## _021307 — Executive Summary and Selected Sections (RAL design)

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### Executive Summary — Purpose and Key Findings
- Purpose: Reserve Augmentation Line (RAL) is a proposed new liquidity instrument for market access countries to reinforce strong policies, reduce likelihood of capital account crises, and offer an alternative to costly self-insurance.
- Context:
  - RAL discussed in an August 2006 Executive Board seminar and follows Medium-Term Strategy call to strengthen crisis-prevention support.
  - Outreach found general merit; market participants emphasized importance of RAL’s commitment and signaling framework.
- Design issues addressed: qualification criteria; monitoring structure; access levels and terms; links to other Fund facilities (notably the SRF); links to the private sector.

### Main Design Conclusions (Executive Summary)
- Qualification:
  - Access only for members with sound fundamentals (though with some remaining vulnerability), strong policy credibility, forward-looking commitments to reduce vulnerabilities, and sustainable debt.
  - Qualification uses a range of quantitative indicators of vulnerability plus judgment on policy quality and likely reaction to shocks.
- Monitoring:
  - Safeguards based on robust qualification standards and semi-annual reviews of macroeconomic policies and progress in reducing vulnerabilities.
  - Consideration of scheduled reviews, performance criteria, and ad hoc reviews.
- Access (August paper design):
  - Initial purchase: 300 percent of quota.
  - Potential second purchase: 100–200 percent of quota subject to post-drawing review.
  - Alternative: financing beyond first purchase under a traditional arrangement.
- Global cap on commitments:
  - Staff preference: review experience if use reaches perhaps SDR 30 billion rather than a fixed cap.
- SRF linkage:
  - Establishing RAL as part of SRF implies relevance only for members with capital market access and application of SRF charges (300–500 basis points for amounts above 100 percent of quota) and maturities (2½–3 years on an obligations basis).
- Commitment fee:
  - Proposal to maintain existing structure of fees (reduced in 2000) at least initially.
- Sunset clause:
  - Staff does not recommend; if desired, suggest 8 to 10 years.

### Rationale, Distinctions, and Outreach
- Rationale:
  - RAL intended to prevent crises rather than contain them; complements countries’ crisis prevention and reduces need for reserve accumulation.
  - Draws lessons from the Contingent Credit Lines (CCL) but targets countries with strong fundamentals yet remaining vulnerabilities and allows immediate drawing if crisis emerges and program on track.
- Distinction from SBAs and precautionary SBAs:
  - RAL approved for members with no immediate balance of payments need; not expected to need to use Fund resources.
  - Members qualifying would not have significant need for policy adjustment or reform, though expected to reduce remaining vulnerabilities.
- Outreach summary:
  - Officials: merit in prevention instrument; importance of immediate drawing and strong safeguards; suggestions for longer duration, less frequent reviews, and access above 300 percent of quota; some concerned commitment fee might reduce demand.
  - Market participants: mixed views; emphasized automaticity/credibility of signaling; 300 percent of quota seen as strong signal but potentially low relative to reserves or rollover needs; mixed views on commitment fees.

### RAL Framework — Key Features (Box 2 summary)
- Objectives: reinforce strong policies, reduce likelihood of capital account crises, allow members to reduce reliance on self-insurance.
- Qualification: members with strong macroeconomic policies, sustainable debt, transparent reporting, proven policy credibility, and progress reducing vulnerabilities; assessed at member’s request.
- Monitoring: member presents policy framework with quarterly quantitative indicators meeting standards required for drawings in upper credit tranches; semi-annual Board review; no performance criteria except standard continuous criteria on exchange and trade restrictions; qualification interrupted after a fixed date if review not completed.
- Financing and terms:
  - Financing proposed at 300 percent of quota with full amount available at outset if crisis emerges and program on track.
  - Proposed as part of SRF: SRF charges and maturities apply.
  - Arrangement duration: one year; series of RALs not discouraged.
- Comparison with CCL:
  - RAL: immediate drawing of 300 percent of quota for qualifying countries; no contagion requirement for drawings.
  - CCL: required limited “activation” Board review before drawing and smaller upfront drawings—normally one-third of access in expected range of 300–500 percent of quota; limited to narrow set of members with very strong fundamentals and required contagion-related crises for drawings.

### Qualification — Criteria, Assessment, and Exclusions
- Purpose: ensure transparent and disciplined assessment that member’s macro position is strong and commitment to reducing vulnerabilities is credible; justify front-loaded access and limit moral hazard.
- Moral hazard control:
  - Selectivity through substantive qualification criteria; end contingent support at mid-year reviews if policies deteriorate or fail to respond.
  - Under RAL creditors and debtors have assurance that a pre-specified amount of financing would be available for six months if needed.
- Directors’ guidance:
  - Favor objective standards combined with discretion; little support for automatic assessment.
  - Quantitative criteria and benchmarks strengthen transparency, but specific thresholds difficult to define.
- Four qualification criteria (Box 4):
  1. No need:
     - At approval, member not expected to need to use Fund resources; excludes members needing exceptional balance of payments financing.
  2. Good policies:
     - Member pursued and remains committed to strong macroeconomic management and policies to reduce remaining vulnerabilities; forward-looking economic and financial program with quantified framework for period covered by RAL.
  3. Sustainable debt:
     - Rigorous debt sustainability analysis indicates high probability debt will remain sustainable; assessment covers debt evolution, rollover and financing requirements under scenarios and stress tests.
  4. Transparency:
     - Commitment to transparent economic data reporting; subscription to Special Data Dissemination Standard and satisfactory progress; work to meet codes of transparency; intention to publish related reports and forward-looking program.
- Staff assessment elements (criterion 2 and related):
  - Draws on Fund surveillance, last Article IV consultation; considers vulnerabilities, policy strength and reactions, and credibility.
  - Quantitative indicators and comparators for emerging markets and all market access countries; prevailing market sentiment (bond spreads, CDS).
  - Indicators listed by sector:
    - Real economy: real GDP growth, inflation.
    - Public sector: overall fiscal balance, gross public debt, short-term public debt, foreign-currency linked debt (all as proportion of GDP).
    - Financial sector: non-performing loans, foreign currency loans, capital-adequacy ratios, credit-to-GDP ratios; Basle Core Principles adherence and FSAP participation.
    - Corporate sector: corporate balance sheet vulnerability indicators as available.
    - External sector: reserve coverage of short-term debt, gross external debt, gross financing requirements, current account deficit, indicators of competitiveness including real exchange rate; evaluation considers exchange rate regime choice.
  - Policy reaction assessment framed around:
    - Appropriate response to recent (last 2–3 years) adverse shocks;
    - Credibility of macroeconomic and structural policies to reduce key vulnerabilities;
    - Institutional and political capacity to implement strong policies looking ahead.
- Circumstances generally precluding qualification (non-exhaustive):
  - Debt unsustainable or need for exceptional financing.
  - Exchange rate pegged and significantly overvalued.
  - Need for substantial macroeconomic policy adjustment.
  - Substantial unfinished reform agenda to address vulnerabilities.
- Links and timing:
  - Approval of RAL should not preclude participation in Fund Financial Transactions Plan (FTP) and RAL not grounds for FTP exclusion.
  - Member may request RAL anytime it meets qualification criteria; assessments and related travel could be conducted at Article IV consultations; semi-annual RAL review could coincide with Article IV.
- Exceptional Access Framework:
  - Any RAL request subject to exceptional access requirements; for members not in a capital account crisis and with market access, the first and third exceptional access criteria would not be relevant.
  - Procedures including early Board involvement and increased reporting apply.

### Arrangement Length, Renewal, and Monitoring
- Arrangement length:
  - August framework: one-year renewable arrangement to limit risk of material change and provide graceful exit.
  - Longer period achievable via series of successor RALs; some Directors favored two to three years initial arrangement; staff not favoring very long arrangement but flexibility up to 18 months or two years may be considered.
  - Alternative rolling structure:
    - Board approves a twelve-month arrangement.
    - At semi-annual review, member could request six-month extension so arrangement continues to cover twelve months ahead; request requires updated policy document with quarterly targets.
    - Maximum limit: three years for a RAL arrangement, after which a new RAL must be requested.
- Monitoring structure (preferred):
  - Semi-annual reviews based on authorities’ forward-looking economic program; reviews verify macroeconomic policies remain appropriate and progress in reducing vulnerabilities.
  - Member retains right to draw immediately so long as reviews are completed by scheduled date; presumption review completed where no material deviations and forward-looking assessment indicates policies remain supportive.
  - Reviews scheduled when mid-year (quarterly) indicator data expected to be available.
  - Advantage: avoids “black-out” periods inherent in SBAs where availability suspended while data confirms performance criteria; continuous access preserved up until scheduled completion date of semi-annual review.
  - Economic program may include monitorable structural milestones as needed.

### Alternative Monitoring Structures Considered (Section 21)
- Alternatives:
  - Different time frames for reviews.
  - Activation review at time of request for a purchase (as under CCL).
  - Monitoring against performance criteria (quarterly or semi-annually).
  - Ad hoc review triggering termination of access under certain conditions.
- Trade-offs:
  - Activation review provides additional safeguards but reduces perception of readily available financing.
  - Performance criteria would block drawings on failure and require waivers; would make RAL less differentiated from precautionary SBAs and introduce black-out periods.
  - Ad hoc reviews allow suspension in case of flagrant departure but increase uncertainty and require robust definition of “flagrant departure”.
- Staff view:
  - Tends to favor original RAL structure with automatic access after approval and semi-annual review monitoring to balance safeguards and confidence resources available.

### Post-drawing Review and Subsequent Financing
- Immediate post-drawing review to consider circumstances and authorities’ policies; to take place shortly after drawing.
- Requests for further assistance likely better handled in separate subsequent Board discussion.
- Additional financing would be provided under the SRF (most likely) or a stand-by arrangement in credit tranches, with phased drawings and conditionality similar to existing arrangements.

### Access Levels, Frontloading, and Options for Additional Access
- Key feature: large access up front to reinforce confidence that resources available on timely basis.
- Staff proposal: uniform access level of 300 percent of quota.
- Alternative favored by some: range of 300 to 500 percent of quota to provide more flexibility.
- Options for additional access after first purchase:
  - Second purchase under RAL: commitment could include a second purchase perhaps 100–200 percent of quota; first purchase prompts Board review to consider policy response and release of subsequent purchases.
  - Additional financing under new arrangement: RAL would include only first purchase; further financing requested under a new SRF-supported program or stand-by.

### Fund Liquidity, Global Cap, and SRF Linkage
- Global cap on commitments:
  - Some Directors favored cap perhaps SDR 50 billion; others concerned about fairness and adherence.
  - Staff suggestion: review RAL if commitments reach perhaps SDR 30 billion.
- Establishing RAL as part of SRF:
  - Directors generally favored.
  - Required amendment: SRF Decision to allow RAL approval addressing SRF’s special balance of payments need.
  - Implications:
    - RAL resources drawable only for SRF’s special balance of payments need (defined in paper).
    - RAL relevant only for members highly integrated or integrating into capital markets.
    - Charges and maturities:
      - Financing up to exceptional access limit (up to 100 percent of quota, depending on outstanding resources) made available with credit tranche rates and repurchase periods.
      - Remaining amounts carry SRF surcharge and maturity structure.
      - Current SRF surcharge: time-based, starting at 300 basis points and rising to 500 basis points in six-monthly steps.
      - Resources expected to be repaid within 2-2½ years, extendable by up to six months on request; required to be repaid 2½–3 years after a purchase.
    - Upcoming follow-up paper will examine surcharge structure for large-scale access; changes would apply to RAL if part of SRF.

### Commitment Fees, Costs, and Fee Recommendations
- Current commitment fee structure (uniform across all GRA arrangements):
  - 25 basis points for the first 100 percent of quota.
  - 10 basis points for access above that level.
  - For RAL arrangement with access of 300 percent of quota, average fee equals 15 basis points per year.
- Considerations:
  - Commitment fee should reflect Fund’s costs in providing GRA resources; staffing and administrative costs for RAL higher than surveillance but similar to precautionary SBAs.
  - Cost of pre-commitment difficult to quantify.
  - Commitment fees provide some income but should not be set to address Fund’s current income situation.
- Staff suggestion:
  - Leave commitment fees unchanged at current levels for the time being.
  - Evidence: Fund’s commitment fees slightly lower than typical bank credit line fees (20–50 basis points) and may be substantially lower than implied cost of holding reserves.
  - Opportunity cost measures cited:
    - Average opportunity cost of holding reserves over 2002–06 measured against the U.S. term premium was about 180 basis points.
    - Opportunity cost estimated as full difference between five-year average emerging market yields and U.S. short-term treasuries was about 440 basis points.
  - Any change to commitment fee structure requires decision by 70 percent majority of total voting power.
  - Expectation fee structure could be reviewed as experience is gained.

### Sunset Clause, Voting Majorities, and Institutional Next Steps
- Sunset clause:
  - Staff would not favor inclusion; if included suggest 8–10 years to allow sufficient experience (CCL had five-year sunset).
- Voting majorities:
  - Establishing special facility with special repurchase periods requires 85 percent majority of total voting power (Article V, Section 7(d)).
  - Establishing special rate of charge requires 70 percent majority of total voting power.
  - Amendment of special facility not changing balance of payments problem, repurchase period/rate or duration requires only majority of votes cast (Article XII, Section 5(c)).
  - Establishing RAL as part of SRF: only majority of votes cast required.
  - Establishing RAL for different balance of payments problem with special repurchase period or special rate of charge would require qualified majority (85 percent or 70 percent respectively).
- Next steps:
  - Prepare short paper setting out steps required to establish RAL, including modifications to existing decisions and policies.
  - Options: establish instrument now to facilitate member requests, or wait until concrete interest emerges to refine design with potential users’ input.

### RAL and the Private Sector
- Private contingent credit lines for sovereigns limited and generally unsuccessful in providing sufficient or attractively priced crisis insurance in past cases (Indonesia, Mexico, Argentina examples).
- Private providers hedge exposure, potentially reducing benefits and exacerbating crises; banks would have to charge high ex ante fees to cover mark-to-market losses.
- RAL intended to complement, not compete with, private sector.
- Footnote analytics on corporate contingent credit line parallels provided historical fee and spread figures: participation fee typically one basis point; annual undrawn fee 8–13 basis points (2001); interest on drawn balances 73 basis points in 2001 (53 in 2002) over LIBOR at 3.8 percent (2.2 percent).

*Source: IMF Executive Summary and staff paper excerpts — "_021307 - Executive Summary" and selected sections on RAL design.*

### Executive Summary ......................................................................................................

### _021307 - Executive Summary ......................................................................................................

### Executive Summary — Key Findings and Purpose
- The Reserve Augmentation Line (RAL) is a proposed new liquidity instrument aimed at market access countries to: reinforce strong policies, reduce the likelihood of capital account crises, and offer an alternative to costly self-insurance.
- The RAL was discussed in an August 2006 Executive Board seminar and follows a call in the Medium-Term Strategy to strengthen Fund support for members’ crisis-prevention efforts.
- Outreach to official sector representatives and market participants found general merit in a prevention-focused instrument; market participants emphasized the importance of the RAL’s commitment and signaling framework.
- The paper addresses specific design issues raised in the August seminar: qualification criteria, monitoring structure, access levels and terms, links to other Fund facilities, and links to the private sector.

### Main Design Conclusions (from Executive Summary)
- Qualification: access only for members with sound fundamentals (though with some remaining vulnerability), strong policy credibility, forward-looking commitments to reduce vulnerabilities, and sustainable debt. Qualification would use a range of quantitative indicators of vulnerability to capital account crises plus judgment on policy quality and likely reaction to shocks.
- Monitoring: favors safeguards based on robust qualification standards and semi-annual reviews of macroeconomic policies and progress in reducing vulnerabilities; considers structures including scheduled reviews, performance criteria, and ad hoc reviews.
- Access: August paper suggested an initial purchase of 300 percent of quota, potentially followed by a second purchase of 100–200 percent of quota subject to post-drawing review; alternatively, financing beyond the first purchase could be considered under a traditional arrangement.
- Global cap on commitments: instead of a fixed cap, review experience if use reaches a particular level, perhaps SDR 30 billion.
- Establishing RAL as part of the SRF: implications include (i) relevance only for members with access to international capital markets and (ii) application of SRF charges (300–500 basis points for amounts above 100 percent of quota) and maturities (2½–3 years on an obligations basis).
- Commitment fee: proposal to maintain, at least initially, the existing structure of fees (reduced in 2000 to reduce disincentives to use the CCL).
- Sunset clause: staff does not recommend a sunset clause; if desired, a relatively long horizon of 8 to 10 years is suggested.

### Rationale and Context
- Purpose: RAL intended to prevent crises rather than contain them, complementing countries’ own crisis prevention while reducing the need for costly reserve accumulation (Box 1: RAL and Risk Pooling).
- Differences from prior instruments: RAL draws on lessons from the Contingent Credit Lines (CCL) but targets countries with strong fundamentals yet remaining vulnerabilities, and would allow an immediate drawing if a capital account crisis emerged and the program was on track.
- Distinction from Stand-By Arrangements (SBA): unlike SBAs in the credit tranches aimed at members with immediate balance of payments needs, RAL would be approved for members with no immediate balance of payments need and not expected to need to use Fund resources.
- Distinction from precautionary SBAs: members qualifying for the RAL would not have a significant need for policy adjustment or reform, though they would be expected to reduce remaining vulnerabilities.

### Outreach — Views Summarized
- Official sector representatives:
  - Many saw merit in an instrument aimed at prevention; stressed need for immediate drawing of a meaningful amount when required and for strong safeguards to minimize moral hazard.
  - Demand could be dampened by the favorable global market environment, but officials judged this a good time to discuss prevention tools.
  - Some suggested longer duration, less frequent reviews, and access above 300 percent of quota (noting the CCL’s 300–500 percent range); some were concerned that the standard commitment fee might reduce demand.
- Financial market participants:
  - Mixed views; many neutral or positive, some doubted necessity given market developments.
  - Emphasized the importance of automaticity/credibility in the instrument’s signaling and commitment features.
  - Considered 300 percent of quota a strong signal but potentially low relative to reserves or rollover needs; some worried about spread compression and overborrowing in abundant liquidity periods.
  - On pricing, views mixed about commitment fees; some saw existing structure as reasonable, others thought lower fees might be needed.

### RAL Framework — Key Features (Box 2 summary)
- Objectives: reinforce strong policies, reduce likelihood of capital account crises, allow members to reduce reliance on self-insurance.
- Qualification: available to members with strong macroeconomic policies, sustainable debt, transparent reporting, proven credibility in policy implementation, and making progress to reduce vulnerabilities; qualification is assessed at the member’s request.
- Monitoring: member presents a policy framework including quarterly quantitative indicators that meet standards required for drawings in the upper credit tranches; no performance criteria except standard continuous performance criteria on exchange and trade restrictions; performance monitored by staff with a formal semi-annual Board review and publication of related documents; qualification would be interrupted after a fixed date if the review could not be completed.
- Financing and Terms: financing proposed at 300 percent of quota with full amount available at outset if a crisis emerges and the program is on track; RAL proposed to be established as part of the Supplemental Reserve Facility (SRF) so SRF charges and maturities apply; arrangement would be one year in duration and a series of several RALs would not be discouraged.
- Comparison with the CCL: RAL would provide an immediate drawing of 300 percent of quota for qualifying countries; CCL required a limited “activation” Board review before drawing and involved smaller upfront drawings—normally one-third of access in the expected range of 300–500 percent of quota; CCL was limited to a narrow set of members with very strong fundamentals and required contagion-related crises for drawings—RAL would not include that requirement.

### Qualification — Design Principles and Tradeoffs
- Qualification must balance selectivity (to protect Fund resources and limit moral hazard) with practical accessibility for countries that face vulnerabilities but maintain strong policies.
- Proposed approach: use a range of quantitative indicators of vulnerability to capital account crises together with judgment on policy quality and the member’s likely response to shocks.
- Qualification would be member-requested (i.e., no automatic assessments).

### Monitoring — Preferred Structure
- Considered options include scheduled reviews, performance criteria, and ad hoc reviews.
- Paper favors safeguards based on robust upfront qualification plus semi-annual reviews of macroeconomic policies and progress in reducing vulnerabilities.
- Staff monitoring would include quarterly quantitative indicators and publication of semi-annual review documents; interruption of qualification if reviews cannot be completed within a fixed date.

### Access, Terms, and Other Issues
- Initial access: 300 percent of quota available at the outset under the design in the August paper.
- Follow-on access: could include a second purchase of 100–200 percent of quota subject to post-drawing review; alternative—treat additional financing under a traditional arrangement.
- SRF linkage: making RAL part of the SRF implies SRF charges of 300–500 basis points for amounts above 100 percent of quota and maturities of 2½–3 years on an obligations basis.
- Commitment fee: maintain existing fee structure (reduced in 2000) at least initially, to avoid disincentives to use contingent instruments.
- Global cap: rather than a rigid cap, staff suggests reviewing experience if aggregate use reaches perhaps SDR 30 billion.
- Sunset clause: staff does not recommend; if adopted, suggest 8 to 10 years.

### RAL and the Private Sector
- The RAL would complement, not compete with, the private sector.
- Private contingent credit lines are unlikely to mitigate crises meaningfully; RAL can stabilize directly by providing fresh and unhedged resources at the time of crisis and indirectly through expectations/signaling.

### Institutional and Procedural Next Steps (from Executive Summary)
- Following Board discussion, a short paper could set out the steps required to establish a new instrument, including modifications to existing decisions and policies.
- Possible approaches:
  - Establish the instrument now to facilitate members making requests.
  - Wait until concrete interest emerges so potential users can input on final design, reduce risk that a new instrument is never used, and inform Board decision-making.

*Source: IMF Executive Summary — "_021307 - Executive Summary ......................................................................................................"*

### 8.      The qualification criteria should provide for selective use of the RAL. Carefully

### _021307 - 8.      The qualification criteria should provide for selective use of the RAL. Carefully

### Purpose and importance of qualification criteria
- Qualification criteria are essential for a transparent and disciplined assessment of RAL requests, ensuring a member’s current macroeconomic position is strong and that its commitment to reducing remaining vulnerabilities is credible.
- Well-designed criteria justify front-loaded access and help limit the risk of moral hazard.
- The instrument should be useful to members with strong policy frameworks but with some remaining vulnerability to capital account crisis.

### Moral hazard (Box 3)
- Concerns:
  - Fund lending can distort incentives—debtor moral hazard (members adopt excessively risky policies) and creditor moral hazard (private creditors underprice lending risks).
  - Moral hazard is especially relevant where a member is perceived as “too big to fail.”
- Controlling moral hazard:
  - Fund financing has not always been forthcoming; the Fund has exercised selectivity and interrupted support when program success was unlikely.
  - Creditors have sustained important losses in some crises, encouraging careful risk assessments.
  - The enormous cost of a crisis to the member, even with Fund financing, deters imprudent policies.
  - Fund surveillance is intended to ensure members pursue sound policies.
- Moral hazard and the RAL:
  - Selectivity through substantive qualification criteria ensures the RAL is available only to members pursuing sound policies aimed at reducing vulnerability and committed to them.
  - The RAL’s ex ante selectivity serves to encourage sound policies before a crisis, helping to prevent crises and limit moral hazard.
  - The Fund should end contingent support at mid-year reviews if policies deteriorate or fail to respond.
  - Under the RAL, creditors and debtors would have assurance that a pre-specified amount of financing would be available for six months, if needed, as they do for shorter periods in a precautionary stand-by arrangement.
- Further work:
  - A survey and empirical updates are provided in “Fund Financial Support and Moral Hazard: Analytics and Empirics”.

### Guidance from Directors and approach to standards
- Directors favored objective standards combined with discretion to reflect diverse country situations; little support for automatic assessment.
- Quantitative criteria and benchmarks strengthen transparency, predictability, and even-handedness, but specific thresholds are difficult to define given disparities among members and changing global conditions.
- Suggested approach: assess a member’s performance against a standard set of quantitative indicators, with comparators for emerging markets and all market access countries.

### The four qualification criteria (Box 4)
1—No need.
- At the time of approval, the member is not expected to need to use Fund resources.
- Ensures the RAL is not used where financing need is immediate; members using other exceptional balance of payments financing would not qualify.

2—Good policies.
- The member has pursued and remains committed to strong macroeconomic management and to policies directed at reducing remaining vulnerabilities, including balance sheets and the financial sector.
- Policies are described in a forward-looking economic and financial program prepared by the member that would include a quantified framework for the period covered by the RAL.

3—Sustainable debt.
- A rigorous debt sustainability analysis indicates that there is a high probability that the debt will remain sustainable.
- Assessment covers evolution of the level of debt and rollover and financing requirements under various scenarios and stress tests, providing reasonable assurances debt will remain sustainable even in the event of a crisis that could lead to a drawing under the RAL.

4—Transparency.
- The member has demonstrated a commitment to transparent reporting of economic data.
- The member should have subscribed to the Special Data Dissemination Standard and be judged to be making satisfactory progress toward meeting its requirements.
- The member should be working to meet codes of transparency in fiscal, monetary and financial policies.
- Members requesting the RAL should indicate intention to publish promptly all related reports, along with their forward-looking economic and financial program, including a quantified framework for the period covered.

### Elaboration of the staff assessment (criterion 2 and related elements)
- The staff assessment would draw on the Fund’s surveillance, including the last Article IV consultation, and consider vulnerabilities, strength of policies and policy reactions, and credibility of commitment.
- Elements of the staff assessment:
  - An assessment of the macroeconomic situation and vulnerabilities, analogous to the staff’s vulnerability exercise, referencing key quantitative indicators with comparators for emerging markets and all market access countries, and prevailing market sentiment (e.g., bond spreads, credit default swaps).
    - Real economy: real GDP growth, inflation;
    - Public sector: overall fiscal balance, gross public debt, short-term public debt, and foreign-currency linked debt, all as a proportion of GDP;
    - Financial sector: non-performing loans, foreign currency loans, capital-adequacy ratios and credit-to-GDP ratios; strength of banking system and bank supervision, adherence to the Basle Core Principles for Banking Supervision and participation in the FSAP;
    - Corporate sector: Indicators of corporate sector balance sheet vulnerabilities to the extent available;
    - External sector: reserve coverage of short-term debt, gross external debt, gross financing requirements, current account deficit, and indicators of competitiveness including the real exchange rate; evaluation takes into account the member’s choice of exchange rate regime.
  - An assessment of policies and policy reactions, framed around three policy aspects:
    - First, appropriate response to recent (last 2–3 years) adverse shocks;
    - Second, credibility of macroeconomic and structural policies to achieve reduction in key vulnerabilities;
    - Third, adequate institutional and political capacity to implement strong policies looking ahead.

### Circumstances that would generally preclude qualification
- A member would not be expected to qualify for the RAL if any of the following apply (list not exhaustive):
  - The debt is unsustainable or the member has a need for exceptional financing;
  - The exchange rate is pegged and considered significantly overvalued;
  - The member has a need for substantial macroeconomic policy adjustment;
  - The member has a substantial unfinished reform agenda to address vulnerabilities.
- Final assessments require judgment tailored to each member’s circumstances; procedures for early Board involvement would inform the Board early on qualification assessments.

### Link to the Fund’s Financial Transactions Plan (FTP)
- Approval of a RAL arrangement should not preclude participation in the FTP, or vice versa.
- Selection for the FTP is based on a judgment about the strength of members’ balance of payments and reserves positions.
- Under current practice, a member is excluded from FTP consideration if it has a drawing arrangement; a precautionary arrangement in the credit tranches is not grounds for exclusion.
- An arrangement under the RAL would also not be grounds for exclusion from the FTP; the RAL may be suitable for some current FTP participants.

### Timing of requests and relation to Article IV consultations
- A member could request a RAL at any time it meets the qualification criteria.
- Ideally, qualification assessments and RAL-related travel could be conducted at the time of the Article IV consultation to keep exploration low key.
- Semi-annual RAL review could also be conducted at the time of the Article IV consultation; no requirement to link RAL requests or reviews to Article IV consultations.

### Link to the Exceptional Access Framework
- Any request for a RAL would be subject to the requirements under the exceptional access framework.
  - Exceptional access criteria: requests must be justified in light of the four exceptional access criteria (Box 5).
  - For members not in a capital account crisis and with market access, the first and third criteria would not be relevant.
  - Procedures and reporting requirements, including early Board involvement and increased reporting, apply as set out in the exceptional access framework.

### Length of arrangement and renewal options
- The August framework focused on a one-year renewable arrangement to limit risk of material change in policies or circumstances and provide a more graceful exit.
- A longer period could be achieved via a series of successor RAL arrangements if the member continues to meet qualification criteria.
- Some Directors and outreach participants favored option of a longer initial arrangement, for example two to three years; staff would not favor a very long arrangement but some flexibility up to 18 months or two years may be considered.
- Difference from SRF: SRF financing can be committed only for up to one year; RAL could justify longer initial arrangements given its precautionary nature.
- Alternative option: one-year arrangement extended at mid-year review to cover twelve months ahead:
  - Board initially approves a twelve-month arrangement.
  - At semi-annual review, member could request a six-month extension so the arrangement continues to cover twelve months ahead, with another semi-annual review scheduled six months ahead.
  - Request for extension must be accompanied by an updated policy document with quarterly targets for the coming twelve months.
  - Maximum limit for a RAL arrangement of three years, after which a new RAL must be requested.

### Monitoring structure
- Monitoring via semi-annual reviews based on the authorities’ forward-looking economic program; reviews verify macroeconomic policies remain appropriate and progress in reducing vulnerabilities.
- Member retains right to draw immediately so long as reviews are completed by scheduled date; presumption that review is completed where no material deviations and forward-looking assessment indicates policies remain supportive.
- Requirements for completing reviews must be sufficiently clear to assure members when drawings could be made and when Fund could not complete reviews.
- Economic program could include monitorable structural milestones as needed.
- Advantage of review-based monitoring: avoids “black-out” periods inherent in stand-by arrangements where financing availability is suspended while data becomes available to confirm observance of performance criteria.
  - Under the review-based structure, continuous access to Fund financing is preserved up until the scheduled completion date of the semi-annual review; if completed on time, effectively no interruption in access over the arrangement period.
  - Reviews should be scheduled when data on mid-year (quarterly) indicators is expected to be available.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2007/_021307.pdf*

### 21.      Alternative monitoring structures could be considered. Alternatives could be

### 21.      Alternative monitoring structures could be considered. Alternatives could be

### Alternative monitoring structures
- Alternatives could be based on (i) different time frames for reviews, (ii) incorporation of an activation review at the time of a request for a purchase (as under the CCL), (iii) monitoring against performance criteria, or (iv) a structure for ad hoc review, which could trigger termination of access under certain conditions.
- Different frequency of reviews:
  - Periodic reviews should be sufficiently frequent to meet safeguard needs, without introducing too high a degree of uncertainty about the availability of financing or creating possible negative exit signals.
  - Extensive gaps between reviews could introduce excess risks to Fund resources.
- Activation review:
  - A structure where the request for purchase needs Board approval, such as the activation review used under the CCL, would ensure discussion of appropriate policy response and provide additional safeguards.
  - Drawback: uncertainty created by an activation review would reduce the perception that financing was readily available, making the RAL less useful for liquidity support or as a signal.
- Performance criteria:
  - The RAL did not include performance criteria other than the standard continuous criteria related to exchange and trade issues.
  - Alternative: include performance criteria (quarterly or semi-annually) against which the member’s performance would be assessed.
  - Important difference: failure to meet a performance criterion would block drawings and would require a waiver from the Executive Board; under the RAL design, deviation from quantified indicators would be considered in the overall context of the semi-annual review.
  - A structure with performance criteria would be less differentiated from precautionary stand-by arrangements in the credit tranches and would introduce problems of black-out periods.
- Ad hoc review triggered by material deviations:
  - Ad hoc reviews could be triggered by material deviations from the member’s program and complement semi-annual (or less frequent) reviews.
  - Would allow suspension of the RAL in case of a flagrant departure from the policy framework and strengthen protection for the Fund against large, unexpected, and rapid changes.
  - Costs: increased uncertainty for the member about availability of financing in a crisis; difficulty defining “flagrant departure” robustly across members and over time; need for a decision-making framework.

### Staff view on monitoring structure
- On balance, staff tends to favor the original RAL structure with automatic access after approval and a monitoring structure based on semi-annual reviews.
- Rationale: balances strong safeguards and confidence that resources would be available.

### Post-drawing review and subsequent financing
- A drawing under the RAL would prompt an immediate post-drawing review to consider the circumstances of the drawing and the authorities’ policies going forward.
- The review should take place shortly after the drawing; requests for further assistance would likely be better handled in a separate, subsequent Board discussion.
- Any additional financing would be provided under the SRF (most likely) or a stand-by arrangement in the credit tranches, with phased drawings and a conditionality structure similar to existing arrangements.
- At that stage, the right combination of financing and policy adjustment would need to be considered, taking into account financing from other official and private sources.

### Access: frontloading and levels
- Key feature: provision of large access up front to reinforce confidence that resources would be available on a timely basis.
- Staff proposal: a uniform level of access of 300 percent of quota.
- Alternative favored by some: a range of 300 to 500 percent of quota to provide more flexibility and link access to members’ specific circumstances.
- Staff preference: uniform 300 percent of quota, consistent with the access norm under the CCL (but more frontloaded in the RAL).

### Options for additional access after first purchase
- Two broad options for structuring access after the first (automatic) purchase:
  - Provide for a second purchase under the RAL:
    - Commitment could include a second purchase, perhaps 100-200 percent of quota.
    - First purchase of 300 percent of quota available automatically (if program on track and member hit by covered capital account shock).
    - First purchase would prompt Board review to consider policy response, set conditionality, and decide release of the second purchase and any subsequent purchases.
    - Advantage: identifies larger amount of access from the start and could encourage continued dialogue; drawback: 100-200 percent of quota availability may not decisively affect countries’ engagement decisions.
  - Provide additional purchases under a new arrangement:
    - RAL would only include the first purchase; further financing would be requested under a new program supported by an SRF (or a stand-by arrangement in the credit tranches).
    - Advantage: keeps RAL simple and focused on crisis prevention; magnitude of additional need would be clearer after a crisis hits.

### Fund liquidity and global cap on commitments
- A global cap on commitments under the RAL could be considered as a guideline for review rather than a hard limit.
- Views:
  - Some Directors saw merit in a global cap, perhaps at SDR 50 billion, to ensure sufficient resources remain available for traditional arrangements.
  - Others concerned about fairness (“first come first served”) and practical adherence.
- Staff suggestion: if commitments under the RAL reach a certain level, for example SDR 30 billion, the RAL would be reviewed to consider experience, design, use, and how to proceed.

### Establishing the RAL as part of the Supplemental Reserve Facility (SRF)
- Directors generally favored establishing the RAL as part of the SRF.
- Required amendments: the SRF Decision would need to be amended to allow approval of an arrangement under the RAL to address on a precautionary basis the SRF’s special balance of payments need.
- Implications of establishing RAL as part of SRF:
  - Circumstances for drawing:
    - RAL resources could only be drawn for the SRF’s special balance of payments need defined as: “the member is experiencing exceptional balance of payments difficulties due to a large short-term financing need resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and the member's reserves, if there is a reasonable expectation that the implementation of strong adjustment policies and adequate financing will result, within a short period of time, in an early correction of such difficulties.”
    - RAL relevant only for members highly integrated, or in the process of integrating, into capital markets.
  - Charges and maturities:
    - Financing under the RAL up to the exceptional access limit (up to 100 percent of quota, depending on whether the member has outstanding resources) would be made available with credit tranche rates of charge and repurchase periods.
    - Remaining amounts would carry the same surcharge and maturity structure as the SRF.
    - Current SRF surcharge structure is time-based, starting at 300 basis points and rising to 500 basis points in six-monthly steps.
    - Resources are expected to be repaid within 2-2½ years, but this expectation can be extended by up to six months on request; resources are required to be repaid 2½–3 years after a purchase.
    - Upcoming follow-up paper on charges and maturities will examine surcharge structure for large-scale access; any changes would apply to the RAL if established as part of the SRF.

### Commitment fees
- Current commitment fee structure (uniform across all GRA arrangements):
  - 25 basis points for the first 100 percent of quota.
  - 10 basis points for access above that level.
  - For a RAL arrangement with access of 300 percent of quota, this gives an average fee of 15 basis points per year.
- Considerations:
  - Commitment fee should reflect Fund’s costs in providing GRA resources.
  - Staffing and administrative costs for approval and monitoring of RAL higher than for a surveillance case, but probably similar to a precautionary stand-by arrangement.
  - Cost associated with pre-commitment of Fund resources is difficult to quantify.
  - Commitment fees provide some income but should not be set to address the Fund’s current income situation.
- Staff suggestion:
  - For the time being, leave commitment fees unchanged at current levels.
  - Evidence suggests Fund’s commitment fees would be slightly lower than the 20-50 basis points charged for a typical bank credit line and may be substantially lower than the implied cost of holding reserves.
  - Average opportunity cost of holding reserves over 2002–06 measured against the U.S. term premium was about 180 basis points; opportunity cost estimated as the full difference between five-year average emerging market yields and U.S. short-term treasuries was about 440 basis points.
  - Any change to the commitment fee structure requires a decision taken by a 70 percent majority of the total voting power.
  - Expectation that fee structure could be reviewed as experience is gained.

### Sunset clause
- Considerations:
  - Potential benefit: ensure Fund does not maintain instruments that are not used.
  - Disadvantage: sunset could arrive before sufficient testing; forced termination could be seen as failure.
- Staff view: would not favor including a sunset clause.
- If included, staff would recommend setting it far enough out, say, 8–10 years, to ensure sufficient experience with market cycles.
- The CCL had a five-year sunset clause.

### Voting majorities
- Legal framework:
  - Establishing a special facility with special repurchase periods requires an 85 percent majority of total voting power (Article V, Section 7(d)).
  - Establishing a special rate of charge requires a 70 percent majority of total voting power.
  - Amendment of a special facility that does not change the balance of payments problem being addressed, or the repurchase period/rate of charge, and does not extend duration where a sunset exists, requires only a majority of votes cast (Article XII, Section 5(c)).
- Implications for RAL:
  - Establishing the RAL as part of the SRF: only a majority of votes cast would be required (RAL addresses same balance of payments problem and no changes proposed to SRF special charges and repurchase period).
  - Establishing the RAL for a different balance of payments problem: a qualified majority would be required if the RAL had a special repurchase period (85 percent) or a special rate of charge (70 percent).

### RAL and the private sector
- Private sector and member countries have not found an instrument that provides reliable crisis-contingent financing.
- Any new Fund facility should complement and not compete with private sector instruments.
- Private sector reluctance:
  - Reluctant to supply insurance to sovereigns that would provide sufficient and reliable resources to stem a crisis at rates attractive to countries during periods of stress.
  - Providing a fixed interest rate contingent financing that would be drawn when market rates are increasing would imply losses for banks which mark to market; banks would have to charge ex ante commitment fees at levels unattractive to countries relative to self-insurance through reserve accumulation.
  - Private sector may offset its exposure from contingent financing, limiting benefits to the country.
- Separate issue: pledging RAL resources to a private lender could be covered under negative pledge clauses in sovereign debt contracts.

*Source: Excerpt from IMF staff paper (RAL design discussion).*

### 35.      It is important to consider the relationship between the RAL and other Fund

### _021307 - 35.      It is important to consider the relationship between the RAL and other Fund

### Relationship between the RAL and precautionary stand-by arrangements
- Precautionary stand-by arrangements in the credit tranches have been a relatively popular form of engagement with the Fund and have had a long and successful track record.
- Concern: an instrument like the RAL could be more attractive than a precautionary arrangement and thereby muddy the latter’s signal if it is viewed as a “second-tier” product.
- Some members that have used precautionary arrangements in similar circumstances might qualify for a RAL; it is probably unavoidable that the RAL will be seen as providing the most positive signal for such members.
- Some members may prefer:
  - the lower access (and the associated lower commitment fee) of a stand-by arrangement in the credit tranches, or
  - the monitoring structure of a stand-by arrangement in the credit tranches.

### RAL qualification structure and appropriate use
- The RAL’s qualification criteria are intended to ensure approval only for members in a clearly defined situation:
  - those with strong macroeconomic policies and policy credibility,
  - but with some remaining vulnerability to capital account crisis,
  - and that have a very specific type of potential balance of payments need.
- Well-defined entry criteria can help prevent the use of the RAL where it is not the appropriate instrument.
- The RAL’s qualification structure is crucial to ensuring it is used appropriately while preserving a clear role for precautionary arrangements in the credit tranches.

### Private sector contingent credit lines for sovereigns (Box 6)
- Experience with private contingent credit lines for sovereigns is very limited; in three cases resources were insufficient to stem crises or were offered at rates unattractive to sovereigns.
  - Indonesia drew on a series of private contingent credit lines arranged with mostly Japanese banks during its crisis in 1997. The resources obtained under these credit lines proved too small to reduce effectively the impact of the crisis.
  - Mexico drew on its fixed rate credit lines in 1998. Banks that were marking to market were booking losses as the prevailing market rate increased. Consequently, they offered a variable interest rate on any subsequent facility—making it less attractive to Mexico.
  - Argentina’s central bank entered into repurchase agreements with international banks that would provide temporary liquidity against Argentine Euro bonds. It drew US$1.5 billion in September 2001, but the funds were insufficient in the face of a growing crisis.
- Availability considerations:
  - Banks can provide (non-contingent) syndicated loans that the country might draw at any time.
  - Private providers hedge themselves against losses in a crisis by shorting their exposure, potentially exacerbating the crisis.
  - By contrast, the RAL can act as a stabilizing force by providing fresh and unhedged resources at the time of a crisis.
- Footnote analytics (corporate contingent credit line parallels):
  - participation fee of (typically) one basis points,
  - annual fee on undrawn balance in the 8-13 basis points range (in 2001),
  - interest rate on drawn balances of 73 basis points in 2001 (53 in 2002) over LIBOR at 3.8 percent (2.2 percent).

### Next steps toward establishing the RAL
- A short paper setting out the steps required to establish a new instrument could be prepared soon; this paper would set out the modifications to existing decisions and policies required to create the RAL.
- Creating the instrument could itself lead members meeting the criteria to request it; alternatively, it may be preferable to wait until there is more concrete interest in using the instrument to allow potential users input on final design issues and to reduce the risk that a new instrument is never used.

### Issues for discussion (questions for Directors)
- How would a new liquidity instrument fit within the Fund’s mandate for crisis prevention?
- Do Directors see merit in the outlines of a qualification structure that is based on an analysis of specified objective indicators in a framework that allows for some judgment?
- Do Directors view a monitoring structure based on semi-annual reviews as providing for appropriate safeguards while preserving a strong degree of predictability?
- Do Directors see merit in a uniform access level of 300 percent of quota, or in a range (i.e., 300 to 500 percent of quota)?
- Do Directors see merit in establishing the RAL as part of the SRF?
- Do Directors prefer:
  - a one-year timeframe for each arrangement,
  - a rolling one-year structure, or
  - a more flexible standard of up to two years, with successor arrangements under the RAL not to be discouraged?
- Do Directors see merit in maintaining commitment fees at existing levels, at least initially?
- Do Directors see merit in not including a global cap on commitments under the RAL, but rather that a review should be triggered if access under the RAL exceeds SDR 30 billion?
- Do Directors see merit in excluding a sunset clause that might be counterproductive, or if needed, that it be set at 8-10 years?
- Do Directors have views on the next steps?

*IMF staff paper excerpt on the RAL and its relationship with other Fund instruments*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2007/_021307.pdf_