## pp073117-collaboration-between-regional-financing-arrangements-and-the-imf

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---

### Context
- The Global Financial Safety Net (GFSN) has expanded considerably since 2008, including in the non-traditional elements such as Regional Financing Arrangements (RFAs).
- The resulting multi-layered structure of the GFSN increases the importance of collaboration among its elements to:
  - increase the effective firepower of the GFSN;
  - ensure timely deployment of resources;
  - combine the Fund’s experience in macroeconomic adjustment and universal risk pooling with RFAs’ greater regional knowledge and country ownership;
  - reduce contagion risk and encourage countries to seek early assistance from the Fund.
- This paper proposes modalities for collaboration across capacity development, surveillance, and lending, plus operational principles to guide future co-lending between the Fund and RFAs.

### Proposal for stronger IMF–RFA collaboration (operational principles and lessons)
- Operational principles draw on lessons from past co-lending, the 2016 CMIM test run, and bilateral discussions with several major RFAs.
- Key lessons from recent IMF–RFA co-financing experiences:
  - importance of early and evolving engagement between the RFA and the Fund;
  - benefits of exploiting complementarities between institutions;
  - criticality of a single program framework;
  - need for mutual respect of institutional independence and capacity.
- Recommendation: an activity-based approach to facilitate similar forms of collaboration across RFAs that undertake similar activities.

### Main elements of the proposed collaboration framework
- Capacity development:
  - potential for agreement on regular training courses;
  - possible temporary staff exchanges;
  - joint seminars.
- Surveillance:
  - possible participation of RFA staff in selected Fund Article IV meetings, with the consent of the corresponding member country;
  - regular exchange of views on common members.
- Instruments with ex-ante conditionality (qualification criteria):
  - align qualification standards for corresponding RFA and Fund instruments where feasible, and share data and methods, but not the assessment;
  - qualification standards for Fund instruments to be established independently by the Board.
- Arrangements including ex-post conditionality — depending on mandates and technical expertise:
  - When a division of labor is possible: adopt a “lead agency” model while preserving close involvement of the RFA (Fund leads on macroeconomic framework; RFA focuses on comparative advantage).
  - When division of labor is not possible due to overlapping mandates: pursue early engagement and collaboration based on one coherent program.

### Other issues to facilitate collaboration
- Addressing differences:
  - avoid rigid rules; guiding principle should allow coherent program design while respecting institutional independence and different lending practices.
- Information-sharing:
  - two-way information-sharing within each institution’s sharing policies is critical; ensure reciprocity;
  - timing and granularity depend on the nature of IMF–RFA engagement, confidentiality, and member consent.
- Financing assurances:
  - RFAs may need to adjust the maturity of their financing so that it is at least as long as that of Fund instruments to ensure overall program financing.
- Legal identity and governance:
  - RFAs need a clearly defined legal identity and governance structure to facilitate information sharing and provide financing assurances.

### Institutional context and scope
- The paper treats the existing, heterogeneous constellation of RFAs as the basis for practical recommendations rather than prescribing an ideal architecture.
- It complements other IMF proposals, including:
  - establishing a Policy Coordination Instrument (PCI) (non-financing);
  - introducing a Short-term Liquidity Swap (SLS) as a new liquidity backstop.

### Representative RFA data (from Table 1)
- Arab Monetary Fund (AMF): Established 1976; Size 3.6 (SDR Billions).
- BRICS Contingent Reserve Arrangement (CRA): Established 2014; Size 74.4 (SDR Billions).
- Chiang Mai Initiative Multilateralization (CMIM): Established 2000 (2010); Size 178.5 (SDR Billions).
- Eurasian Fund for Stabilization and Development (EFSD): Established 2009; Size 6.3 (SDR Billions).
- European Union-Balance of Payments (EU-BoP) Facility: Established 2002; Size 39 (SDR Billions) (EU non-Eurozone countries).
- European Stability Mechanism (ESM): Established 2012; Size 392 (SDR Billions) (Eurozone countries).
- Latin American Reserve Fund (FLAR): Established 1978; Size 3.5 (SDR Billions).

### Next steps and implementation
- Near-term actions proposed:
  - enhance the operational-level dialogue between the Fund and RFAs;
  - conduct joint test runs with some RFAs;
  - maintain ongoing dialogue between RFAs and the Fund, individually and collectively.

### Expansion of the GFSN and RFA resources (post-GFC)
- Since the GFC, new RFA arrangements and facilities have been established and resources under existing RFAs increased.
- Examples:
  - European Stability Mechanism (ESM) with a lending capacity of €500 billion for crisis prevention in the euro area.
  - CMIM reformed in 2010 and its resources doubled to US$240 billion, effective from 2014.
  - BRICs Contingent Reserve Arrangement (CRA) with total committed resources of US$100 billion.
  - Eurasian Fund for Stabilization and Development (EFSD) established in 2009 with budgetary contributions of US$8.5 billion.
  - Members’ contributions to the Arab Monetary Fund (AMF) and the Latin American Reserve Fund (FLAR) almost doubled.
  - European Financial Stabilization Mechanism (EFSM); temporary European Financial Stability Facility (EFSF) introduced in Europe.

### Shift in shares across GFSN components and decentralization risks
- The rising share of RFA resources has been striking; the Fund, the second largest component (after own reserves) before the crisis, increased its share marginally and fell behind the RFAs (and BSAs).
- Risks from decentralization:
  - Difficulties in tapping multiple resources.
  - “Facility shopping” that may delay necessary macroeconomic adjustment and create inadequate incentives for sound policies.

### Evolution of Fund engagement and borrower composition
- Before the GFC, Fund borrowers were predominantly EMDEs; since the GFC the membership requesting Fund-supported programs broadened to include upper middle-income and high-income countries.
- Fund financing provided only where the financing-policy adjustment package can plausibly resolve a country’s BoP problems within the medium term.
- “Upper Credit Tranche conditionality” (UCT) standard for a successful program is the same regardless of the Fund’s share in financing.
- Some RFAs (CMIM, BRICS CRA) introduced an explicit link between high access to RFA resources and a Fund-supported program.

### Hurdles to IMF-RFA collaboration (identified in literature and practice)
- Stigma associated with Fund-supported programs based on perceptions of overly rigorous conditionality (Kawai, 2009).
- RFAs created as alternatives to Fund lending (Volz, 2012).
- RFAs’ concerns about potential loss of independence in joint lending (Henning, 2011).
- Tension from RFAs’ closeness to borrowers making strong adjustment demands difficult, while RFAs may seek influence over conditionality terms (Eichengreen, 2012).
- Concerns that closer collaboration could undermine the Fund’s conditionality, monitoring, and credibility (e.g., Ghate et al., 2008).

### Dividends and comparative advantages from stronger collaboration
- Reduced stigma and earlier country engagement:
  - Countries may approach RFAs earlier due to lower stigma; early engagement helps withstand liquidity shocks and prevent solvency problems; avoiding delays (no facility shopping) contains problem size.
- Mitigation of contagion (stylized contagion model—results below):
  - Delayed Fund-supported programs create substantial costs and increased contagion.
  - RFA support without Fund involvement, even if immediate, is less effective at deterring contagion and comparable to a Fund with a 2-quarter lag.
  - Joint Fund + RFA support reduces contagion more than either acting alone.
- Utilization of comparative advantages:
  - Fund: universal risk pooling, lower susceptibility to political factors, broader membership, greater distance from borrowing country.
  - RFAs: region-specific knowledge, experience, and possibly greater country ownership.

### Contagion model simulation results (number of countries affected by initial shock)
- Global shocks:
  - Fund with no lag: 9
  - Fund with 2 quarter lag: 19
  - RFA only: 13
  - Fund (no lag) + RFA: 5
  - Fund (2 quarter lag) + RFA: 12
- Regional shocks:
  - Fund with no lag: 0
  - Fund with 2 quarter lag: 5
  - RFA only: 7
  - Fund (no lag) + RFA: 0
  - Fund (2 quarter lag) + RFA: 2

### Experience with IMF-RFA collaboration and past usage (2000–16)
- Use of RFA financing since 2000:
  - 28 cases of RFA financing in Europe, the Middle East, and Latin America since 2000.
  - 11 cases jointly financed with the Fund, almost all in Europe.
  - In 2016, the Fund was invited to participate in a CMIM test run.
  - RFAs accounted for most program financing in Europe due to large financing needs.
- Burden sharing of program financing (2000–16) — Billions of U.S. Dollars (non-precautionary financing at onset of program):
  - Fund: 198.0
  - RFA: 354.3
  - Non-RFA: 118.5
  - Total: 670.9
- Burden sharing in percent (2000–16):
  - Fund: 29.5
  - RFA: 52.8
  - Non-RFA: 17.7

### Lessons from past IMF-RFA collaboration (distilled)
- Lesson 1: Importance of program ownership (e.g., Ireland, Latvia).
- Lesson 2: Need for early and evolving engagement.
- Lesson 3: Respect independence and recognize differences in lending practices and governance.
- Lesson 4: Foster complementarity based on comparative advantages (clear division of tasks increased operational efficiency in Hungary, Romania).
- Lesson 5: Need for coherent program design:
  - Avoid excessive conditionality; parsimonious, focused conditionality increases probability of success (Cyprus example).
  - Avoid lack of coordination: uncoordinated reviews and differing analytical frameworks can produce conflicting messages (Latvia, Belarus examples).
  - Anchor inter-institutional discussions around a conditionality document; Fund taking the initial draft expedited discussions (success in MFA cases).
- Lesson 6: Resolve differences rapidly to avoid undue delays, though not at any cost (Cyprus example: nearly year-long delay worsened recession; Ireland example: quick resolution involved trade-offs).
- Lesson 7: Need for effective, consistent, and coordinated public communication (alignment of messaging helped Hungary; poor coordination hindered Cyprus and Latvia).

### Observed changes in Fund-supported program composition (1987–2016)
- Number of Fund Programs, 1987–2007 (by income level):
  - High income: 0%
  - Upper middle income: 11%
  - Low middle income: 37%
  - Low income: 52%
- Number of Fund Programs, 2008–16 (by income level):
  - High income: 7%
  - Upper middle income: 17%
  - Low middle income: 36%
  - Low income: 40%
- Amount approved, 1987–2007 (by income level):
  - High income: 49%
  - Upper middle income: 14%
  - Low middle income: 34%
  - Low income: 3%
- Amount approved, 2008–16 (by income level):
  - High income: 7%
  - Upper middle income: 34%
  - Low middle income: 42%
  - Low income: 17%

### Box 3 — Lead Agency Model of Collaboration (concept and flexibility)
- Concept and objectives:
  - Build on institutional strengths and comparative advantage to achieve an effective division of labor in designing and monitoring conditionality.
  - Each institution fully responsible for establishment and monitoring of their respective conditions.
  - For policies outside an institution’s core areas, that institution seeks advice from the other.
  - Framework provides clarity to the member on primary responsibilities and aims to improve policy quality underlying the program.
- Flexibility, overlap, and program coherence:
  - Application should be flexible to accommodate overlap and ensure overall coherence.
  - Recognizes comparative advantages and potential overlap; adaptable to preserve coherence of conditionality across institutions.

### Modalities for designing and monitoring programs with ex-post conditionality
- Program design and monitoring should reflect mandates and capacity of the RFA.
- For RFAs without sufficient capacity:
  - engagement mainly through information-sharing to agree financing need and sustainability;
  - Fund likely plays leading role in macroeconomic framework, conditionality and policies (“Lead agency” model);
  - desirable to delegate to the Fund the initial draft of core program aspects.
- For RFAs with developed capacity:
  - more flexibility; Fund policies require ownership of the macroeconomic framework and the Debt Sustainability Analysis;
  - early engagement and seeking common views on key parameters before MEFP discussion recommended.
- Burden-sharing: case-by-case discussions based on principles:
  - depends on RFA resources, program objectives, quality of policies, and size of financing gaps;
  - start early given that financing envelope can affect program design.
- Addressing differences:
  - avoid rigid rules for resolving differences; guiding principle: coherent program design while respecting independence;
  - Independence principle: Fund and RFA maintain ability to act alone; members retain right to move forward with one financing partner if agreement is not possible.
- Transparency and information-sharing:
  - Two-way information-sharing critical; share within each institution’s policy and with member consent.
  - Current Fund policy permits staff to share preliminary program information at technical level with an RFA, subject to Management approval, when the RFA is considered a co‑financier or creditor for program design purposes.
  - No general provision for routine sharing of country Board documents with RFAs prior to Board consideration under existing policies.
  - Possible changes (e.g., Transmittal Policy revision) could enable sharing of Board papers with established RFAs after submission to the Board.
  - RFA commitments: transparent and reciprocal information-sharing and confidentiality assurances needed; commitments should come from primary RFA entity able to provide assurances.
- Information-sharing specifics:
  - Regular surveillance (Article IV): RFAs with surveillance capacity could receive staff reports for their members at same time as circulation to the Fund’s Executive Board, requiring transmittal policy revision.
  - Lending operations: timing and granularity depend on Fund link, RFA capabilities, financing expertise, and institutional independence.
  - Precautionary instruments: qualification criteria are public and assessments decided independently by each institution; information-sharing similar to regular program case.
  - RFA lending without the Fund: RFA could consult the Fund via technical assistance requested by the member or RFA (with legal personality) with Board approval; an assessment letter may permit the Fund to share views in some circumstances.
- Governance:
  - A clearly defined legal identity and governance structure of the RFA—with transparent decision-making—facilitates collaboration, information-sharing, and confidentiality assurances.
  - Legal entity should cover necessary organs and be able to provide assurances on behalf of the RFA.
- Maturity and Financing Assurances:
  - Fund’s Financing Assurances Policy requires pre-commitment to future financing from all sources, including RFAs.
  - Tension arises when RFA arrangement periods are shorter than the Fund’s and RFAs cannot pre-commit to future financing; RFAs may need to change policies (e.g., raise maximum number of rollovers and provide pre-commitment of rollovers, conditional on completion of program review).
- Next steps and operational preparedness:
  - Holding test-runs for coordinated financing to strengthen collaboration (experience with MDBs and bilateral donors suggests practice is important).
  - Continued dialogue between Fund and RFAs, individual and collective; consistent communication to build public support.
  - Proposed modalities should be flexible to handle newly developed RFA and Fund instruments as vulnerabilities evolve.
- Issues for discussion (paragraph 46) asked Directors whether they:
  - agree with rationale and lessons for stronger collaboration;
  - support proposed operational principles;
  - concur with proposed activity-based modalities;
  - agree with identifying impediments and modalities for regular informal exchanges;
  - agree on proposed next steps, including exploring joint test-runs with RFAs lacking co-financing experience.

### Annex I — Literature review key findings (selected)
- Post-GFC experience increased focus on the cost of coordination failures and the need for coordination mechanisms.
- Consensus on benefits of ex-ante IMF-RFA cooperation: prevent facility shopping and institutional arbitrage; allow larger pool of resources; promote stronger ownership.
- Challenges: political stigma (Kawai 2009); joint-lending may sacrifice autonomy (Henning 2011); inherent tension in RFA financing complicates cooperation (Eichengreen 2012).
- Proposed spectra for division of labor include:
  - alignment of qualification criteria across RFA precautionary lines and the Fund;
  - sequential approach (RFA short-term backstop, Fund steps in later) — criticized for delay and stigma;
  - two-tier approach (RFA financing up to threshold, beyond which co-financing with Fund occurs) — similar to CMIM;
  - shock-specific approach (RFA + Fund for small shocks; Fund leads for regional/systemic shocks); Fund lending to a region not possible under Fund Articles.

### Annex II — Lessons from RFA lending beyond members’ constituency (MFA case)
- The European Commission (EC) can borrow on behalf of the EU and lend to partner countries outside the EU using the Macro-Financial Assistance (MFA) facility.
- MFA targets countries politically, economically, and geographically close to the EU (e.g., ENP countries).
- Instruments: medium- or long-term loans, grants, or combinations.
- MFA is mobilized case-by-case to help countries facing balance of payments problems and is available only in the context of a Fund adjustment and reform program; intended as strict complement to the Fund with clear demarcation of responsibilities.
- Disbursements conditional on satisfactory progress under the Fund-supported program and fulfillment of measures agreed via a Memorandum of Understanding.
- Key preconditions:
  - Existence of a residual external financing gap (Commission estimate in liaison with the Fund).
  - Respect of effective democratic institutions and mechanisms in beneficiary country.
- MFA intended to be exceptional and discontinued once the country can satisfy financing needs through other sources.
- MFA disbursements paid to beneficiary central banks and use not restricted.
- Guarantee Fund covers loan against default risk through a 9 percent provision.
- Burden sharing:
  - Pre-2011: MFA capped at 60 percent of residual external financing gap for ENP countries; one-third of residual gap for other politically/economically/geographically close countries.
  - Post-2011: burden sharing has no ceiling.
  - Historical MFA contribution: on average about 54 percent of the Fund’s intended disbursement at onset; this average has declined since 2011; historically about 9 billion euros in supplementary financing.
- Effectiveness and collaboration:
  - EC views MFA as valuable to macroeconomic stability with positive EU spillovers.
  - Field collaboration between MFA and Fund has been active, timely, and constructive with clear delineation of responsibilities.
  - Timing notes: since inception in 1990, MFA disbursements were approved by the Commission’s Council about 818 days prior to the Fund’s Board approval; post-2011 average lead time was 204 days.
  - Some risk of overburdening authorities with conditionality noted.
  - Overall assessment: MFA acted as a de facto complementary partner to the Fund in financing and operations.

*Source: EXECUTIVE SUMMARY and selected sections — pp073117-collaboration-between-regional-financing-arrangements-and-the-imf (IMF, June 29, 2017).*

### EXECUTIVE SUMMARY

### pp073117-collaboration-between-regional-financing-arrangements-and-the-imf - EXECUTIVE SUMMARY

### Context
- The Global Financial Safety Net (GFSN) has expanded considerably since 2008, including in the non-traditional elements such as Regional Financing Arrangements (RFAs).
- The resulting multi-layered structure of the GFSN increases the importance of collaboration among its elements to:
  - increase the effective firepower of the GFSN;
  - ensure timely deployment of resources;
  - combine the Fund’s experience in macroeconomic adjustment and universal risk pooling with RFAs’ greater regional knowledge and country ownership;
  - reduce contagion risk and encourage countries to seek early assistance from the Fund.
- This paper is part of a broader set of proposals to fortify the GFSN and proposes modalities for collaboration across capacity development, surveillance, and lending, plus operational principles to guide future co-lending between the Fund and RFAs.

### Proposal for stronger IMF–RFA collaboration (operational principles and lessons)
- Proposed operational principles draw on lessons from past co-lending, the 2016 CMIM test run, and bilateral discussions with several major RFAs.
- Key lessons highlighted by recent IMF–RFA co-financing experiences:
  - importance of early and evolving engagement between the RFA and the Fund;
  - benefits of exploiting complementarities between institutions;
  - criticality of a single program framework; and
  - need for mutual respect of institutional independence and capacity.
- An activity-based approach is recommended to facilitate similar forms of collaboration across RFAs that undertake similar activities.

### Main elements of the proposed collaboration framework
- Capacity development:
  - potential for agreement on regular training courses;
  - possible temporary staff exchanges;
  - joint seminars.
- Surveillance:
  - possible participation of RFA staff in selected Fund Article IV meetings, with the consent of the corresponding member country;
  - regular exchange of views on common members.
- Instruments with ex-ante conditionality (qualification criteria):
  - collaboration could be facilitated by aligning qualification standards for corresponding RFA and Fund instruments, and by sharing data and methods, but not the assessment;
  - qualification standards for Fund instruments would be established independently by the Board.
- Arrangements including ex-post conditionality — collaboration depends on mandates and technical expertise:
  - When a division of labor is possible: adopt a “lead agency” model while preserving close involvement of the RFA.
    - Example: the Fund leads on the macroeconomic framework and policies; the RFA focuses on areas within its comparative advantage.
  - When division of labor is not possible due to overlapping mandates and expertise: pursue early engagement and collaboration based on one coherent program.

### Other issues to facilitate collaboration
- Addressing differences:
  - avoid formulating rigid rules; the guiding principle should allow for coherent program design while respecting institutional independence and different lending practices.
- Information-sharing:
  - two-way information-sharing within each institution’s sharing policies is critical;
  - ensure reciprocity;
  - timing and granularity of information-sharing depend on the nature of the IMF–RFA engagement, confidentiality of information, and consent of the corresponding member country.
- Financing assurances:
  - in some cases, RFAs may need to adjust the maturity of their financing so that it is at least as long as that of Fund instruments to ensure that the overall program is properly financed.
- Legal identity and governance:
  - RFAs need a clearly defined legal identity and governance structure to facilitate information sharing and provide financing assurances.

### Institutional context and scope
- The paper starts from the existing, heterogeneous constellation of RFAs and treats current structures as the basis for practical recommendations rather than prescribing an ideal architecture.
- It complements other IMF proposals, including:
  - establishing a Policy Coordination Instrument (PCI) (non-financing) to signal commitment to reforms and catalyze financing;
  - introducing a Short-term Liquidity Swap (SLS) as a new liquidity backstop.

### Representative RFA data (from Table 1)
- Arab Monetary Fund (AMF): Established 1976; Size 3.6 (SDR Billions).
- BRICS Contingent Reserve Arrangement (CRA): Established 2014; Size 74.4 (SDR Billions).
- Chiang Mai Initiative Multilateralization (CMIM): Established 2000 (2010); Size 178.5 (SDR Billions).
- Eurasian Fund for Stabilization and Development (EFSD): Established 2009; Size 6.3 (SDR Billions).
- European Union-Balance of Payments (EU-BoP) Facility: Established 2002; Size 39 (SDR Billions) (EU non-Eurozone countries).
- European Stability Mechanism (ESM): Established 2012; Size 392 (SDR Billions) (Eurozone countries).
- Latin American Reserve Fund (FLAR): Established 1978; Size 3.5 (SDR Billions).

### Next steps and implementation
- Near-term actions proposed:
  - enhance the operational-level dialogue between the Fund and RFAs;
  - conduct joint test runs with some RFAs;
  - maintain ongoing dialogue between RFAs and the Fund, individually and collectively.

*Source: EXECUTIVE SUMMARY — pp073117-collaboration-between-regional-financing-arrangements-and-the-imf (IMF, June 29, 2017).*

### 8.      The size of the GFSN has increased significantly since the GFC, with a notable expansion

### pp073117-collaboration-between-regional-financing-arrangements-and-the-imf - 8.      The size of the GFSN has increased significantly since the GFC, with a notable expansion

### Expansion of the Global Financial Safety Net (GFSN) and RFA resources
- Since the GFC, new RFA arrangements and facilities have been established and resources under existing RFAs increased.
- Examples of new or expanded facilities and committed resources:
  - European Stability Mechanism (ESM) with a lending capacity of €500 billion for crisis prevention in the euro area.
  - European Financial Stabilization Mechanism (EFSM); temporary European Financial Stability Facility (EFSF) (introduced in Europe).
  - CMIM reformed in 2010 and its resources doubled to US$240 billion, effective from 2014.
  - BRICs Contingent Reserve Arrangement (CRA) with total committed resources of US$100 billion.
  - Eurasian Fund for Stabilization and Development (EFSD) established in 2009 with budgetary contributions of US$8.5 billion.
  - Members’ contributions to the Arab Monetary Fund (AMF) and the Latin American Reserve Fund (FLAR) almost doubled.

### Shift in shares across GFSN components and decentralization risks
- The rising share of RFA resources has been striking; the Fund, the second largest component (after own reserves) before the crisis, increased its share marginally and fell behind the RFAs (and BSAs).
- Risks from decentralization of the GFSN:
  - Difficulties in tapping multiple resources.
  - “Facility shopping” that may delay necessary macroeconomic adjustment and create inadequate incentives for sound policies (IMF 2016a).

### Evolution of Fund engagement and borrower composition
- Before the GFC, the Fund’s borrowers were predominantly EMDEs; since the GFC the membership requesting Fund-supported programs broadened to include upper middle-income and high-income countries.
- The Fund’s lending approach and standards:
  - Fund financing provided only where the financing-policy adjustment package can plausibly resolve a country’s BoP problems within the medium term.
  - “Upper Credit Tranche conditionality” (UCT) standard for a successful program is the same regardless of the Fund’s share in financing.
  - Some RFAs (CMIM, BRICS CRA) introduced an explicit link between high access to RFA resources and a Fund-supported program.

### Hurdles to IMF-RFA collaboration
- Identified hurdles in literature and practice:
  - Stigma associated with Fund-supported programs based on perceptions of overly rigorous conditionality (Kawai, 2009).
  - RFAs created as alternatives to Fund lending (Volz, 2012).
  - RFAs’ concerns about potential loss of independence in joint lending (Henning, 2011).
  - Tension from RFAs’ closeness to borrowers making strong adjustment demands difficult, while RFAs may seek influence over conditionality terms (Eichengreen, 2012).
  - Concerns that closer collaboration could undermine the Fund’s conditionality, monitoring, and credibility (e.g., Ghate et al., 2008).

### Dividends and comparative advantages from stronger collaboration
- Mutually reinforcing benefits of Fund-RFA collaboration:
  - Reduced stigma and earlier country engagement:
    - Countries may approach RFAs earlier due to lower stigma; early engagement helps withstand liquidity shocks and prevent solvency problems; avoiding delays (no facility shopping) contains problem size.
  - Mitigation of contagion (results from a stylized contagion model—Box 1):
    - Delayed Fund-supported programs create substantial costs and increased contagion.
    - RFA support without Fund involvement, even if immediate, is less effective at deterring contagion and comparable to a Fund with a 2-quarter lag.
    - Joint Fund + RFA support reduces contagion more than either acting alone.
  - Utilization of comparative advantages:
    - Fund: universal risk pooling, lower susceptibility to political factors, broader membership, greater distance from borrowing country.
    - RFAs: region-specific knowledge, experience, and possibly greater country ownership.

- Contagion model simulation results (number of countries affected by initial shock):
  - Global shocks:
    - Fund with no lag: 9
    - Fund with 2 quarter lag: 19
    - RFA only: 13
    - Fund (no lag) + RFA: 5
    - Fund (2 quarter lag) + RFA: 12
  - Regional shocks:
    - Fund with no lag: 0
    - Fund with 2 quarter lag: 5
    - RFA only: 7
    - Fund (no lag) + RFA: 0
    - Fund (2 quarter lag) + RFA: 2

### Experience with IMF-RFA collaboration and past usage
- Use of RFA financing since 2000:
  - 28 cases of RFA financing in Europe, the Middle East, and Latin America since 2000.
  - 11 cases jointly financed with the Fund, almost all in Europe.
  - In 2016, the Fund was invited to participate in a CMIM test run.
  - RFAs accounted for most program financing in Europe due to large financing needs.
- Burden sharing of program financing (2000–16) — Billions of U.S. Dollars (non-precautionary financing at onset of program):
  - Fund: 198.0
  - RFA: 354.3
  - Non-RFA: 118.5
  - Total: 670.9
- Burden sharing in percent (2000–16):
  - Fund: 29.5
  - RFA: 52.8
  - Non-RFA: 17.7

### Lessons from past IMF-RFA collaboration (distilled from case studies and a CMIM test run)
- Lesson 1: Importance of program ownership.
  - Strong ownership (e.g., Ireland’s National Recovery Program; Latvian authorities’ commitment to euro adoption) anchored collaboration and facilitated implementation.
- Lesson 2: Need for early and evolving engagement.
  - Early cooperation with RFAs during risk emergence allows faster and more efficient policy design; engagement may evolve as RFAs gain experience.
- Lesson 3: Respect independence and recognize differences in lending practices and governance.
  - Differences in objectives and lending practices can emerge and should be recognized upfront to facilitate program strategy agreement.
- Lesson 4: Foster complementarity based on comparative advantages.
  - Clear division of tasks increased operational efficiency (Hungary, Romania); Fund often provided macroeconomic framework and conditionality where RFAs relied on it.
- Lesson 5: Need for coherent program design.
  - Avoid excessive conditionality: parsimonious, focused conditionality increases probability of success (Cyprus case showed heavy structural load where competencies overlapped).
  - Avoid lack of coordination: uncoordinated program reviews and differing analytical frameworks can produce conflicting messages and erode credibility (Latvia, Belarus examples).
  - Anchor inter-institutional discussions around a conditionality document; Fund taking the initial draft of core goals and policies expedited discussions (success in MFA cases).
- Lesson 6: Resolve differences rapidly to avoid undue delays, though not at any cost.
  - Delays in resolving disagreements can deepen crises and raise costs (Cyprus example: nearly year-long delay worsened recession and increased bail-in size).
  - Quick resolutions can still entail trade-offs and costs (Ireland example: greater risk to debt sustainability and damage to public support).
- Lesson 7: Need for effective, consistent, and coordinated public communication.
  - Coordinated communication reduces program uncertainty during financial market turmoil; alignment of messaging helped collaboration in Hungary; poor coordination hindered Cyprus and Latvia.

### Observed changes in Fund-supported program composition (1987–2016)
- Number of Fund Programs, 1987–2007 (by income level):
  - High income: 0%
  - Upper middle income: 11%
  - Low middle income: 37%
  - Low income: 52%
- Number of Fund Programs, 2008–16 (by income level):
  - High income: 7%
  - Upper middle income: 17%
  - Low middle income: 36%
  - Low income: 40%
- Amount approved, 1987–2007 (by income level):
  - High income: 49%
  - Upper middle income: 14%
  - Low middle income: 34%
  - Low income: 3%
- Amount approved, 2008–16 (by income level):
  - High income: 7%
  - Upper middle income: 34%
  - Low middle income: 42%
  - Low income: 17%

*Source: pp073117-collaboration-between-regional-financing-arrangements-and-the-imf - 8.      The size of the GFSN has increased significantly since the GFC, with a notable expansion (IMF).*

### Box 3. Lead Agency Model of Collaboration

### Box 3. Lead Agency Model of Collaboration

### Concept and objectives
- The “lead agency” concept aims to build on the institutional strengths and comparative advantage of both institutions to achieve an effective division of labor in designing and monitoring conditionality.1
- Each institution is fully responsible for the establishment and monitoring of their respective conditions.
- For policies that are not within the “core areas of responsibility” and hence, expertise of a particular institution, the one will seek advice on the design and monitoring of these conditions from the other.
- The framework provides clarity to the member on primary responsibilities of each institution and aims to improve the quality of the policies underpinning the program.
- With each institution maintaining the overall responsibility for monitoring its conditionality, the model seeks to safeguard the resources of both parties.

### Flexibility, overlap, and program coherence
- The application of the “lead agency” framework should be flexible enough to:
  - accommodate areas of overlap in expertise and responsibility; and
  - ensure overall coherence of the reform agenda.
- Recognizes that:
  - In some areas, the comparative advantage and depth of expertise lie with one institution.
  - In many instances, areas of responsibility and expertise can overlap.
  - One institution might lead on designing and monitoring a particular reform while externalities to other areas could endanger overall program coherence.
- The lead agency concept should therefore be adaptable to accommodate overlap and at all points ensure that overall conditionality imposed by all institutions preserves coherence.

*1/ “Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality,” 2001.*

### 31.      Modalities for designing and monitoring programs with ex-post conditionality should

### 31.      Modalities for designing and monitoring programs with ex-post conditionality should

### Program design and monitoring: mandates, capacity, and roles
- Modalities should critically depend on the mandates and capacity of the RFA.
- Roles of the Fund and the RFA in program design and monitoring (establishing the macroeconomic framework, BoP need, phasing, policy adjustment, and conditionality) need to reflect:
  - the respective mandates and policies of the Fund and the RFA;
  - the analytical capacity of the RFA (mandates and expertise).
- For RFAs without sufficient capacity for program design and monitoring:
  - engagement will be mainly through information-sharing to ensure timely agreement on the financing need and sustainability of the policy adjustment package;
  - the Fund would likely play a leading role in establishing the macroeconomic framework, conditionality and policies (“Lead agency” model);
  - as noted in Section III, it is desirable to delegate to the Fund the initial draft of the statement of core aspects—economic and financial policies—of the program, reflecting the Fund’s extensive global experience in program design (expertise) and need to ensure evenhandedness.
- For RFAs with developed capacity and experience with program design and monitoring:
  - more flexibility will be necessary;
  - the Fund’s policies require it to have ownership of the macroeconomic framework and the Debt Sustainability Analysis (independence);
  - engagement at an early stage of the design should facilitate smooth collaboration and help address differences (early cooperation);
  - seeking a common view on key parameters and policies before the MEFP is discussed in the field (stages I and II in Annex IV) would be useful.

### Burden-sharing: principles and case-by-case approach
- Discussions over burden-sharing should be case-by-case, based on general principles.
- Burden-sharing depends on:
  - the available resources of the RFA as well as other financing sources that could be catalyzed by a Fund-supported program;
  - the objectives of the program;
  - the quality of policies proposed in the program (especially important in the context of the Fund’s exceptional access policy), given the size of financing gaps (mandate and expertise).
- These factors are very case-specific; a one-size-fits-all approach is difficult while complying with policies of both the Fund and the RFA (independence).
- Since the available financing envelope can have a bearing on the overall program design, the discussion on burden-sharing should start early (early cooperation).

### Addressing differences: resolving significant differences in views
- Resolving significant differences—while balancing rigid rules and flexibility—is critical to ensuring smooth IMF-RFA collaboration, particularly in lending under the “coherent program design and independence” model.
- Formulating rigid rules for resolving differences could be counterproductive:
  - past differences of views emerged over banking sector strategy (Cyprus); the pace of fiscal consolidation (Ireland, Latvia); exchange rate setting (Latvia); pace of private sector deleveraging (Ireland); debt re-profiling (Cyprus); and capital controls (Cyprus);
  - in these cases, mutually acceptable solutions consistent with a feasible program were found—quickly in most cases;
  - creating rigid rules or specifying a method for resolving differences could undercut independence or professional judgement and be counterproductive.
- Guiding principle: allow for coherent program design while respecting independence and different lending practices.
- Independence principle: the Fund and the RFA maintain the ability to act alone if needed; members retain the right (subject to other international obligations) to move forward with one financing partner alone where agreement is not possible or delayed.
- Better collaboration can be developed with practice and experience:
  - Fund experience with World Bank, regional development banks, and bilateral donors suggests practical experience is important;
  - the Bank-Fund Concordat took roughly two decades to reach a formal agreement, suggesting a critical mass of practical experience may be needed before well-reasoned recommendations can be implemented.

### Transparency and information-sharing
- Transparency contributes to better collaboration by building public support, increasing credibility of policies, and building trust among co-financing parties.
- The Fund has well-grounded transparency policies ensuring disclosure of documents and information on a timely basis unless strong and specific reasons argue against disclosure, while respecting the voluntary nature of publishing documents pertaining to member countries.
- RFAs’ transparency practices are heterogeneous:
  - some RFAs publish individual requests for financing or their assessment of implemented conditionality promptly (e.g. EFSD, EC);
  - others disclose limited information (e.g., FLAR, CMIM) on their members, or do so with a lag.
- Two-way information-sharing is critical for collaboration in co-financing operations (including conditionality and financing assurances). Informational asymmetries can complicate collaboration.
- Principle: information should be shared within each institution’s information-sharing policy and with the consent of the corresponding member country.
- Current Fund policy on information-sharing:
  - permits staff to share preliminary program information at the technical level with an RFA, subject to Management approval, when the RFA is considered a co-financier or creditor for program design purposes;
  - when a member country shares confidential information with the Fund, it cannot be shared further without that member’s consent;
  - RFA recipients of such information need to provide confidentiality assurances;
  - there is no general provision for routine sharing of country Board documents with RFAs prior to Board consideration under the Fund’s existing policies (country Board papers can generally only be transmitted after Board consideration with organizations meeting established criteria under the Transmittal Policy);
  - surveillance or program staff reports can be shared with RFAs shortly after submission to the Board, subject to specific ad hoc approval by the Board and the consent of the members concerned.
- Overarching issues before specific enhanced information-sharing modalities:
  - changing the Transmittal Policy could enable the Fund to share country Board papers with established RFAs after they are submitted to the Board, allowing RFA members to coordinate views through the RFA;
  - RFAs need to commit to transparent and reciprocal information-sharing and to treat as confidential any information from the Fund that the Fund considers and classifies as confidential;
  - any commitment of RFAs should be provided by the primary entity with which the Fund coordinates; a secretariat sufficiently covering all necessary organs of the RFA could give such a commitment, conditional on its ability to provide assurances on behalf of the RFA.
- Information-sharing in surveillance:
  - for regular surveillance (e.g., Article IV), RFAs with surveillance capacity could receive staff reports for their members at the same time as the reports are circulated to the Fund’s Executive Board, requiring a revision to the Fund’s transmittal policy.
- Information-sharing in lending operations:
  - timing and granularity depend on the existence of a Fund link and the practical/proven capabilities of RFAs in program design and monitoring, financing expertise, and institutional independence;
  - for an RFA with sufficient capacity to design and monitor programs, Fund staff can—with management approval and the member’s consent—share information with RFA counterparts on the macroeconomic framework (a set of tables and key policies) but not the policy note itself;
  - for an RFA without such capacity, exchanging information on key program parameters and policies in the field would be sufficient, with the possibility of sharing more detailed information on an as-needed basis and with the member’s consent;
  - for precautionary instruments (with ex-ante conditionality), since qualification criteria are public and qualification assessments are decided independently by each institution, information-sharing could be similar to a regular program case;
  - for cases where an RFA is lending without the Fund, the RFA could consult the Fund on aspects of the proposed loan and adjustment needs via technical assistance requested by either: (i) the member borrowing from the RFA; or (ii) the RFA—provided it has its own legal personality—with Board approval; an assessment letter may, in some circumstances, provide a vehicle for the Fund to share its views.

### Governance
- A clearly defined legal identity and governance structure of the RFA—with transparent decision-making—will facilitate collaboration, particularly for information-sharing and confidentiality assurances.
- Because the Fund’s ability to share information with the RFA is contingent on the consent of the corresponding member country, appropriate governance structures and confidentiality arrangements are necessary to provide comfort for the member country to share confidential and potentially sensitive information.
- The legal entity should sufficiently cover all other necessary organs of the RFA and be able to provide assurances on behalf of the RFA.
- This structure could help reduce potential conflicts of interest in joint financing operations at the Fund Executive Board, where Directors represent countries that are also RFA members.

### Maturity and Financing Assurances
- Use of Fund resources must comply with its policies, lending modalities, and other policy requirements.
- The Fund’s Financing Assurances Policy requires pre-commitment to future financing from all sources, including RFAs.
- When the program period and maturity of RFA financing (without decisions of extensions) are longer than those of the Fund, there are no issues regarding financing assurances.
- Tension arises when RFA lending instruments have an arrangement period shorter than the Fund’s and the RFA finds it difficult to pre-commit to future financing beyond its arrangement duration, creating a conflict with the Fund’s financing assurances.
- For effective collaboration, RFAs may need to change policies, for example, to raise the maximum number of rollovers of lending/swap lines and to provide pre-commitment of rollovers, conditional on completion of program review.

### Next steps and operational preparedness
- Holding test-runs for coordinated financing could strengthen collaboration:
  - Fund collaboration experience with MDBs and bilateral donors points to accumulating experience as important for better collaboration;
  - recent Fund participation in a CMIM test-run aimed at improving CMIM operating procedures and coordination with the Fund; the exercise highlighted coordination issues;
  - holding test-runs with other RFAs (that have not had experience of co-financing or test-runs with the Fund) could help identify coordination issues and additional constraints.
- Continued dialogue between the Fund and RFAs—both individually and collectively—and consistent communication are fundamental:
  - better understanding and support from political parties, media, civil society, and the public are needed;
  - communication should be incorporated into Fund-RFA operations to ensure timely, clear, and consistent messaging;
  - establishing a forum for regular dialogue between the Fund and RFA institutions could help identify and address newly emerging issues.
- Proposed modalities should have sufficient flexibility to handle newly developed RFA (and Fund) instruments:
  - as vulnerabilities and risks evolve, RFAs may need to adjust instruments and the Fund’s instruments may need refinement to enhance liquidity support and improve collaboration.

### Issues for discussion (paragraph 46)
- Do Directors agree with the rationale for stronger collaboration (Section II), and the lessons derived from past IMF-RFA collaboration (Section III)?
- Do Directors support the proposed operational principles of IMF-RFA collaboration (Section IV)?
- Do Directors concur with the proposed (activity-based) operational modalities for collaboration (Section V)?
- Do Directors agree with the need to identify: (i) potential impediments to collaboration; and (ii) modalities for establishing a regular informal exchange of views on issues affecting their common members?
- Do Directors agree with the proposed next steps, specifically, any scope for the Fund to improve its operational preparedness and procedures for co-financing by exploring the possibility of holding joint test-runs with RFAs without extensive experience of co-financing (Section VII)?

### Annex I. Review of Literature on IMF-RFA Cooperation — key findings
- Experience since the global financial crisis increased focus on the cost of coordination failures and need for a coordination mechanism.
- Consensus in literature on benefits of establishing an ex-ante IMF-RFA cooperation mechanism: prevent facility shopping and institutional arbitrage; allow a larger pool of resources for crisis prevention and management; promote stronger sense of ownership.
- Literature highlights challenges for establishing a well-functioning coordination mechanism:
  - political stigma is an issue (Kawai 2009);
  - joint-lending operations require sacrificing some autonomy (Henning 2011);
  - an inherent tension in RFA financing complicates cooperation (Eichengreen 2012).
- Proposed spectra for division of labor between RFAs and the Fund include:
  i) Alignment of qualification criteria across RFA precautionary lines with that of the Fund to eliminate facility shopping and watering down of criteria;
  ii) Sequential approach: RFA provides short-term liquidity backstop, Fund steps in when fundamental imbalances arise (criticized for possible delay of necessary structural adjustment and stigma effects);
  iii) Two-tier approach: RFA provides financing up to a threshold, beyond which co-financing with the Fund occurs with more demanding conditionality (similar to current CMIM approach);
  iv) Shock-specific approach: RFA provides financing with the Fund for small-scale shocks and/or small member states, with the Fund leading conditionality for regional and systemic shocks; proposals for Fund lending to a region are discussed but not possible under the Fund’s Articles of Agreement.

*IMF staff report excerpt: pp073117-collaboration-between-regional-financing-arrangements-and-the-imf - 31.      Modalities for designing and monitoring programs with ex-post conditionality should*

### Annex II. Any Lessons from RFA Lending Beyond its

### Annex II. Any Lessons from RFA Lending Beyond its Members’ Constituency?

### A supplementary role
- The European Commission (EC) can borrow on behalf of the European Union (EU) and lend to partner countries outside the EU using the Macro-Financial Assistance (MFA) facility.
- MFA targets countries "politically, economically, and geographically close to the EU," for example those bordering the EU and covered by the European Neighborhood Policy (ENP).
- Assistance instruments: medium- or long-term loans, grants, or a combination of these.
- MFA is mobilized on a case-by-case basis to help countries facing balance of payments problems restore external financial stability while encouraging economic adjustments and reforms.
- MFA is available only in the context of a Fund adjustment and reform program and is intended as a strict complement to the Fund, with a clear demarcation of responsibilities.
- Disbursements are conditional on satisfactory progress under the Fund-supported program and fulfilment of economic and financial policy measures agreed between the EU and the beneficiary, based on a Memorandum of Understanding (MoU).
- Key preconditions for MFA provision:
  - Existence of a residual external financing gap—as estimated by the Commission in liaison with the Fund.
  - Respect of effective democratic institutions and mechanisms in the beneficiary country.
- MFA is intended to be exceptional and discontinued once the country can satisfy its financing needs through other sources.
- MFA disbursements are paid to beneficiary central banks and their use is not restricted (e.g., can be used for FX intervention or as direct budget support).
- The Guarantee Fund covers the loan against default risk through a 9 percent provision.

### Burden sharing
- Before 2011, burden sharing under MFA was capped:
  - 60 percent of the country’s residual external financing gap for countries covered by the ENP.
  - one-third of the residual external gap for other countries politically, economically, and geographically close to the EU.
- Post-2011, burden sharing has no ceiling, reflecting difficulties in estimating financing gaps.
- Historical MFA contribution:
  - On average about 54 percent of the Fund’s intended disbursement at the onset of the program.
  - This average has declined since 2011.
  - Historically represented about 9 billion euros in supplementary financing.

### Effectiveness
- The EC considers MFA made a valuable contribution to macroeconomic stability in beneficiary countries, with positive spillovers on the EU economy.
- After the 2008-09 global financial crisis, the EC introduced in 2011 a proposal to enhance MFA to deploy resources quicker and speed up decision-making, and to improve complementarity with the Fund and other IFIs.
- The 2011 initiative was withdrawn in May 2013; decisions on individual MFA operations continued to be adopted on a case-by-case basis.

### Collaboration (operational experience)
- Field collaboration between the MFA and the Fund has been active, timely, and constructive.
- Fund staff reported no overlap in institutional roles within programs, noting clear delineation of responsibilities.
- Timing issues were highlighted in specific cases; Fund staff estimates show:
  - Since inception in 1990, MFA disbursements were approved by the Commission’s Council about 818 days prior to the Fund’s Board approval.
  - Post-2011 average lead time was 204 days.
- Some staff noted the risk of overburdening authorities with conditionality.
- Overall assessment: clear delineations allowed a successful partnership in which the MFA has played a de facto and not just de jure complementary role to the Fund, both in financing and operational terms.

*Source: Annex II. Any Lessons from RFA Lending Beyond its Members’ Constituency? (provided content).*

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_Source: https://www.imf.org/-/media/files/publications/pp/2017/pp073117-collaboration-between-regional-financing-arrangements-and-the-imf.pdf_