term balance of payments needs, including an option to provide support on a precautionary basis.
The RCF provides rapid access to IMF concessional resources with limited conditionality to meet urgent balance of payments needs, with no ex-post conditionality.
The PSI is a policy support tool to help low-income countries that do not currently need IMF financing implement economic programs aimed at consolidating a stable and sustainable macroeconomic position.
The new debt limits framework approach, based on a menu of options, takes better account of the diversity of situations faced by low-income countries with regard to their debt vulnerabilities, as assessed under the joint IMF-World Bank Debt Sustainability Framework, and to their macroeconomic and public financial management capacity (“capacity”).
Each of these two factors is assessed to be either “lower” or “higher”, resulting in four different types of concessionality requirements. These requirements are summarized in the matrix below.
| |
|
Extent of debt vulnerabilities |
| |
|
Lower |
Higher |
| Capacity |
Higher |
Minimum average concessionality requirement applied to external or total public borrowing; for most advanced LICs, overall nominal debt limit if needed |
Overall limit on the present value of external or total public debt; for most advanced LICs, ceilings on nominal external or total public debt |
| Lower |
Minimum concessionality requirement based on debt-by-debt approach, but with added flexibility on nonconcessional borrowing |
Maintain minimum concessionality requirement based on debt-by-debt approach, with limited or no room for nonconcessional borrowing |
