1998 IMF Survey Supplement on the Fund / September 1998
IMF Financing Helps Members Pursue
The IMF uses its financial resources to help members redress balance of payments problems and to help cushion the impact of adjustment. The IMF’s financing is provided through both its general resources and its concessional financing facilities, which are administered separately. The extension of IMF credit is subject to Executive Board approval and, in most cases, to the member’s commitment to take steps to address the causes of its payments imbalance (see Conditionality). Members using the IMF’s general resources “purchase” (or draw) other members’ currencies or SDRs with an equivalent amount of their own currency. The IMF levies charges on these drawings and requires that members “repurchase” (or buy back) their own currency from the IMF with other members’ currencies or SDRs within a specified time. Concessional financing under the Enhanced Structural Adjustment Facility (ESAF) is provided in the form of low-interest loans and grants under the HIPC (heavily indebted poor countries) debt initiative.
Reserve Tranche. A member has a reserve tranche position if the IMF’s holdings of its currency in the General Resources Account, excluding those holdings that reflect the member’s use of IMF resources, are less than its quota. A member may draw up to the full amount of its reserve tranche position at any time, subject only to the member’s representation of a balance of payments need. A reserve tranche drawing does not constitute a use of IMF credit and is not subject to charges or to an expectation or obligation to repurchase.
Credit Tranches. IMF credit is subject to different conditionality and phasing, depending on whether it is made available in the first credit “tranche” (or segment) of 25 percent of a member’s quota or in the upper credit tranches (any segment above 25 percent of quota). For drawings in the first credit tranche, members must demonstrate reasonable efforts to overcome their balance of payments difficulties.
Upper credit tranche drawings are made in installments, or phased, and are released when performance targets are met. Such drawings are normally associated with Stand-By or Extended Arrangements, which typically seek to resolve balance of payments difficulties and to support structural policy reforms where appropriate. Performance criteria and periodic reviews are used to assess policy implementation.
Stand-By Arrangements. Stand-By Arrangements give members the right to draw up to a specified amount of IMF resources during a prescribed period. Drawings are normally phased on a quarterly basis, with their release conditional upon meeting performance criteria and the completion of periodic reviews. Performance criteria generally cover bank credit, government or public sector borrowing, trade and payments restrictions, foreign borrowing, and international reserve levels. These criteria allow both the member and the IMF to assess progress and may signal the need for further corrective policies. Stand-By Arrangements typically cover a 12–18 month period (although they can extend up to three years). Repayments are to be made within 3¼ to 5 years of each drawing.
In 1997/98, the IMF approved commitments under nine new Stand-By Arrangements totaling SDR 27.3 billion. Stand-By Arrangements totaling SDR 26.7 billion were approved for Indonesia (SDR 7.3 billion), Korea (SDR 15.5 billion), the Philippines (SDR 1.0 billion), and Thailand (SDR 2.9 billion). The arrangement for Korea—the largest in the IMF’s history—included SDR 10.0 billion available until December 1998 under the newly created Supplementary Reserve Facility (SRF). Stand-By Arrangements totaling SDR 0.6 billion were also approved for Cape Verde, Estonia, Latvia, Ukraine, and Uruguay. As of April 30, 1998, 14 countries had Stand-By Arrangements with the IMF, with total commitments of SDR 28.3 billion and undrawn balances of SDR 12.4 billion. Commitments totaling SDR 1.2 billion have been approved since April 30, 1998. This includes an augmentation of SDR 1.0 billion for Indonesia.
Extended Fund Facility (EFF). The EFF provides assistance for adjustment programs over longer periods and with generally larger amounts of financing than under Stand-By Arrangements. Extended Arrangements, which normally run for three years (and can be extended for a fourth), are designed to rectify balance of payments difficulties that stem largely from structural problems and require a longer period of adjustment.
A member requesting an Extended Arrangement outlines its objectives and policies for the period of the arrangement and presents a detailed statement each year of the policies and measures to be pursued over the next 12 months. The phasing and performance criteria are comparable to those of Stand-By Arrangements, although phasing on a semiannual basis is possible. Repayments are to be made within 4½ to 10 years of each drawing.
During 1997/98, four new Extended Arrangements totaling SDR 2.8 billion were approved for Argentina, Pakistan, Panama, and Yemen. In addition, the Extended Arrangement for the Philippines was augmented by SDR 0.3 billion. The Extended Arrangements for Pakistan and Yemen were approved in conjunction with ESAF arrangements. As of April 30, 1998, 13 countries had Extended Arrangements, with commitments totaling SDR 12.3 billion and undrawn balances of SDR 6.8 billion.
Overall, new commitments of IMF resources under Stand-By and Extended Arrangements amounted to SDR 30.4 billion in 1997/98. Of this total, nearly 90 percent was approved for Asian countries directly affected by the regional financial crisis. In July 1998, there was an augmentation of commitments amounting to SDR 6.3 billion for Russia, financed under the GAB.
The IMF’s special facilities include the Compensatory and Contingency Financing Facility (CCFF), the Buffer Stock Financing Facility—which has not been used since 1984—and the Supplemental Reserve Facility (SRF).
Compensatory and Contingency Financing Facility. The export compensatory element of the CCFF provides timely financing to members experiencing a temporary shortfall in export earnings or an excess in cereal import costs, attributable to factors largely beyond the member’s control. This element of the facility has been used particularly by commodity exporters. The contingency element helps members with IMF arrangements keep their adjustment programs on track when faced with unexpected adverse external shocks. The affected variables could include export earnings, import prices, and international interest rates; workers’ remittances and tourism receipts may also be covered if they are a significant component in the member’s current account. During the 1997/98 fiscal year, no member used the CCFF. In July 1998, the IMF approved financial support for Russia in the amount of SDR 2.16 billion under the CCFF to compensate for a shortfall in export earnings related mainly to lower crude oil prices.
Buffer Stock Financing Facility. Under this facility, the IMF helps finance members’ contributions to approved international buffer stocks if the member demonstrates a balance of payments need. No drawings have been made under this facility for the past 14 years.
Supplemental Reserve Facility (SRF). In December 1997, the Executive Board opened a new lending window—the SRF—for member countries experiencing exceptional balance of payments problems owing to a large short-term financing need resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and the member’s reserves. Assistance under the SRF is available when there is a reasonable expectation that implementation of strong adjustment policies and adequate financing will result, in a short period, in early correction of the balance of payments difficulties. Although resources under IMF facilities are available to all members, the SRF is likely to be used in cases where the magnitude of the outflows may create a risk of contagion that could potentially threaten the international monetary system. In approving a request for the use of IMF resources under the SRF, the IMF takes into account the financing provided by other creditors. To minimize moral hazard, a member using resources under the SRF is encouraged to maintain the participation of creditors—both official and private—until the pressure on the balance of payments ceases.
Financing under the SRF, available in the form of additional resources under a Stand-By or Extended Arrangement, is committed for up to one year and generally available in two or more drawings. The first drawing is available at the time of approval of the financing, which normally coincides with the approval of the corresponding arrangement.
Countries drawing under the SRF are expected to repay within 1 to 1½ years of the date of each purchase. The Board may, however, extend this repayment period by up to one year, at which point repayment is obligatory. During the first year from the date of approval of financing to a country under the SRF, the use of IMF resources is subject to a surcharge of 300 basis points above the rate of charge on IMF loans. This rate will be increased by 50 basis points at the end of that period and every six months thereafter until the surcharge reaches 500 basis points. The IMF first activated the SRF in December 1997, committing SDR 9.95 billion to Korea as part of its Stand-By Arrangement. In July 1998, SDR 4 billion was committed to Russia under the SRF as part of the augmentation of Russia’s Extended Arrangement by SDR 6.3 billion.
Enhanced Structural Adjustment Facility (ESAF). This facility, which was established by the Executive Board in 1987 and extended and enlarged in February 1994, is the principal means by which the IMF provides financial support, in the form of highly concessional loans, to low-income member countries facing protracted balance of payments problems and loans and grants under the HIPC Initiative.
At the same time that the ESAF was extended and enlarged, no new resources were made available for its precursor—the Structural Adjustment Facility (SAF), which had been established in 1986. All remaining SAF resources were disbursed by end-1995. The objectives and primary features of the SAF were similar to those of the current ESAF, but programs supported under ESAF arrangements are more ambitious with regard to macroeconomic policy and structural reform measures.
ESAF resources are intended to support strong medium-term structural adjustment programs. Eligible members seeking ESAF resources must develop, with the assistance of the staffs of the IMF and the World Bank, a policy framework paper (PFP) for a three-year adjustment program. The PFP, which is updated annually, describes the authorities’ economic objectives, macroeconomic and structural policies during the three-year period, and associated external financing needs and major sources of financing. The PFP, which is a document of the national authorities, is intended to ensure a consistent framework for economic policies and to attract financial and technical assistance in support of the adjustment program.
Adjustment measures under ESAF-supported programs are expected to strengthen substantially a country’s balance of payments position and foster growth during the three-year period. Monitoring under ESAF arrangements is conducted through quarterly financial and structural benchmarks. In addition, semiannual performance criteria are set for key quantitative and structural targets. ESAF loans are disbursed semiannually, initially upon approval of an annual arrangement and subsequently based on the observance of performance criteria and after completion of a midterm review. ESAF loans are repaid in ten equal semiannual installments, beginning 5½ years and ending 10 years after the date of each disbursement. The interest rate on ESAF loans is 0.5 percent a year.
In 1997/98, the IMF approved eight new ESAF arrangements totaling SDR 1.7 billion for Cameroon, Côte d’Ivoire, Mongolia, Nicaragua, Pakistan, Senegal, Uganda, and Yemen, as well as an ESAF grant to Uganda under the HIPC Initiative. As of April 30, 1998, 33 ESAF arrangements were in effect. Cumulative commitments under all SAF and ESAF arrangements approved since 1986 (excluding undisbursed amounts under expired and canceled arrangements) totaled SDR 9.9 billion as of April 30, 1998, compared with SDR 8.8 billion a year earlier. ESAF disbursements in 1997/98 totaled SDR 1.0 billion, compared with SDR 0.7 billion in 1996/97, bringing cumulative SAF and ESAF disbursements through April 30, 1998, to SDR 8.1 billion. Since April 30, 1998, seven new ESAF arrangements have been approved for a total of SDR 0.4 billion.
Financing the ESAF Trust. The resources to finance lending in support of ESAF arrangements are kept separate from the general resources of the IMF and are administered by the IMF as Trustee of the ESAF Trust. ESAF operations are conducted through three accounts with separate functions. The ESAF Trust borrows resources through the Loan Account for onlending to eligible members under ESAF arrangements, with the maturity of drawings coinciding with the maturity of loans to ESAF borrowers. Lenders have extended loans to the ESAF Trust on different interest rate terms, free of interest in one case and highly concessional in others. Also, most lenders making loans at market-related interest rates have made separate contributions to help reduce the interest rate charged to borrowers. Subsidy contributions (including a contribution from the IMF’s Special Disbursement Account in 1994) are channeled through the Subsidy Account and have taken the form of direct grants or deposits at concessional interest rates. These funds are invested by the Trust, with the subsidy contribution being equal to the interest rate differential. Resources are set aside in the Reserve Account to provide security to lenders’ claims on the Trust against the risk of nonpayment by borrowers. These latter resources result mainly from repayments of SAF loans and the part of ESAF loans that was financed with SAF resources and ultimately originate in the profits from gold sales undertaken by the IMF in 1976–81.
Making the ESAF Self-Sustaining. Based on the broad agreement that the ESAF is, and will remain, the centerpiece of the IMF’s support for the poorest countries, including in the context of the HIPC Initiative, the Executive Board in 1996 agreed on a framework for the continuation of ESAF operations. Under current projections, available ESAF resources are expected to be fully committed by mid-2000. A self-sustained ESAF, with a commitment capacity of about SDR 0.8 billion a year, would begin in the year 2005, or perhaps earlier, financed from the IMF-owned resources set aside in the Reserve Account, which will be freed as ESAF lenders are repaid. This would leave an interim period of about four years during which financing of an estimated SDR 1.7 billion on an “as needed” basis would need to be mobilized to cover interest subsidies. In addition, financing needs for special ESAF operations under the HIPC Initiative are estimated to be SDR 1.1 billion on an “as needed” basis.
Other IMF Policies and Procedures
For specific circumstances that cannot be adequately addressed under its regular and special facilities, the IMF extends financing to member countries under a variety of special mechanisms. These include an emergency financing mechanism, support for currency stabilization funds, and emergency assistance to members facing balance of payments difficulties arising from sudden and unforeseeable natural disasters or in post-conflict situations. In addition, special accelerated procedures are available to facilitate rapid Board approval of IMF financial support in emergency cases.
Support for Currency Stabilization Funds. In September 1995, the Executive Board decided that in the framework of an upper credit tranche Stand-By or Extended Arrangement, the IMF could provide financial support for the establishment of a currency stabilization fund to bolster confidence, for a transitional period, in an exchange-rate-based stabilization strategy. For a currency stabilization fund to play its intended role, economic policies would have to be sufficiently tight to deliver an inflation path compatible with the targeted exchange rate anchor, so that little, if any, use of the currency stabilization fund for exchange market intervention would be expected. The most appropriate exchange rate arrangement to be supported by a currency stabilization fund would be an exchange rate peg with relatively narrow margins or a preannounced crawl.
IMF support would be conditional upon fiscal adjustment and credit creation consistent with targeted inflation, appropriate measures to deal with backward-looking automatic wage and other indexation schemes, a high degree of current account convertibility and an open trade regime and other measures to encourage a return of flight capital, contingency plans to deal with large capital account outflows or inflows, integrated management of foreign exchange reserves and intervention policy, and other structural and institutional elements designed to reduce inflation sharply. So far, no occasion has arisen for the IMF to provide financial support for currency stabilization funds.
Emergency Assistance. The IMF can also provide emergency financial assistance to a member facing balance of payments difficulties caused by a natural disaster and has provided such assistance on a number of occasions. The assistance is available through outright purchases, usually limited to 25 percent of quota, provided that the member is cooperating with the IMF to find a solution to its balance of payments problem. In most cases, this assistance has been followed by an arrangement with the IMF under one of its regular facilities.
In 1995, the policy on emergency assistance was expanded to cover countries in post-conflict situations. This assistance may be provided when the member’s institutional or administrative capacity has been disrupted as a result of the conflict but there is still sufficient capacity for planning and policy implementation and a demonstrated commitment on the part of the authorities; there is an urgent balance of payments need; and IMF support could be catalytic and is part of a concerted international effort. Conditions for the assistance include a statement of economic policies, a quantified macroeconomic framework to the extent possible, and a statement of the authorities’ intention to move as soon as possible to an upper credit tranche Stand-By or Extended Arrangement, or to an ESAF Arrangement. The conditionality is tailored to the individual country situation and to rebuilding the country’s administrative and institutional capacity. In 1997/98, three countries (Albania, Rwanda, and Tajikistan) made purchases totaling SDR 30 million under the IMF’s policy on emergency post-conflict assistance.
Emergency Financing Mechanism (EFM). A set of procedures to facilitate rapid Executive Board approval of IMF financial support while ensuring the conditionality necessary to warrant such support, these emergency measures are to be used only in rare circumstances representing, or threatening to give rise to, a crisis in a member’s external accounts that requires an immediate IMF response. The EFM was established by the Executive Board in September 1995, and it was first activated in support of the Philippines’ request in July 1997 for an extension and augmentation of its three-year extended arrangement. It was used again in August, November, and December 1997, and in July 1998—together with the provision of exceptional financial support—for Thailand, Indonesia, Korea, and Russia, respectively.