## pp080618-flexible-credit-line-operational-guidance-note

## Source details

**Canonical URL:** [pp080618-flexible-credit-line-operational-guidance-note](https://www.imf.org/-/media/files/publications/pp/2018/pp080618-flexible-credit-line-operational-guidance-note.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/pp/2018/pp080618-flexible-credit-line-operational-guidance-note.pdf.md)
- [Structured JSON version](/-/media/files/publications/pp/2018/pp080618-flexible-credit-line-operational-guidance-note.pdf.json)

---

### Overview of the Flexible Credit Line (FCL)
- Purpose: Provide a credit line with large and upfront financing to members with very strong fundamentals and institutional policy frameworks and sustained track records of implementing very strong policies and commitment to maintaining them.
- Nature of access:
  - Access under the FCL is provided under an FCL arrangement.
  - Drawings under the FCL are not tied to ex-post conditionality.
  - The FCL is flexible:
    - access is uncapped and funds are available upfront;
    - grace period and repayment terms are long (3¼–5 years, starting on the date of each purchase) relative to alternative contingent financing;
    - successor arrangements are unrestricted;
    - the FCL can be used for either contingent (precautionary) or actual balance of payments (BoP) needs.
- Approval and Board interaction:
  - Approval follows a confidential request from a member; there is no pre-qualification list.
  - Staff may assess qualification confidentially only after a member expresses interest.
  - Management will promptly consult the Executive Board at an informal meeting when access may be appropriate.
  - A concise staff note for the informal meeting must include:
    - a rigorous assessment of the member’s actual or potential need for Fund resources and repayment capacity;
    - an assessment of the impact of the arrangement on Fund liquidity where access would exceed 575 percent of quota or SDR 10 billion, whichever is lower.
  - Formal approval is taken by the Executive Board at a subsequent meeting based on the member’s written request, a staff report assessing qualification and justifying access, and the Managing Director’s recommendation.
- Duration and mechanics:
  - An FCL arrangement may be approved for one year or two years (binary choice).
  - For two-year arrangements, no purchase can be made after one year until completion of an Executive Board mid-term review of the member’s policies.
  - Successive FCL arrangements may be approved if qualification criteria continue to be met.
  - Access under the FCL is uncapped and can be augmented or reduced at the member’s request, subject to Board approval and continued qualification.
  - The exceptional access policy does not apply to the FCL; approval procedures are substantively similar to those under the exceptional access framework.
  - Phasing: the entire amount of requested access is available upon approval and remains available throughout the arrangement period (subject to the mid-term review for two-year arrangements).
  - The arrangement expires upon the earlier of:
    - the expiration of the approved term;
    - the purchase of the full amount of approved access;
    - cancellation of the arrangement by the member.
- Conditionality:
  - No traditional ex-post conditionality or prior actions because qualification is based on track record.
  - Only ex-ante conditionality (qualification criteria) applies to mid-term reviews or approval of successive arrangements.
  - If purchases occur, post-program monitoring (PPM) will be conducted as warranted in accordance with the PPM policy.
- Financial terms and fees:
  - Purchases under the FCL are subject to the same financial terms as SBAs (repayment period, surcharges, and charges).
  - Unpurchased amounts are subject to the standard upward-sloping commitment fee schedule.
  - Marginal commitment fee schedule:
    - 15 basis points for access up to 115 percent of quota;
    - 30 basis points for access above 115 and up to 575 percent of quota;
    - 60 basis points for access above 575 percent of quota.
  - Example: the effective commitment fee levied on a 500 percent of quota arrangement is 27 basis points (15 basis points on 115 percent of quota and 30 basis points on the remaining 385 percent of quota).
  - The commitment fee is levied upon approval and refunded pro rata if drawings are made; if cancelled without full draw, the fee is refunded based on available amounts and remaining days.
- Treatment in reserves:
  - Unpurchased amounts available under the FCL arrangement are not counted in gross reserves.
  - Space exists in the Reserves Data Template filed by SDDS subscribers to announce availability of unpurchased credit line resources.
  - Once purchased, FCL resources increase gross reserve assets and external liabilities to be reported in Sections I and II of the Reserves Data Template.
  - Guidance on inclusion in Section III:
    - Undrawn amounts under one-year FCL arrangements should be included in Section III from approval to maturity.
    - Undrawn amounts under two-year FCL arrangements should be included in Section III from approval up until the scheduled review date under the FCL.

### Process when a member expresses interest
- Initial steps and confidentiality:
  - Member should approach staff or management confidentially to indicate interest.
  - A mission is not required; a fact-finding staff visit may be needed if the latest Article IV report is more than a year old or circumstances warrant.
  - Staff should strongly encourage confidentiality to avoid negative effects on market sentiment if the member fails to qualify.
  - Staff must treat the request as confidential and refrain from public discussion of qualification.
  - Staff should wait for a formal expression of interest (e.g., email or written communication) before assessing qualification.
- Preliminary assessment and interdepartmental consultation:
  - Country team prepares a confidential preliminary assessment of qualification under the FCL.
  - Area teams should consult early with SPR, FIN, LEG, and other functional departments.
  - Staff can discuss qualification criteria with the member but must clarify the Executive Board decides final qualification.
- Consultations with other creditors and RFAs:
  - Staff will consult with key creditors when support from other creditors is important to address BoP difficulties or when authorities request precautionary support from both the IMF and other providers.
  - Consultations are limited to preliminary technical information; staff note for informal Board meeting is treated as strictly confidential.
  - Specified Board documents may be shared with RFAs that are co-financiers pursuant to established Fund policy, typically via SEC, with prior consent of country authorities.
- Informal Board engagement and staff note:
  - If management concludes access may be appropriate, it will promptly consult the Board in an informal (restricted) meeting.
  - A concise staff note (more succinct than the subsequent staff report) should set out the basis for possible approval and include:
    - preliminary assessment of qualification and appropriateness of proposed access;
    - rigorous assessment of actual or potential need and repayment capacity;
    - where relevant, assessment of impact on Fund liquidity for access above 575 percent of quota or SDR 10 billion.

### Justification of access, exit strategy, and risk considerations
- Assessment expectations:
  - Staff note and staff report must rigorously assess actual or potential BoP needs and repayment capacity.
  - Where access would exceed 575 percent of quota or SDR 10 billion, the impact on Fund liquidity must be assessed.
- Exit strategy guidance (elements expected in initial request and mid-term review):
  - A statement about exit contingent on reduction of external risks, specifying relevant external risks and informed by the external economic stress index (see Annex III).
  - A statement on authorities’ efforts to improve domestic resilience, where relevant.
  - A statement expecting that access will decline in successor arrangements when conditions are in place, mentioning contingencies under which a successor arrangement may be requested with lower access or where no successor would likely be requested.
  - For two-year arrangements, the mid-term review should include an updated assessment of anticipated evolution of risks.
- Risk and communication:
  - Exit and risk discussions are inherently uncertain and should preserve judgment while avoiding adverse market reactions.
  - Inclusion of the external economic stress index in documents is intended to help guide exit expectations and access discussions.

### Confidentiality, communications, and timing of inputs
- Confidentiality and press handling:
  - Recent practice: treat the staff note as strictly confidential.
  - Following the informal Board consultation, if concerns about market-sensitive leaks exist, a press release could be issued indicating authorities’ interest and management’s intention to recommend Board approval; such a release must not prejudge the Board’s final decision.
- Timing of Article IV and related inputs:
  - FCL decision requires “a very positive assessment of the member’s policies by the Executive Board in the context of the most recent Article IV consultations.”
  - Principle: Article IV discussions (including mandatory financial stability assessments and documents feeding into Article IV consultations, such as voluntary FSAPs and ROSCs) should be timed sufficiently early to allow the Board’s most recent assessment to be fully integrated into qualification assessments for FCL approval or review.
  - In practice: hold the Article IV discussion at least 4–6 weeks prior to a formal Board meeting for either the approval of, or review under, an FCL arrangement.
- Preparation and circulation:
  - Details on staff report content set out in Annex V.
  - SPR clearance of the staff report provided after the informal Board meeting because the report normally reflects discussions at that meeting.
  - Current circulation period: two weeks for the formal Executive Board meeting; recent practice for the informal Board meeting: one-week circulation.
  - Expedited procedures available where needed (Annex VI).

### Authorities’ written communication and central bank safeguards
- Authorities’ written request:
  - Written, signed communication should describe macroeconomic conditions, broad policy goals and strategies, reasons for requesting FCL assistance, nature of BoP need and whether request is precautionary, and may reference exit expectations.
  - The letter should be dated after the informal Board meeting.
  - This written communication is not a Letter of Intent for monitoring policy commitments.
- Central bank safeguards:
  - Members requesting an FCL arrangement are not subject to the Fund’s safeguards assessment policy applicable to other arrangements.
  - At the time of the formal written request, the member must authorize Fund staff access to the most recently completed annual independent audit of its central bank’s financial statements, whether or not the audit is published.
  - Authorization includes allowing the central bank’s external auditors to discuss audit findings with Fund staff.
  - Staff will raise significant safeguards issues from the latest published external audit in mid-term reviews; area teams encouraged to consult FIN early.

### Formal meeting outcomes, activation, fees, publication, and post-draw reporting
- Formal Executive Board meeting and activation:
  - The Board may approve an FCL arrangement based on the member’s written request and the staff report.
  - Staff will provide a Summing Up (internal) and a Chairman’s Statement, which will be published subject to member’s consent.
  - The credit line is open on approval of the arrangement.
  - Prior to approval, FIN needs authorization to debit the member’s SDR account for the commitment fee, due upon approval.
- Transparency and publication:
  - The Managing Director will generally not recommend approval unless the member consents to publication of the associated staff report.
  - Expected publication: staff report and authorities’ written communication shortly after Board approval.
  - The Fund’s Transparency Policy applies.
- Purchases and post-draw reporting:
  - For a purchase, FIN must receive official SWIFT communication from the member’s fiscal agency specifying the amount and representing an actual BoP need.
  - FIN will coordinate operational details (value date, currency composition).
  - Two-year arrangement: provides purchase rights not subject to ex-post conditionality until scheduled mid-term review (scheduled immediately prior to lapse of one year).
  - One-year arrangement: provides purchase rights for the entire period.
  - If requested on a precautionary basis, Executive Directors would normally be informed ex post when a member has drawn.
  - Post-draw reporting: concise note discussing developments, the BoP need, outlook, updated financing needs and sources table, and updated capacity to repay table.

### Mid-term review, changes in access, cancellation, and successor arrangements
- Mid-term review (two-year arrangements):
  - Required prior to the lapse of the first twelve months to assess continued qualification (FCL decision, paragraph 5(a)).
  - Review should aim for completion by the Executive Board immediately prior to the lapse of the one-year period to avoid temporary loss of automatic access.
  - Staff should prepare a concise staff report covering recent developments, expected evolution of risks, policy initiatives, and a brief update assessing the country against qualification criteria.
  - Significant safeguards issues from latest published external audit would be raised and discussed; FIN consulted promptly.
  - A mission will not normally be necessary.
- Changes in access, expiration, and cancellation:
  - Members may request reductions or augmentations of access at any time; requests should justify changes relative to BoP needs.
  - Example practice: Poland reduced access on three occasions before fully exiting the FCL arrangement in November 2017.
  - With nearing expiration, staff or management could issue a factual press statement at the member’s request noting successful conclusion of the FCL arrangement.
  - Press statements should not include assessment of potential qualification for a successor arrangement; successor interest subject to same confidentiality.
  - At expiration or cancellation, staff would update the Board through the Secretary before commencing public communication strategy.
- Successor arrangements and cancellation mechanics:
  - A request for a successor arrangement follows same procedures as a first-time request.
  - If Board meeting for successor is before expiration of current arrangement, current arrangement must be cancelled prior to its expiration.
  - Authorities’ written communication for a successor request should include statement canceling the existing arrangement as of a specified date, usually the date of approval of the new arrangement.
  - Cancellation: member can cancel via written notification specifying effective date (should not be earlier than date of receipt by the Fund).

### Determining qualification: core framework and nine qualification criteria
- Core assessment for FCL:
  - Member’s economic fundamentals, institutional policy framework, and policies are very strong.
  - Sustained track record of very strong policy implementation.
  - Member’s policies must have been assessed very positively by the Executive Board in the context of the most recent Article IV consultations.
  - Recognition that heterogeneity and projection uncertainty matter: very strong performance against all criteria not necessary; significant shortcomings on one or more criteria—unless compensated—generally signal non-eligibility.
- Nine qualification criteria (grouped under five areas with core indicators):
  I. External Position and Market Access
    - 1. A sustainable external position:
      - Core indicator: external position assessed in the most recent Board document as “broadly consistent”, “moderately stronger (weaker)”, “stronger”, or “substantially stronger”.
      - CA gap categories: substantially stronger (CA gaps more than 4 percent); stronger (CA gaps between 2 and 4 percent); moderately stronger (CA gaps between 1 and 2 percent); broadly consistent (CA gaps between -1 and 1 percent); moderately weaker (CA gaps between -2 and -1 percent); weaker (CA gaps between -4 and -2 percent); substantially weaker (CA gaps less than -4 percent).
    - 2. Capital account position dominated by private flows:
      - Core indicator: public flows 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. Track record of steady sovereign access to capital markets at favorable terms:
      - Core indicator: 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 in a cumulative amount over that period equivalent to at least 50 percent of the country’s Fund quota at time of assessment; and no loss of market access in last 12 months.
    - 4. Reserve position (precautionary requests):
      - Core indicator: reserves greater than 100 percent of the unadjusted ARA metric on average over three years, and not below 80 percent in any of these three years.
  II. Fiscal Policy
    - 5. Sound public finances, including sustainable public debt position determined by rigorous debt sustainability analysis:
      - Core indicator: public debt assessed as sustainable with a high probability; assessment explicitly accounts for risks not immediately visible in current projections.
  III. Monetary Policy
    - 6. Low and stable inflation:
      - Core indicator: maintained single-digit inflation over the past five years.
  IV. Financial Sector Soundness and Supervision
    - 7. Sound financial system and absence of systemic solvency problems:
      - Core indicator: average capital adequacy ratio for the banking sector above regulatory thresholds; most recent Article IV did not highlight significant solvency risks or recapitalization needs.
    - 8. Effective financial sector supervision:
      - Core indicator: most recent FSAP or Article IV report did not raise substantial concerns regarding supervisory framework.
  V. Data Adequacy
    - 9. Data transparency and integrity:
      - Core indicator: member is SDDS subscriber or has made satisfactory progress toward meeting SDDS requirements.
- Assessment of track record:
  - Determination guided by assessment of qualification criteria in each of the five most recent years; bottom-line assessments follow same approach as current year.
- Indicators of institutional strength:
  - Consider policy cyclicality (moving correlations), effective response to shocks (Worldwide Governance Indicators), and other institutional indicators; staff should use point scores and account for uncertainty.

### Annex II — Determining access on a precautionary basis (framework and scenario construction)
- Aim and key criteria:
  - Ensure Executive Board papers include rigorous analysis of determination of access levels; recognize high degree of judgment.
  - Key criteria for access: (i) member’s actual or potential need for Fund resources (access cannot be greater than this need); (ii) capacity to repay the Fund; (iii) outstanding Fund credit and track record of using Fund resources.
- Framework for access:
  - Staff should construct a plausible adverse scenario to estimate potential financing gap and appropriate access level.
  - Staff should present link between access and size of actual or potential BoP needs, allow comparability in choice of adverse shocks, and cross-check programmed reserves against standard adequacy metrics.
- Adverse scenario inputs:
  - (i) downside global assumptions aligned with latest WEO downside scenario, GFSR or G-RAM, with description of shock and likelihood;
  - (ii) developments in an index of external economic stress (Annex III);
  - (iii) evidence from past or current crises (Annex IV guidance);
  - (iv) country-specific factors and likelihood based on past experience.
- Reserve adequacy and drawdown:
  - Assess reserve adequacy using ARA and other metrics; adverse scenarios may allow reserves to fall below 100 percent of ARA in extreme stress; 80 percent ARA cited as lower threshold discussed in 2014 Review.
  - For countries with above-adequate reserves, adverse scenario should include use of international reserves to cover part of financing gap.
- Presentation:
  - Access levels presented based on potential BoP need irrespective of specific use of Fund resources; operationally, proposed access should be commensurate with projected BoP need shown in staff reports.
- Rolling 12-month window:
  - Precautionary BoP needs and corresponding access levels can be based over a rolling 12-month window, even for longer-duration arrangements, informed by past crisis evidence.

### Annex III — Index of External Economic Stress (EES) and illustrative methodology
- Purpose and role:
  - Indicator of evolution of external environment to inform access and exit prospects under FCL/PLL arrangements.
  - Country teams construct indices tailored to the member after discussion with authorities; once choices fixed they should remain fixed across successor arrangements absent compelling reasons.
- Core methodological choices:
  - (i) select key external risks; (ii) select proxy variables capturing these risks; (iii) choose weights applied to each proxy variable.
- Computation:
  - Weighted sum of standardized deviations of external proxy variables from their means (deviations divided by long-run standard deviation).
- Weighting approaches:
  - Data-based weights (economic size of balance of payments vulnerability) or model-based weights (econometric methods such as VAR/BVAR).
- Practical guidance:
  - Indices should be recent and forward looking; downside scenario for access should be informed by flagship reports (WEO downside scenario, GFSR, spillover reports) or G-RAM.
- Illustrative BVAR-based approach (Box 1):
  - Structural Bayesian VAR to detect historical relations of balance of payments pressures to external proxy variables, controlling for domestic variation.
  - Example country-specific variables listed for Poland, Mexico, and Colombia.
- Example component weights (Annex III. Table 1) — illustrative entries:
  - Mexico (Data-based weights / Model-based weights where shown):
    - Exports to the US — US growth: 0.43 / 0.23
    - FDI from the US — Eurozone growth: 0.21 / 0.29
    - Remittances from the US — Change in oil price: 0.32 / 0.03
    - Oil exports — Equity portfolio investment stock: 0.06 / 0.32
    - Emerging market implied volatility (VXEEM): -0.24 / -0.30
    - Change in US Treasury 10 year yield: -0.27 / -0.15
  - Poland:
    - Exports to the Eurozone — Eurozone growth: 0.21 / 0.29
    - FDI from the Eurozone — European bank equity price (Euro Stoxx Banks): 0.38 / 0.27
    - Equity portfolio investment stock — Emerging market implied volatility (VXEEM): -0.09 / -0.14
    - Change in US Treasury 10 year yield: -0.31 / -0.30
  - Colombia:
    - Oil exports, Coal exports, FDI into the oil industry, Exports to the US — US growth: 0.24 / 0.25
    - Emerging market implied volatility (VXEEM): -0.04 / -0.44
    - Change in US Treasury 10 year yield: -0.40 / -0.28

### Annex IV — Framework for comparing access assumptions and empirical benchmarking
- Purpose and approach:
  - Compare access assumptions across FCL/PLL users by benchmarking against past EM behavior during large exogenous (AM-led) shocks.
  - Two-step approach:
    1. Identify exogenous shock periods (e.g., 1991, 2001, 2009).
    2. Measure moves in key external variables across EMs during these crisis periods and benchmark current access assumptions against distributions from past episodes.
- Sample and variables:
  - Country sample: 49 EMs that are medium sized, have market access, and attract private inflows.
  - Variables: exports, FDI, commodity prices excluding fuel, fuel prices, and short- and MLT public and private rollover rates (others can be added).
- Statistical benchmarking:
  - Use stacked country observations for event years to estimate kernel density distributions; place FCL/PLL shock assumptions on these densities to calibrate and compare access assumptions.
- Findings and expectations:
  - Severity of assumed shocks fell under second FCL arrangements, then increased as global conditions worsened.
  - Country teams expected to use less severe assumptions as external risks subside; for two-year arrangements consider less severe second-year assumptions anchored in a separate empirical distribution.

### Staff documentation requirements for Board consideration (Annex V summary)
- Concise Staff Note for Informal Board Meeting should include:
  - Qualification: assessment of very strong fundamentals and policy track record; statement on most recent Article IV assessments.
  - Access: indication of appropriate access level based on rigorous assessment of actual or potential need and repayment capacity; scenarios using alternative assumptions (external debt rollover rates, portfolio outflows, etc.).
  - Assessment of impact on Fund liquidity where access would exceed 575 percent of quota or SDR 10 billion.
  - Tables: standard economic indicators and balance of payments table (current year and following year); gross external financing requirements and sources under baseline and adverse scenario (if precautionary); for successor arrangements, comparison with previous adverse shock assumptions.
- Staff Report for Formal Request should include:
  - Discussion of developments, policies, outlook, expected evolution of risks, authorities’ forward-looking policy plans including exit expectations.
  - Detailed assessment of qualification criteria; debt sustainability analysis including alternative scenarios and stress tests.
  - Discussion and justification of proposed access level and capacity to repay; staff appraisal; tables covering projections (ideally five-year span) and alternative metrics for access.
  - Draft proposed decision and text of the FCL arrangement (prepared by LEG).
  - Assessment by FIN on impact of proposed FCL on Fund finances and liquidity.
  - Authorities’ written, signed communication.
- Mid-term Review staff report should be concise and include updated developments, evolution of risks, brief review of qualification criteria, staff appraisal, and relevant tables; for successor arrangements show comparisons to prior adverse shock assumptions.

### Expedited and synchronized procedures (Annex VI and VII)
- Expedited procedures:
  - EFM procedures do not apply; FCL Decision sets expedited procedures.
  - Expedited timetable: documentation provided to Board at least two hours prior to informal meeting to “engage”; formal Board meeting could consider request within 48 to 72 hours following circulation of staff reports.
  - Directors consulted during informal meeting on possible press release; press release must not prejudge Board decision.
- Synchronized approvals for multiple countries:
  - Each member’s qualification assessed individually; each must express interest.
  - Confidentiality preserved; expedited approval procedures can be followed.
  - Staff to include liquidity assessment in staff note when total access across proposed arrangements would exceed SDR 10 billion.

*Source: FLEXIBLE CREDIT LINE––OPERATIONAL GUIDANCE NOTE (selected excerpts).*

### EXECUTIVE SUMMARY

### FLEXIBLE CREDIT LINE––OPERATIONAL GUIDANCE NOTE — EXECUTIVE SUMMARY

### Overview of the FCL
- Purpose: Provide a credit line with large and upfront financing to members with very strong fundamentals and institutional policy frameworks and sustained track records of implementing very strong policies and commitment to maintaining them.
- Nature of access:
  - Access under the FCL is provided under an FCL arrangement.
  - Drawings under the FCL are not tied to ex-post conditionality.
  - The FCL is flexible:
    - access is uncapped and funds are available upfront;
    - grace period and repayment terms are long (3¼–5 years, starting on the date of each purchase) relative to alternative contingent financing;
    - successor arrangements are unrestricted;
    - the FCL can be used for either contingent (precautionary) or actual balance of payments (BoP) needs.
- Approval and Board interaction:
  - Approval follows a confidential request from a member; there is no pre-qualification list.
  - Staff may assess qualification confidentially only after a member expresses interest.
  - Management will promptly consult the Executive Board at an informal meeting when access may be appropriate.
  - A concise staff note for the informal meeting must include:
    - a rigorous assessment of the member’s actual or potential need for Fund resources and repayment capacity;
    - an assessment of the impact of the arrangement on Fund liquidity where access would exceed 575 percent of quota or SDR 10 billion, whichever is lower.
  - Formal approval is taken by the Executive Board at a subsequent meeting based on the member’s written request, a staff report assessing qualification and justifying access, and the Managing Director’s recommendation.
- Duration:
  - An FCL arrangement may be approved for one year or two years (binary choice).
  - For two-year arrangements, no purchase can be made after one year until completion of an Executive Board mid-term review of the member’s policies.
  - Successive FCL arrangements may be approved if qualification criteria continue to be met.
- Access mechanics:
  - Access under the FCL is uncapped and can be augmented or reduced at the member’s request, subject to Board approval and continued qualification.
  - The exceptional access policy does not apply to the FCL; approval procedures are substantively similar to those under the exceptional access framework.
  - Phasing: the entire amount of requested access is available upon approval and remains available throughout the arrangement period (subject to the mid-term review for two-year arrangements).
  - The arrangement can be requested on a precautionary basis or to address an actual BoP need; the member may make one or multiple purchases at any time during the term.
  - The arrangement expires upon the earlier of:
    - the expiration of the approved term;
    - the purchase of the full amount of approved access;
    - cancellation of the arrangement by the member.
- Conditionality:
  - No traditional ex-post conditionality or prior actions because qualification is based on track record.
  - Only ex-ante conditionality (qualification criteria) applies to mid-term reviews or approval of successive arrangements.
  - If purchases occur, post-program monitoring (PPM) will be conducted as warranted in accordance with the PPM policy.
- Financial terms and fees:
  - Purchases under the FCL are subject to the same financial terms as SBAs (repayment period, surcharges, and charges).
  - Unpurchased amounts are subject to the standard upward-sloping commitment fee schedule.
  - Marginal commitment fee schedule:
    - 15 basis points for access up to 115 percent of quota;
    - 30 basis points for access above 115 and up to 575 percent of quota;
    - 60 basis points for access above 575 percent of quota.
  - Example: the effective commitment fee levied on a 500 percent of quota arrangement is 27 basis points (15 basis points on 115 percent of quota and 30 basis points on the remaining 385 percent of quota).
  - The commitment fee is levied upon approval and refunded pro rata if drawings are made; if cancelled without full draw, the fee is refunded based on available amounts and remaining days.
- Treatment in reserves:
  - Unpurchased amounts available under the FCL arrangement are not counted in gross reserves.
  - There is space in the Reserves Data Template filed by SDDS subscribers to announce availability of unpurchased credit line resources.
  - Once purchased, FCL resources increase gross reserve assets and external liabilities to be reported in Sections I and II of the Reserves Data Template.
  - Guidance on inclusion in Section III:
    - Undrawn amounts under one-year FCL arrangements should be included in Section III from approval to maturity.
    - Undrawn amounts under two-year FCL arrangements should be included in Section III from approval up until the scheduled review date under the FCL.

### Process when a member expresses interest
- Initial steps:
  - Member should approach staff or management confidentially to indicate interest.
  - A mission is not required; a fact-finding staff visit may be needed if the latest Article IV report is more than a year old or circumstances warrant.
  - Staff should strongly encourage confidentiality to avoid negative effects on market sentiment if the member fails to qualify.
  - Staff must treat the request as confidential and refrain from public discussion of qualification.
  - Staff should wait for a formal expression of interest (e.g., email or written communication) before assessing qualification.
  - In exploratory discussions, staff should ask about the nature of BoP problems (actual or potential), desired access level, length of arrangement, and whether it is precautionary.
  - Area departments should consult closely with SPR on key elements and process for assessing qualification after an expression of interest.
- Preliminary assessment of qualification:
  - Country team prepares a confidential preliminary assessment of qualification under the FCL.
  - Staff can discuss qualification criteria with the member but must clarify that the Executive Board decides final qualification.
  - Area teams should consult early with SPR, FIN, LEG, and other functional departments to ensure thorough and evenhanded assessment (see Annex I).
- Support from other creditors and RFAs:
  - When support from other creditors is likely important to address BoP difficulties, staff will consult with key creditors (official or private) as appropriate to inform access assessment.
  - Consultations are envisaged when:
    - sizeable remaining financing gaps need filling by other creditors (usually official creditors); or
    - authorities request precautionary support from both the IMF and other providers (e.g., an RFA).
  - Consultations are limited to sharing preliminary technical information and do not include sharing the staff note for the informal Board meeting.
  - Specified Board documents may be shared with RFAs that are co-financiers pursuant to established Fund policy, typically via SEC, with prior consent of country authorities.
- Informal Board engagement and staff note:
  - If management concludes access may be appropriate, it will promptly consult the Board in an informal (restricted) meeting.
  - A concise staff note (more succinct than the subsequent staff report) should set out the basis for possible approval and include a preliminary assessment of qualification and the appropriateness of proposed access.
  - The staff note should include a rigorous assessment of the member’s actual or potential need and repayment capacity and, where relevant, the impact on Fund liquidity for access above 575 percent of quota or SDR 10 billion.

### Justification of access, exit, and risk considerations
- Assessment expectations:
  - The staff note and subsequent staff report should rigorously assess actual or potential BoP needs and repayment capacity.
  - Where access would exceed 575 percent of quota or SDR 10 billion, the impact on Fund liquidity must be assessed.
- Exit strategy guidance:
  - A staff assessment of risks and authorities’ exit prospects should be included at initial FCL request to justify arrangement duration and to promote transparency.
  - For two-year arrangements, the mid-term review should include an updated assessment of anticipated evolution of risks.
  - Exit strategy elements expected:
    - A statement about exit contingent on reduction of external risks, specifying relevant external risks and informed by the external economic stress index (see Annex II).
    - A statement on authorities’ efforts to improve domestic resilience, where relevant.
    - A statement expecting that access will decline in successor arrangements when the right conditions are in place, mentioning contingencies under which a successor arrangement may be requested with lower access or where no successor would likely be requested.
  - Exit and risk discussions are inherently uncertain and should preserve judgment while avoiding adverse market reactions.
  - Inclusion of the external economic stress index in documents is intended to help guide exit expectations and access discussions.

*Prepared by the Strategy, Policy, and Review Department in consultation with the Legal and Finance Departments; Approved by Martin Mühleisen; July 11, 2018.*

### Annex V). Recent practice has been to treat the staff note as strictly confidential. Following

### FLEXIBLE CREDIT LINE––OPERATIONAL GUIDANCE NOTE

### Confidentiality and communications around the request
- Recent practice: treat the staff note as strictly confidential.
- Following consultation with the Board at the informal meeting, if there are concerns about a market-sensitive leak/misinformation regarding the FCL request, a press release could be issued indicating the authorities’ interest and management’s intention to recommend Board approval of the FCL arrangement.
- Any press release “would take special care not to prejudge the Board’s final decision on an FCL arrangement.”

### Timing of Article IV consultation and related inputs
- The FCL decision requires “a very positive assessment of the member’s policies by the Executive Board in the context of the most recent Article IV consultations.”
- Principle: Article IV discussions (including mandatory financial stability assessments and documents feeding into Article IV consultations, such as voluntary FSAPs and ROSCs) should be timed sufficiently early to allow the Board’s most recent assessment to be fully integrated into qualification assessments for FCL approval or review.
- In practice: hold the Article IV discussion at least 4–6 weeks prior to a formal Board meeting for either the approval of, or review under, an FCL arrangement to ensure the Board’s appraisal can be incorporated in the staff report sent for review and management clearance.

### Preparation of the staff report and informal Board meeting
- Details on the content of the staff report are set out in Annex V.
- A mission is not normally expected. However, in some cases a mission may be necessary (prior to the informal Board meeting) to further assess qualification, finalize access levels, or clarify authorities’ intentions regarding policy goals and strategies.
- SPR’s clearance of the staff report would only be provided after the conclusion of the informal Board meeting because the staff report normally reflects discussions at that meeting.

### Authorities’ written communication requesting an FCL
- The written, signed communication should:
  - Describe macroeconomic conditions and the authorities’ broad policy goals and strategies for the term of the arrangement.
  - State the reasons inducing the member to request Fund assistance under the FCL (FCL decision, paragraph 6(a)(iv)).
  - Specify the nature of the BoP need and whether the access request is to be treated on a precautionary basis.
  - May add a reference to exit expectations (see discussion of exit strategy in ¶2).
  - Explain how the authorities will remain committed to very strong economic policies and respond to shocks.
- Cross-referencing material published separately by the authorities is appropriate.
- Note: this written communication is not a Letter of Intent for monitoring policy commitments.
- Timing: the letter should be dated after the informal Board meeting.

### Central bank safeguards
- Members requesting an FCL arrangement are not subject to the Fund’s safeguards assessment policy applicable to other arrangements.
- At the time of the formal written request, the member must authorize Fund staff access to the most recently completed annual independent audit of its central bank’s financial statements, whether or not the audit is published.
- Authorization includes allowing the central bank’s external auditors to discuss audit findings with Fund staff, including written observations on weaknesses in internal controls (FCL decision, paragraph 6(b)).
- Staff will raise and discuss significant safeguards issues from the latest published external audit report in the context of mid-term reviews.
- Area department teams are encouraged to consult early with FIN staff on safeguards requirements, including ahead of mid-term reviews.

### Interdepartmental review, circulation periods, and expedited procedures
- Normal interdepartmental review procedures apply to the FCL.
- Current circulation period: two weeks for the formal Executive Board meeting.
- Recent practice for the informal Board meeting: allow for one-week circulation.
- Circulation period for informal Board meetings is similar to that for informal Board Discussions on Exceptional Access cases.
- Where needed (urgent actual BoP need or risk of market-destabilizing leaks), FCL-specific expedited procedures can be followed (Annex VI).

### Formal Executive Board meeting, activation, and fees
- The Board may approve an FCL arrangement based on the member’s written request and the staff report.
- As for other Use of Fund Resources meetings, staff will provide a Summing Up (internal) and a Chairman’s Statement, which will be published subject to the member’s consent.
- The credit line is open on approval of the arrangement.
- Prior to approval, FIN needs authorization from the authorities to debit the member’s SDR account for payment of the commitment fee, which is due upon approval of the FCL arrangement.

### Transparency and publication
- The Managing Director will generally not recommend approval of an FCL request unless the member consents to publication of the associated staff report.
- It is expected that the staff report and the authorities’ written communication requesting an FCL arrangement will be published shortly after Board approval.
- The Fund’s Transparency Policy, including rules on corrections and deletions, applies.

### Purchases under the FCL
- For a purchase, FIN must receive official SWIFT communication from the member’s fiscal agency specifying the amount and representing an actual BoP need.
- FIN will contact the authorities to determine earliest value date, currency composition, and operational details.
- Members should be encouraged to disclose information about purchases; purchases under Fund arrangements are routinely publicly displayed on the Fund’s external webpage.
- Effect of approval:
  - Two-year FCL arrangement: provides purchase rights not subject to ex-post conditionality until the scheduled mid-term review, which should be scheduled immediately prior to the lapse of one year since approval.
  - One-year arrangement: provides purchase rights for the entire period of the arrangement.
- If requested on a precautionary basis, Executive Directors would normally be informed ex post when a member has drawn under the FCL.
- Post-draw reporting: a concise note discussing developments, the BoP need, and the outlook should be provided; include an updated financing needs and sources table and an updated capacity to repay table. The note can be sent to the Executive Board for information or as background for an informal briefing.

### Mid-term review (two-year arrangements) and related procedures
- For two-year FCL arrangements, a mid-term review prior to the lapse of the first twelve months is required to assess continued qualification (FCL decision, paragraph 5(a)).
- The review should aim for completion by the Executive Board immediately prior to the lapse of the one-year period to avoid temporary loss of automatic access.
- Staff should prepare a concise staff report covering recent developments, expected evolution of risks, policy initiatives, and a brief update assessing the country against qualification criteria (see Annex V for likely content).
- Significant safeguards issues identified in the latest published external audit would be raised and discussed in the mid-term review; staff should consult FIN promptly ahead of the review.
- Board approval of the review could be on a lapse of time basis.
- A mission will not normally be necessary; assessment will benefit from recent routine staff visits or Article IV missions.
- If very substantial changes in policy strategies or goals occurred, a new letter from the member setting out new strategies and goals should be attached and discussed.
- Standard review process applies (no Policy Note or Policy Consultation Meeting required) and normal circulation procedures should be followed unless expedited procedures apply.

### Changes in access, expiration, and cancellation
- Members may request reductions or augmentations of access at any time within an existing FCL arrangement; all requests should refer to changes in BoP needs and provide justification.
- Example practice: Poland reduced access on three occasions before fully exiting the FCL arrangement in November 2017.
- With nearing expiration, staff or management could issue a factual press statement at the member’s request noting the successful conclusion of the FCL arrangement, highlighting recent performance and the supporting role of the FCL.
- Press statements should not include any assessment of potential qualification for a successor FCL arrangement; expressions of interest in a successor arrangement are subject to the same confidentiality requirements as the initial request.
- If a member is likely not to continue to qualify, staff should begin discussions well ahead of time (most likely in the context of a regular staff visit or Article IV mission) to signal possible outcomes and incentivize policy adjustment or prepare for exit.
- At expiration or cancellation, staff would update the Board through the Secretary before commencing public communication strategy, as a courtesy.

### Successor arrangements and cancellation mechanics
- A request for a successor arrangement follows the same procedures as a first-time request.
- If the Board meeting for a successor request is before expiration of the current arrangement, the current arrangement must be cancelled prior to its expiration.
- Authorities’ written communication for a successor request should include a statement about the decision to cancel the existing arrangement as of a specified date, usually the date of approval of the new arrangement.
- A member can cancel an FCL arrangement via written notification to IMF management, preferably a formal letter signed by the authorities; the notice must specify the effective date of cancellation, which should not be earlier than the date of receipt by the Fund.

### Communication strategy
- A communication strategy is essential to provide forward guidance to market participants about the authorities’ future use of the FCL and exit plans.
- Strategy should be developed with country authorities and cover instrument details, rationale for usage, and the authorities’ exit strategy.
- Coordination with COM and SPR is required for press statements to consider impacts on all members under FCL arrangements.

### Determining qualification
- Determining qualification is not a tick-the-box exercise; staff should make a judgment based on all of the following:
  - Whether 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, giving confidence the member will respond appropriately to BoP difficulties (FCL decision, paragraph 2). This assessment is the core of the qualification process.
  - Staff should make clear that a very positive assessment of the member’s policies was given in the context of the most recent Article IV consultations (FCL decision, paragraph 2).
  - The relevant qualification criteria listed in Annex I should be assessed in the initial concise staff note to the Board and the staff report on the FCL request.
- Recognize heterogeneity of members’ circumstances and projection uncertainties: strong performance against all relevant criteria is not necessary for qualification; however, significant shortcomings on one or more criteria—unless compensated by other factors or corrective measures—would generally signal the member is not among the strong performers for whom the FCL is intended.

*Source: FLEXIBLE CREDIT LINE––OPERATIONAL GUIDANCE NOTE (Annex V and surrounding text).*

### 6.      In circumstances where a member is assessed and judged not to qualify for the FCL,

### FLEXIBLE CREDIT LINE––OPERATIONAL GUIDANCE NOTE

### Justification of access
- Board notification: The Board is notified only when management decides that access under the FCL may be appropriate; if a member is assessed and judged not to qualify for the FCL, the Board would not be notified.
- General Fund policy requires access decisions to be based on:
  - (i) the member’s actual or potential need for Fund resources taking into account other sources of financing and the desirability of maintaining a reasonable level of reserves (further details on determining the BoP need are covered in Annex II of GRA Lending Toolkit and Conditionality—Reform Proposals);
  - (ii) the member’s capacity to repay the Fund, which takes into account the strength of its adjustment program, including the extent to which it will lead to a strengthening of the member’s BoP by the time that repurchases begin to fall due; and
  - (iii) the amount of the member’s outstanding Fund credit and its record in using Fund resources in the past.
- SPR reviewers and the Lending Policy Division in SPR can provide further guidance when needed.
- Poland’s 2015 FCL request is cited as an example of good practice for a precautionary request.

### Framework and tools for access scenarios
- Annex II: General framework for staff when considering access in a precautionary setting.
- Annex III: Methodology to calculate an external economic stress index, showing the evolution of the external environment as it pertains to the particular member, with examples from the 2014 Review of the FCL, PLL, and RFI. The external economic stress index was endorsed by the Board in the 2014 Review.
- Annex IV: Empirical method for comparing access assumptions across FCL cases and with historical experience; routinely implemented in FCL and PLL requests to improve transparency.

### Core qualification framework (overview)
- FCL core assessment: The member’s economic fundamentals, institutional policy framework, and policies are very strong; sustained track record of very strong policy implementation; member’s policies must have been assessed very positively by the Executive Board in the context of the most recent Article IV consultations.
- PLL core assessment: The member’s economic fundamentals, institutional policy framework, and policies are generally sound; track record of sound policy implementation; member’s policies must have been assessed as generally positive by the Executive Board in the context of the most recent Article IV consultation.
- Qualification for both is based on nine specific qualification criteria; assessment involves judgment and takes into account country circumstances and projection uncertainties.
- FCL: Very strong performance against all relevant criteria not necessary, but significant shortcomings on one or more criteria—unless compensated—generally signal non-eligibility.
- PLL: Assessed based on five broad qualification areas; qualification standard is strong performance in most of the five areas (i.e., three of five areas). A member would not be qualified to use the PLL if any of the following apply:
  - (i) sustained inability to access international capital markets,
  - (ii) the need to undertake large macroeconomic or structural policy adjustments (unless such adjustment has already been set credibly in train before approval),
  - (iii) a public debt position that is not sustainable in the medium term with a high probability, and
  - (iv) widespread bank insolvencies.

### Nine qualification criteria (grouped and core indicators)
I. External Position and Market Access
- 1. A sustainable external position
  - Core indicator: external position 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.
  - Other relevant indicators: debt-stabilizing noninterest current account balance; level and composition of external debt; level of net international reserves; level and composition of private sector external assets.
- 2. A capital account position dominated by private flows
  - Core indicator: public flows account for less than half of a member’s direct, portfolio, and other asset and liability flows, on average in the past three years.
  - Other relevant indicators: International Investment Position.
- 3. A track record of steady sovereign access to capital markets at favorable terms
  - Core indicator: 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.
  - Indicator also requires that the member did not, in staff’s assessment, lose market access at any point in the last 12 months.
  - Other relevant indicators: comparison of spreads with comparator countries and relative performance of spreads during global shocks.
- 4. Reserve position (precautionary requests)
  - Core indicator: reserves greater than 100 percent of the unadjusted Assessing Reserve Adequacy (ARA) metric on average over three (the current and the two previous) years, and not below 80 percent in any of these three years.
  - Other relevant indicators: metrics based on imports, short-term debt, monetary base, augmented ARA metrics; alternative indicators may be used if unadjusted ARA is inadequate.

II. Fiscal Policy
- 5. Sound public finances, including a sustainable public debt position determined by a rigorous and systematic debt sustainability analysis
  - Core indicator: public debt assessed as sustainable with a high probability, explicitly taking into account risks to public finances not immediately visible in current projections.
  - Discussions include evolution of debt, rollover and financing requirements under alternative scenarios, contingent liabilities where appropriate, and stress tests.
  - Relevant indicators: public sector debt-to-GDP ratio; primary and overall fiscal balance (average for the last 3/5 years); structural fiscal balances; debt-stabilizing primary balance; assessment of medium-term plans and institutional budgetary framework.

III. Monetary Policy
- 6. Low and stable inflation, in the context of a sound monetary and exchange rate policy framework
  - Core indicator: the member has maintained single-digit inflation over the past five years.
  - Bottom-line assessment considers whether performance reflects favorable external conditions, persistent deviations from targets, sustained deflation, core inflation and inflation expectations, policy responses, adequacy of instruments, and policy transparency and accountability.

IV. Financial Sector Soundness and Supervision
- 7. Sound financial system and the absence of solvency problems that may threaten systemic stability
  - Core indicator: average capital adequacy ratio for the banking sector above regulatory thresholds, and the most recent Article IV did not highlight significant solvency risks or recapitalization needs.
  - Other indicators: profitability, asset quality, stress tests, market/credit/liquidity risk analyses, and the condition of large/systemic banks.
- 8. Effective financial sector supervision
  - Core indicator: the most recent FSAP or Article IV report did not raise substantial concerns regarding the supervisory framework.
  - Bottom-line assessment considers changes since the latest FSAP and the legal/institutional/operational capacity for prompt corrective action and emergency liquidity assistance.

V. Data Adequacy
- 9. Data transparency and integrity
  - Core indicator: the member is a Special Data Dissemination Standard (SDDS) subscriber or has made satisfactory progress toward meeting the SDDS requirements.
  - Routine assessments in Article IV consultations inform data quality and integrity.

### Assessment of policy track record
- Determination of whether a member meets the track record requirement guided by assessment of the qualification criteria in each of the five most recent years.
- Bottom-line assessments on each criterion follow the same approach as for the current year, drawing on additional information (e.g., appropriateness of policy responses to past capital flow volatility).
- Very strong performance against all qualification criteria is not required.

### Indicators of institutional strength
- Eligible members should be assessed to have a very strong (FCL) or sound (PLL) institutional policy framework.
- Considered indicators include:
  - Policy cyclicality: moving correlations for fiscal policy (cyclically-adjusted fiscal balance or government spending and cyclically-adjusted GDP) and for monetary policy (cyclically-adjusted real short-term policy rate and cyclically-adjusted GDP); in rigid exchange rate regimes, cyclicality of cash reserve requirements.
  - Effective response to shocks: government effectiveness and control of corruption from the Worldwide Governance Indicators, used consistently with IMF policy on third-party indicators. Staff should use point scores (not rankings) and account for uncertainty and overlapping confidence intervals.

### Annex I. Table 1 — Summary of broad indicators for FCL and PLL qualification criteria
- Criterion 1 (Sustainable external position): Gross external debt/GDP; including DSA assessment; debt-stabilizing noninterest current account deficit; net external debt/GDP; short-term gross external debt/GDP; share of bank, nonbank and public sector gross external debt.
- Criterion 2 (Capital account position dominated by private flows): FDI plus portfolio inflows as a share of total capital inflows; ratio of private holdings of external debt to gross external debt; and private foreign holdings of domestic debt/total domestic debt.
- Criterion 3 (Track record of steady sovereign access to capital markets at favorable terms): EMBI spread; spread between country EMBI and EMBI overall index (using latest observation and averages over previous five years); current yield on benchmark bonds; credit ratings; and last external issuance (details on amount issued/original yield/maturity).
- Criterion 4 (Reserve position for precautionary requests): Ratio of reserves to: ARA metric, short-term debt (remaining maturity basis); short-term debt (remaining maturity basis) plus current account deficit; imports; and broad money.
- Criterion 5 (Sound public finances and sustainable public debt): Public sector debt-to-GDP ratio, and debt sustainability assessment; primary and overall fiscal balance (average for the last 3/5 years); structural fiscal balances and debt-stabilizing primary balance; assessment of MT plans anchoring fiscal policy outcomes; and overall sound institutional budgetary framework as informed by recent fiscal ROSCs, where available.
- Criterion 6 (Low and stable inflation): Recent evolution of core and headline inflation and inflation expectations; past and announced policy responses; adequacy of monetary policy instruments; accountability, transparency, and communication.
- Criterion 7 (Sound financial system): Capital adequacy and profitability (CAR; return on equity); liquidity and funding risks (liquid assets ratios; loan-to-deposit ratio; share of external funding); asset quality (credit to private sector growth; nonperforming loan ratios).
- Criterion 8 (Effective financial sector supervision): Assessment of supervisory standards and practices based on FSAP findings; assessment of legal and institutional framework and operational capacity for prompt corrective actions and emergency liquidity assistance.
- Criterion 9 (Data transparency and integrity): Subscription to the SDDS or satisfactory progress toward meeting its requirements; routine assessments (Article IV consultations) of data quality and integrity, informed by data ROSCs where available.

*Flexible Credit Line—Operational Guidance Note (Annex I summary and related sections).*

### Annex I. Table 2. Core Indicators for FCL and PLL Qualification Criteria

### Annex I. Table 2. Core Indicators for FCL and PLL Qualification Criteria

### Overview
- The table lists nine core criteria and the specific indicator requirements used to assess qualification for the Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL).
- The assessment of policy track record is anchored in the same set of core indicators based on an assessment of the qualification criteria in each of the five most recent years. Judgment is particularly important for criteria 6, 7, and 8.

### Core criteria and exact indicator requirements
- 1. 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.
  - This assessment implies that members with “weaker” or “substantially weaker external positions” would not meet the criterion.
  - Asymmetry rationale: “weaker” or “substantially weaker” external positions (e.g., high current account deficit or net foreign liabilities, overvalued exchange rate, etc.) constitute early warning indicators for impending BOP crises.
  - Additional detail on staff-assessed CA gaps and categories:
    - (i) substantially stronger (CA gaps more than 4 percent);
    - (ii) stronger (CA gaps between 2 and 4 percent);
    - (iii) moderately stronger (CA gaps between 1 and 2 percent);
    - (iv) broadly consistent (CA gaps between -1 and 1 percent);
    - (v) moderately weaker (CA gaps between -2 and -1 percent);
    - (vi) weaker (CA gaps between -4 and -2 percent);
    - (vii) substantially weaker (CA gaps less than -4 percent).

- 2. 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.
  - Public flows defined as the sum of the absolute values of reserve assets flows, and general government and central bank portfolio and other debt liability flows. In absence of data for a large sample, other official asset and liability flows of the public sector are assumed to be zero.

- 3. 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.
  - Deteriorating funding conditions and adverse changes in issuance patterns (volume, maturity, and frequency of issuance) that cannot be explained by funding needs would indicate loss of market access.
  - Bottom-line assessment may consider evidence that sovereign could have tapped international markets on a durable and substantial basis even if actual borrowing fell short.

- 4. Reserve position which—notwithstanding potential BoP pressures that justify Fund assistance—remains relatively comfortable (precautionary requests)
  - 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.
  - The assessment includes a lower—but not an upper—threshold for reserves. See Annex III for empirical justification of the 80 percent threshold.
  - The overall assessment could consider other reserve metrics if the ARA metric is deemed inadequate.

- 5. Sound public finances, including a sustainable public debt position determined by a rigorous and systematic debt sustainability analysis
  - Requires the member’s public debt to be assessed as sustainable with a high probability.
  - The high probability assessment would explicitly take into account risks to public finances not immediately visible in current public debt projections.

- 6. Low and stable inflation, in the context of a sound monetary and exchange rate policy
  - Requires the member to have maintained single-digit inflation over the past five years.
  - Bottom-line assessment considers whether performance reflects favorable external conditions or whether there are grounds to question the ability of the policy framework to maintain low inflation under normal circumstances.
  - Also considers persistent deviations from stated inflation targets and sustained deflation to the extent it reflects deficiencies in the monetary policy framework.

- 7. Sound financial system and the absence of solvency problems that may threaten 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 would consider other financial soundness indicators and relevant stress tests, and reflect potential problems in large and systemic banks that may be 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 would consider any significant changes in conditions 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.

---

### Annex II. Determining Access on a Precautionary Basis

### Aim
- To ensure Executive Board papers include a rigorous analysis of the determination of access levels based on a consistent framework while allowing country-specific flexibility.
- Recognizes high degree of judgment in estimating a potential financing gap.
- Staff should clearly spell out underlying assumptions and show access is reasonable when compared with a range of metrics and indicators.

### Key criteria for access
- The key criteria governing access decisions are:
  - (i) the member’s actual or potential need for Fund resources, taking into account other sources of financing and the desirability of maintaining a reasonable level of reserves (Fund policy: access cannot be greater than this need);
  - (ii) the member’s capacity to repay the Fund (including strength of the member’s adjustment program);
  - (iii) the member’s outstanding Fund credit and track record of using Fund resources.
- These criteria are broad and require substantial judgment, especially for precautionary access.

### Framework for determining access in a precautionary setting
- Staff should construct a plausible adverse scenario to estimate a potential financing gap and appropriate access level.
- Additional factors beyond the adverse scenario may be weighted in judgment but must be carefully justified.
- To enhance transparency and evenhandedness, staff should:
  - (i) present the link between access and the size of actual or potential BoP needs;
  - (ii) allow comparability in choice of adverse shocks while accounting for country-specific factors;
  - (iii) cross-check programmed reserves against standard adequacy metrics.

### Construction of the adverse scenario — inputs and considerations
- The adverse scenario should be informed by:
  - (i) downside global assumptions in line with the latest WEO downside scenario, GFSR or Global Risk Assessment Matrix (GRAM), with description of potential shock and likelihood;
  - (ii) developments in an index of external economic stress (mechanics set out in Annex III);
  - (iii) evidence from past or current crises (and Annex IV guidance);
  - (iv) country-specific factors and likelihood based on past experience.
- The adverse scenario should take into account:
  - whether there is a case for an orderly exchange rate adjustment;
  - whether reserve coverage (including the Fund’s ARA metric) suggests reserve level should be maintained, raised, or lowered.
- Teams should ensure balance of payments tables demonstrate the potential need.
- Annex Table 1 provides a guide to shocks that could be used (examples set a minimum information requirement).

### Global assumptions
- Draw global assumptions from most relevant downside risks as identified by the latest WEO downside scenario, GFSR, or G-RAM.
- Staff reports should indicate the scenario used and the probability attached.
- The chosen scenario should be informed by the downside scenario in the external economic stress index; sources need not be identical but should be consistent in shock source and direction.
- The WEO and GRAM provide useful reference for quantitative estimates of global economic and financial shocks (effects on export demand, terms of trade, remittances).
- The GFSR should be the main source for global and regional assumptions on financing conditions, including market analysts’ expectations under baseline and adverse scenarios.

### Index of External Economic Stress
- Country teams, following consultation with authorities, should develop an index of external economic stress (mechanics in Annex III) to indicate evolution of external environment for the country.
- The index should guide access discussions: higher index → more extreme adverse scenario assumptions; lower index → smaller assumed shocks.
- As risks decline over time, access would be expected to decline, consistent with progressive exit from FCL arrangements.

### Evidence from crises and country-specific factors
- Evidence from previous and current crisis cases and economic literature can inform impacts on BoP components (FDI, rollover rates, deposit outflows).
- Past crisis episodes provide reference for expected shock sizes (Annex IV approach adopted by all FCL and PLL users).
- Country-specific characteristics (structure and volatility of capital flows, derivatives, intra-group lending, private foreign asset holdings) are critical to plausibility.
- When using country-specific factors, staff must defend the scale and probability of the shock and provide full explanations in Board documents.
- Additional access cushions beyond the adverse scenario must be carefully justified.
- Under Fund Transparency Policy, market-sensitive information on access determination can be deleted from staff reports before publication where warranted.

### Additional considerations and reserve adequacy
- Assess reserve adequacy and effect if the adverse scenario materializes. Compare reserve levels across metrics relevant for country vulnerabilities and exchange rate regime (e.g., ARA metric and other standard metrics).
- With reserve drawdown a key element in access determination, limited reserve drawdown should be justified; reserve adequacy ratios well into adequacy range in the adverse scenario should generally be avoided.
- It would normally be expected that assumed levels of gross reserves are allowed to fall below 100 percent of the ARA in the adverse scenario (extreme stress event).
- The 2014 Review discussed a lower threshold level of 80 percent of the Fund’s ARA metric.
- Pace of reserve drawdown should be considered to avoid adverse market reactions.
- For countries with reserves above adequate, adverse scenario should include use of international reserves to cover part of financing gap—i.e., not all potential financing need met through Fund resources.
- If reserve levels need to rise over the FCL arrangement to maintain adequacy, staff may build in reserve level increases in the baseline projection.
- Assumptions regarding exchange rate movement and implied impact on financing needs should be clearly spelled out.

### Presentation of access levels
- Access levels should be presented based on potential BoP need, irrespective of the specific use of Fund resources (budgetary support, reserve buildup, bank restructuring costs).
- Access can be granted to finance potential budgetary needs as long as a public sector S-I deficit is mirrored by a BoP need.
- Example: A BoP need may arise during economic contraction if stimulative policies worsen the current account (public sector S-I deterioration not offset by private sector S-I improvement).
- Operationally, proposed access levels should be commensurate with the projected BoP need shown in staff reports.

*Source: Annex I (Table 2) and Annex II of the Flexible Credit Line––Operational Guidance Note*

### 13. Estimates of precautionary BoP needs and thus the corresponding access level can be

### pp080618-flexible-credit-line-operational-guidance-note - 13. Estimates of precautionary BoP needs and thus the corresponding access level can be

### Estimates of precautionary BoP needs and access duration
- Precautionary balance of payments (BoP) needs and corresponding access levels can be appropriately based over a rolling 12-month window, even for longer-duration arrangements, informed by evidence from past crisis cases (see 2009 Review of Recent Crisis Programs paper).
- Use of rolling 12-month window aligns precautionary sizing with historical crisis evidence and financing-gap estimation practices.

### Appropriateness checks for access levels
- Staff should verify that the level of access is appropriate not only relative to financing gap estimates but also against a wider range of metrics and indicators related to capacity to repay and quota.
- The policy note and staff report should include a comparison of high access cases indicators table.
- Risk calibration guidance: avoid prediction/misclassification errors that (i) miss crises (threshold too high) and (ii) predict false crises (threshold too low).
  - Example calibration: with an 80 percent threshold separating crisis from non-crisis signals, countries may be able to draw down reserves to that limit in severe stress events without igniting crisis risks.
- Legal/operational reminder: A purchase in the GRA can only be made if the member represents it has to make the purchase to meet a BoP need—i.e., “because of its balance of payments or its reserve position or developments in its reserves.” (Article I, Section 3 (b)).
- Articles of Agreement purpose cited: “To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” (Article I)

### Annex II — Illustrative BoP shocks in adverse scenarios (themes and risk sources)
- External financing requirements and sources are explored through potential shocks and downside risks drawn from WEO, GFSR, GRAM, VE, and EWE, evidence from previous and current crisis cases, and country-specific risks/compensating factors.
- Risk categories and considerations:
  - A. Current Account: foreign demand, commodity prices, remittances; use WEO alternative scenario; consider exports/imports composition and elasticities; current account norm and debt-stabilizing level.
  - B. FDI: EWE/GFSR/VE/GRAM inputs; consider FDI decline patterns, historical volatility, foreign bank takeovers, investments in nontradable sector, greenfield investments, retained earnings.
  - C. Equities and debt securities: VE/GRAM inputs; monitor nonresident holdings and outflows, valuation effects, secondary market liquidity.
  - D. Debt Rollover (MLT/ST; sovereign/bank/nonbank; official/private): MCM survey of market analysts, GRAM; focus on rollover rates, debt composition, trade credits, intra-group lending, Private Sector Involvement.
  - E. Other Investment: currency and deposits, secondary market, derivatives positions; GFSR/VE/GRAM inputs; monitor stock and flows of nonresident deposits, resident deposit outflows, degree of dollarization.
  - F. Gross International Reserves and Private Foreign Assets: apply Greenspan-Guidotti rule, Jeanne-Rancière Reserve rule, and other indicators mentioned in Annex I; assess availability of liquid foreign assets by private sector.

### Annex III — Index of External Economic Stress (EES): purpose and methodology
- Purpose: provide an indicator of the evolution of the external environment as it pertains to a member to inform access and exit prospects under FCL/PLL arrangements.
- Development: country teams construct indices tailored to the member after discussion with authorities; methodology is flexible but once choices (risks, variables, weights) are set they should remain fixed across successor arrangements absent compelling economic reasons.
- Core methodological choices:
  - (i) Selection of key external risks facing the country (drawn from Article IV staff reports, G-RAM).
  - (ii) Selection of proxy variables capturing these risks (e.g., trading-partner growth for export risk; U.S. Treasury yields for portfolio debt liability risks; volatility indices for equity portfolio risk).
  - (iii) Choice of weights applied to each proxy variable.
- Index computation: weighted sum of standardized deviations of external proxy variables from their means (differences divided by long-run standard deviation to make deviations comparable and additive).
- Weighting approaches:
  - Data-based weights: determined by economic size of the balance of payments vulnerability relative to the economy (e.g., long-term average size of exports to a market as a share of output).
  - Model-based weights: econometric methods (e.g., vector autoregressions, BVAR) to derive economically meaningful weights where feasible.

### Annex III — Practical guidance on index construction and scenario use
- Indices should capture recent changes and be forward looking; country teams should model a downside risk scenario drawing on flagship reports (WEO downside scenario, GFSR, spillover reports) or G-RAM.
- Downside scenario should inform the adverse financing needs scenario; while not required to be identical, source and direction of shocks should be consistent.
- Illustrative indices for Mexico, Colombia, and Poland (2008–13) use differences from long-run means and show broadly similar stress indices under data-based and model-based weights.

### Annex III. Box 1 — Illustrative estimation of EES index weights (BVAR-based)
- Method: structural Bayesian vector autoregression (BVAR) to detect historical relation of balance of payments pressures to external proxy variables, controlling for domestic variation.
- Model vector: external proxy variables, domestic controls (GDP growth and short-term money market interest rates), and quarterly average exchange market pressure (EMP) index.
- Country-specific external variables used:
  - Poland: seasonally-adjusted euro area quarter-on-quarter real output growth; quarterly change in U.S. Treasury 10-year yield; logarithm of quarterly average Euro Stoxx Banks index; quarterly average VXEEM index.
  - Mexico and Colombia: seasonally-adjusted U.S. quarter-on-quarter real output growth; change in quarterly average oil price; quarterly change in U.S. Treasury 10-year yield; quarterly average VXEEM index.
- Identification: Cholesky ordering with external trading-partner growth most exogenous, followed by commodity prices and foreign interest rates, then domestic variables; shrinking priors applied to domestic variables so they do not influence external proxies.
- Estimation details: data from 1995 (or earliest available) with 2 lags; BVAR uses priors on means, variances, and first-order autocorrelation; results robust to alternate ordering and lag length.
- Weight derivation: absolute cumulative response over a year of EMP to each external proxy variable is used to weight each risk (larger EMP impact → larger index weight).
- Data caveat: VXEEM available from 2011; prior to that VIX is used with an additional spread equal to average spread between VIX and VXEEM in 2011–2013.

### Annex III. Table 1 — Example EES components and weights (Mexico, Poland, Colombia)
- Mexico (Data-based weights / Model-based weights where shown):
  - Exports to the US — US growth: 0.43 / 0.23
  - FDI from the US — Eurozone growth: 0.21 / 0.29
  - Remittances from the US — Change in oil price: 0.32 / 0.03
  - Oil exports — Equity portfolio investment stock: 0.06 / 0.32
  - Emerging market implied volatility (VXEEM): -0.24 / -0.30
  - Change in US Treasury 10 year yield: -0.27 / -0.15
- Poland:
  - Exports to the Eurozone — Eurozone growth: 0.21 / 0.29
  - FDI from the Eurozone — European bank equity price (Euro Stoxx Banks): 0.38 / 0.27
  - Equity portfolio investment stock — Emerging market implied volatility (VXEEM): -0.09 / -0.14
  - Change in US Treasury 10 year yield: -0.31 / -0.30
- Colombia:
  - Oil exports, Coal exports, FDI into the oil industry, Exports to the US — US growth: 0.24 / 0.25
  - Emerging market implied volatility (VXEEM): -0.04 / -0.44
  - Change in US Treasury 10 year yield: -0.40 / -0.28

### Annex IV — Framework for comparing access assumptions (overview)
- Purpose: compare access assumptions across FCL/PLL users by benchmarking against past emerging market (EM) behavior during large exogenous (advanced market-led) shocks.
- Two-step approach:
  1. Identify exogenous shock periods (AM real domestic demand compression exceeding one standard deviation occurred in 1991, 2001, and 2009; these periods coincided with elevated AM financial stress and follow-on EM stresses).
  2. Measure moves in key external variables across EMs during these crisis periods and benchmark current access assumptions against distributions from past episodes.
- Sample and variables:
  - Country sample: 49 EMs that are medium sized, have market access, and attract private inflows via FDI, portfolio flows, and loans (broadly coincides with VEE sample).
  - Variables: eight external variables focused on current and financial accounts underpinning downside risk assumptions in past FCL decisions—exports, FDI, commodity prices excluding fuel, fuel prices, and short- and MLT public and private rollover rates (others could be added over time, e.g., deposit outflows).
- Statistical benchmarking:
  - Density distributions: stack country observations for event years to estimate univariate kernel densities; use kernel density estimators to approximate density f(x) from observations on x and present FCL assumptions on these distributions.
  - Time period specifics:
    - For FDI and exports: use averages spanning the three years prior to the crisis year as baseline; crisis year deviations from baselines constitute shock scenario.
    - For private and public rollover rates: use episode year values to estimate densities.
    - For commodity and fuel prices: pool 1991–2011 time series values to estimate densities.
- Application: place FCL and PLL cases on these densities based on shock scenarios described in country case studies to calibrate and compare access assumptions.

*International Monetary Fund — FLEXIBLE CREDIT LINE––OPERATIONAL GUIDANCE NOTE*

### 4. To compare the implicit assumptions on tail risks across current and past FCL cases,

### pp080618-flexible-credit-line-operational-guidance-note - 4. To compare the implicit assumptions on tail risks across current and past FCL cases,

### Comparison of implicit assumptions on tail risks
- Implicit assumptions from FCL-PLL cases are placed in the empirical distributions of key EM access parameters (see Annex Figure 1).
- Findings from this placement:
  - The severity of assumed shocks fell under the second FCL arrangements, before increasing as global conditions worsened.
  - Earlier FCL requests showed varying degrees of severity of various shocks across BoP category; these became less extreme in later requests after the implementation of this framework.
  - It is expected that these empirical distributions are used to underpin assumptions in all future access scenarios.

### Expectations as external risks subside
- Country teams are expected to use less severe assumptions in their access scenarios as external risks subside.
  - Specifically, assumptions will move closer to the center of the distribution.

### 2014 review guidance on second-year assumptions
- The 2014 review found that assumptions are increasingly conservative and severe when compared against distributions for the second year of a crisis, where typically the severity of the situation declines (see second part of Annex Figure 1).
- Guidance for two-year arrangements:
  - Country teams requesting a two-year arrangement should consider using less severe assumptions in the second year of the scenario.
  - Those second-year assumptions should be anchored in a separate empirical distribution specifically for the second year of the crisis.

### Empirical distributions and definition of “shocks” (Annex IV, Figure 1 notes)
- In the empirical distributions, “shocks” are defined as:
  - countries’ actual experiences during the crisis year (for all four types of debt rollover rates), or
  - countries’ experiences during the crisis year relative to proceeding 3-year average (for exports and FDI).
- The definition can differ from that in FCL/PLL staff reports, which often define shocks as deviations in the adverse scenario from the baseline projection.
- In placing the shock assumptions underpinning the FCL/PLL arrangements on the empirical distributions, staff recalculates the FCL/PLL shock assumptions so that the definition of shocks is in line with that underlying the empirical distributions.

### Staff documentation and analytical requirements for Board consideration (Annex V)
- Concise Staff Note for Informal Board Meeting should include:
  - Qualification: assessment that the member has very strong fundamentals, is implementing—and has a sustained track record of implementing—very strong policies, and remains committed to maintaining such policies; statement on whether the most recent (2–3 years) Article IV consultations included very positive assessments.
  - Access: indication of an appropriate access level based on rigorous assessment of actual or potential need and repayment capacity, including scenarios based on alternative assumptions about key parameters (external debt rollover rates, magnitude of portfolio outflows, etc.).
  - Assessment of impact on Fund liquidity where requested access would exceed 575 percent of quota or SDR 10 billion, whichever is lower.
  - Tables: standard economic indicators and balance of payments table (current year and following year), and a table on gross external financing requirements and sources under baseline and adverse scenario (if precautionary). For successor arrangements, comparison of current adverse shock assumptions to previous arrangement; table comparing access metrics across cases; capacity to repay table if requested access amount finalized.
- Staff Report for the Formal Request for an FCL Arrangement should include:
  - Discussion of recent macroeconomic developments, policies, outlook, expected evolution of risks over the arrangement period, and authorities’ forward-looking policy plans including exit expectations.
  - Discussion of potential or actual sources of BoP pressures and other risks.
  - Detailed assessment of qualification criteria (including concise staff note material).
  - Debt sustainability analysis including evolution of debt, rollover and financing requirements under alternative scenarios, and stress tests.
  - Discussion and justification of the proposed access level and the member’s capacity to repay the Fund if purchases are made under the FCL.
  - Staff appraisal; tables covering projections for the length of the arrangement (ideally five-year time span), balance of payments, external financing requirements and sources, fiscal projections, debt sustainability tables (external and public), capacity to repay table, and alternative metrics for access.
  - Draft proposed decision and text of the FCL arrangement prepared by LEG.
  - An assessment prepared by FIN on the impact of the proposed FCL arrangement on the Fund’s finances and liquidity position, as a supplement to the staff report.
  - Authorities’ written, signed communication.
- Mid-Term Review Staff Report should be concise and include:
  - Recent economic developments with discussion about the role of the FCL in dissipating tail risks and expected evolution of risks (including latest WEO and GFSR) over remainder of the arrangement period.
  - Brief review of qualification criteria; staff appraisal.
  - Tables: standard economic indicators for the current year and following years to cover the length of the arrangement (ideally five-year time span), balance of payments table, tables on external financing requirements and sources and fiscal projections for current and following year, debt sustainability tables (external and public), and capacity to repay table.
  - For successor arrangements, external financing needs table should show how current adverse shock assumptions compare to those under the previous arrangement.
  - Proposed decision to complete the review prepared by LEG.
  - If very substantial changes in policy strategies or goals occurred, a new signed letter from the member setting out their new strategies and goals should be attached and discussed.

### Expedited procedures for urgent cases (Annex VI)
- The EFM procedures do not apply to requests for FCL arrangements; the FCL Decision sets out expedited procedures (FCL decision, paragraph 6(a)(v)).
- Expedited timetable when necessary (e.g., imminent crisis or risk of market-sensitive leaks):
  - Staff and management “engage” the Board on qualification and proposed access level on basis of documentation provided to the Board at least two hours prior to the informal Board meeting “to engage”.
  - Directors would be consulted during the informal Board meeting on possible issuance of a press release indicating authorities’ interest and management’s intention to recommend Board approval; press release must not prejudge the Board’s final decision.
  - A formal Board meeting could consider the member’s request within 48 to 72 hours following circulation of the staff reports to the Board (paragraph 6(a)(v)).

### Synchronized approval of FCLs for multiple countries (Annex VII)
- Purpose and scope:
  - Synchronized approval can strengthen response to a common shock and minimize first-mover problems.
  - The annex does not modify Fund policies or establish a new financing instrument.
- Procedures and principles:
  - Each member’s qualification for the FCL is assessed individually; each member must affirmatively express interest.
  - Confidentiality must be preserved in discussing potential use and qualification for the FCL (FCL Decision ¶6); Fund staff and management would not confirm that any particular member would qualify or reveal other members’ interest without agreement.
  - If multiple members express interest and management deems access appropriate, the Executive Board will be promptly consulted in an informal meeting; expedited approval procedures could be followed consistent with the FCL Decision.
  - External communications: If concerns about a market-sensitive leak exist, management could issue a short press statement following the initial informal Board meeting indicating concurrent requests, provided relevant members agree; the statement must not prejudge the Board’s final Decision.
- Access and safeguards:
  - Proposed access levels for synchronized approvals follow general Fund policies for duration and access under FCL arrangements, based on rigorous assessment of each member’s balance of payments need and capacity to repay and considering individual and cumulative impact on Fund resources (¶6(a)(iii)(I) and (II) of the FCL Decision).
  - To ensure early Executive Board consideration of liquidity implications from concurrently approved FCL arrangements, staff intends to include a liquidity assessment in the staff note (or notes) for the initial informal Board meeting whenever total access across the proposed arrangements would exceed SDR 10 billion, even if no individual arrangement contemplates access above this threshold.

*Source: FLEXIBLE CREDIT LINE––OPERATIONAL GUIDANCE NOTE (selected excerpts).*

---


_Source: https://www.imf.org/-/media/files/publications/pp/2018/pp080618-flexible-credit-line-operational-guidance-note.pdf_