## A New Facility for Market Access Countries—The Short-Term Liquidity Facility

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### Introduction
- Purpose: Propose a special facility—the Short-Term Liquidity Facility (SLF)—to complement existing IMF instruments by addressing short-term, self-correcting balance of payments needs for members with strong fundamentals and sustained market access.
- Rationale:
  - Recent financial market turmoil produced rapid, cross-border short-term funding disruptions, deleveraging, and contagion, generating external liquidity needs even in emerging market countries with strong policies.
  - Traditional facilities (e.g., Stand-By Arrangements) may be suboptimal for members reluctant to seek Fund financing when policy adjustment is not warranted.
  - The SLF aims to provide large, quick-disbursing liquidity support tailored to members with very strong policies and fundamentals to prevent short-term pressures from escalating into prolonged balance of payments or financial system problems.
- Paper structure and approval:
  - Section II: overview of events the SLF addresses and rationale.
  - Section III: main design features.
  - Section IV: concluding thoughts.
  - Prepared by the Strategy, Policy, and Review Department, the Legal Department, and the Finance Department in consultation with other departments.
  - Approved by Reza Moghadam, Sean Hagan, and Andrew Tweedie.
  - Date: October 24, 2008.

### General considerations
- Target population:
  - Members well-integrated into global capital markets whose sovereign and private sectors have sustained market access at relatively favorable terms.
  - Members with sustainable public domestic and external debt positions and strong policy implementation records.
- Problem addressed:
  - Short-term balance of payments needs arising from external market developments despite strong underlying fundamentals and domestic policies.
  - Liquidity problems expected to be quickly self-correcting with temporary Fund support and continued strong policies.
- Intended benefits:
  - Bolster reserves to defend against temporary capital account outflows.
  - Use announcement of Fund support to boost confidence and reduce incentives for investors to cut exposures.

### Design — High-level principles
- Three guiding principles:
  - Clarity of purpose: Access explicitly limited to short-term, self-correcting BOP pressures arising from external developments, not from domestic policy weaknesses.
  - Tailoring and speed: Premium on speed and simplicity—large, quick disbursing access; streamlined requirements; expedited procedures; no mission prior to Board approval; only ex ante conditionality applied to purchases.
  - Safeguards: Participation restricted to members with very strong policies, sustainable debt, a history of sound policy implementation; strictly limited period over which resources can remain outstanding.

### Design — A. Balance of Payments Problem and Eligibility
- Legal basis: Established pursuant to Article V, Section 3(a).
- Coverage: Exceptional balance of payments difficulties reflected in pressure on the capital account and the member’s reserves judged to be quickly self-correcting given strong policies and fundamentals.
- Eligibility criteria (assessed via bilateral and multilateral surveillance and Article IV consultations):
  - Very strong policies and underlying fundamentals:
    - Solid initial position and a sustained track record of pursuing very strong policies.
    - Policies assessed very positively by the Board in the most recent Article IV consultations.
  - Sustainable debt:
    - Standard Fund debt sustainability analysis of both public domestic and external debt indicates a high probability that both will remain sustainable.
    - Analysis covers evolution of debt levels, rollover and financing requirements under various scenarios and stress tests.
- Typical indicators of strong performers:
  - Sound structural fiscal positions.
  - Low and relatively stable rates of inflation resulting from solid monetary policy implementation.
  - Effective financial sector supervision.
  - Sustainable current account positions.
  - Capital accounts dominated by private flows.
  - History of steady access to capital markets at favorable terms.
  - Relatively comfortable reserve position by standard measures.

### Design — B. Access and Safeguards
- Access:
  - Up to 500 percent of quota, available in the form of outright purchases.
  - Maximum 500 percent of quota would typically be needed given high capital market integration of eligible members and the nature of the BOP problem.
  - Full amount of any purchase must be justified by the member’s actual balance of payments needs.
- Safeguards:
  - Key safeguards: self-correcting nature of the BOP problem; very short repurchase period; strict qualification criteria focused on strong policies and track records.
  - Outright purchases require the Executive Board to conduct its assessment of policies and needs at the time each purchase is to be made.
  - Debt sustainability analysis provides further assurance of the member’s capacity to repay the Fund.
  - Rationale: high-access financing via outright purchases, in the context of very strong fundamentals, would not reduce safeguards relative to arrangements with ex-post conditionality.

### Design — C. Terms and Modalities
- Modality:
  - Resources made available as outright purchases rather than under an arrangement.
  - Outright purchases employ ex ante conditionality (assessment at time of purchase) rather than the periodic review framework typical of arrangements.
- Purchase limits and frequency:
  - Limited to three outright purchases per 12-month period.
  - All purchases under the SLF subject to the same terms and conditions.
  - After three purchases, further Fund support would require another facility (e.g., successor arrangement financed through the SRF or in the credit tranches).
- Repurchase schedule:
  - Single repurchase three months after the date of the relevant purchase (i.e., members obligated to repurchase Fund’s holdings of their currencies in a single repurchase three months after the purchase).
- Charges and surcharges:
  - SLF subject to charges and surcharges in line with the current schedule in the credit tranches.
  - SLF purchases subject to the general service charge that applies to all GRA purchases.
  - SLF purchases subject to the same level of periodic charges/surcharges as purchases in the credit tranches, specifically:
    - Surcharge equal to the adjusted rate of charge plus surcharge of (i) 100 bps for outstanding credit in excess of 200 percent of quota and (ii) 200 bps for outstanding credit in excess of 300 percent of quota.
  - Upcoming review of charges and maturities will consider surcharges under all facilities, including the SLF.
- Fund liquidity considerations:
  - Forward Commitment Capacity (FCC) at SDR 127.6 billion as of end-September 2008.
  - Illustration of potential SLF demand:
    - For an average-sized emerging market country, SLF access at 500 percent of quota would be on the order of SDR 4.3 billion.
    - For some countries access could be of the order of SDR 15 billion or larger.
  - Proposed review trigger:
    - SLF to be reviewed if outstanding purchases under the facility reach about SDR 60 billion, or half of the current Forward Commitment Capacity.

### Design — D. Approval
- Approval process objectives:
  - Ensure prompt consideration of requests while reducing the risk of negative signals to markets.
- Initial steps:
  - Following an expression of interest from the member, staff would make a preliminary assessment of eligibility.
  - If Management decides there is a basis for moving forward, it would consult promptly with Executive Directors in an informal meeting.

### Board consideration and FCC measurement
- Staff would provide Directors with a short note setting out the case for approving the request.
- Board consideration of the member’s request would take place quickly thereafter and be based on:
  - a short policy statement from the authorities; and
  - a staff report that assesses the member’s qualification and the nature of the member’s balance of payments problem.
- The staff report would also include an assessment of the impact of the proposed purchase on the Fund’s finances and liquidity position.
- To ensure that the FCC appropriately captures purchases under the SLF, it will be necessary to redefine the measure by excluding repurchases falling due under the new facility.

### Other design issues
- Establishment and voting:
  - SLF would require an Executive Board decision adopted by an 85 percent majority of the total voting power.
  - Article V, Section 7(d) requires this qualified majority where a special repurchase period would apply.
  - Floating purchases: proposed that purchases under the facility would “float” against the reserve tranche; such a decision requires an 85 percent majority under Article XXX(c)(iii).
- Sunset clause:
  - SLF would incorporate a sunset clause providing for expiration of the facility two years after its establishment.
  - At that time the Board could review experience with the facility and determine whether it should continue to exist and whether any design changes are warranted.
  - A decision to extend the SLF beyond the initial sunset date would require an 85 percent majority of the total voting power.
- Collateral considerations:
  - Fund has authority to require collateral when providing high-access financing but has generally not done so.
  - SLF involves no formal ex post conditionality; ex ante requirements emphasize policies.
  - A collateral requirement could signal doubt about the nature of the BOP problem or the credibility of the member’s policies and would raise implementation issues including review of negative pledge clauses in existing debt contracts.
  - Under Article V, Section 4, the Fund may require a member to pledge collateral security as a condition for the waiver required where access exceeds 200 percent of quota; such collateral must be in the form of “acceptable assets.”
  - This authority has been used extremely rarely, last used over 45 years ago.

### Concluding comments: role and design advantages of the SLF
- Role:
  - SLF would fill an important gap in the Fund’s toolkit at a critical time in global financial markets.
  - High integration of some emerging market countries into global capital markets has led to significant short-term external liquidity difficulties even in countries with sound macroeconomic frameworks and sustained histories of market access.
  - Existing Fund facilities are fundamentally designed for countries that require both financing and policy adjustment, not for countries facing liquidity pressures that are external in origin and expected to be self-correcting without policy changes.
- Features and advantages:
  - Approval under the SLF would represent a very strong endorsement from the Fund of the member’s policies; a qualifying member would have passed a selective qualification framework.
  - SLF design provides substantial financing, all available upfront, without the standard phasing and conditionality of a Fund arrangement.
  - SLF would support the authorities’ own efforts to reduce the impact of a crisis, providing substantial policy space to members.

*Source: Prepared by the Strategy, Policy, and Review Department, the Legal Department, and the Finance Department; Approved October 24, 2008.*

### Section 1

### A New Facility for Market Access Countries—The Short-Term Liquidity Facility

### Introduction
- Purpose: Propose a special facility—the Short-Term Liquidity Facility (SLF)—to complement existing IMF instruments by addressing short-term, self-correcting balance of payments needs for members with strong fundamentals and sustained market access.
- Rationale:
  - Recent financial market turmoil has produced rapid, cross-border short-term funding disruptions, deleveraging, and contagion, generating external liquidity needs even in emerging market countries with strong policies.
  - Traditional facilities (e.g., Stand-By Arrangements) may be suboptimal for members reluctant to seek Fund financing when policy adjustment is not warranted.
  - The SLF aims to provide large, quick-disbursing liquidity support tailored to members with very strong policies and fundamentals to prevent short-term pressures from escalating into prolonged balance of payments or financial system problems.
- Paper structure:
  - Section II: overview of events the SLF addresses and rationale.
  - Section III: main design features.
  - Section IV: concluding thoughts.
- Approval and preparation:
  - Prepared by the Strategy, Policy, and Review Department, the Legal Department, and the Finance Department in consultation with other departments.
  - Approved by Reza Moghadam, Sean Hagan, and Andrew Tweedie.
  - Date: October 24, 2008.

### General considerations
- Target population:
  - Members well-integrated into global capital markets whose sovereign and private sectors have sustained market access at relatively favorable terms.
  - Members with sustainable public domestic and external debt positions and strong policy implementation records.
- Problem addressed:
  - Short-term balance of payments needs arising from external market developments despite strong underlying fundamentals and domestic policies.
  - Liquidity problems expected to be quickly self-correcting with temporary Fund support and continued strong policies.
- Intended benefits:
  - Bolster reserves to defend against temporary capital account outflows.
  - Use announcement of Fund support to boost confidence and reduce incentives for investors to cut exposures.

### Design — High-level principles
- Three guiding principles:
  - Clarity of purpose: Access explicitly limited to short-term, self-correcting BOP pressures arising from external developments, not from domestic policy weaknesses.
  - Tailoring and speed: Premium on speed and simplicity—large, quick disbursing access; streamlined requirements; expedited procedures; no mission prior to Board approval; only ex ante conditionality applied to purchases.
  - Safeguards: Participation restricted to members with very strong policies, sustainable debt, a history of sound policy implementation; strictly limited period over which resources can remain outstanding.

### Design — A. Balance of Payments Problem and Eligibility
- Legal basis: Established pursuant to Article V, Section 3(a).
- Coverage: Exceptional balance of payments difficulties reflected in pressure on the capital account and the member’s reserves judged to be quickly self-correcting given strong policies and fundamentals.
- Eligibility criteria (assessed via bilateral and multilateral surveillance and Article IV consultations):
  - Very strong policies and underlying fundamentals:
    - Solid initial position and a sustained track record of pursuing very strong policies.
    - Policies assessed very positively by the Board in the most recent Article IV consultations.
  - Sustainable debt:
    - Standard Fund debt sustainability analysis of both public domestic and external debt indicates a high probability that both will remain sustainable.
    - Analysis covers evolution of debt levels, rollover and financing requirements under various scenarios and stress tests.
- Typical indicators of strong performers:
  - Sound structural fiscal positions.
  - Low and relatively stable rates of inflation resulting from solid monetary policy implementation.
  - Effective financial sector supervision.
  - Sustainable current account positions.
  - Capital accounts dominated by private flows.
  - History of steady access to capital markets at favorable terms.
  - Relatively comfortable reserve position by standard measures.

### Design — B. Access and Safeguards
- Access:
  - Up to 500 percent of quota, available in the form of outright purchases.
  - Maximum 500 percent of quota would typically be needed given high capital market integration of eligible members and the nature of the BOP problem.
  - Full amount of any purchase must be justified by the member’s actual balance of payments needs.
- Safeguards:
  - Key safeguards: self-correcting nature of the BOP problem; very short repurchase period; strict qualification criteria focused on strong policies and track records.
  - Outright purchases require the Executive Board to conduct its assessment of policies and needs at the time each purchase is to be made.
  - Debt sustainability analysis provides further assurance of the member’s capacity to repay the Fund.
  - Rationale: high-access financing via outright purchases, in the context of very strong fundamentals, would not reduce safeguards relative to arrangements with ex-post conditionality.

### Design — C. Terms and Modalities
- Modality:
  - Resources made available as outright purchases rather than under an arrangement.
  - Outright purchases employ ex ante conditionality (assessment at time of purchase) rather than the periodic review framework typical of arrangements.
- Purchase limits and frequency:
  - Limited to three outright purchases per 12-month period.
  - All purchases under the SLF subject to the same terms and conditions.
  - After three purchases, further Fund support would require another facility (e.g., successor arrangement financed through the SRF or in the credit tranches).
- Repurchase schedule:
  - Single repurchase three months after the date of the relevant purchase (i.e., members obligated to repurchase Fund’s holdings of their currencies in a single repurchase three months after the purchase).
- Charges and surcharges:
  - SLF subject to charges and surcharges in line with the current schedule in the credit tranches.
  - SLF purchases subject to the general service charge that applies to all GRA purchases.
  - SLF purchases subject to the same level of periodic charges/surcharges as purchases in the credit tranches, specifically:
    - Surcharge equal to the adjusted rate of charge plus surcharge of (i) 100 bps for outstanding credit in excess of 200 percent of quota and (ii) 200 bps for outstanding credit in excess of 300 percent of quota.
  - Upcoming review of charges and maturities will consider surcharges under all facilities, including the SLF.
- Fund liquidity considerations:
  - Forward Commitment Capacity (FCC) at SDR 127.6 billion as of end-September 2008.
  - Illustration of potential SLF demand:
    - For an average-sized emerging market country, SLF access at 500 percent of quota would be on the order of SDR 4.3 billion.
    - For some countries access could be of the order of SDR 15 billion or larger.
  - Proposed review trigger:
    - SLF to be reviewed if outstanding purchases under the facility reach about SDR 60 billion, or half of the current Forward Commitment Capacity.

### Design — D. Approval
- Approval process objectives:
  - Ensure prompt consideration of requests while reducing the risk of negative signals to markets.
- Initial steps:
  - Following an expression of interest from the member, staff would make a preliminary assessment of eligibility.
  - If Management decides there is a basis for moving forward, it would consult promptly with Executive Directors in an informal meeting.

*Source: Prepared by the Strategy, Policy, and Review Department, the Legal Department, and the Finance Department; Approved October 24, 2008.*

### Section 2

### _102408 - Section 2

### Board consideration and FCC measurement
- Staff would provide Directors with a short note setting out the case for approving the request.
- Board consideration of the member’s request would take place quickly thereafter and be based on:
  - a short policy statement from the authorities; and
  - a staff report that assesses the member’s qualification and the nature of the member’s balance of payments problem.
- The staff report would also include an assessment of the impact of the proposed purchase on the Fund’s finances and liquidity position.
- In order to ensure that the FCC appropriately captures purchases under the SLF, it will be necessary to redefine the measure by excluding repurchases falling due under the new facility.

### Other design issues
- Establishment of the SLF would require an Executive Board decision adopted by an 85 percent majority of the total voting power.
  - Inter alia, Article V, Section 7(d) requires this qualified majority in cases (as proposed for the SLF) where a special repurchase period would apply to holdings of currency acquired under a special policy.
- As is normal for special facilities, it is also proposed that purchases under the new facility would “float” against the reserve tranche (i.e., members would be able to maintain a reserve tranche position in the Fund despite making purchases under the facility); a decision providing for such floating also requires an 85 percent majority of the total voting power under Article XXX(c)(iii).
- The SLF would incorporate a sunset clause providing for the expiration of the facility two years after its establishment.
  - At that time, the Board could review experience with the facility and determine whether it should continue to exist and whether any design changes are warranted.
  - The effects of the SLF on the Fund’s liquidity position could also be examined.
  - A decision to extend the SLS beyond the initial sunset date would, like the original decision establishing the facility, require a Board decision adopted by an 85 percent majority of the total voting power.
- Collateral considerations:
  - While the Fund has authority to require collateral when it provides high-access financing of the kind proposed for the SLF, it has generally not done so.
  - The Fund has considered that the most effective safeguard for the use of its resources has been members’ implementation of sound policies in the context of Fund-supported programs that enable them to overcome their balance of payments difficulties.
  - The SLF involves no formal ex post conditionality; the facility’s ex ante requirements place significant emphasis on policies.
  - A collateral requirement in this context would seem necessarily to signal doubt by the Fund about either the nature of the balance of payments problem and/or the credibility of the member’s policies and track record.
  - Taking a pledge of collateral would raise important implementation issues, including the need to review the negative pledge clauses in the member’s existing debt contracts to determine if any waiver or modification is needed.
  - Under Article V, Section 4, the Fund may require a member to pledge collateral security, inter alia, as a condition for the waiver required under the Articles where access exceeds 200 percent of quota. Such collateral is to be in the form of “acceptable assets” having a value sufficient in the opinion of the Fund to protect its interests. This authority has been used extremely rarely in the history of the Fund, and was last used over 45 years ago.

### Concluding comments: role and design advantages of the SLF
- The SLF would fill an important gap in the Fund’s toolkit at a critical time in global financial markets.
- Rationale:
  - The high degree of integration of some emerging market countries into global capital markets has led to significant short-term external liquidity difficulties even in countries with sound macroeconomic frameworks and sustained histories of market access.
  - Existing Fund facilities are fundamentally designed for countries that require both financing and policy adjustment, and not for countries facing liquidity pressures that are external in origin and are expected to be self-correcting without the need for changes to an already sound policy framework.
- Features and advantages of the proposed SLF:
  - Approval of a request for support under the SLF would represent a very strong endorsement from the Fund of the member’s policies. A qualifying member would have passed a selective qualification framework.
  - The design of the SLF is unique in that it provides substantial financing, all available upfront, without the standard phasing and conditionality of a Fund arrangement.
  - The SLF would support the authorities’ own efforts to reduce the impact of a crisis, providing substantial policy space to members.

*Source: IMF staff section on the proposed SLF (Section 2).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2008/_102408.pdf_