## ADEQUACY OF GFSN—PROPOSALS FOR TOOLKIT REFORM (pp121917-adequacyofgfsn-proposalsfortoolkitreform) ## Source details **Canonical URL:** [ADEQUACY OF GFSN—PROPOSALS FOR TOOLKIT REFORM (pp121917-adequacyofgfsn-proposalsfortoolkitreform)](https://www.imf.org/-/media/files/publications/pp/2017/pp121917-adequacyofgfsn-proposalsfortoolkitreform.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2017/pp121917-adequacyofgfsn-proposalsfortoolkitreform.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2017/pp121917-adequacyofgfsn-proposalsfortoolkitreform.pdf.json) --- ### Executive summary — context, motivation, and high-level proposals - Context and motivation - Heightened and protracted global uncertainty and frequent episodes of capital flow volatility have intensified demand for liquidity support. - Fund identified gaps in the global financial safety net (GFSN) and in the Fund’s lending toolkit for crisis prevention, including insufficient coverage against liquidity pressures from volatile capital flows. - Work draws on prior Fund reviews (adequacy of GFSN, review of toolkit for crisis prevention) and membership consultations. - Date: June 1, 2017. - Three complementary reform proposals 1. Establish a Short-term Liquidity Swap (SLS) — renewable, reliable liquidity support for potential short-term moderate volatility of capital flows; for members with very strong fundamentals and policies; features include revolving access, no exit expectations, extension of a Fund “offer”, and option for sole central bank signatory. 2. Use a core set of indicators with thresholds to guide judgment in FCL qualification — improves predictability/transparency while keeping standards unchanged; same framework to apply to the new liquidity backstop. 3. Eliminate the Precautionary and Liquidity Line (PLL) — to streamline the toolkit given low PLL use and potential tiering with the FCL. - Commitment-fee policy reforms (possible options) - Options include increasing the commitment fee at high access levels (steepen schedule) or introducing a time-based commitment fee (TBCF). ### Review findings on the FCL and PLL: effectiveness, use, exit, access, and transparency - Effectiveness and use - FCL effective in providing precautionary support against external tail risks. - Successor FCL arrangements and access levels aligned with assessment of external risks and potential BOP needs. - No new users of the FCL or PLL since the 2014 review. - Only three members (Colombia, Mexico, and Poland) have used the FCL, with a total of 18 arrangements since 2009. - Only one member (Morocco) has used the PLL, with a total of three arrangements since 2011. - Exit and access - Staff reports became more explicit about exit expectations; revised 2015 FCL guidance note highlights exit discussion expectations. - Reductions in access do not appear to be associated with adverse market reaction on average (Annex I). - Poland reduced access on three occasions — most recently to 159 percent of quota in January 2017 — without adverse market reaction (Annex II). - No recent member has exited from FCL or PLL arrangements; two members increased access in 2016: - Colombia: access doubled to 400 percent of quota (about USD 11.5 billion). - Mexico: access increased by more than 30 percent to 700 percent of quota (about USD 88 billion). - In light of elevated external risks, prolonged precautionary use or high access levels show no evidence of being unjustified; access discussions generally consistent with developments in the External Economic Stress Index (ESI). - Qualification and transparency - Scope exists to strengthen transparency and predictability by adding indicator-based thresholds to complement judgment. - 2014 review unified qualification areas and proposed developing an External Economic Stress Index (ESI) to guide access discussions; implementation uneven and could be improved. ### Implementation and use of the External Economic Stress Index (ESI) and adverse scenarios - ESI implementations and issues - ESI constructed using Fund flagship reports (WEO, GFSR), but shocks were not always based on most recent scenarios; size of assumed global shocks varied across program requests (Annex III). - Staff reports for Mexico and Colombia listed assumptions for current and previous two arrangements, improving transparency. - Recommendation: specify ESI downside scenarios be based on Fund documents no older than six months or use common scenarios for consistency. - Exchange rate and reserve assumptions in adverse scenarios - Assumed use of reserves in adverse scenarios has become more prevalent. - Reserve adequacy guidance: suggested adequacy range: 100-150 percent; 2014 review/2015 FCL guidance note suggest 80 percent of the ARA metric as a lower threshold in extreme stress events. - Country-specific notes preserved exactly from source: - Mexico 2/: Net international reserves declined to 89 percent of the ARA metric in the adverse scenario. - Morocco 3/: Financing gap defined to maintain reserves at 90 percent of the standard ARA metric (before adjusting for capital controls). After adjusting for capital controls, baseline reserves amounted to 136 percent of the ARA metric and reserves in the adverse scenario remained adequate. - 1/ Augmented by buffer for commodity exports. - Guidance: assumed gross reserves should not fall below 100 percent of the ARA in adverse scenarios without clear justification; pace of drawdown should consider market reaction. - Exchange rate depreciation impacts often implicit and insufficiently communicated; recommended clarify assumed impact of exchange rate depreciation in adverse scenario descriptions. ### Proposed changes to FCL qualification — core indicators and thresholds - Maintain existing high FCL qualification standard: to approve FCL, member must meet: - (i) very strong economic fundamentals and institutional policy frameworks; - (ii) implementing — and with a sustained track record of implementing — very strong policies; and - (iii) committed to maintain such policies. - Retain nine qualification criteria and specify role of core indicators with thresholds drawn from established analytical frameworks (e.g., ARA). - Selected exact thresholds and requirements (Box 3 highlights) - 1. Sustainable external position: must be assessed in most recent Board document as “broadly consistent”, “moderately stronger (weaker)”, “stronger”, or “substantially stronger” than implied by fundamentals and desirable policies. Members with “weaker” or “substantially weaker external positions” would not meet the criterion. - 2. Capital account position dominated by private flows: public flows must account for less than half of direct, portfolio, and other asset and liability flows, on average in the past three years. - 3. Track record of sovereign access: public sector issuance/guarantees or disbursements in at least three of the last five years, cumulative amount ≥ 50 percent of the country’s Fund quota at assessment time; no loss of market access in last 12 months per staff assessment. - 4. Reserves (precautionary): reserves > 100 percent of the ARA metric on average over three years (current and two previous), and not below 80 percent in any of these three years. - 5. Public debt: assessed as sustainable with a high probability. - 6. Inflation: maintained single-digit inflation over past five years; bottom-line assessment considers context. - 7. Financial system soundness: average capital adequacy ratio above regulatory thresholds; most recent Article IV should not highlight significant solvency risks or recapitalization needs. - 8. Supervision: most recent FSAP or Article IV should not raise substantial supervisory concerns. - 9. Data: member is an SDDS subscriber or has made satisfactory progress toward SDDS requirements. ### Assessment of policy track record and operational considerations - Track record assessment anchored in five most recent years; bottom-line assessments follow same approach as current year and may draw on additional information (e.g., policy response to capital flow volatility). - Exception: public finance criterion is forward-looking due to debt sustainability assessment. - ESI implementation could be strengthened: downside scenarios should use most recent flagship reports; similar shock scenarios expected for contemporaneous arrangements unless context warrants differences. - Use of reserves: internal review should consider alternative reserve drawdown scenarios (including pace) to inform access; decision to maintain higher reserve levels in adverse scenario requires clear justification. ### Proposed Short-term Liquidity Swap (SLS) — design, terms, and operational features - Objective and scope - Provide “swap-like” liquidity support to very strong members for special BOP needs defined as “potential short-term BOP difficulties reflected in pressure on the capital account and the member’s reserves resulting from volatility in international capital markets.” - Expected scale limited; requires at most fine-tuning of central bank policies. - Qualification - Same standards and criteria as the FCL; high qualification bar ensures no ex‑post conditionality required. - SLS arrangements: “There will be no ex-post conditionality, including no standard continuous Performance Criteria (PCs), and no reviews during an arrangement.” - Criterion 4 amended to remove “When the arrangement is requested on a precautionary basis” to reflect SLS can be requested only when member faces a potential (not actual) BOP need. - Key terms and features (selected exact terms) - Repurchase period: 12 months; purchases subject to a one-year repurchase obligation without installments. - Access and revolving access: - Access defined as limit on stock of Fund credit outstanding under SLS. - Maximum access: up to normal annual access limit (145 percent of new quota). - Revolving access enables repeated purchases and repurchases within an arrangement and across successor arrangements; full drawing does not terminate arrangement; repurchase reconstitutes right to purchase up to maximum access approved. - Access under SLS would not trigger the exceptional access framework (access capped below exceptional access levels, i.e., 145 percent of quota). - Duration of arrangement: individual arrangements approved for 12 months; successor arrangements possible upon continued qualification. - Charges and fees (special SLS fee structure): - Nonrefundable commitment fee (8bps) - Service charge (21bps) - Normal rate of charge - Normal surcharge schedule - Activation and signatory: - Board approves the “extension of an offer”; arrangement effective upon Fund confirming receipt of signed written communication including acceptance and policy commitments. - Option for sole central bank signatory in certain cases. - Reviews and ex-post conditionality: None. - Successor arrangements and exit: No restrictions on successor arrangements if qualification met; exit expected as global risk declines. - Operational mechanics — revolving drawing rights (Box 5 highlights) - Repurchases follow a “first out, first in” rule. - Stylized examples preserve exact assumptions: - Base assumption: member has 145 percent access; faces BOP shock 3 months after approval and purchases 100 percent of quota; purchase triggers 12-month repurchase obligation; member retains right to purchase up to 45 percent of quota during remaining 9 months. - Fee mechanics rationale: - Non‑refundable commitment fee proposed to avoid penalizing reconstitution of access and to support revolving use. - Service charge 21 bps and commitment fee 8 bps provide total cost comparable to credit tranche purchase when revolving use occurs twice (50 bps total). - Review clause: special fee structure to be reviewed within two years. ### Signatory, confidentiality, relationship to FCL, and other modalities - Signatory and legal authority - Central bank may be sole signatory if it has domestic legal authority to commit the member and is the exclusive authority for necessary adjustment; the member remains counterpart obliged to repurchase and pay charges. - Fund will rely on member’s representation regarding legal authority; staff will confirm Finance Ministry commitment to maintain fiscal stance. - Confidentiality and coordinated opt-in - Process strictly confidential; qualification public only for countries that enter into arrangement. - Group synchronized opt-in possible; Board may consider extension of offers to multiple countries at single meeting. - Relationship with FCL - SLS aimed at medium-sized liquidity shocks; FCL addresses any type/size of BOP need. - Transition between SLS and FCL facilitated by identical qualification criteria. - Other modalities and safeguards - Review clause: review two years after creation or earlier if combined SLS+FCL commitments exceed SDR 150 billion. - Safeguards: SLS subject to same safeguards assessment requirements as the FCL (modified safeguards approach applies). - No concurrent use: members will not use SLS to “double up” with other GRA arrangements. - Post-program monitoring: credit outstanding under SLS counted for PPM policy. - Article IV consultation cycle: approval of an SLS arrangement places member on a 12-month Article IV cycle. ### Resource implications, scenarios, FCC scoring, and second‑round effects - Preliminary commitment estimates - Staff estimates potential SLS commitments would likely not exceed SDR 90 billion, and probably be much lower. - Scenario commitments (staff analysis) - Scenario A: all potentially eligible members (except those with active FCL) opt in — commitments about SDR 88 billion (upper-bound estimate). - Scenario B: only potentially eligible members that have expressed clear interest opt in — commitments about SDR 32 billion. - Scenario C: Scenario B plus three current FCL users qualify and opt in once arrangements expire — commitments under SLS would rise to around SDR 54 billion; aggregate commitments under SLS and FCL would fall by about SDR 55 billion, raising the Fund’s forward commitment capacity (FCC) by SDR 23 billion. - Under all scenarios, commitments under SLS well below current FCC of SDR 210 billion (as of April 11, 2017, comprises only quota resources). - Second‑round (liquidity) effects if simultaneous drawings - Members meeting SLS criteria expected to be included in FTP; drawings would remove them temporarily from FTP, reducing FCC and creating second‑round effects on Fund liquidity. - Example: in Scenario B, maximum temporary second‑round effects (if all SLS members made purchases) would reach SDR 12 billion. - FCC scoring and staff view - Staff view: full scoring of precautionary arrangements in FCC remains appropriate. - Rationale: avoid doubts over Fund’s ability to meet commitments; drawings can be highly correlated across members; absence of alternative liquidity sources. - Review trigger: staff proposes review if combined SLS+FCL commitments exceed SDR 150 billion; assuming no change in current FCL commitment of SDR 77 billion, threshold reached with SLS commitments of SDR 73 billion (reducing FCC to SDR 136 billion). - Partial scoring considerations: two conditions could justify partial scoring — (i) sufficiently well‑diversified precautionary exposures so only a fraction drawn in a short period; and/or (ii) credible mechanism to mobilize resources quickly — staff view neither condition currently in place. ### Commitment-fee reform options — steepening vs time-based commitment fee (TBCF) - Rationale - Higher fees could promote more balanced use of Fund resources and discourage prolonged large precautionary commitments that tie up finite resources. - Option 1: Steepen current commitment fee schedule - Current upward-sloping fee structure introduced in 2009. - Illustrative modification: increase current 60 bps rate applied at access above highest fee threshold of 575 percent of quota by 10–20 bps. - Pros: operationally simple and transparent; strengthens price incentive to discourage prolonged high-access precautionary commitments. - Cons: applies uniformly to all GRA arrangements irrespective of precautionary nature; could affect large drawing arrangements that go off-track. Mitigation: commitment fees refunded upon purchases. - Illustrative impacts (selected exact figures preserved): - Mexico (FCL 2016-): Access 700 (percent of quota); Effective Rate 33 (bps); Nominal Fee 205.2 (millions of SDR). Under 10 bps increase above 575%: Effective Rate 35 (bps); Change in fee 11.1 (millions of SDR). Under 20 bps increase above 575%: Effective Rate 36 (bps); Change in fee 22.3 (millions of SDR). - Colombia (FCL 2016-): Access 400 (percent of quota); Effective Rate 26 (bps); Nominal Fee 21.0 (millions of SDR); No change under these illustrative alternatives. - Poland (FCL 2017-): Access 159 (percent of quota); Effective Rate 19 (bps); Nominal Fee 12.4 (millions of SDR); No change under illustrative alternatives. - Option 2: Introduce a Time-based Commitment Fee (TBCF) - TBCF charged on top of existing level-based fees once undrawn credit remains above a specified threshold for a defined duration (“duration trigger”), example duration trigger: 4 years. - For arrangements currently in effect, clock toward duration trigger would start, at earliest, in mid-2013. - Clock pauses when undrawn balances fall below the threshold; resets after a “cooling off” period (suggested one year). - Proposed fee level modest, e.g., 10–20 bps. - Pros: more targeted on prolonged precautionary use. - Cons: not state-dependent (could penalize members with prolonged adverse external circumstances); adds complexity and operational burden; legal constraints require uniformity of charges across members. - Threshold considerations: set at 575 percent of quota to target very large prolonged commitments; to date only one FCL arrangement had access above 575 percent of quota (Mexico’s FCL arrangement approved May 2016). - Scope/exclusions: appropriate to exclude extended arrangements and the new liquidity facility from TBCF application. - Grandfathering: current arrangements would be grandfathered; new policy applies to requests approved after new fee structure comes into effect. - Staff view: both options have drawbacks — steepening simple but not targeted; TBCF more targeted but blunt and complex. ### Annex findings and empirical motivation - Annex I — Access reduction and market impact: six instances of access reduction since FCL/PLL inception; high-frequency data show generally muted market reaction to access reductions; regression evidence suggests no negative market reaction. - Annex III — ESI evaluation: first ESI implementations in 2014–2015; teams used data-based weights; projected downside ESI scenarios have generally aligned with potential financing needs and access levels, though inconsistencies in shock quantification exist. - Annex IV — Reserve use in adverse scenarios: reserve drawdown increasingly prevalent; reserve adequacy generally remained at or above 100 percent of ARA metric in adverse scenarios; suggested adequacy range: 100-150 percent; 2014 review suggests 80 percent of ARA as lower threshold in extreme stress events. - Empirical stylized facts motivating SLS (Box 4) - Liquidity events follow a short acute phase followed by normalization within about a year; acute phase typically around one quarter; outflows reverse within two to three quarters; only the GFC had profound impact on EM reserves; policy response mainly central bank measures. - Sample: 22 large EMs (listed in source); data sources: EPFR flows, IFS, IMF staff calculations. ### Issues for Board discussion (exact questions preserved) - Do Directors agree with use of a core set of indicators with thresholds to guide judgment in FCL qualification? - Do Directors see scope for increasing price-based incentives to encourage exit from the FCL? Views on steepening the commitment fee schedule vs introducing a TBCF? - Do Directors concur with proposed elimination of the PLL? - Do Directors agree that qualification standards and frameworks for the SLS should be fully aligned with the FCL? - Do Directors support SLS design features: revolving access, no exit expectation, sole central bank signatory option, Board’s conditional approval of an arrangement? - Do Directors agree with the proposed special fee structure for the SLS? - Do Directors agree that precautionary commitments should continue to be counted at full value in the FCC calculation? *Source: pp121917-adequacyofgfsn-proposalsfortoolkitreform (PDF chapter/section).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and motivation - Heightened and protracted global uncertainty combined with frequent episodes of capital flow volatility have intensified demand for liquidity support. - The Fund identified gaps in the global financial safety net (GFSN) and the Fund’s lending toolkit for crisis prevention, including insufficient coverage against liquidity pressures resulting from volatile capital flows. - The proposals draw on previous Fund work on the adequacy of the GFSN, the review of the Fund’s current toolkit for crisis prevention, and extensive consultations with the membership. - Date: June 1, 2017. ### Review findings on the FCL and PLL - Effectiveness and use - The review concludes that the Flexible Credit Line (FCL) has been effective in providing precautionary support against external tail risks. - Successor FCL arrangements and associated access levels have been in line with the assessment of external risks and potential balance of payments needs. - There have been no new users of the FCL or PLL since the 2014 review. - Only three members (Colombia, Mexico, and Poland) have used the FCL, with a total of 18 arrangements since its introduction in 2009. - Only one member (Morocco) has used the PLL, with a total of three arrangements since its establishment in 2011. - Exit and access - Staff reports for successive FCL arrangements have been more explicit about the expectation for exit; the revised 2015 FCL guidance note highlights specific expectations for exit discussions. - Examples of authorities’ language on exit expectations are documented for Colombia, Mexico, and Poland. - Reductions in access do not appear to be associated with adverse market reaction on average (Annex I). - Poland reduced access on three occasions—most recently to 159 percent of quota in January 2017—without adverse market reaction (Annex II). - No member has recently exited from FCL or PLL arrangements; two members increased access in 2016: - Colombia: access doubled to 400 percent of quota (about USD 11.5 billion). - Mexico: access increased by more than 30 percent to 700 percent of quota (about USD 88 billion). - In light of elevated external risks, there is no evidence that prolonged precautionary use or high access levels have been unjustified; access discussions were generally consistent with developments in the External Economic Stress Index (ESI). - Qualification and transparency - There is scope to strengthen the transparency and predictability of the qualification framework by adding indicator-based thresholds to complement and inform judgment. - The 2014 review unified qualification areas and added quantitative indicators of institutions; staff proposed developing an External Economic Stress Index (ESI) to guide access discussions. ### Proposed reforms to enhance crisis resilience and toolkit coherence - Three complementary reforms are proposed: 1. Establishment of a Short-term Liquidity Swap to provide renewable and reliable liquidity support against potential short-term moderate volatility of capital flows. - The proposed instrument is for members with very strong fundamentals and economic policies, and tailored to improve reliability and appeal to users. - Key features were designed through extensive consultations and include revolving access, no exit expectations, extension of a Fund “offer”, and option for sole central bank signatory. 2. Use of a core set of indicators with thresholds to guide judgment in FCL qualification. - This will improve predictability and transparency while keeping the standards unchanged. - The same qualification framework would apply to the new liquidity backstop. 3. Elimination of the Precautionary and Liquidity Line (PLL) to maintain a streamlined and coherent toolkit, given the low use of the PLL and likely tiering issues with the FCL. - Commitment fee policy reforms (possible options) - The paper discusses possible reforms of the current commitment fee policy to promote a more balanced use of Fund resources. - Possible options include increasing the commitment fee at high access levels or introducing a new time-based commitment fee. ### Design and operational considerations for the new liquidity backstop - The new liquidity backstop is proposed as a special facility to address a key identified gap in the GFSN and to act as a complement to other elements of the GFSN. - Qualification and process - To address Directors’ concerns about qualification standards and process, the new backstop will have the same qualification standards as the FCL. - The backstop will be available year-round and will follow a process largely similar to the FCL (eschewing alignment with Article IV cycles). - Key design features - Revolving access. - No exit expectations. - Extension of a Fund “offer”. - Option for sole central bank signatory. - Relationship with other reforms - The FCL qualification improvements (core indicators with thresholds) will apply to both the FCL and the new liquidity backstop. - The PLL will be eliminated to avoid instrument proliferation and ensure toolkit cohesion. ### Resource implications and broader reform context - The paper reviews resource implications of the proposed reforms and discusses commitments and second-round effects (section five). - Proposed reforms are part of a broader set of proposals to improve Fund facilities and instruments, including: - Establishing a new (non-financing) Policy Coordination Instrument to help signal commitment to reforms and catalyze financing. - Strengthening cooperation between the Fund and the Regional Financing Arrangements. - Issues for discussion include coherence of the lending toolkit, impact on Fund resources, high qualification bar for facilities without ex post conditionality, and qualification process design to avoid adverse signaling and protect surveillance candor. *Prepared by an interdepartmental staff team from the Strategy, Policy and Review, Finance, and Legal Departments; approved by Sean Hagan, Siddharth Tiwari, and Andrew Tweedie.* ### 13. The implementation of the ESI has, nevertheless, been somewhat uneven and could be ### 13. The implementation of the ESI has, nevertheless, been somewhat uneven and could be improved. ### Implementation of adverse scenarios and transparency - ESI adverse scenarios were constructed drawing on Fund flagship reports, such as the WEO and the GFSR, but shocks were not always based on the most recent scenarios (see Annex III). - The size of assumed global shocks varied across shock scenarios in recent program requests. - Staff reports have recently become more transparent regarding the assumptions underpinning the access scenario; both the Mexico and Colombia requests have listed all relevant assumptions for not only the current arrangement but also the previous two arrangements. - Figure 1 in the source documents shows an Evolution in the Severity of Shocks Relative to Previous Arrangement for Morocco, Poland, Colombia, and Mexico (colors denote severity: Red: more severe; Yellow: unchanged; Green: less severe; Gray: not available). ### Reserves, assumed drawdown, and access levels - Assumed use of reserves in adverse scenarios has become more prevalent. - Developments in fundamentals and the use of buffers have had an important role in reducing access levels (Annex IV). Example: improved fundamentals and buffers reduced financing needs in the 2017 Poland FCL request. - Reserve levels in extreme stress scenarios have generally remained within the adequacy range (text chart), in part reflecting concerns about adverse market reactions to a large and rapid reserve drawdown. - The 2014 review and the 2015 FCL guidance note suggest considering 80 percent of the Fund’s ARA metric as a lower threshold in an extreme stress event (see Annex IV). This would imply that additional room for reserve drawdown may be available. - Reserve adequacy chart notes and specific values in source: - Suggested adequacy range: 100-150 percent - Colombia 1/: Baseline and Adverse reserve adequacy percentages plotted (percent of reserve adequacy metric; based on gross international reserves). - Mexico 2/: Net international reserves declined to 89 percent of the ARA metric in the adverse scenario. - Morocco 3/: Financing gap defined to maintain reserves at 90 percent of the standard ARA metric (before adjusting for capital controls). After adjusting for capital controls, baseline reserves amounted to 136 percent of the ARA metric and reserves in the adverse scenario remained adequate. - 1/ Augmented by buffer for commodity exports. - 2/ Net international reserves declined to 89 percent of the ARA metric in the adverse scenario. - 3/ Financing gap defined to maintain reserves at 90 percent of the standard ARA metric (before adjusting for capital controls). After adjusting for capital controls, baseline reserves amounted to 136 percent of the ARA metric and reserves in the adverse scenario remained adequate. ### Exchange rate assumptions in adverse scenarios - Discussion of exchange rate assumptions and the implied impact on financing needs in adverse scenarios could be strengthened. - FCL guidance note: “the adverse scenario should also take into account whether there is a case for an orderly exchange rate adjustment.” - Temporary exchange rate depreciation could impact the current account; while adverse scenarios have often implicitly built in exchange rate depreciation (e.g., Poland’s most recent FCL request), this has generally not been clearly communicated. - The assumed impact of exchange rate depreciation should be clarified in the description of the adverse scenario. ### Qualification: 2014 review outcomes and remaining ambiguity - The 2014 review modified the qualification criteria for the FCL and the PLL to improve transparency and predictability and added new indicators to strengthen the assessment: - Clarification of the PLL qualification areas by introducing a direct mapping between the five PLL qualification areas and the nine FCL qualification criteria, strengthening comparability. - Introduction of indicators to inform the assessment of institutional strength. - The review also pointed to ambiguity over what constitutes underperformance relative to the qualification requirements, especially with respect to the PLL. - Recent FCL and PLL staff reports highlight the lack of specific tools and benchmarks (i.e., specific indicators with thresholds) to guide judgment in several of the nine qualification criteria (see Box 2). The absence of benchmarks reduces predictability in qualification. - The assessment of a sustained track record of implementing very strong policies has been based entirely on judgment, since neither the benchmarks nor the period over which they are assessed are defined. ### Box 2 summary — Use of quantitative and qualitative assessments in qualification (key points) - Qualification area I: External position and market access - 1. Sustainable external position: Assessment has benefitted from tools (debt sustainability analysis, current account and real exchange rate assessment). Specific tools to assess external (as opposed to public) debt remain absent. - 2. A capital account position dominated by private flows: No specific threshold available; assessment is entirely judgment-based. - 3. A track record of steady sovereign access to international capital markets at favorable terms: Readily available information used, but benchmark not specified. - 4. A reserve position that is relatively comfortable when requested on a precautionary basis: Reserves assessed against standard metrics; assessment largely analytical. - Qualification area II: Fiscal policy - 5. Sound public finance, including sustainable public debt position: Judgment applied, existing tools (debt sustainability analysis) provide analytical framework. - Qualification area III: Monetary policy - 6. Low and stable inflation, in context of sound monetary and exchange rate policy framework: Deviations attributed to temporary external shocks in examples; benchmark against which assessment is made is not specified. - Qualification area IV: Financial sector soundness and supervision - 7. Sound financial system and absence of solvency problems threatening systemic stability: Staff assess capital against requirements and use stress tests; basis for assessing overall soundness could be clearer. - 8. Effective financial sector supervision: Staff reference implementation of FSAP recommendations and other steps to strengthen supervision. - Qualification area V: Data adequacy - 9. Data transparency and integrity: References to ROSCs, timely data provision, and SDDS observance have helped create benchmarks. ### Proposed changes to qualification for the FCL (overview) - Proposal: maintain existing high FCL qualification standard. To approve an FCL arrangement, the Fund must assess that the member: - (i) has very strong economic fundamentals and institutional policy frameworks; - (ii) is implementing—and has a sustained track record of implementing—very strong policies; and - (iii) remains committed to maintain such policies in the future. - Proposed changes retain all existing qualification criteria but specify more clearly the role of indicators in guiding judgment. - Framework would be anchored in a set of core indicators with thresholds based on established analytical frameworks (e.g., metrics such as the ARA and bottom-line assessments of a member’s external position). Core indicators are drawn from indicators endorsed by the Executive Board in 2014. - Bottom-line assessments on each criterion remain judgmental but are to be clearly guided by the proposed set of core indicators. The indicators and thresholds will be a key element in determining whether the FCL criteria are met, without obviating the need to consult other relevant information. ### Box 3 — Qualification criteria and proposed core indicators (selected exact thresholds and requirements) - 1. A sustainable external position: Requires the member’s external position to have been assessed, in the most recent Board document (Article IV or ESR), as “broadly consistent”, “moderately stronger (weaker)”, “stronger”, or “substantially stronger” than implied by fundamentals and desirable policies. Members with “weaker” or “substantially weaker external positions” would not meet the criterion. - 2. A capital account position dominated by private flows: Requires public flows to account for less than half of a member’s direct, portfolio, and other asset and liability flows, on average in the past three years. - 3. A track record of steady sovereign access to capital markets at favorable terms: Requires public sector issuance or guaranteeing of external bonds or disbursements of public and publicly-guaranteed external commercial loans in international markets during at least three of the last five years for which data are available, in a cumulative amount over that period equivalent to at least 50 percent of the country’s Fund quota at the time of the assessment. Also requires that the member did not, in staff’s assessment, lose market access at any point in the last 12 months. - 4. When the arrangement is requested on a precautionary basis, reserves requirement: Requires reserves to have been greater than 100 percent of the ARA metric on average over three (the current and the two previous) years, and not below 80 percent in any of these three years. - 5. Sound public finances, including sustainable public debt: Requires the member’s public debt to be assessed as sustainable with a high probability. - 6. Low and stable inflation: Requires the member to have maintained single-digit inflation over the past five years. Bottom-line assessment will consider if performance reflects favorable external conditions or if the policy framework is unable to maintain low inflation; persistent deviations from targets and sustained deflation will be considered. - 7. Sound financial system and absence of solvency problems threatening systemic stability: Requires the average capital adequacy ratio for the banking sector to be above regulatory thresholds, and that the most recent Article IV did not highlight significant solvency risks or recapitalization needs. Bottom-line assessment will consider other financial soundness indicators and stress tests, and potential problems in large and systemic banks masked by system-wide averages. - 8. Effective financial sector supervision: Requires that the most recent FSAP or Article IV report did not raise substantial concerns regarding the supervisory framework; bottom-line assessment considers significant changes since the latest FSAP. - 9. Data transparency and integrity: Requires that the member is an SDDS subscriber or has made satisfactory progress toward meeting the SDDS requirements. *Source: IMF staff reports and the chapter text provided.* ### 21. The assessment of policy track record will be anchored in the same set of core ### pp121917-adequacyofgfsn-proposalsfortoolkitreform - 21. The assessment of policy track record will be anchored in the same set of core ### Assessment of policy track record - Determination of whether a member meets the track record requirement would be guided by an assessment of the qualification criteria in each of the five most recent years. - Bottom-line assessments on each criterion would follow the same approach as for the current year, including by drawing on additional information, e.g., the appropriateness of a member’s policy response to past bouts of capital flow volatility, and the extent to which individual indicator outcomes reflect favorable external conditions. - Exception: The “Sound public finances, including a sustainable public debt position” criterion is forward-looking due to the underlying assessment of debt sustainability with high probability. - Very strong performance against all qualification criteria is not required. ### Other operational considerations for the FCL - External economic stress index (ESI) - Implementation of the ESI could be strengthened to enhance comparability of external risks across countries. - Staff plans to amend guidance to ensure downside scenarios are based on the most recent flagship reports (i.e., WEO, GFSR, or spillover reports). - While impact of a given shock differs across countries (reflecting different exposures and hence different ESI weights), the underlying shock scenario would be expected to be similar across countries with arrangements falling close in time. - If different assumptions (e.g., different shock size) are warranted, this should be clarified by specifying the context surrounding the given shock. - Use of international reserves - Potential impact on access levels of additional reserve drawdown could be considered to support lower access levels. - In past cases, reserves have generally been assumed to remain adequate, even though FCL guidance provides scope to draw them below relevant adequacy thresholds in adverse financing needs scenarios. - Internal review discussions could take into account alternative reserve drawdown scenarios (e.g., access levels under a lower bound of reserves, with consideration to pace of drawdown to avoid adverse market reactions; see Annex IV). - A decision to maintain significantly higher reserve levels in the adverse scenario should be clearly justified. ### Commitment fees — context and rationale - Rationale - Although the review has not found evidence of undue use of the FCL, higher fees could promote a more balanced use of Fund resources, including between the FCL and the proposed new liquidity instrument. - Prolonged use of large precautionary arrangements ties up a significant share of the Fund’s finite resources and potentially entails costs to creditor members, particularly non-reserve-currency-issuing members in the Financial Transactions Plan (FTP) that maintain liquid assets to meet potential calls under such arrangements. - Director views (summarized) - Some Directors have called for stronger exit incentives from prolonged precautionary use of Fund facilities at high access levels, including time-based commitment fees or time limits; others saw no compelling evidence of problems with exit and noted exit should depend on external environment. - Two commitment fee reform options considered (see Annex V for details) 1. Steepen the current commitment fee schedule - Current upward-sloping fee structure introduced in 2009. - Example modification: increase the current 60 bps rate applied at access above the highest fee threshold of 575 percent of quota by, say, 10-20 bps. - Pros: operationally simple and transparent; strengthens price-based incentives to discourage prolonged commitments under very high access arrangements (typically precautionary FCLs). - Cons: applies uniformly to all GRA arrangements irrespective of whether precautionary; could affect large drawing arrangements that go off-track. - Mitigation: commitment fees are refunded upon purchases. 2. Introduce a time-based commitment fee (TBCF) - Intended to discourage large-scale prolonged precautionary commitments. - Mechanism: an additional fee once the level of undrawn credit has remained above a specified threshold for a defined period (“duration trigger”), example duration trigger: 4 years. - For arrangements currently in effect, the clock toward meeting the duration trigger would start, at the earliest, in mid-2013. - Arrangements remain subject to the fee until undrawn credit falls below the threshold, through purchases or upon expiration. - Clock behavior: the clock would pause once undrawn balances fall below the threshold, and would reset once undrawn balances remain below the threshold for a defined continuous period of time (“cooling off” period). - Pros: more targeted on prolonged precautionary use. - Cons: not state-dependent (could penalize members facing prolonged adverse external circumstances); would add complexity and operational burden; requires careful calibration of design elements. - Proposed fee level: modest, e.g., 10-20 bps. - Threshold considerations for a time-based fee - Threshold could be set at the higher level-based commitment fee threshold of 575 percent of quota to target particularly large and prolonged commitments and mitigate unintended consequences. - A lower threshold would increase risk of unintended consequences for other high access arrangements expected to be drawn. - To date, based on quotas in effect after completion of the 14th General Review of Quotas, only one FCL arrangement has had access above 575 percent of quota (Mexico’s FCL arrangement approved May 2016). - Scope and exclusions - Given the purpose to discourage large-scale prolonged precautionary commitments, it would be appropriate not to apply TBCF to extended arrangements and the new liquidity facility. - Applying it to all GRA arrangements could subject extended arrangements (generally not precautionary) to the fee in instances not aligned with the fee’s purpose. - Arrangements under the new liquidity facility are envisaged to have no exit expectations and should not be subject to a TBCF. - Effects and trade-offs - Members could still request new arrangements or renewals if warranted by external risks. - Under current commitment fee structure, costs to users of precautionary facilities are materially lower than staff’s estimates for cost of accumulating reserves and fees for comparable IFI arrangements (Annex VI). - Increasing fees through either option would bring costs closer to these comparators (see Annex V for numerical examples). - Staff view: both options have significant drawbacks — steepening is administratively simple but not targeted; TBCF is more targeted but blunt and complex. - Grandfathering and implementation - If adopted, staff would propose that current arrangements be grandfathered: increased fees would not be payable under existing arrangements; new policy would apply to all new requests for use of Fund resources approved after the new fee structure comes into effect. - For TBCF, past repeat use could be taken into account when determining whether the fee is triggered — past commitments would be remeasured in percent of 14th Review of Quotas and compared against the TBCF threshold. - Any augmentation or successor arrangements could become subject to TBCF if the trigger condition has been met and the level of undrawn credit under the augmented or new arrangement continues to exceed the chosen threshold. - Alternatively, the duration trigger could be applied from the date of effectiveness of the decision or the approval date of a new arrangement. - Alternatives considered but constrained - Charging an additional fee at times of lower external risks or imposing time limits on use of FCLs face significant legal and policy constraints: - Articles of Agreement: any difference in fees paid by members must be related to the use of Fund resources and cannot be based on members’ specific circumstances. - A legally possible alternative: uniformly waive some portion of commitment fees (e.g., time-based fee if introduced) for all members on the basis of some global stress indicator — but this would add complexity and unpredictability. - Staff does not support imposing a time limit on FCL use; this could come into play while external risks remain elevated and limit the Fund’s ability to provide support. ### Elimination of the PLL - Background and usage - The PLL has had two users since introduction in 2011 as a replacement for the PCL. - Despite offering more flexibility than its predecessor, Morocco is the only member that has opted to use the PLL. - FYR Macedonia’s January 2011 PCL was converted into a PLL; Morocco’s first PLL arrangement was in 2012. - Staff proposal - Staff proposes to eliminate the PLL to maintain a streamlined and coherent toolkit. - Rationale: low use and general Board concerns about instrument proliferation; removing PLL would eliminate tiering vis-à-vis the FCL and avoid instrument proliferation. - Expected impact: might open a small gap in the toolkit, but members not qualifying for the new liquidity facility/FCL could continue to have access to the precautionary SBA. - The existing PLL arrangement would be grandfathered (it will remain under pre-existing policies until it expires). - Note: This staff proposal was revised in the subsequent paper “Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform—Revised Proposals,” IMF Policy Paper, December 2017. ### Design of the Short-term Liquidity Swap (SLS) — overview - Objective and BOP need - The Short-term Liquidity Swap (SLS) will provide liquidity support within normal access limits for potential short-term moderate BOP needs, reflecting capital account pressures arising from external developments. - Features: - Revolving access feature to cover against repeated shocks. - No exit expectation for as long as the member qualifies and has the special BOP need. - Qualification for the SLS will be based on the same standards and criteria as the FCL. - High qualification bar, 12-month duration of arrangements, annual requalification, short repurchase period, and a facility-review clause to help safeguard and conserve Fund resources. - Context - Post-2008–09 review: shift toward more flexible instruments to address all types of BOP problems; greater reliance on credit tranches and elimination of special facilities that were seldom used. - Recent changes in global economy: protracted uncertainty, frequent volatility, increased amplitude and duration of global financial cycles, more volatile capital flows, and expanded nonbank finance channels. - Demand for liquidity backstop has intensified, particularly from EMs exposed to liquidity events triggered by external developments and channeled through the capital account. *Italic: Source: pp121917-adequacyofgfsn-proposalsfortoolkitreform (PDF chapter/section).* ### 39. Staff proposes to establish the SLS as a special facility to provide “swap-like” liquidity ### 39. Staff proposes to establish the SLS as a special facility to provide “swap-like” liquidity ### Objective and scope of the SLS - Provide “swap-like” liquidity support to very strong members for special BOP needs. - Anchor: a special BOP need defined as “potential short-term BOP difficulties reflected in pressure on the capital account and the member’s reserves resulting from volatility in international capital markets.” - Expected scale: limited in scale and requiring, at most, fine-tuning of central bank policies (e.g., exchange rate adjustments, foreign exchange market intervention, and/or interest rate changes). - Facility type: Special facility (Short-term Liquidity Swap, SLS) contrasted with the Flexible Credit Line (FCL) which addresses “Any” BOP need. ### Qualification - SLS qualification will be based on the same standard and criteria as the FCL. - High qualification bar rationale: - Ensures that a member will undertake necessary adjustment to correct BOP problems, so ex-post conditionality is not needed. - Provides confidence that a member will take necessary policy actions under moderate shocks and repay the Fund without ex-post conditionality. - Provides assurance member is less susceptible to deeper or more protracted BOP problems. - Design note: Discussions of subsequent SLS arrangements would consider the member’s use of Fund resources under previous SLS arrangements in accordance with the special nature of the facility. - Operational detail: “There will be no ex-post conditionality, including no standard continuous Performance Criteria (PCs), and no reviews during an arrangement.” - Qualification criterion amendment: Criterion 4 will be amended slightly from that in the FCL arrangement to eliminate the language “When the arrangement is requested on a precautionary basis” to reflect that an SLS arrangement can only be requested when the member faces a potential but not an actual BOP need. ### Key terms and features - Repurchase period: - Proposed repurchase obligation: 12 months. - Rationale: consistent with observed duration of liquidity shocks SLS aims to cover; acute phase typically lasted a few months and impact dissipated within about a year. - Purchases would be subject to a one-year repurchase obligation without installments; each purchase must be repurchased within a year of the purchase. - Establishing a repurchase period shorter than credit tranches requires an Executive Board decision adopted by an 85 percent majority of the total voting power. - Legal basis: Pursuant to Article V, Section 7(d), the Fund may adopt repurchase periods other than that which applies within the credit tranches by an eighty-five percent majority of the total voting power. - Access and revolving access: - Access defined as a limit on the stock of Fund credit outstanding under the SLS. - Maximum access: up to normal annual access limit (145 percent of new quota). - Revolving access: enables repeated purchases and repurchases within an arrangement and across successive arrangements; a full drawing of access under the arrangement would not terminate the arrangement; any repurchase would reconstitute the member’s right to purchase up to the maximum access approved. - Operational detail for successor arrangements: if credit is outstanding from an earlier SLS, initial rights to purchase under a new arrangement limited to the difference between newly approved access and credit outstanding; if full 145 percent of quota were approved and drawn under an earlier arrangement, a continuing qualifier may purchase under a successor arrangement only after credit has been repurchased. - Access under the SLS would not trigger the exceptional access framework (access capped below exceptional access levels, i.e., 145 percent of quota). - Qualification criteria include elements similar to exceptional access criteria, including requirement for sustainable debt with high probability. - Duration of arrangement: - Individual arrangements approved for a period of 12 months. - If qualification criteria are met, arrangement remains in place for 12 months unless unilaterally terminated by the member. - No restrictions on Board approval of successor SLS arrangements provided the member continues to meet qualification criteria. - No expectation that members would exit the facility when current arrangement expires; repeat use requires continued qualification and member’s wish to avail themselves of the facility. - Features preserving temporary nature of Fund resource use: - (i) each arrangement duration limited to 12 months; - (ii) approval of initial and all successor arrangements requires Executive Board decision; - (iii) repurchases must be made within a 12-month repurchase period. - Charges and fees (special fee structure proposed for SLS): - Nonrefundable commitment fee (8bps) - Service charge (21bps) - Normal rate of charge - Normal surcharge schedule - Activation and signatory: - Activation: Board approves the “extension of an offer”, and arrangement enters into effect upon the Fund confirming receipt of the signed written communication from the member, including acceptance of the “offer” and policy commitments; no prior informal Board meeting required. - Signatory: Given the more limited anticipated adjustment (if needed), sole central bank signatory of the written communication possible in certain cases (in contrast to FCL where both central bank and government generally sign). - Reviews and ex-post conditionality: - Ex-post conditionality: None. - Reviews: None (contrast: FCL has annual review to assess qualification for two-year arrangements). - Successor arrangements and exit: - No restrictions on successor arrangements, upon Board assessment of continued qualification and existence of potential BOP need. - Exit expected as global risk declines. ### Comparative table highlights (SLS vs FCL) — selected items preserved exactly as in source - Facility: SLS — Short-term Liquidity Swap (Special facility); FCL — Flexible Credit Line (Credit tranches). - Objective: SLS — Provide “swap-like” liquidity support to very strong members for special BOP needs; FCL — Allow very strong members to deal with any type of BOP needs. - BOP need: SLS — Potential moderate short-term BOP difficulties reflected in pressure on the capital account and the member’s reserves resulting from volatility in international capital markets; FCL — Any. - Qualification: Based on assessment of very strong fundamentals and institutional policy frameworks; very strong policies in the past, currently, and commitment to maintaining them. - Repurchase period: SLS — 12 months; FCL — 3¼–5 years. - Access: SLS — Up to normal annual access limit (145 percent of new quota); revolving access. FCL — No access limit. - Duration of arrangement: SLS — 12 months; FCL — 1 or 2 years. - Charges and fees (SLS special fee structure): Nonrefundable commitment fee (8bps); Service charge (21bps); Normal rate of charge; Normal surcharge schedule. (FCL follows the usual credit tranches schedule as listed in the table.) - Activation: SLS — Board approves the “extension of an offer”, arrangement enters into effect upon Fund confirming receipt of signed written communication; no prior informal Board meeting required. FCL — Upon Board approval of the request for the arrangement; prior informal Board meeting required. - Signatory: SLS — Sole central bank signatory possible in certain cases; FCL — Both central bank and the government generally sign. - Ex-post conditionality: None for both. - Reviews: SLS — None; FCL — Annual review to assess qualification for two-year arrangements. - Successor arrangements: SLS — No restrictions, upon Board assessment of continued qualification and existence of potential BOP need; Exit expected as global risk declines. ### Empirical motivation and stylized facts (Box 4) - Motivation: Major liquidity events affecting emerging markets (EMs) since the Global Financial Crisis (GFC) motivate introduction of the SLS. - Events analyzed: GFC, the 2011 Euro Debt crisis, the 2013 Taper Talk, and the 2015 China market correction. - Stylized facts: - Liquidity events follow a pattern: a short acute phase followed by gradual normalization within about a year. - The first month of the crisis is the most severe (as measured by the EMP); the acute phase lasts around one quarter. - During acute phase, even better-performing EMs (75th percentile) experience portfolio outflows. - Outflows reverse within two to three quarters; by the first anniversary of the crisis, portfolio investments either surpass original level or stabilize at a new equilibrium (Taper Talk). - Some major liquidity episodes are followed by smaller market-moving events (oil price collapse, Brexit, the US elections). - Only the GFC had a profound impact on EM reserves; in subsequent episodes, reserves of possible SLS qualifiers showed little downward movement and remained at or above 100 percent of the ARA metric, suggesting reliance on exchange rate flexibility. - Policy response is generally limited to central bank policies: FX interventions, liquidity measures, and monetary tightening; fiscal and structural measures were deployed only in a few cases. - Data and sample notes: - Analysis based on four major exogenous events that generated financial stress in at least half of the 22 major EMs. - Sample includes 22 large EMs: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Hungary, India, Indonesia, Kazakhstan, Malaysia, Mexico, Peru, Philippines, Poland, Romania, Russia, South Africa, Thailand, Turkey, Ukraine, and Venezuela. - Sources: EPFR flows, IFS and IMF staff calculations; EPFR used for granular monthly analysis though EPFR covers only a fraction of BOP-recorded flows. *Source: pp121917-adequacyofgfsn-proposalsfortoolkitreform - 39. Staff proposes to establish the SLS as a special facility to provide “swap-like” liquidity* ### Box 5. Operational Aspects of Revolving Drawing Rights Under the New Facility ### Box 5. Operational Aspects of Revolving Drawing Rights Under the New Facility ### Revolving access feature: rules and intent - The SLS revolving access feature means purchases followed by early repurchases re-establish purchase rights both within and across successive arrangements; the Fund’s commitment is for a maximum stock of credit, not a maximum flow of purchases. - Repurchases follow a “first out, first in” rule: any repurchase is automatically applied to the SLS credit that has been outstanding for the longest time (falls due soonest). - This contrasts with credit tranches or extended arrangements where members may apply early repurchases to any outstanding obligation. - The “first out, first in” rule streamlines processing, limits operational risk, and has only a limited impact on members. - Where a member has preexisting GRA credit outstanding from a purchase made outside of the SLS, and GRA credit outstanding under the SLS, the member may elect to apply an early repurchase to non‑SLS GRA credit or to SLS outstanding credit; to the extent the repurchase is applied to outstanding SLS purchases, the “first out, first in” rule will apply. ### Stylized examples illustrating revolving access - Base assumptions for examples: - Member has 145 percent of access under the SLS. - Member faces a balance of payments shock 3 months after approval and purchases 100 percent of quota. - The purchase triggers a 12-month repurchase obligation. - Member retains the right to purchase up to 45 percent of quota during the remaining 9 months of the arrangement. - Example 1: Early repurchase and no further purchases - 9 months after approval (6 months after the original purchase) the member makes an early repurchase for 100 percent of quota (within the 12‑month obligation term). - The early repurchase restores, pro tanto, rights to make purchases over the remaining life of the arrangement up to the stock limit of 145 percent of quota. - Example 2: Multiple purchases, across two successive arrangements - At end of first arrangement the member has not made an early repurchase; the Fund considers the member still qualified; the member opts for a new 12‑month arrangement. - At approval of successor arrangement the member is entitled to a purchase up to 45 percent of quota (to bring outstanding stock to 145 percent of quota). - Sequence: member purchases 45 percent of quota shortly after approval; two months later repurchases 60 percent of quota. - The 60 percent repurchase is first applied to retire part of the obligation associated with the oldest purchase (the 100 percent purchase from the first arrangement). - One month later the member repurchases 50 percent of quota: - 40 percent of quota of that repurchase retires the remaining 40 percent of the first purchase. - 10 percent of quota retires early part of the second purchase. - The member’s right to make purchases during the rest of the successor arrangement period is restored pro tanto to 110 percent of quota (representing the two repurchases). - Example 3: Different access levels across two successive arrangements - If at the start of the second arrangement access is reduced to 120 percent of quota, and outstanding credit of 100 percent of quota exists under the first arrangement, the member is eligible at the beginning of the second arrangement to make a purchase of 20 percent of quota. ### Charges and fees: proposed structure and rationale - Staff proposes a non‑refundable commitment fee of 8 bps and a service charge of 21 bps for the SLS to reflect the short‑term BOP need and revolving access feature. - Rationale: - Commitment fees cover costs of establishing and monitoring arrangements, setting aside resources, and discourage unnecessarily high precautionary access to help contain Fund liquidity risks. - Service charge generates income to cover administrative costs and discourage unnecessary purchases. - Commitment fee is generally lower than the service charge so that, even after refunds where applicable, there is often a net cost to drawing under an arrangement. - Concerns with applying current standard rules to the SLS: - Current refundable commitment fee and pro‑rated fees on reconstituted access would provide financial disincentives to early repurchases and could undermine revolving access. - Applying the current 50 bps service charge on each purchase could be prohibitively expensive for repeated purchases/repurchases; staff example: full draw, repay, and draw again under an SLS with 145 percent access in a 12‑month period would yield total fees of 100 bps from combination of refundable 18 bps average commitment fee and 50 bps service charge—viewed as out of line and discouraging revolving use. - Proposed non‑refundable commitment fee mechanics: - Commitment fee for the SLS to be non‑refundable to avoid charging members pro‑rated commitment fees when they reconstitute access. - This also applies when a successor arrangement is approved while previous SLS drawings remain outstanding (e.g., proposed 8 bps non‑refundable fee applied to entire access of 145 percent of quota even if only 45 percent of quota is available for drawings at approval). - Consideration could be given to billing the commitment fee at the end of the arrangement rather than upfront to simplify operations. - Fee level justification: - Expected commitment fee paid and received as income by the Fund for other GRA facilities of the same size and duration (145 percent of quota for 12 months on a precautionary basis) would be between 0–18 bps. - A non‑refundable commitment fee of 8 bps makes expected costs and related income broadly comparable with credit tranche facilities under combined drawing/non‑drawing scenarios. - A service charge of 21 bps, together with 8 bps non‑refundable commitment fee, would provide an additional net cost to users above the commitment fee but remain lower than standard 50 bps service charge to support revolving use. - Under the proposed pricing, the cost of using the SLS’s revolving feature once (making two drawings) is 50 bps in total (8 bps non‑refundable commitment fee + 21 bps service charge for each of two drawings), comparable to the 50 bps service charge cost of a single purchase under credit tranches (which lack a revolving feature). - Review - The special commitment fee and service charge structure for the SLS would be reviewed within two years as part of a broader review of the SLS to assess whether experience is consistent with pricing assumptions. ### Process for approval and use (key steps and differences from FCL) - The approval and use process largely follows the FCL with three notable differences: extension of an “offer” by the Fund to qualifying members; absence of a prior informal Board meeting; option for sole central bank signatory. - Main steps: - Initial confidential consultation: staff discusses interest and likelihood of meeting qualification criteria; discussions are confidential and may occur any time during the year. - Assessment of qualification: staff assesses qualification and potential access level based on latest information; management assesses appropriateness of access to Fund resources. - Preparation of Board paper: staff report includes (i) assessment of qualification; and (ii) assessment of potential BOP need, appropriateness of proposed access level, and repayment capacity. - Formal Board meeting: Board approves the “extension of an offer” to the member (contingent on acceptance within a specified period and policy commitments). Press release options exist if requested by member to address market‑sensitive leaks. - Extension of an “offer”: Board’s conditional approval with specified access is communicated within 24 hours; authorities must respond within two weeks. - Effectiveness: arrangement becomes effective upon Fund confirmation of receipt of signed acceptance and policy commitments; staff will then inform the Board for information. - Press release and publication: press release published on date arrangement enters into effect; staff report and written communication published shortly afterwards. - Purchases: member may make one or multiple purchases during the SLS period subject to approved access level; staff informs the Board promptly of purchases. - Transition between FCL and SLS: member may cancel an existing arrangement and request the other; qualification criteria are fully aligned and process for new arrangement is expected to be expeditious where member is already qualified. *Source: Box 5, “Operational Aspects of Revolving Drawing Rights Under the New Facility,” pp. 27–31, ADEQUACY OF GFSN––PROPOSALS FOR TOOLKIT REFORM, INTERNATIONAL MONETARY FUND.* ### 54. The central bank could be the sole signatory of the written communication, if the ### ADEQUACY OF GFSN—PROPOSALS FOR TOOLKIT REFORM ### Signatory, legal authority, and responsibility for adjustment - The central bank could be the sole signatory of the written communication, if the member so chooses, subject to requirements: - The central bank must have the domestic legal authority to commit the member to the financial obligations to the Fund. - The central bank must be the exclusive responsible authority for any necessary adjustment; the SLS is designed to address a special BOP need that by nature requires only adjustment of a monetary and exchange rate nature (e.g., interest rate changes, exchange rate policies), and any needed adjustment would likely be confined to measures implemented by the central bank. - The central bank would need to be the designated fiscal agent for the Fund to be able to communicate the member’s request for purchase under the facility. - Irrespective of signatory, the counterpart obliged to make repurchases and pay any applicable charges vis-à-vis the Fund is the member country, not the specific agency or authority signing the written communication. - Staff will generally rely on the member’s representation regarding its domestic legal authority. - The written communication must convey the member’s commitment to maintain its current very strong policies that form the basis for the qualification assessment; staff will confirm with the Ministry of Finance that they are committed to maintaining their current fiscal stance during the course of the arrangement. ### Confidentiality, qualification, and coordinated opt-in - The SLS process is strictly confidential and handled in the same way as for the FCL; qualification assessment is made public only for countries that meet the criteria and ultimately enter into an arrangement. - The risk of damaging leaks is mitigated because reports are produced only for countries that have passed staff’s qualification assessment; the negative signal from a non-renewal is muted because it would be unclear whether it was the member’s choice or loss of qualification. - A group of qualifying countries could simultaneously opt in: - Synchronized extension of offers and opt-in can help kick-start SLS use and strengthen response to a common shock. - The Executive Board considers extension of offers to multiple countries at a single meeting; external communication could be coordinated (e.g., a single Fund press release), subject to members’ agreement. - Confidentiality is preserved; staff only reveal other members’ interest if those members have agreed. ### Relationship with the FCL - The SLS and the FCL are designed to address different BOP needs but may be complementary: - SLS: aimed at medium-sized BOP shocks of a special nature (medium-sized liquidity shocks). - FCL: for any type and size of BOP needs; could serve as exceptional-access counterpart for extreme shocks/tail events requiring comprehensive policy adjustments, with an exit expectation. - Maximum access under the SLS should provide sufficient coverage for the envisaged volatility. If a member’s financing need with an active SLS exceeds 145 percent of quota (or remaining credit under the SLS), the member would need to transition to a different instrument, e.g., the FCL, which provides more resources and a longer repayment period. - Transition between FCL and SLS would be facilitated by identical qualification criteria. ### Other modalities - Review clause: - Staff propose the SLS be reviewed two years after its creation, or earlier if total combined commitments under the SLS and the FCL exceed SDR 150 billion. - The Board could consider a sunset clause providing for expiration of the facility eight years after establishment; extension would require a Board decision adopted by an 85 percent majority of total voting power. - Safeguards assessment: - The SLS would be subject to the same requirements as the FCL regarding safeguards assessments; FCL arrangements are not subject to the Fund’s policy on safeguards assessments and a modified safeguards approach applies. - No concurrent use: - Members with other GRA arrangements (e.g., FCL or SBA) would not use the liquidity backstop to “double up”; members do not access financing under concurrent GRA arrangements. - Post-program monitoring (PPM): - Credit outstanding under SLS arrangements will be taken into account for the purpose of the PPM policy. - Consequential policy changes: - Establishing the SLS will require changes to Fund policies, including the decision on overall access to GRA resources, transparency policy (linking publication timelines to activation), and Article IV consultation cycles (upon approval of an SLS arrangement, a member will remain on a 12-month Article IV consultation cycle). ### Resource implications — Commitments and second-round effects - Staff’s preliminary estimates indicate potential commitments under the SLS would likely not exceed SDR 90 billion, and would probably be much lower. - All scenarios assume members that opt in receive the maximum access under the facility of 145 percent of quota. - Scenario descriptions and commitments (from staff analysis): - Scenario A: all potentially eligible members (except those with current active FCL arrangements) opt in — commitments about SDR 88 billion (considered an upper-bound estimate). - Scenario B: only potentially eligible members that have so far expressed clear interest opt in — commitments about SDR 32 billion. - Scenario C: builds on Scenario B and assumes the three current FCL users qualify and opt in once their arrangements expire — commitments under SLS would rise to around SDR 54 billion; aggregate commitments under SLS and FCL would fall by about SDR 55 billion, raising the Fund’s forward commitment capacity (FCC) by SDR 23 billion. - Under all scenarios, commitments under the SLS would be well below the current FCC of SDR 210 billion, which as of April 11, 2017, comprises only quota resources. - Second-round (liquidity) effects if members draw simultaneously: - Members meeting SLS criteria would generally be expected to have sufficiently strong external positions to be included in the Financial Transactions Plan (FTP). - Members included in the FTP would be removed temporarily from the FTP if they draw on their arrangements, reducing the FCC and giving rise to second-round effects on Fund liquidity. - Second-round effects could be significant but temporary given the short-term nature of special BOP needs. - Example: in Scenario B, the maximum temporary second-round effects (if all members with SLS arrangements made purchases) would reach SDR 12 billion. ### Resource implications — Review trigger and scoring in the FCC - Staff proposes to review the SLS if total combined commitments under the SLS and the FCL exceed SDR 150 billion; ceteris paribus, assuming no change in current FCL commitment of SDR 77 billion, the threshold would be reached with SLS commitments of SDR 73 billion, which would reduce the FCC to SDR 136 billion. - The Fund’s forward commitment capacity (FCC) currently counts all Fund commitments at their full value; the one year FCC is the primary liquidity measure. - Partial scoring considerations: - Two conditions could justify partial scoring: (i) sufficiently well-diversified precautionary exposures so only a fraction would be drawn in a short period; and/or (ii) a credible mechanism to mobilize resources quickly if large-scale drawings materialize. - Staff’s view: neither condition is currently in place: - It is difficult to conclude that only a fraction of precautionary commitments would be drawn given global interconnectedness and the possibility that external shocks affect multiple countries simultaneously. - The NAB (primary liquidity backstop) cannot be used to meet commitments made when the NAB was not activated; NAB resources can only finance commitments made after activation. Bilateral borrowing agreements are a tertiary line and also unavailable for commitments made prior to activation. - Recent legislation constrains U.S. support for NAB activation unless the FCC is expected to fall below SDR 100 billion, effectively setting a quantitative constraint for achieving the required 85 percent majority for activation. - Under partial scoring, the Fund could be in a position where available quota resources are fully committed while the FCC remains above SDR 100 billion, impeding NAB activation to finance new commitments. *International Monetary Fund — ADEQUACY OF GFSN—PROPOSALS FOR TOOLKIT REFORM (excerpt).* ### 72. Under partial scoring, the FCC would also become an increasingly misleading indicator ### pp121917-adequacyofgfsn-proposalsfortoolkitreform - 72. Under partial scoring, the FCC would also become an increasingly misleading indicator ### Scoring of precautionary commitments and the FCC - Staff view: full scoring of precautionary arrangements in the FCC remains appropriate. - Main reasons for full scoring: - (i) the importance of avoiding any doubts over the Fund’s ability to meet its financial commitments under precautionary arrangements and thus ensuring their effectiveness as part of the GFSN; - (ii) the potential for drawings to be highly correlated in response to external shocks that affect several members at the same time; - (iii) the absence under the current framework of an alternative source of liquidity that could be tapped in the event of such correlated drawings. - Operational implications: - Full scoring of precautionary commitments is embedded in the Fund’s Borrowing Guidelines and in each individual bilateral borrowing agreement, which would need to be amended if partial scoring were adopted. - Staff proposes that the FCC calculation in future provides a breakdown of total commitments between arrangements expected to be drawn and those treated as precautionary by the authorities to facilitate judgments on when a need exists to supplement quota resources. - Contingency: If an alternative source of liquidity were identified in the future, the full-scoring treatment could be revisited. ### Issues for discussion (points posed to Directors) - Do Directors agree with the use of a core set of indicators with thresholds to guide judgment in FCL qualification, to improve the predictability and transparency of the assessments? - Do Directors see scope for increasing price-based incentives to encourage exit from the FCL? What are Directors’ views on the options, i.e., steepening the current commitment fee schedule and introducing a time-based commitment fee? - Do Directors concur with the proposed elimination of the PLL? - Do Directors agree that the qualification standards and frameworks for the SLS should be fully aligned with the standards and framework for the FCL? - Do Directors support the new design features of the SLS, including revolving access, no exit expectation, the option of sole central bank signatory, and the Board’s conditional approval of an arrangement? - Do Directors agree with the proposed special fee structure for the SLS? - Do Directors agree that precautionary commitments should continue to be counted at their full value in the calculation of the FCC? ### Annex I — Access Reduction and Market Impact: key findings - Historical cases: six instances of access reduction since inception of FCL and PLL. - Morocco reduced access at its second (July 2014) and third (July 2016) arrangements. - Poland reduced access at the fifth arrangement approval (January 2015) and review (January 2016), and at the sixth arrangement (January 2017). - Colombia reduced access under the FCL at the time of the second arrangement (May 2010), but has since reversed this change. - Market reaction: - High-frequency (daily) data show generally muted market reaction to access reductions, with no negative impact on EMBI spreads and nominal bilateral exchange rates on the day immediately following announcements. - In Poland (January 2015 announcement) observed exchange rate appreciation and reduction in spreads. - Regression analysis of EMBI spreads (residuals after controlling for VIX) on an access reduction dummy shows no evidence of negative market reactions; the access-reduction dummy is consistently negative and statistically significant in some specifications, suggesting potentially favorable market reaction. - Communication: effective communication, including outreach by top Ministry of Finance officials, accompanied access reductions and likely contributed to muted market responses. ### Annex II — Recent FCL and PLL Arrangements: access levels and changes - Colombia: - Sixth arrangement approved in June 2016: SDR 8.18 billion (400 percent of quota). - Previous arrangement: SDR 3.870 billion. - Note: sixth arrangement represented more than a doubling from the previous arrangement, and was only moderately above access under the first arrangement in May 2009. - Mexico: - Sixth arrangement approved in May 2016: SDR 62.389 billion (700 percent of quota). - Previous arrangement: increase of more than 30 percent from prior arrangement; first arrangement in April 2009 was SDR 31.5 billion. - Poland: - Gradual exit: after peaks, Poland reduced access close to 30 percent at the fifth request (January 2015), an additional 16 percent at the fifth-review (January 2016), and a further 50 percent at the sixth request, resulting in access reduced to 159 percent of quota from a peak of 537 percent of current quota. - Morocco (only current PLL user): - Initial PLL in August 2012: SDR 4.1 billion. - Continued lowering of access in second and third arrangements; access under the third (2016) PLL arrangement is close to 40 percent lower than under the first arrangement. ### Annex III — Evaluation of the External Economic Stress Index (ESI) - Purpose and implementation: - ESI introduced in 2014 to guide access discussions and help inform exit strategies in program documents; 2015 FCL guidance note specified modalities and asked country teams to develop and maintain an ESI. - ESI computed as a weighted sum of standardized deviations from means of external variables; when ESI indicates elevated risks, adverse scenarios would normally be more extreme. - Implementation details: - First ESI implementations: 2014 (Mexico) and 2015 (Colombia, Morocco, Poland). - All four country teams used data-based weights (based on economic size of trade and financial exposures relative to the economy); none used model-based weights. - Performance and alignment with access: - Projected downside ESI scenarios have generally aligned with potential financing needs and access levels over time. - Colombia’s and Mexico’s 2016 requests for higher access showed worsened projected downside ESI values relative to prior arrangements. - Morocco’s and Poland’s 2016 requests for lower access were associated with marginal improvements in adverse ESI scenarios relative to earlier documents. - Example divergence: May 2016 staff report for Mexico incorporated a U.S. growth shock of 1.5 percentage points (referencing the April 2016 GFSR), whereas the June 2016 staff report for Colombia involved a smaller U.S. growth shock—illustrating inconsistencies in shock quantification. - Recommendations to strengthen comparability: - Specify that ESI downside scenarios should be based on scenarios developed in Fund documents no older than six months, to the extent relevant scenarios are available. - Alternatively, use specific common scenarios as they pertain to the G-RAM to ensure consistency. - Ensure global shocks are treated equally across reports that fall close in time; where differences are warranted, clarify the context surrounding the shock. ### Annex IV — Use of Reserves in Adverse Scenarios - Conceptual point: - FCL and PLL provide an enlarged backstop without requiring accumulation of excess international reserves; in tail-risk events, some reserve drawdown should be expected and included in adverse scenarios. - Guidance and thresholds: - 2015 FCL guidance note: for countries with plentiful reserves well above adequate, adverse scenarios should include use of international reserves to cover part of the financing gap, implying not all potential financing need is met by Fund resources; reserves could go below relevant adequacy thresholds in extreme stress events. - 2014 Review pointed to a lower threshold of 80 percent of the Fund’s ARA metric as a separation between crisis and non-crisis signals. - Empirical basis: threshold derived using a large sample of EMs over a 22-year period to minimize Exchange-Market-Pressure crisis prediction errors. - Implication: - In many past access scenarios where reserve drawdowns were modest, more severe shock assumptions could be partially met through larger reserve drawdown rather than increasing access levels. *International Monetary Fund* ### 3. In turn, the use of reserves in adverse scenarios has become more prevalent. Requests ### 3. In turn, the use of reserves in adverse scenarios has become more prevalent. Requests ### Reserve drawdown trends across FCL and PLL arrangements - Requests for FCL arrangements in 2012 (Mexico) and 2013 (Colombia and Poland) were characterized by the absence of a drawdown of reserves in the adverse scenarios, with Poland assuming reserve accumulation corresponding to half of that projected under the baseline scenario. - Since then, all adverse scenarios in FCL arrangements have been accompanied by reserve drawdown, with the drawdown playing an increasing role in reducing the financing gap across most arrangements (Figures AIV.1 and AIV.2). - Reserve use has become more prevalent across adverse scenarios in all FCL and PLL arrangements. ### Reserve adequacy observations and guidance - While reserve drawdown has been increasingly prevalent, the level of reserves has generally remained above 100 percent of the ARA metric in the adverse scenario. - Example: Colombia 2016 FCL arrangement request incorporated a reserve drawdown of more than USD 6 billion, yet reserves remained well within the adequacy range. - Example: Morocco’s financing gap was defined to maintain reserves at 90 percent of the standard ARA metric; after adjusting for capital controls, reserves in the adverse scenario remained adequate (baseline reserves amounted to 136 percent of the ARA metric and reserves in the adverse scenario remained adequate). - Net international reserves for Poland declined to 89 percent of the ARA metric in the adverse scenario (note in figure footnote). - Suggested adequacy range: 100-150 percent. - Policy guidance: - Assumed levels of gross reserves should not be allowed to fall below 100 percent of the ARA in the adverse scenario without clear justification. - Reserve adequacy ratios well into the adequacy range in the adverse scenario should be avoided. - The pace of the reserve drawdown should be considered to avoid adverse market reactions. - Limited reserve drawdown should be clearly justified in light of the guidance provided by the 2014 review. ### Contributions to first-year financing gap (selected country highlights) - Colombia: - In adverse scenarios, debt payments were partly offset by reserve drawdown. - Chart components include CA deficit, FDI, Public debt disbursements, Private debt disbursements, Other financing needs, Gross reserve accumulation, Financing gap, Access. - Mexico: - Higher access coincided with lower contribution from reserve drawdown. - Chart components include CA deficit, FDI, Public debt disbursements, Private debt disbursements, Other financing needs, Gross reserve accumulation, Financing gap, Access. - Poland: - Larger reserve use reduced Poland’s financing gap. - Note: In 2009, adjusted for the use of private buffers (liquid foreign assets). - Morocco: - Larger reserve use reduced the financing gap in the latest arrangement. - Reserve accumulation assumes the need to maintain 90 percent of the ARA metric in reserves (85 percent in the 2012 request). ### Annex V — Commitment Fee Reform Options (summary of key proposals) - Purpose and application of commitment fees: - Serve to (i) cover the cost of establishing and monitoring arrangements and of setting aside resources to be used if a purchase were to be made; and (ii) discourage unnecessarily high precautionary access and help contain risks to the Fund’s liquidity. - Charged uniformly for all GRA arrangements; due and payable on the date an arrangement enters into effect; billed annually for a 12-month period (or for the period left under the arrangement, if shorter). - Level depends on access level during the relevant period, following the current tiered fee structure; refunded when purchases are made, pro-rated by the size of the purchase within each tier. - Option 1: Steepening the current commitment fee schedule - Proposal: modest upward adjustment to the commitment fee level at the highest tier (above 575 percent of quota). - Rationale: target largest Fund commitments while preserving quota-based thresholds from the 2016 Review; keep the rate increase modest so as not to excessively penalize warranted high access arrangements. - Historical calibration: 2009 upward-sloping structure; thresholds increased in 2016 in the Review of Access Limits and Surcharge Policies (SDR value of the fee thresholds increased). - Option 2: Introducing a Time-based Commitment Fee (TBCF) - Structure: TBCF charged on top of existing level-based commitment fees; applies once undrawn credit for each relevant 12-month period has remained above a specified threshold for a defined duration of time (“duration trigger”). - Operational features: - Duration trigger: one option is to link to typical length of a severe shock, i.e., around 3 or 4 years; in view of maximum two-year duration under current FCL arrangements, a 4-year duration trigger could be considered. - Cooling-off period: count toward duration trigger pauses when undrawn credit falls below threshold; count resets once a “cooling-off” period is exceeded; a cooling-off period of one year when undrawn credit remains below the threshold continuously is suggested. - Ex-post billing and non-refundability: TBCF billed and paid ex-post at each anniversary date (or end of arrangement if sooner); pro-rated for period where threshold exceeded; once triggered, TBCF would not be refundable. - Legal and design considerations: - Level of undrawn credit defined as amount that could be purchased during the relevant period as provided by Rule I-8. - Due to legal requirement of uniformity of charges, TBCF cannot be ring-fenced to specific arrangements nor legally restricted only to arrangements treated as precautionary. - Design must balance providing incentive to reduce high commitments and acknowledging prolonged justified elevated external risks. - Numerical illustrations and calibration examples - Option 1 illustrative calibration: increase the level-based commitment fee rate for the highest tier (access above 575 percent of quota) by 10 and 20 bps for first and second alternatives respectively. - Example: For an arrangement with 700 percent of access, effective commitment fee rate increases from 33 bps (current) to 35–36 bps under the two alternatives. - Option 2 illustrative calibration: similar increases in highest marginal fee rate would apply only after being triggered by the duration trigger. - With clock starting at earliest in mid-2013, the only arrangement that would be affected would be Mexico’s FCL if renewed at its current access level beyond May 2020. - Table AV1 illustrative implications for current FCL/PLL arrangements (selected figures preserved): - Mexico (FCL 2016-): Access 700 (percent of quota); Effective Rate 33 (bps); Nominal Fee 205.2 (millions of SDR); Under 10 bps increase above 575%: Effective Rate 35 (bps); Change in fee 11.1 (millions of SDR); Access level keeping effective rate constant 666 (percent of quotas). Under 20 bps increase above 575%: Effective Rate 36 (bps); Change in fee 22.3 (millions of SDR); Access level keeping effective rate constant 647 (percent of quotas). - Colombia (FCL 2016-): Access 400 (percent of quota); Effective Rate 26 (bps); Nominal Fee 21.0 (millions of SDR); No change under both illustrative alternatives. - Morocco (PLL 2016-): Access 280 (percent of quota); Effective Rate 24 (bps); Nominal Fee 6.0 (millions of SDR); No change under both illustrative alternatives (computed on basis of approved access). - Poland (FCL 2017-): Access 159 (percent of quota); Effective Rate 19 (bps); Nominal Fee 12.4 (millions of SDR); No change under both illustrative alternatives. - Figure AV.1 illustrative fee structures show marginal and effective rates under current policy and under 10 bps and 20 bps increases above 575 percent of quota. *ADEQUACY OF GFSN—PROPOSALS FOR TOOLKIT REFORM, International Monetary Fund* ### Annex VI. Cost Comparison of Commitment Fees ### Annex VI. Cost Comparison of Commitment Fees ### Cost of Accumulating Reserves - Purpose: Reserves treated as self-insurance; cost of accumulating reserves used as an “upper” benchmark for guiding level of Fund commitment fees. - Components of reserve cost estimates: - (i) Foregone return on an alternative investment; less - (ii) Foreign currency return on reserves. - Staff proxy for marginal cost used in analysis: - EMBI 5-year spread in USD + (5-year US bond yield – Average of 2-year US bond yield and 3-month US Treasury bill). - Data and methodology notes: - Analysis uses USD denominated EMBI spreads for 40 emerging market economies with data since 2000. - Peak observations associated with unfavorable market conditions are excluded from long-term average (excluding the highest 20 percent of observations). - Calculation focuses on lower deciles (10th and 25th percentiles) to reflect strong qualification criteria for arrangements with no ex-post conditionality. - For Poland the 5 year euro EMBI spread is used. - Key findings: - The Fund’s current commitment fees stand substantially below members’ estimated cost of accumulating reserves. - For most of the period since 2000, the adjusted EMBI spreads for the lowest 10th and 25th percentiles have remained above the Fund’s highest marginal commitment fee rate of 60 bps. - The average adjusted EMBI spread for the period ranges from about 210 to 260 bps. ### Interpretative caveats on reserve cost comparison - Reasons for cautious interpretation: - There is generally a premium to the cost of contingent credit relative to having resources directly available on the balance sheet. - There can be additional (immeasurable) stigma-related costs for engaging in Fund precautionary arrangements. - Commitment fee costs at the Fund are partially offset by the refundability of Fund commitment fees against purchases, unlike the permanent opportunity costs of building reserves. - Market borrowing costs may be volatile with cyclical and structural components; the difference between market funding costs and commitment fees is unlikely to remain constant. ### Cost of contingent credit from other institutions - Cross-institution comparisons are not straightforward due to different financing models and risk management frameworks. - Comparison examples and fee features: - IBRD DPL-DDO: - 25 bps front-end fee, due within 60 days of the effectiveness date. - Annual stand-by fee of 50 bps on the undisbursed balance. - Fees are not refundable in event of cancellation after the effectiveness date. - Fees are not linked to the size of the loans; loans are subject to country exposure limits and a country cap of $16.5 billion ($17.5 billion for India). - ESM precautionary facilities (PCCL and ECCL): - Annual commitment fee applied ex-post at the end of the calendar year based on the negative carry actually incurred and allocated to benefiting ESM members on the basis of the share of each such member’s Programme Amounts. - In case of draw-downs under precautionary credit lines, the commitment fee applies to the remaining maximum agreed amount under the facility plus the amount outstanding under the credit line. - Fees charged are not refundable. - Comparative conclusion: - Bearing caveats in mind, the Fund’s commitment fees are generally low relative to corresponding fees charged on credit lines by other multinational or regional institutions. *Source: Annex VI. Cost Comparison of Commitment Fees, pp. 55–57, from the provided IMF content unit.* ### 12. The following scenarios illustrate how constraints to partial scoring of the Fund’s ### 12. The following scenarios illustrate how constraints to partial scoring of the Fund’s commitments would play out in practice ### Scenarios and illustrative calculations - Scenarios are based on the FCC as of end-December 2016 (projected inflows from scheduled repurchases and repayments of borrowing due in the next 12 months are assumed to net out and are not shown). - A new concept, available liquidity, measures the Fund’s resources available for new financing after fully accounting for existing commitments. - Under full scoring (first column in Table AVII.1): - FCC and available liquidity are equal. - The FCC indicates the Fund could commit about SDR 208 billion in any combination of drawing and precautionary arrangements based on existing (quota) resources, i.e., without requiring activation of the NAB. - The Fund would need to commit at least SDR 108 billion before NAB activation would be possible, based on an assumed SDR 100 billion threshold. - Under partial scoring with a constant 50 percent scoring of all precautionary arrangements (second column): - FCC would rise to SDR 249 billion. - The Fund’s actual available liquidity to finance new commitments would remain unchanged at SDR 208 billion. - With sizable demand for a new liquidity instrument (third column example: illustrative new precautionary demand of SDR 100 billion): - FCC under partial scoring would fall to SDR 199 billion. - Fund’s actual available liquidity would be SDR 108 billion (close to half the FCC). - In a strong-demand example (fourth column: illustrative new precautionary demand of SDR 250 billion): - FCC under partial scoring would drop to SDR 124 billion, still above the NAB activation threshold. - Actual available liquidity would be negative (SDR -42 billion), indicating over-commitment of quota resources while remaining unable to activate the NAB. ### Key figures from Table AVII.1 (Billions of SDR) - Usable Resources (A): 388 - Undrawn commitments (scored) (B): 99, 58, 10, 81, 83 (table shows entries across columns) - Existing precautionary 2/: 82, 41, 41, 41 (entries across columns) - Existing drawing arrangements: 17, 17, 17, 17 - Illustrative new precautionary: 50, 125 (columns with partial scoring scenario inputs) - Uncommitted Usable Resources (C = A-B): 288, 329, 279, 204 - Prudential balance (D): 80, 80, 80, 80 - FCC (current definition) (E = C-D) 3/: 208, 249, 199, 124 - Actual commitments (F): 99, 99, 193, 49 - Existing precautionary 2/: 82, 82, 82, 82 - Existing drawing arrangements: 17, 17, 17, 17 - Illustrative new precautionary: 100, 250 - Available liquidity (G = A-D-F) 3/: 208, 208, 108, -42 - Source note: Data as of December 30, 2016; Undrawn balances under existing precautionary GRA arrangements, excluding NAB-financed portion; Excluding projected inflows from scheduled repurchases and repayments of borrowing due in the next 12 months. ### Analysis and policy implications - As precautionary commitments expand, FCC becomes an increasingly misleading indicator of the Fund’s ability to make new commitments under partial scoring. - FCC can indicate a sizable ability to commit new resources while actual resources available to meet drawings under those commitments are substantially or fully exhausted. - This undermines a key strength of the current FCC measure in terms of transparency. - Capping commitments under a new liquidity instrument (example cited: cap at SDR 100 billion) could reduce the risk of over-committing quota resources, but would not eliminate the divergence between FCC and actual available liquidity (e.g., FCC could still report SDR 199 billion while actual ability to make new commitments over the next 12 months is exhausted). ### Illustrative related decisions (contextual summary from the same chapter) - The supplement includes illustrative decisions to: (i) complete the review of the Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL) and set the deadline for the subsequent review of the FCL; (ii) eliminate the PLL; and (iii) establish the Short-term Liquidity Swap (SLS), with related policy changes (access, Article IV consultation cycle, transparency, allocation of repurchases, surcharges, service charge and commitment fee). - Proposed SLS features include: - Qualification criteria same as the FCL; no ex-post conditionality or reviews. - Access up to 145 percent of quota, on a revolving basis, for 12 months (repurchase obligation of 12 months). - Purchases under the SLS would not count against a member’s reserve tranche position. - Service charge for SLS purchases: 21 bps (Rule I-1). - Commitment fee for the SLS: 8 basis points on a non-refundable basis (Rule I-8), charged at the beginning of each SLS arrangement with pro-rata refund if member cancels before expiry. - Two illustrative options for commitment-fee reform (Illustrative Decision IV): - Option A: Steepen the commitment fee schedule. - Option B: Introduce a time-based commitment fee (three timing variants for how the time period would be calculated). *Source: IMF staff calculations and chapter text (data as of December 30, 2016).* ### 1. The Fund is prepared to provide financial assistance under a Short-term Liquidity Swap (SLS) ### 1. The Fund is prepared to provide financial assistance under a Short-term Liquidity Swap (SLS) ### Overview - The Fund may provide financial assistance under an SLS to a member facing short-term balance of payments difficulties that: - are only of a potential nature, reflected in pressure on the capital account and the member’s reserves; - are resulting from volatility in international capital markets; and - are reasonably expected to be limited in scale and to require, at most, fine-tuning of central bank policies. - If adopted, an SLS arrangement is governed by the terms set out in this Decision. ### Qualification criteria and member characteristics - An SLS shall be approved upon a member’s informal expression of potential interest and where the Fund assesses that the member: - (a) has very strong economic fundamentals and institutional policy frameworks, - (b) is implementing—and has a sustained track record of implementing—very strong policies, and - (c) remains committed to maintaining such policies in the future. - Relevant criteria for assessing qualification include: - (i) a sustainable external position; - (ii) a capital account position dominated by private flows; - (iii) a track record of steady sovereign access to international capital markets at favorable terms; - (iv) a reserve position that is relatively comfortable; - (v) sound public finances, including a sustainable public debt position; - (vi) low and stable inflation, in the context of a sound monetary and exchange rate policy framework; - (vii) a sound financial system and the absence of solvency problems that may threaten systemic stability; - (viii) effective financial sector supervision; and - (ix) data transparency and integrity. - In addition, a very positive assessment of the member’s policies by the Executive Board in the context of the most recent Article IV consultations is required. ### Monitoring, reviews, and program conditionality - SLS arrangements shall not be subject to performance criteria or other forms of ex-post program monitoring and shall have no reviews. ### Access, amounts, and repurchase terms - An SLS arrangement may be approved in an amount of up to 145 percent of the member’s quota; this limit is cumulative for total credit outstanding under the SLS. - There shall be no phasing under SLS arrangements. - A member may make one or more purchases up to the approved access at any time during the arrangement, subject to this Decision, and outstanding amounts purchased under current or previous SLS arrangements shall commensurately reduce the amount available under a current SLS. - Repurchases of amounts previously purchased increase subsequent purchase capacity by an equal amount, provided a member never purchases more than the approved access of its current SLS arrangement. - The Fund shall not challenge a representation of need by a member for a purchase requested under an SLS arrangement. - Purchases under this Decision and holdings resulting from such purchases shall be excluded for the purposes of the definition of reserve tranche purchase pursuant to Article XXX(c). - A member shall be obliged to repurchase any amounts purchased under an SLS arrangement no later than 12-months after the date of the purchase of such amounts. ### Duration and renewals - (a) An SLS arrangement shall be approved for a period of 12 months. - (b) An SLS arrangement shall expire only upon the earlier of: - (i) the expiration of the approved period of the arrangement; or - (ii) the cancellation of the SLS arrangement by the member. - Upon expiration, the Fund may approve an additional SLS arrangement in accordance with the Decision. ### Procedures, Board consultations, and timing - Procedures after a member’s informal expression of interest: - (i) Staff will conduct a confidential preliminary assessment of the qualification criteria in paragraph 2. - (ii) When the Managing Director is prepared to recommend offering an SLS opportunity, relevant documents including a staff report assessing qualification will be circulated to the Board. - (iii) Minimum circulation periods for staff reports apply; the Executive Board will generally be prepared to consider a request within 48 to 72 hours after circulation in exceptional circumstances. - (iv) If the Executive Board approves an SLS arrangement, approval will be communicated to the member within one business day and will be conditional on receipt of a satisfactory written communication from the member confirming it wishes to avail itself of the SLS. Such written communication shall be submitted no later than [two weeks] after the Board’s conditional approval and shall: - outline that the member will maintain very strong policies during the course of the arrangement; - indicate commitment, when relevant, to take adequate corrective measures to deal with shocks; and - provide consent to publication of the associated staff report. - (v) The SLS becomes effective on the date the Fund confirms receipt of the written communication satisfying the requirements in 6(a)(iv). A copy of the written communication will be circulated for information to the Executive Board. - A member availing itself of an SLS would not be subject to the Fund’s policy on safeguards assessments for Fund arrangements. However, at the time of its written communication the member will authorize Fund staff access to the most recently completed annual independent audit of its central bank’s financial statements (published or not), including authorization for central bank authorities and external auditors to discuss audit findings with Fund staff. While Fund credit is outstanding under this Decision, the member will provide copies of annual audited financial statements and management letters and authorize discussions of audit findings with the external auditor. ### Publication, transparency, and Board communications - Executive Board decision to approve an SLS will be conditioned on receipt of the member’s consent to publication when the member accepts an SLS arrangement. - The associated staff report and the authorities’ written communication are expected to be published by the Fund no later than fourteen calendar days after the SLS arrangement becomes effective. - A Press Release containing a Chairman’s statement will be issued to the public after an SLS arrangement becomes effective; the Executive Director elected, appointed, or designated by the member will have the opportunity to review the Chairman’s statement and propose minor revisions or consent to publication immediately after the SLS becomes effective. - If, after twenty-eight calendar days from the effective date of an SLS arrangement, the staff report has not been published, a brief factual statement will be issued stating the fact of effectiveness of the SLS arrangement and clarifying the authorities’ publication intention with respect to the staff report. ### Interaction with Fund limits, Article V waiver, and consultation cycles - The Fund will be prepared to grant a waiver of the limitation of 200 percent of quota in Article V, Section 3(b)(iii) whenever necessary to permit purchases under this Decision or to permit other purchases that would raise the Fund’s holdings of the purchasing member’s currency above that limitation because of purchases outstanding under this Decision. - The Fund will review this Decision by the earlier of (i) [two] years from the date of adoption of this Decision, or (ii) whenever aggregate outstanding credit and commitments under this Decision and under Decision No. 14283-(09/29) adopted March 24, 2009, as amended, on the Flexible Credit Line exceed SDR [150 billion]. - Amendments to consultation cycles: - Members with an FCL, PLL, or SLS arrangement are placed on a 12-month Article IV consultation cycle. - Members with other Fund arrangements or a Policy Support Instrument are placed on a 24-month consultation cycle. ### Related amendments to Fund access policy, charges, and rules - Overall access limits: - The overall access by members to the Fund’s general resources shall be subject to (i) an annual limit of 145 percent of quota; and (ii) a cumulative limit of 435 percent of quota, net of scheduled repurchases; provided these limits will not apply in cases where a member requests an FCL or an SLS, although outstanding holdings arising under such arrangements will be taken into account when applying these limits for requests under other Fund facilities. - Surcharges and rates: - The rate of charge under Article V, Section 8(b) on the Fund’s combined holdings of a member’s currency in excess of 187.5 percent of the member’s quota in the Fund resulting from purchases in the credit tranches, under the SLS and under the Extended Fund Facility shall be 200 basis points per annum above the rate of charge referred to in Rule I-6(4) as adjusted for purposes of burden sharing; additional 100 basis points per annum apply in certain long-outstanding cases described in the Decision. - Service charge and commitment fee for SLS: - Rule I-1: The service charge payable by a member buying, in exchange for its own currency, the currency of another member or SDRs from the General Resources Account shall be 0.5 percent for purchases in the credit tranches and under the Extended Fund Facility and [0.21] percent for purchases under the Short-term Liquidity Swap. - Rule I-8(g): With respect to SLS arrangements, a charge of [8/100] of 1 percent per annum on the total amount of access approved by the Fund for a member under an SLS arrangement shall be payable at the beginning of the arrangement. The charge shall not be refundable against purchases; if the member cancels an SLS arrangement the Fund shall repay a prorated portion corresponding to the unexpired period. - Additional illustrative options and amendments: - Amendments to commitment fees and time-based commitment fee options are proposed, including bracketed parameter ranges such as [70-80/100] of 1 percent, [575] percent, [3/5] of 1 percent, [10-20/100] of 1 percent, and duration/trigger parameters like [48] months and [12] months as specified in the illustrative text. *Source: pp121917-adequacyofgfsn-proposalsfortoolkitreform - 1. The Fund is prepared to provide financial assistance under a Short-term Liquidity Swap (SLS)* --- _Source: https://www.imf.org/-/media/files/publications/pp/2017/pp121917-adequacyofgfsn-proposalsfortoolkitreform.pdf_