## _022509 — Executive Summary and Selected Sections (IMF staff paper)

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### Purpose and scope
- Assesses adequacy of the Fund’s facilities and financing framework for low-income countries (LICs) and proposes reform options.
- Part of broader review of all Fund financial instruments; basis for first stage of LIC-specific review; more detailed reform proposals to be prepared in second stage based on Executive Directors’ feedback and external consultation.
- Focus areas:
  - (i) gaps and overlaps in the facility architecture for LICs;
  - (ii) design issues such as access, financing terms, and conditionality;
  - (iii) the concessional resource envelope and funding structure.

### LIC usage and economic performance
- Of the 78 countries eligible for the Poverty Reduction and Growth Facility (PRGF), four-fifths have received Fund financing, and three-quarters have been supported under the PRGF or its predecessor.
- Usage and disbursements:
  - Total disbursements 1987–2008: SDR 26.4 billion, of which SDR 15.6 billion was on concessional terms.
  - HIPC Initiative assistance disbursed: SDR 1.7 billion to 34 members.
  - MDRI assistance disbursed: SDR 2.3 billion to 25 members.
  - Disbursements under all facilities fell from SDR 8.1 billion for 1989–93 to SDR 5.8 billion for 2004–08.
  - By 2008: PRGF-ESF Trust and GRA disbursements rose from SDR 330 million and SDR 40 million in 2007 to SDR 640 million and SDR 2.8 billion in 2008 (the latter including SDR 2.1 billion to Pakistan).
  - Approvals in 2008: Nine PRGFs, four ESFs, four EPCAs, three SBAs, two ENDAs, and one EFF.
- Economic outcomes for extensive users:
  - Significant increases in long-term growth, exports, and foreign direct investment (FDI);
  - Noticeable reductions in inflation, external debt (supported by debt relief), and current account and fiscal deficits;
  - Closing of the performance gap with other LICs.
- Situation snapshot:
  - At end-2007, about one-third of PRGF eligible countries had established medium-term track records of satisfactory macro performance; about one-third remain relatively fragile.
  - More than one-third of LICs are in fragile situations; about one-third are particularly vulnerable to the ongoing global crisis.

### Changes in LIC needs and implications
- LICs face increasingly diverse needs and heightened exposure to global volatility.
- Demand shift:
  - Toward more episodic, short-term Fund financing (at higher access levels) and precautionary arrangements as LICs gain market access and experience higher private capital inflows and trade volumes.
  - Many LICs continue on longer-term adjustment paths and can benefit from PRGF-type financing to smooth adjustment.
- Short-term vs medium/long term definitions used:
  - “short term” = two years or less;
  - “medium- or longer-term” = three years or more.
- Survey of mission chiefs:
  - About three quarters of LICs presently have a balance of payments need;
  - 40 percent have both a long-term and a short-term need;
  - 30 percent have a long-term need only;
  - 25 percent have a short-term need only.

### Identified gaps and overlaps in concessional toolkit
- Three notable gaps:
  - (i) Flexible short-term financing: neither the ESF nor the PRGF effectively addresses short-term financing needs primarily caused by domestic factors such as policy slippages, banking troubles, or confidence problems.
  - (ii) A concessional precautionary instrument: lack of such an instrument constrains the Fund’s capacity to play a stabilizing role as LICs gain market access.
  - (iii) Flexible emergency financing: countries with limited policy implementation capacity can be supported after natural disasters, conflicts, or exogenous shocks, but not in other emergency situations where financing is critical to prevent precipitous deterioration.
- Evidence from country experience and surveys:
  - Short-term financing needs expected in 37 percent of countries included in survey responses;
  - Precautionary needs in 31 percent;
  - Financing for non-post conflict fragile states and/or flexible emergency financing in 39 percent.
- Overlaps and ambiguities:
  - Overlapping instruments: PRGF, ESF, PSI, SBA, EPCA, ENDA, CFF.
  - Ambiguities arise in disentangling exogenous vs endogenous causes for ESF qualification and in distinguishing short- vs longer-term needs when both coexist.
  - CFF identified as a little-used facility that might be eliminated.

### Reform options sketched (each can retain the PSI)
- Option 1 — More Flexible PRGF and Emergency Assistance:
  - Make the PRGF more flexible by including a short-term window for shocks and policy slippages (eliminating need for High-Access ESF);
  - Allow precautionary use of this window;
  - Broaden Emergency Post-Conflict Assistance (EPCA) to cover wider needs.
  - Purpose: streamline facilities and keep PRGF as main facility for programs with significant policy content.
  - Pros and cons cited: reinforces PRSP-based foundation; streamlines policy-content programs; risks confusion about PRGF role; PRSP requirements may impede rapid response; potential stigma and complexities related to HIPC linkages.
- Option 2 — Three-Pillar Structure: PRGF, Stand-By-like Concessional Facility, and Emergency Assistance:
  - Keep PRGF unchanged for medium- and longer-term needs;
  - Create concessional short-term financing facility similar to SBA that could be used precautionarily (effectively replacing High-Access ESF);
  - Cover natural disaster, post-conflict, and other emergency needs through a unified concessional emergency assistance facility.
  - Purpose: tailor facilities to main types of LIC adjustment needs.
  - Pros and cons cited: tailored facilities; maintains PRGF-HIPC linkage; avoids difficult exogenous/endogenous judgments; could require additional concessional resources; potential step away from PRSP-based framework for some countries.
- Option 3 — Single Concessional Financing Facility:
  - Replace existing facilities with a single concessional instrument with flexible length (up to three years) for all balance of payments needs; PRGF retained as transitional measure for pre-completion point HIPCs.
  - Purpose: maximal streamlining and flexibility.
  - Facility features:
    - Three-year financing for prolonged adjustment needs;
    - Shorter-term financing for shocks and policy slippages;
    - PRSP requirements could apply from second or third year;
    - Usable on a precautionary basis;
    - Short-term emergency purchases up to 25 percent of quota for non-UCT situations.
  - Pros: eliminates ambiguity across facilities; allows movement between short- and medium-term arrangements.
  - Cons and risks: uncertainty about Fund’s role in LICs; stigma for relatively advanced LICs; difficulty applying uniform design to diverse circumstances; donor earmarking and funding clarity issues.

### Program design and operational recommendations
- Access limits:
  - Access limits should be raised to assist LICs most exposed to global volatility, including during current crisis.
  - Historical context:
    - PRGF access norms introduced in 2004.
    - PRGF access limits have declined substantially in effective terms since 1987.
    - Example indicators: preliminary calculations suggest maximum PRGF access limit would have to more than double to restore it to its 1998 level relative to GDP.
  - PRGF access norms (In percent of quota):
    - First time 90;
    - Second time 65;
    - Third time 55;
    - Fourth time 45;
    - Fifth time 35;
    - Sixth time 25.
  - Interaction with GRA proposed changes: widening gap between PRGF and GRA access limits when GRA annual and cumulative limits are increased.
- Financing terms:
  - PRGF-ESF financing terms remain broadly appropriate and should be extended to all types of Fund assistance for LICs, including emergency assistance.
  - Current PRGF/ESF terms:
    - Interest rate: 0.5 percent per annum;
    - Grace period: 5½ years;
    - Maturity: 10 years.
  - PRGF concessionality currently estimated at 28 percent; reduction of interest rate to zero would raise grant element to 31 percent.
  - ENDA/EPCA current terms: repurchases on GRA terms with a 3¼ year grace period and 5 year maturity; subsidy resources can reduce rate to 0.5 percent when available.
  - Recommendation: finance both principal and interest subsidies for ENDA/EPCA through PRGF-ESF Trust to align concessionality across LIC facilities (would require amendment and donor consents).
- Blending and eligibility:
  - Strengthen and clarify rules for blending concessional and GRA financing.
  - Suggested guidelines:
    - (i) Recommend blended arrangements only for countries meeting minimum debt sustainability standards in context of DSAs;
    - (ii) Clarify approach for exceptional cases (e.g., arrears clearance);
    - (iii) Establish consistent blending mechanism across facilities.
  - Review PRGF eligibility and relevant criteria in near future and possibly on a fixed cycle.
- Assessment of need:
  - PRGF standard of a “protracted balance of payments problem” remains relevant for medium- or longer-term adjustment needs.
  - Short-term facilities should be based on present balance of payments needs.
- Conditionality:
  - Modify conditionality to give countries greater flexibility while supporting macro-critical policies; tailor conditionality to country circumstances and facility type.
  - Options considered:
    - Review-based conditionality (reduce reliance on individual performance criteria; use set of quantitative and structural targets);
    - Greater use of ex-ante conditionality for short-term operations;
    - Hybrid approaches.
  - Tailoring examples:
    - Post-conflict/fragile countries: fewer structural conditions, focus on basic institutions;
    - Countries moving to emerging market status: limited “second-generation” reform benchmarks;
    - Short-term programs: limited conditionality with urgency on timing.

### Concessional financing envelope and projected needs
- Available resources (end-2008):
  - Loan resources: SDR 2.5 billion.
  - Subsidy resources: SDR 1.3 billion.
  - Reserve Account balance: SDR 3.8 billion.
  - Of subsidy resources, estimated SDR 0.3 billion needed to cover existing PRGF/ESF credit, leaving about SDR 1 billion to subsidize new PRGF/ESF loans of about SDR 4.5 billion (additional loan resources of SDR 2 billion would be needed to fully utilize available subsidy resources).
- Impact of low SDR interest rates (Box 1):
  - Updated staff assumption: SDR interest rates remain below 1 percent in 2009 and rise gradually to 4.5 percent by 2014 and thereafter.
  - Under this assumption:
    - Available PRGF-ESF subsidy resources could subsidize new lending of about SDR 4.5 billion.
    - Reserve Account self-sustained subsidization capacity estimated at about SDR 0.7 billion per year.
  - Historical SDR interest rates (selected averages):
    - 5 years (2004–2008): 2.9;
    - 10 years (1999–2008): 3.0;
    - 15 years (1994–2008): 3.4;
    - 20 years (1988–2008): 4.4.
- Near-term demand projections (impact of global financial crisis):
  - Demand could increase from SDR 0.8 billion in 2008 to an annual average of SDR 1.3–2 billion in 2009–10.
  - Two illustrative scenarios:
    - Scenario 1: annual lending could average SDR 1.3 billion in 2009–10.
    - Scenario 2 (more severe): demand could average SDR 2 billion a year in 2009–10.
  - Staff estimated total number of requests: 56; Total SDR demand implied: 2.7 (Scenario 1) to 4.0 (Scenario 2).
  - Managing Director requested additional contributions estimated at SDR 100 million in March 2008 to cover existing ENDA/EPCA credit and new lending through 2014.
- Medium-term prospects:
  - Drivers of sustained above-historical demand: greater exposure to global volatility, higher private sector financing exposure, potential protracted fallout from global crisis, potential requests post-arrears clearance.
  - Medium-term annual demand range: SDR 1 billion to SDR 2 billion.
  - Central projection: annual demand averaging about SDR 1.5 billion; to meet this through 2015 could require:
    - Additional subsidy resources of about SDR 0.7 billion; and
    - New loan resources of SDR 9 billion.
  - Reserve Account “self-sustained” subsidization would require amendment of PRGF-ESF Trust Instrument (85 percent majority and consents of all lenders).

### Concessional financing framework and fund-raising
- Current challenges:
  - Concessional resources limited and could be depleted quickly; fund-raising increasingly ad hoc; financing structure inflexible.
  - PRGF-ESF subsidy resources cannot be used to subsidize ENDA/EPCA lending without additional contributions and donor consents.
- Two broad reform directions:
  - Regularized, structured fund-raising cycles (e.g., five-year cycles for loan and subsidy mobilization).
  - Simplified and more flexible financing architecture (general subsidy account or common pools).
- Financing structure options:
  - Option 1: Establish new general subsidy account outside PRGF-ESF Trust to receive contributions and subsidize all concessional lending; leave PRGF-ESF subsidy accounts open for earmarking donors; allow transfers to general account.
  - Option 2: Create common pools of loan and subsidy resources to finance all concessional lending operations; would require contributors’ agreement to broaden use of their contributions and reduce earmarking.
- Implementation constraints:
  - Amendments to PRGF-ESF Trust Instrument and consents from all current loan and subsidy contributors required.
  - Executive Board decision amending Trust Instrument must be adopted by an 85 percent majority of total voting power.
  - Reallocating subsidy resources represents departure from past donor earmarking preferences and raises legal and consent challenges.
- Advantages of structured fund-raising and common pools:
  - Ensures sufficient resources to meet LIC financing needs;
  - Reduces uncertainty and ad hoc donor appeals;
  - Allows quicker use of resources for diverse concessional lending needs;
  - Reserve Account can continue as contingency buffer.

### Issues posed for Executive Directors
- Should the IMF’s facilities and financing framework be more flexible to address diverse LIC needs and heightened exposure to global volatility?
- Should the Fund maintain ability to provide both medium- and short-term concessional financing and accommodate members seeking program-based engagement with limited financing?
- Do Directors support reform to close gaps (short-term financing other than exogenous shocks, precautionary needs, flexible emergency support) while reducing ambiguities and overlaps? Which of the three broad reform models should be explored in the second stage?
- Should modifications to access policies be explored in the second stage given erosion of access norms and greater global volatility?
- Do Directors agree PRGF-ESF Trust financing terms remain appropriate and that emergency assistance and short-term adjustment lending should be provided on the same terms? Should blending rules and PRGF eligibility be revisited more regularly?
- Do Directors support making conditionality under concessional facilities more flexible, including adapting proposals made for the GRA? Should the protracted BOP problem standard remain for medium/long-term lending and a present-needs standard apply to short-term financing?
- How should risk of insufficient concessional resources be addressed given crisis-driven demand, greater LIC exposure to volatility, and possible reforms closing gaps?
- Do Directors agree to a more structured and periodic approach to fund-raising to make concessional financing more flexible and allow donors to support broad range of lending facilities? Which financing architecture options should be explored further?

*Source: Executive Summary and selected sections from IMF staff paper _022509 (review of the Fund’s facilities and financing framework for low-income countries).*

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

### _022509 - Executive Summary ......................................................................................................

### Purpose and scope
- This paper assesses the adequacy of the Fund’s facilities and financing framework for low-income countries (LICs) and proposes reform options.
- It is part of a broader review of all Fund financial instruments and provides the basis for the first stage of the LIC-specific review; more detailed reform proposals will be prepared in the second stage based on feedback from Executive Directors and further external consultation.
- Focus areas: (i) gaps and overlaps in the facility architecture for LICs, (ii) design issues such as access, financing terms, and conditionality, and (iii) the concessional resource envelope and funding structure.

### LIC usage and economic performance
- Of the 78 countries eligible for the Poverty Reduction and Growth Facility (PRGF), four-fifths have received Fund financing, and three-quarters have been supported under the PRGF or its predecessor.
- Countries that have made extensive use of Fund facilities showed:
  - significant increases in long-term growth, exports, and foreign direct investment (FDI);
  - noticeable reductions in inflation, external debt (supported by debt relief), and current account and fiscal deficits;
  - closing of the performance gap with other LICs.
- More than one-third of LICs are in fragile situations; about one-third are particularly vulnerable to the ongoing global crisis.

### Changes in LIC needs and implications
- LICs face increasingly diverse needs and heightened exposure to global volatility, including during the current global crisis.
- Demand is shifting toward more episodic, short-term Fund financing (at higher access levels) and precautionary arrangements as LICs gain market access and experience higher private capital inflows and trade volumes.
- Many LICs remain on longer-term adjustment paths and can benefit from PRGF-type financing to smooth adjustment.

### Identified gaps and overlaps in concessional toolkit
- Three notable gaps:
  - (i) Flexible short-term financing: neither the ESF nor the PRGF effectively addresses short-term financing needs primarily caused by domestic factors such as policy slippages, banking troubles, or confidence problems.
  - (ii) A concessional precautionary instrument: lack of such an instrument constrains the Fund’s capacity to play a stabilizing role as LICs gain market access.
  - (iii) Flexible emergency financing: countries with limited policy implementation capacity can be supported after natural disasters, conflicts, or exogenous shocks, but not in other emergency situations where financing is critical to prevent a precipitous deterioration in economic and social conditions.
- Overlaps and ambiguities exist, particularly among instruments for addressing shocks and emergencies, suggesting potential benefits from streamlining.

### Reform options sketched (each can retain the PSI)
- Option 1:
  - Make the PRGF more flexible by including a short-term window for shocks and policy slippages (eliminating the need for the High-Access ESF);
  - allow precautionary use of this window;
  - broaden Emergency Post-Conflict Assistance (EPCA) to cover a wider range of needs.
  - Purpose: streamline facilities and keep the PRGF as the main facility for programs with significant policy content.
- Option 2:
  - Keep the PRGF unchanged for medium- and longer-term adjustment needs;
  - create a concessional short-term financing facility similar to the Stand-By Arrangement (SBA) that could also be used on a precautionary basis (effectively replacing the High-Access ESF);
  - cover natural disaster, post-conflict, and other emergency needs through a unified concessional emergency assistance facility.
  - Purpose: tailor facilities to the main types of LIC adjustment needs.
- Option 3:
  - Replace existing facilities with a single concessional instrument with flexible length (up to three years) for all balance of payments needs;
  - as a transitional measure, the PRGF would be retained for pre-completion point Heavily Indebted Poor Countries (HIPCs).
  - Purpose: go furthest on streamlining and deviate most from the status quo.

### Program design and operational recommendations
- Access limits:
  - Access limits should be raised to ensure the Fund can assist effectively those LICs most exposed to global volatility, including in the current crisis.
  - Concessional access limits and norms have gradually declined relative to GDP and trade, while LICs have become more exposed to global volatility; access limits have become binding in several cases.
- Financing terms:
  - PRGF-ESF financing terms, which remain broadly appropriate, should be extended to all types of Fund assistance for LICs, including emergency assistance (currently less concessional with shorter maturities).
- Blending and eligibility:
  - Rules for blending concessional and General Resources Account (GRA) financing should be clarified and strengthened, and eligibility for concessional assistance should be assessed regularly.
- Assessment of need:
  - The PRGF standard of a “protracted balance of payments problem” remains relevant for medium- or longer-term adjustment needs; short-term facilities should be based on present balance of payments needs.
- Conditionality:
  - Conditionality should be modified to give countries greater flexibility while supporting macro-critical policies; tailored to country circumstances and facilities.
  - Recommendations from the review of conditionality in the GRA context could be adapted to LICs to allow more flexibility, particularly on the timing of structural reforms.

### Concessional financing envelope and projected needs
- Demand is projected to average about SDR 1.5 billion a year (double the 2008 level) over the medium term, exceeding currently available resources and the estimated “self-sustained” subsidization capacity of the PRGF-ESF Reserve Account.
- Meeting projected financing needs through 2015 could require:
  - additional subsidy resources of about SDR 0.7 billion; and
  - new loan resources of SDR 9 billion.
- A spike in demand due to commodity price shocks and the impact of the global economic downturn is already apparent; evolving needs and potential creation of new instruments could boost demand further.

### Concessional financing framework and fund-raising
- Concessional resources could be used more flexibly through a more structured approach to fund-raising that allows donors to make contributions available to support the broad range of lending facilities.
- Periodic rather than ad hoc fundraising would reduce uncertainty and ensure timely financing for LICs.
- A more flexible financing structure would allow resources to be used for all types of concessional assistance.

*Source: Executive Summary, IMF staff paper on the review of the Fund’s facilities and financing framework for low-income countries.*

### 4.      The paper is organized as follows. Section II reviews the existing toolkit, the usage

### _022509 - 4.      The paper is organized as follows. Section II reviews the existing toolkit, the usage

### Paper organization
- Section II reviews the existing toolkit, the usage of facilities, and LICs’ economic performance.
- Section III examines the analytical underpinnings of IMF lending to LICs, and their changing needs.
- Section IV discusses gaps and overlaps in the architecture, and proposes reform options.
- Section V discusses facility design (access policies, financing terms, balance of payments needs criteria, and conditionality).
- Section VI examines the availability of concessional resources and potential LIC financing needs.
- Section VII discusses the concessional financing framework, and provides possible reform options.
- Section VIII seeks Executive Directors’ views.

### II. EXPERIENCE TO DATE — A. The Fund’s Evolving Toolkit
- For over three decades, the Fund has complemented General Resources Account (GRA) financing available to all members with specific non-GRA financing for LICs via administered accounts under Article V, Section 2(b).
- Trust Fund lending, established in 1976, set the financial terms—longer repayment period and a low interest rate—that are still used today for Poverty Reduction and Growth Facility (PRGF) and ESF lending.
- The Structural Adjustment Facility (SAF) created in 1986 explicitly recognized that structural weaknesses could contribute to balance of payments needs.
- The PRGF has long been at the center of the Fund’s financial engagement with LICs; ESAF (created in 1987) and PRGF (created in 1999) were intended to help countries address entrenched balance of payments problems through three-year programs covering macroeconomic policies and structural reforms.
- Satisfactory performance under a PRGF arrangement is generally a requirement for Heavily Indebted Poor Country (HIPC) debt relief (other facilities can be used but this is rare).
- LICs have also received financial assistance from the GRA. Emergency assistance is available to countries hit by natural disasters (ENDA) or emerging from conflict (Emergency Post-Conflict Assistance (EPCA)).
- The Extended Fund Facility (EFF) has been an important tool for blending concessional and non-concessional resources in cases where a country is moving toward graduation from (income-based) eligibility for PRGF-ESF Trust resources or requires high access.
- The Stand-By Arrangement (SBA) has been used by a few LICs for short-term stabilization needs and to obtain access above PRGF limits.
- By 2005, several LICs had made good progress toward sustained macroeconomic stability and stronger institutions; several countries moved to low-access PRGFs as financing needs declined.
- In 2005, when the Multilateral Debt Relief Initiative (MDRI) was approved, the Fund established two new LIC tools:
  - (i) the PSI to provide policy support and signaling for mature stabilizers seeking to implement an Upper-Credit Tranche (UCT) standard economic program but not in need of Fund financial assistance; and
  - (ii) the ESF to provide rapid assistance in the event of an exogenous shock for countries without a PRGF arrangement in place.
- ESF modifications (main changes listed in the source):
  - (i) allowing the ESF to be used at the same time as a PSI,
  - (ii) not requiring a PRSP,
  - (iii) creating a new Rapid-Access Component under which countries hit by exogenous shocks could receive up to 25 percent of quota more quickly, and
  - (iv) establishing a higher normal limit of 75 percent of quota for the ESF’s High-Access Component.

### II. EXPERIENCE TO DATE — Table 1: IMF Facilities Available to Low-Income Member Countries (selected entries and terms)
- PRGF
  - Purpose: Longer-term assistance for deep-seated balance of payments need of structural nature; aims at poverty reducing growth through 3 year UCT program based on country-owned PRSP (extension to 4 years possible).
  - Access: Max. of 140 or 185 in exceptional circumstances plus norms for successive arrangements
  - Terms: 0.5 percent; 5½ - 10 years
- ESF – Rapid Access
  - Purpose: Rapid assistance (usually in a single disbursement) for exogenous shocks on the basis of a commitment to appropriate policies. Not UCT.
  - Access: Max. 25
  - Terms: 0.5 percent; 5½ - 10 years
- ESF – High Access (PRGF-ESF Trust)
  - Purpose: Assistance for exogenous shocks through a 1-2 year UCT program.
  - Access: Norm of 75, no ceiling
  - Terms: 0.5 percent; 5½ - 10 years
- ENDA
  - Purpose: Rapid assistance in the event of a natural disaster. Single purchase. Not UCT.
  - Access: Norm of 25, max. of 50
  - Terms: Rate of charge / 0.5 percent (subsidy resources permitting); 3¼ - 5 years
- EPCA
  - Purpose: Assistance over a period of up to 3 years to countries emerging from conflict. Not UCT.
  - Access: Norm of 25, max. of 50 with max. of 25 per year
  - Terms: Rate of charge / 0.5 percent (subsidy resources permitting); 3¼ - 5 years
- SBA
  - Purpose: Short-term assistance based on 1-2 year UCT program for short-term balance of payments needs (3 year program possible).
  - Access: Annual limit of 100 and cumulative limit of 300 although exceptional access possible
  - Terms: Rate of charge + surcharge for high access; 3¼ - 5 years
- EFF
  - Purpose: Longer-term assistance to support structural reforms through a 3 year UCT program.
  - Access: Annual limit of 100 and cumulative limit of 300
  - Terms: Rate of charge + surcharge for high access; 4½ - 10 years
- CFF
  - Purpose: Medium-term assistance for temporary export shortfalls or increased cereal import costs.
  - Access: Limit of 45 (exports or cereal) or 55 if combined
  - Terms: Rate of charge; 3¼ - 5 years
- TIM
  - Source: GRA or PRGF-ESF Trust
  - Purpose: Additional assistance under existing UCT program for balance of payments need due to multilateral trade liberalization.
  - Access: Determined by UCT program to which TIM policy is applied
- PSI
  - Source: Non-Financial
  - Purpose: Policy support under UCT program for countries that are mature stabilizers and do not need or want Fund financial assistance.
  - Access/Terms: n.a.

### II. EXPERIENCE TO DATE — B. Usage of the Fund’s Facilities by LICs
- More than four-fifths of the 78 PRGF-eligible members have received IMF financing, with arrangements in place for an average of 11 of the past 21 years per country.
- Three-quarters of all LICs have been supported under the PRGF/ESAF; on average there have been almost three such arrangements per user.
- Total disbursements from 1987 to 2008 amounted to SDR 26.4 billion, of which SDR 15.6 billion was on concessional terms.
- The Fund has disbursed SDR 1.7 billion in HIPC Initiative assistance to 34 members and SDR 2.3 billion in MDRI assistance to 25 members.
- Disbursements under all facilities fell from SDR 8.1 billion for 1989-93 to SDR 5.8 billion for 2004-08, with a notable regional shift toward Africa and low-income transition economies in Eastern Europe and Central Asia.
- Average number of Fund-supported country programs stayed at about 38 during the two periods compared.
- Drivers of trends:
  - (i) improved economic performance of most LICs;
  - (ii) a relatively favorable global environment, with strong world growth and a sharp increase in private financing to LICs during 2003-07;
  - (iii) debt relief through HIPC and MDRI;
  - (iv) declining access norms for repeat PRGF users; and
  - (v) increased demand for program engagement with the Fund through low-access and non-financing facilities (low-access PRGFs and PSIs).
- Recent global volatility led to a spike in LIC demand: new financing requests jumped from 5 in 2007 to 23 in 2008.
- In 2008 there were 12 augmentations of access under PRGF arrangements.
- Total disbursements to LICs from the PRGF-ESF Trust and the GRA increased from SDR 330 million and SDR 40 millio respectively in 2007, to SDR 640 million and SDR 2.8 billion in 2008 (the latter including SDR 2.1 billion to Pakistan).
- Approvals in 2008 included: Nine PRGFs, four ESFs, four EPCAs, three SBAs, two ENDAs, and one EFF.

### II. EXPERIENCE TO DATE — C. Economic Performance
- LICs that have made extensive use of IMF facilities have experienced a marked improvement in long-term economic performance.
- Countries under IMF financial arrangements for at least 10 of the past 20 years showed on average more significant increases in long-term growth, exports, and foreign direct investment (FDI), and larger reductions in inflation, external debt, and current account and fiscal deficits than countries with little or no program engagement.
- As a result, countries with longer-term engagement have largely closed the performance gap with other LICs that existed when the ESAF was created.
- At end-2007, about one-third of PRGF eligible countries had established a medium-term track record of satisfactory economic growth, moderate inflation, manageable fiscal and current account deficits, adequate reserves, sustainable debt, and basic macroeconomic policy capacity.
- About one-third of PRGF-eligible countries are still considered relatively fragile.
- Progress on poverty reduction remains incomplete despite improvements in social spending and human development indicators; urgent action is needed to help LICs meet the Millennium Development Goals (MDGs) by 2015.

### III. THE IMF’S LENDING ROLE IN LICS — Analytical considerations
- IMF financing provides temporary balance of payments support to smooth economic adjustment toward a sustainable external position.
- A balance of payments need can arise from macroeconomic imbalances caused by exogenous shocks, policy slippages, or structural weaknesses.
- Fund financing provides an intertemporal smoothing mechanism, with the understanding that resources are repaid as the economy recovers and macroeconomic stability is restored.
- IMF lending to LICs has been adapted to reflect particular circumstances:
  - (i) entrenched macroeconomic and structural imbalances, implying longer-term adjustment needs;
  - (ii) emphasis on reconciling adjustment policies with the need to raise economic growth and reduce poverty;
  - (iii) aid dependence and the catalytic role of Fund-supported programs;
  - (iv) excessive debt and high vulnerability to shocks;
  - (v) an explicit link between HIPC debt relief and Fund arrangements, especially the PRGF; and
  - (vi) extensive policy advice and technical assistance needs.
- These factors support intensive program engagement, maintaining short- and medium-term concessional financing capacity, and facilitating adjustment toward a sustainable macroeconomic equilibrium with higher growth and lower poverty.

### III.A What are the Adjustment and Financing Needs of LICs?
- For many LICs, the required adjustment process is long, reflecting entrenched macroeconomic imbalances and structural challenges.
- Common challenges include:
  - (i) a low-growth “trap” often caused by weak capacity, poor governance, conflict, poor infrastructure, and/or distance to markets;
  - (ii) high and variable inflation, partly due to high exposure to world commodity prices and adverse weather conditions;
  - (iii) a narrow revenue base, resulting in inadequate spending, large fiscal deficits, and budgetary arrears;
  - (iv) large underlying balance of payments disequilibria, often characterized by weak exports, import compression, inadequate reserves, and external arrears; and
  - (v) excessive public debt.
- PRGF lending has been based on a “protracted balance of payments problem” standard, reflecting the long adjustment processes many LICs face.

*Source: Excerpt from IMF document _022509 (sections II–III) contained in the supplied content.*

### 18.      In addition, like other countries, LICs may also face short-term adjustment and

### _022509 - 18.      In addition, like other countries, LICs may also face short-term adjustment and

### Short-term adjustment and financing vulnerabilities of LICs
- LICs are particularly vulnerable to oil, food, and other commodity price swings due to:
  - high oil import-to-GDP ratios;
  - high shares of food in the consumer basket;
  - limited export diversification.
- Many LICs are exposed to:
  - shortfalls in aid or remittances;
  - private capital volatility in some cases.
- Common sources of financing needs:
  - natural disasters (frequent among LICs);
  - post-conflict balance of payments support (typically provided through the EPCA).
- IMF instruments used to address shocks and policy slippages:
  - PRGF (often through augmentations);
  - SBA;
  - ESF (more recently, in case of exogenous shocks).

- Survey of IMF mission chiefs for LICs (findings cited):
  - about three quarters of low-income countries presently have a balance of payments need;
  - 40 percent have both a long-term and one of several types of short-term needs;
  - 30 percent have a long-term need only;
  - 25 percent have a short-term need only.
- Definitions used in the paper:
  - “short term” refers to two years or less;
  - “medium- or longer-term” refers to three years or more.

### Benefits of Fund program engagement beyond immediate financing
- Fund engagement provides:
  - capacity/policy support:
    - institutional capacity in most LICs remains limited;
    - Fund technical assistance and training have helped build capacity and are typically closely integrated with Fund program work;
    - program (and near-program) engagement, including missions and resident representatives, builds macroeconomic management capacity through in-depth policy and technical discussions.
  - commitment device:
    - concessional arrangements and associated conditionality can help LIC members build commitment around economic policies and facilitate policy coordination within government and with donors.
  - insurance:
    - growing exposure to private financing increases demand for contingent Fund support;
    - currently no concessional precautionary instrument exists;
    - low-access PRGF arrangements have played an indirect precautionary role with the understanding that access can be easily augmented;
    - an on-track PSI could enable relatively rapid approval of an ESF if needed.
  - signaling/catalytic effect:
    - IMF arrangements can help inform donor decisions and catalyze grants and concessional loans;
    - on average, official inflows have been higher by about 1¼ percent of GDP in the presence of a Fund program (Figure 6);
    - for LICs with market access, a Fund-supported program can provide comfort to investors.

### Role of concessional IMF lending relative to donor support
- Rationale for concessional IMF financing:
  - significant debt-related vulnerabilities of LICs justify concessional terms, subject to resource constraints;
  - many LICs, including post-HIPC countries, are at moderate-to-high risk of debt distress based on IMF-World Bank debt sustainability analyses;
  - concessional facilities are used because borrowing on non-concessional terms risks future debt problems.
- Access and blending:
  - given limited concessional resources administered by the Fund, access is rationed through norms and limits;
  - concessional financing is blended with GRA resources for higher-income borrowers, countries with market access, and very large financing needs.
- Distinctive roles of PRGF financing versus development aid:
  - macroeconomic stability focus:
    - Fund’s unique contribution is helping members address macroeconomic imbalances and risks through appropriate policies, macro-critical structural reforms, and related capacity building.
  - intertemporal smoothing to support adjustment:
    - IMF financial assistance, while concessional, is primarily intended to provide a temporary resource transfer permitting intertemporal smoothing of absorption;
    - aid typically aims to increase the long-term resource envelope and is usually provided on a steady and predictable basis, whereas IMF lending is generally counter-cyclical.
  - crisis response:
    - Fund can provide speedy financial support and coordinate closely with partners that may scale up more gradually.
  - balance of payments and fiscal impact:
    - aid should generally be fully spent and absorbed over the medium term;
    - IMF loans can be partly (or even fully) saved when reserves are low to provide a cushion against macroeconomic volatility;
    - Fund assistance is aimed at general balance of payments support whereas development assistance is often targeted at particular spending areas.
  - signaling/catalytic effect:
    - performance under an IMF financial arrangement can be an important signal to donors.

### Need for a more flexible set of LIC instruments
- Context and evolution:
  - concessional medium-term financing under the PRGF aligned with PRSPs accompanied marked improvement in economic performance over two decades;
  - LICs have become increasingly diverse: more than a quarter are in broadly sustainable macroeconomic positions, while a majority continue to face entrenched adjustment needs, and about a third remain in fragile situations (Figure 7).
  - as LICs integrate into the world economy, challenges increasingly resemble those of emerging market countries, with more episodic, short-term financing needs even as program-based engagement remains relevant.
- Increasing exposure to global volatility:
  - private capital inflows and FDI have risen sharply in recent years, making some LICs vulnerable to sudden stops;
  - LICs have become increasingly exposed to commodity price volatility as trade shares in GDP have risen and global volatility has trended up (Figures 8 and 9);
  - some countries have become more dependent on aid and remittances, increasing vulnerability to reversals;
  - local financial sector growth can amplify external shocks in the presence of domestic financial fragilities;
  - the global economic crisis has severely affected LICs via lower export demand, sharp declines in commodity prices, lower remittances, and reduced FDI.

- Implications for the Fund’s framework (areas for reform to be considered):
  - gaps and overlaps in the facility architecture:
    - potential relative shift of demand toward episodic, short-term and emergency financing, and precautionary arrangements;
    - gaps increasingly constrain the Fund’s ability to assist LICs effectively (see Section IV).
  - access limits and norms:
    - access limits have been eroded and may be too low for assisting LICs exposed to greater volatility (see Section V.A).
  - financing terms:
    - case for making emergency assistance for LICs more concessional;
    - need to further clarify rules for blending concessional and GRA resources;
    - need for more regular review of PRGF eligibility (see Section V.B).
  - conditionality:
    - growing diversity of LIC adjustment needs argues for a more tailored and flexible application of conditionality (Section V.D).
  - concessional resource envelope and financing framework:
    - demand for Fund concessional financing is expected to double over the medium term, implying the need to secure additional concessional resources (Section VI).
  - fundraising and trust fund structure:
    - changes could make the concessional financing framework more flexible and efficient (Section VII).

### Gaps in the concessional facility architecture (identified needs)
- Three notable gaps:
  - (i) a flexible short-term financing instrument;
  - (ii) a precautionary instrument;
  - (iii) a flexible emergency financing instrument, including for LICs in fragile situations.
- Evidence from country experience and surveys:
  - short-term financing needs are expected in 37 percent of countries included in survey responses;
  - precautionary needs in 31 percent of countries;
  - financing for non-post conflict fragile states and/or flexible emergency financing in 39 percent of countries.
- Limitations of existing instruments:
  - ESF:
    - provides a short-term concessional option for exogenous shocks but does not cover financing needs arising from domestic problems such as policy slippages, banking troubles, or declines in public confidence;
    - in practice, disentangling exogenous and endogenous contributions to balance of payments pressures can be difficult.
  - PRGF:
    - designed for protracted balance of payments problems and requires a three-year program, potentially tying up concessional resources longer than necessary for shorter-term needs;
    - requires a PRSP, which can take considerable time to prepare;
    - members that moved to a PSI or surveillance-only engagement may be reluctant to return to a PRGF perceived as linked to poverty reduction and HIPC debt relief.
  - Consequence:
    - lack of an appropriate short-term concessional instrument may induce some countries to opt for non-concessional SBAs, which could significantly raise near-term debt service burdens.

*Source: _022509 - 18.      In addition, like other countries, LICs may also face short-term adjustment and (IMF PDF chapter).*

### 30.      Precautionary arrangements are likely to become more important as LICs have

### _022509 - 30.      Precautionary arrangements are likely to become more important as LICs have

### Integration, volatility, and demand for precautionary arrangements
- LICs are becoming more integrated into global markets and developing their financial sectors, increasing exposure to volatility of commodity prices and global growth.
- The combination of greater integration and a more unsettled global financial environment could create significant near-term demand for precautionary arrangements among LICs.
- Precautionary SBAs have worked well for many middle-income members; in the absence of a concessional precautionary instrument, some LICs have turned to non-concessional precautionary SBAs or low-access PRGFs.
- Limitations noted:
  - SBA terms may be inappropriate for LICs if drawings are needed and countries are not ready to rely primarily on non-concessional financing.
  - A low-access PRGF signal is unlikely to be optimal for mature stabilizers seeking to keep or gain market access; the three-year term may be longer than desired.
- Recent practice: SBAs have been approved for PRGF-eligible countries such as Georgia, Pakistan, and Honduras; Honduras indicated it would treat its SBA as precautionary.

### Gaps in emergency/flexibility for fragile and limited-capacity countries
- Fund financial assistance can be critical when policies do not meet UCT standards due to external arrears, political transitions, or fragile situations.
- Currently the Fund cannot provide concessional emergency assistance unless the country recently experienced a conflict (qualifies for EPCA), a natural disaster (qualifies for ENDA), or an exogenous shock (qualifies for the ESF’s Rapid-Access Component (RAC)).
- The lack of a flexible concessional mechanism for emergencies in fragile or limited-capacity situations has been noted repeatedly.

### Overlaps among instruments and consequences
- Instruments with overlapping coverage include PRGF, ESF, PSI, SBA, EPCA, ENDA, and the CFF.
- A LIC hit by an exogenous shock could seek assistance via: PRGF augmentation or new PRGF, ESF RAC or HAC, non-concessional SBA, ENDA, EPCA, or the Compensatory Financing Facility (CFF).
- Some overlaps are inevitable due to all Fund members’ access to GRA resources, but scope exists to reduce the number of facilities for shocks and emergencies; the CFF is identified as a little-used facility that might be eliminated.
- Ambiguities arise from:
  - Difficulty assessing qualification criteria (e.g., separating exogenous and endogenous components for ESF).
  - Distinguishing short- versus longer-term balance of payments needs when both underlying weaknesses and immediate needs coexist.
  - Differing program requirements, access limits, financing terms, and the possibility of combining facilities.

### Country situation typology and applicable financing approaches
- Three broad country situations and financing implications:
  - Countries not meeting UCT standards:
    - Concessional financing for urgent balance of payments needs may be necessary for natural disasters, shocks, and emergencies in post-conflict or fragile situations.
    - Speed and flexibility are often critical; access would naturally be low given lack of UCT policy standards.
    - Roles: avoid excessive adjustment when hit by shocks; prevent precipitous deterioration in economic and social conditions; catalyze donor support; facilitate transition to a UCT facility.
  - Countries undergoing medium- or longer-term adjustment:
    - Three-year (PRGF-type) financing is usually most appropriate; can be aligned to the PRSP.
    - Occasional short-term financing needs are best addressed by augmentations of the medium-term arrangement.
    - Short-term financing might be used as a bridge toward a medium-term facility if no arrangement is yet in place.
  - Countries in broadly sustainable macroeconomic situations:
    - Short-term financing best supports adjustment needs from shocks or policy slippages.
    - Precautionary arrangements or the PSI can provide signaling, policy support, and insurance, especially for countries with high aid dependence, evolving macroeconomic management capacity, and exposure to global volatility and private financing.
- Movement among the three categories is expected depending on country circumstances.

### Principles and tradeoffs for reforming LIC facilities
- Key tradeoffs:
  - Streamlining versus greater tailoring of facilities.
  - Targeting versus flexibility: narrower definitions reduce overlaps but may restrict flexibility and increase underuse.
  - PRSP link: PRSP-based programs (PRGF, PSI) have helped build country ownership and donor support but may delay urgent emergency assistance if required.
  - Symmetry with GRA facilities: mirroring GRA instruments on concessional terms could aid blending of concessional and non-concessional resources.
- Other considerations: access, repayment terms, conditionality, concessional financing structure, and blending.

### Reform models considered (three broad models)
- All options would close three main gaps and reduce overlaps to differing degrees; CFF could be eliminated; PSI could remain as a zero-money policy support and signaling instrument; Staff-Monitored Program (SMP) would continue its role.
- Noted numeric references and specifics in reform discussion:
  - Low-access PRGF arrangement, normalized at 10 percent of quota.
  - Access up to 25% of quota mentioned in illustration.
  - Short-term/Stand-By-like concessional facility envisioned with a 1-2 years duration in some proposals.
  - PRGF described as three-year financing.

- Model summaries:
  - Option 1 — More Flexible PRGF and Emergency Assistance:
    - Modify PRGF to include a short-term window to address short-term needs and include a precautionary option; limit ESF to its RAC component with limited conditionality; expand EPCA eligibility to non-post-conflict fragile situations.
    - Pros:
      - Reinforces PRSP-based foundation tied to growth and poverty reduction.
      - Streamlined: one concessional facility supporting UCT-quality policy adjustment.
      - Permits some flexibility on timing and nature of reforms.
    - Cons:
      - Short-term PRGF window could create confusion given PRGF’s role for entrenched balance of payments problems.
      - Risk of negative stigma due to association of PRGF with poverty, growth, and debt problems.
      - PRSP requirements could impede rapid response.
      - Would leave some overlaps and ambiguities on exogenous shocks.
      - Changes to the PRGF-ESF Trust could be complex due to linkages with the HIPC Initiative.
  - Option 2 — Three-Pillar Structure: PRGF, Stand-By-like Concessional Facility, and Emergency Assistance:
    - Maintain PRGF unchanged for medium/long-term needs; create a concessional short-term financing facility similar to the SBA (could be used precautionarily, would not require a PRSP); create a unified concessional emergency facility for rapid/low-access support with limited conditionality for countries not meeting UCT standards.
    - Pros:
      - Tailors facilities to main types of adjustment need.
      - Maintains PRGF’s role and HIPC debt relief linkage.
      - Provides a flexible short-term instrument to avoid difficult judgments over exogenous vs endogenous factors.
      - Unified emergency facility provides rapid, flexible tool for emergencies.
      - Logical alignment with GRA instruments (EFF, SBA, EPCA/ENDA), facilitating blending.
      - New short-term facility could be created relatively easily by broadening ESF-HAC eligibility.
    - Cons:
      - Risk of repeated short-term arrangements for entrenched problems.
      - Shorter repayment terms could increase debt service pressures.
      - Step away from PRSP-based framework for some poor, aid-dependent countries.
      - Potential considerable demand for the Stand-By-like facility could require additional concessional resources.
  - Option 3 — Single Concessional Financing Facility:
    - Create a single flexible facility for all needs; would be most streamlined and allow greatest design flexibility and social objectives focus.
    - (Detailed pros/cons for Option 3 are implied but not provided in the excerpt.)

### Implementation and next steps noted
- Different approaches to program design elements—access, financing terms, conditionality, and concessional financing structure—could be considered under any reform scenario.
- All issues would be examined in greater detail in subsequent proposals following Executive Board discussion of broad architecture options.

*Source: IMF staff discussion on LIC facilities architecture and reform options.*

### 42.      This option would replace all existing facilities with a single concessional

### _022509 - 42.      This option would replace all existing facilities with a single concessional

### Single concessional facility option: design and transitional arrangements
- Replace all existing facilities with a single concessional instrument with flexible length.
- Facility features:
  - Could provide three-year financing to assist countries with prolonged adjustment needs.
  - Could provide shorter-term financing for shocks and policy slippages.
  - PRSP requirements could apply from the second or third year of financing.
  - Could be used on a precautionary basis.
- Transitional arrangement:
  - The PRGF would be kept active for all existing arrangements and pre-HIPC completion point countries.
- Short-term emergency provision:
  - Countries with programs not meeting UCT standards could receive short-term financing through outright purchases of up to 25 percent of quota for all emergency situations.

### Pros of a single facility
- Streamlining and simplicity:
  - Would go furthest on streamlining.
  - No ambiguity or arbitrage between facilities.
  - Countries could move between shorter and more medium-term arrangements based on circumstances.
- Focus and limits:
  - Would focus IMF lending on temporary balance of payments support to smooth adjustment toward a sustainable macroeconomic position.
  - Would limit differences in access, qualification standards, and concessionality that exist with multiple facilities.

### Cons and risks of a single facility
- Uncertainty and role clarity:
  - Could create significant uncertainty about the Fund’s financing role and objectives in LICs.
- Risks from lack of differentiation:
  - (i) Stigma perceived by relatively advanced LICs.
  - (ii) Applying uniform design features (e.g., conditionality, PRSP, and access policies) to highly diverse country circumstances.
  - (iii) Difficulties in funding an undifferentiated facility since some donors have preferred earmarking in the past.
  - (iv) Lack of clarity as to whether a three-year arrangement would have the same growth and poverty objectives as a PRGF arrangement.
- Trade-off:
  - Differentiating program design for different users could alleviate first two concerns but would add back much of the complexity of multiple facilities.

### Comparative characteristics (summary of Table 2)
- Status Quo: PRGF, ESF, EPCA, ENDAP
  - Gaps: Lacks flexible short-term, precautionary, and emergency financing.
  - Overlaps: Multiple shocks and emergency facilities.
  - Streamlining: Multiple, asymmetric facilities.
  - Tailoring: Medium-term adjustment, shocks, certain emergencies.
  - Flexibility: No flexible instruments.
  - PRSP: PRGF requires PRSP upfront, ESF not.
  - GRA Symmetry: No equivalent of SBA and precautionary SBA.
- Model 1: More Flexible — PRGF consolidated
  - Gaps: No major gaps.
  - Overlaps: Multiple shocks and emergency facilities.
  - Streamlining: All programs with policy content consolidated under PRGF.
  - Tailoring: PRGF windows tailored, but blurs role of PRGF.
  - Flexibility: Flexible length PRGF, with precautionary option, and flexible EPCA.
  - PRSP: PRSP for both short- and medium-term financing.
  - GRA Symmetry: No equivalent of SBA.
- Model 2: PRGF, LIC-SBA, PRGF and EPCA Emergency Assistance Financing
  - Gaps: No major gaps.
  - Overlaps: No major overlaps.
  - Streamlining: Emergency financing consolidated.
  - Tailoring: Each facility tailored to one main adjustment need.
  - Flexibility: Flexible short-term and emergency facilities.
  - PRSP: PRSP for PRGF, not for short-term financing.
  - GRA Symmetry: SBA & EFF-like facilities, but emergency assistance not fully aligned.
- Model 3: Single Concessional Facility
  - Gaps: No major gaps.
  - Overlaps: No major overlaps.
  - Streamlining: Single facility for all needs.
  - Tailoring: Some tailoring by length of program, but weak differentiation signal.
  - Flexibility: Flexible length, and precautionary option.
  - PRSP: PRSP only for medium-term financing.
  - GRA Symmetry: No EFF-like instrument, and emergency assistance not fully aligned.

### Access: current patterns, trends, and implications
- Role: Access limits allocate scarce concessional resources across LIC members.
- PRGF access norms introduced in 2004 to guide access decisions in cases of repeated PRGF use.
- Historical decline:
  - PRGF access limits have declined significantly in effective terms since the inception of the ESAF in 1987 (Figure 11 and Table 3).
  - Decline reflects downward revision of maximum access limit and more rapid GDP and trade growth of eligible countries relative to quota increases.
- Interaction with proposed GRA changes:
  - When proposed increases in both the annual and cumulative limits on GRA access become effective, the difference between PRGF and GRA access limits will widen sharply.
- Examples of access at or above limits:
  - Augmentation to maximum PRGF access for Haiti.
  - Access at the ESF limit for the Kyrgyz Republic and Malawi.
  - Use of SBAs with access above PRGF limits by Georgia and Pakistan.
  - Exceptional maximum PRGF access for Liberia’s arrears clearance.
- Recent vulnerability and financing needs:
  - The current global economic crisis is likely to result in large-scale balance of payments financing needs for several LICs.
  - Staff paper: 22 LICs are particularly vulnerable to the crisis.
  - Over the medium term, based on updated WEO projections, annual financing requirements of LICs could exceed US$110 billion, as compared to US$25 billion at the inception of the ESAF.
- Access limits data snapshots:
  - Figure 11 caption: "Access limits have declined substantially as shares of GDP and trade."
  - Table 3 excerpt (Access Limits):
    - GRA: Annual access 110 100 200; Cumulative access 440 300 500.
    - PRGF 2/: Maximum access 250 140... Exceptional access 350 185...
  - Note: "These figures exclude China and India. In addition, Afghanistan, Liberia, and Somalia were not included initially and in some subsequent calculations owing to the lack of reliable GDP data."
- Policy argument:
  - Factors argue in favor of increasing access limits for the Fund’s concessional facilities to allow more meaningful Fund support and reduce the risk that LICs resort to non-concessional support.
  - One approach: restore access limits to their 1998 levels relative to key macroeconomic indicators such as GDP and trade.
  - Preliminary calculations suggest that the maximum PRGF access limit would have to more than double to restore it to its 1998 level relative to GDP.
- Constraints and trade-offs:
  - Need to balance potential financing needs against resource constraints and other factors.
  - Higher access limits likely boost demand for concessional resources; resource constraints are more pressing for concessional resources than for the GRA.
  - Fund concessional financing catalyzes donor support; important to maintain incentives for LICs to seek donor financing on more concessional terms.
  - A sharp increase in access limits would imply a substantially higher medium-term debt service burden for some countries.
- Norms and flexibility:
  - PRGF access norms (Table 4) applied flexibly; about one third of new PRGF arrangements approved since 2004 have exceeded the access norms.
  - PRGF access norms table (In percent of quota):
    - First time 90
    - Second time 65
    - Third time 55
    - Fourth time 45
    - Fifth time 35
    - Sixth time 25
  - Decisions on access typically take into account: (i) balance of payments needs; (ii) strength of the program and degree of adjustment effort; (iii) outstanding concessional credit and record of use of such credit in the past; and (iv) ability to repay the Fund.
  - Staff will develop specific proposals on limits and rules in the second stage of the review; PRGF access norms could be increased proportionally in the event of an increase in PRGF access limits.

### Financing terms: concessionality, repayment, blending, and emergency assistance
- Current PRGF/ESF terms:
  - Grace period and maturity of PRGF/ESF loans are 5½ and 10 years, respectively.
  - Interest rate is 0.5 percent per annum.
  - At inception of ESAF in 1987, concessionality estimated at about 48 percent (methodology evolved).
  - PRGF concessionality is currently estimated at 28 percent; a reduction to an interest rate of zero would raise the grant element to 31 percent.
  - IDA comparison: IDA loans have a 0.75 percent annual interest rate, with a grace period and maturity of 10 and 40 years respectively.
- Options and trade-offs on concessionality:
  - Reducing interest rate further to zero would have little effect on concessionality relative to current low market rates.
  - Extending maturity beyond ten years to achieve greater concessionality would raise questions about the temporary nature of PRGF-ESF Trust Fund lending and the nature of Fund assistance to LICs.
  - Given the Fund’s role in catalyzing donor flows, providing adequate access to meet urgent needs is likely more important than increasing concessionality.
- Shorter repayment periods for short-term adjustment lending:
  - Could discourage inappropriate use of short-term facility and place less burden on limited concessional resources (resources repaid sooner).
  - Would reduce concessionality and add to near-term debt service burdens.
  - Could lead countries with short-term needs to seek longer-term instruments, tying up concessional resources.
  - On balance, uniform PRGF/ESF terms across LIC instruments seem preferable; shorter repayment periods for some advanced LICs could be achieved through blending with GRA instruments.
- Flexible repayment terms:
  - Other agencies pilot approaches making debt service effectively counter-cyclical (flexible grace periods).
  - For the Fund, such approaches are less effective given PRGF-ESF Trust’s relatively short grace and repayment periods and the counter-cyclical nature of Fund disbursements.
  - Operational complexity and need for simple shock definitions reduce attractiveness.
  - Members could repay PRGF credit early if balance of payments needs decrease unexpectedly to preserve concessional resources, but low interest rates make this option unlikely to be used frequently.
- Emergency assistance concessionality:
  - Strong case for increasing concessionality of emergency assistance by extending it on the same terms as PRGF/ESF loans.
  - Currently, ENDA/EPCA credit is less concessional: repurchases are made on GRA terms with a shorter grace period (3¼ years) and maturity (5 years).
  - Resources permitting, rate of charge on ENDA/EPCA credit is subsidized to 0.5 percent per annum through donor contributions.
  - Recommendation: finance both principal and interest subsidies for ENDA/EPCA through the PRGF-ESF Trust to make concessionality symmetric across all LIC facilities; would require amendment to the PRGF-ESF Trust Instrument and consents by all lenders and subsidy contributors.
- Blending concessional and GRA resources:
  - 2004 guidelines on blend arrangements clarified and strengthened; implemented flexibly.
  - Since 2004, two “blend” arrangements approved: Albania (2006) and Liberia (2008).
  - Several countries meeting criteria for blend arrangements opted for GRA financing only or PRGF only.
  - Possible guideline strengthening:
    - (i) Recommend blended arrangements only for countries that meet minimum standards of debt sustainability in context of DSAs.
    - (ii) Clarify approach in exceptional cases where countries do not meet blending criteria but require access above concessional thresholds (e.g., arrears clearance).
    - (iii) Establish a blending mechanism that applies consistently across facilities.
- Eligibility reviews:
  - PRGF eligibility is occasionally reviewed by the Fund’s Executive Board based on IDA and IDA-blend eligibility.
  - Several PRGF-eligible countries are above the IDA operational cutoff (a 2007 per capita income of $1,095) but remain eligible for IDA or IDA-blend financing due to creditworthiness considerations and exceptions for small islands.
  - Suggestion: review PRGF eligibility and relevant criteria in the near future, possibly followed by regular reviews on a fixed cycle.

*Source: _022509 - 42.      This option would replace all existing facilities with a single concessional (IMF staff paper content).*

### 58.      In recognition of LICs’ longer-term adjustment needs, PRGF financing has been

### _022509 - 58.      In recognition of LICs’ longer-term adjustment needs, PRGF financing has been

### PRGF protracted balance of payments problem standard — role and implications
- PRGF financing is provided to countries facing a “protracted balance of payments problem,” implying an eventual balance of payments need over the course of the three-year arrangement rather than necessarily a present need at approval or disbursement.
- Assessment of the size of need requires judgment because needs are endogenous to policy choices; this is especially complex in LICs with entrenched structural problems where imbalances often manifest as output gaps and import compression rather than low reserves or large BOP deficits.
- Phasing half-yearly disbursements to match BOP needs can be particularly difficult in entrenched cases.
- Access is usually anchored in the medium-term PRSP-based macroeconomic framework; the protracted BOP problem standard enables predictable support.
- Drawbacks noted:
  - Committing PRGF financing based on the protracted standard ties up concessional resources for three years irrespective of eventual needs since disbursement schedules are usually not revised down if needs are lower in outer years.
  - It has been argued the standard is inconsistent with treating the PRGF as precautionary.

### Conditionality — current approach and reform options
- Objectives and concerns:
  - Conditionality ensures measures to resolve a country’s BOP problem and enable repayment, while assuring members on steps needed to secure financing.
  - Structural conditionality raises questions about (i) sensitivity to political, institutional, and capacity constraints; (ii) whether it is well-designed and “macro-critical”; and (iii) focus on Fund expertise.
- Since 2002, the Fund has promoted “parsimony” and “criticality” in structural conditionality; the 2007 IEO study found some progress.
- Tailoring conditionality to country circumstances:
  - Post-conflict or fragile countries: fewer structural conditions; focus on building basic institutions and mechanisms for macro policy conduct.
  - Countries undergoing longer-term adjustment: higher structural content, derived from country-owned PRSPs.
  - Countries moving to emerging market status: limited number of “second-generation” reform benchmarks (e.g., capital market integration, financial sector stability), potentially drawn from PRSPs.
  - Short-term adjustment programs: more limited conditionality but potentially greater urgency on timing; longer-term programs might allow greater flexibility on timing.
- Options under consideration (from broader conditionality paper):
  - (i) Review-based conditionality: eliminate performance criteria in favor of assessments based on a set of quantitative and structural targets; an individual breach would not by itself interrupt purchases or trigger a waiver.
  - (ii) Greater use of ex-ante conditionality (as in the Short-Term Liquidity Facility), less appropriate for longer arrangements.
  - (iii) A hybrid of review-based and ex-ante approaches.
- For LICs, review-based conditionality could be particularly useful for medium-term structural reform agendas with timing uncertainty.

### Concessional resource envelope — resource availability (end-2008) and implications
- Available loan and subsidy resources for PRGF/ESF lending at end-2008:
  - Loan resources: SDR 2.5 billion.
  - Subsidy resources: SDR 1.3 billion.
- Of the available subsidy resources, an estimated SDR 0.3 billion would be needed to cover existing PRGF/ESF credit, leaving about SDR 1 billion to subsidize new PRGF/ESF loans of about SDR 4.5 billion (though additional loan resources of SDR 2 billion would be needed to fully utilize available subsidy resources).
- ESF establishment context:
  - Initial ESF target (2005): financing for ESF loans of SDR 2 billion and subsidy resources of SDR 0.5 billion for a five-year period.
  - To date (as of end-2008): 11 countries pledged subsidy contributions of SDR 0.2 billion and new loan resources of SDR 0.6 billion.
- Reserve Account:
  - Purpose: provide security to lenders for delays/nonpayment, meet temporary mismatches, and cover PRGF-ESF administrative costs.
  - As of end-2008, Reserve Account balance: SDR 3.8 billion.
  - Proposed “self-sustained” subsidization by Reserve Account income would require amendment of the PRGF-ESF Trust Instrument (85 percent majority and consents of all current PRGF-ESF Trust lenders).

### Box 1 findings — impact of decline in SDR interest rates on subsidy resources
- Previous staff assumption (Update on the Financing ...): average annual SDR interest rate rising from 4 percent in 2008 to 5 percent by 2013 and remaining at 5 percent thereafter; under that, available PRGF-ESF subsidy resources could subsidize new lending of SDR 3.2 billion and the Reserve Account could sustain annual subsidization capacity of SDR 0.8 billion; subsidy resources for ENDA/EPCA credit could be depleted by end-2009.
- Updated staff assumption: SDR interest rates remain below 1 percent in 2009 and rise gradually to 4.5 percent by 2014 and thereafter.
  - On this basis, available PRGF-ESF subsidy resources could subsidize new lending of about SDR 4.5 billion.
  - Reserve Account self-sustained subsidization capacity is now estimated at about SDR 0.7 billion per year.
  - With lower interest rates, subsidy needs for ENDA/EPCA are lower and resources currently available are estimated to be broadly sufficient for existing credit, though additional resources would be needed for new ENDA/EPCA requests.
- Historical SDR interest rates (1988-2008) reported:
  - 5 years (2004-2008): 2.9
  - 10 years (1999-2008): 3.0
  - 15 years (1994-2008): 3.4
  - 20 years (1988-2008): 4.4

### Projected financing needs — short-term prospects (impact of global financial crisis)
- Crisis effects:
  - Expected substantial increase in BOP needs of LICs due to collapsing commodity prices and adverse effects on exports, remittances, and capital inflows.
  - Among PRGF-eligible countries, 22 are considered particularly vulnerable to the current global crisis.
- Near-term demand projections:
  - Demand for concessional financing could increase from SDR 0.8 billion in 2008 to an annual average of SDR 1.3–2 billion in 2009-10.
  - Two illustrative scenarios (projections are highly tentative and illustrative):
    - Scenario 1:
      - Assumptions: half of current PRGF/ESF users request augmentations of 15 percent of quota (average size of augmentations in 2008); all countries expected to seek new PRGF/ESF arrangements request access in line with norms.
      - Result: annual lending could average SDR 1.3 billion in 2009-10.
    - Scenario 2 (more severe global crisis):
      - Assumptions: current PRGF/ESF users considered highly vulnerable request augmentations of 30 percent of quota (others request 15 percent of quota); remainder of highly vulnerable countries seek new PRGF/ESF arrangements with access of 20 percent of quota above norms; other new applicants request new arrangements at normal access.
      - Result: demand could average SDR 2 billion a year for 2009-10.
- Expected requests (staff estimates, Table 5 summary):
  - Total number of requests: 56; Total SDR demand implied: 2.7 (Scenario 1) to 4.0 (Scenario 2) — see Table 5 for breakdown by augmentations and new arrangements and by “highly vulnerable” vs “others”.
- Emergency assistance (ENDA/EPCA):
  - Due to lower SDR interest rates and subsidy needs, resources are now estimated to be broadly sufficient to cover existing ENDA/EPCA credit.
  - Additional resources would be needed to meet new requests in a timely manner.
  - In March 2008, the Managing Director requested additional contributions estimated at SDR 100 million to cover existing ENDA/EPCA credit and new lending through 2014.

### Projected financing needs — medium-term prospects
- Drivers of sustained above-historical demand:
  - Increasing exposure to volatility of global growth and commodity prices, higher exposure to private sector financing, and increasing likelihood of emerging market-type stress periods in some LICs.
  - Risk of a protracted fallout from the global financial crisis.
  - Potential financing requests by the three protracted arrears cases following clearance of arrears to the Fund.
- Medium-term annual demand range:
  - Annual demand for concessional financing could range from SDR 1 billion to SDR 2 billion over the medium term.
  - Basis: estimated share of the Fund’s concessional financing in total gross financing requirements (GFR) of PRGF-eligible countries.
  - If the Fund’s share remains at the recent level, annual demand ≈ SDR 1 billion.
  - If the Fund’s share rises to its long-run average of 2.9 percent, annual demand ≈ SDR 2 billion per year.
- Central projection and resource shortfall:
  - Under a central projection of annual demand averaging about SDR 1.5 billion, an additional SDR 0.7 billion in subsidy resources would be needed to supplement the lending capacity of the Reserve Account through 2015.
  - To cover demand over the same period, new loan resources of SDR 9 billion would also need to be secured.

*Italic: Source: Excerpt from the provided IMF staff paper content unit.*

### 74.      The review of LIC facilities, with possible changes to lending policies and

### _022509 - 74.      The review of LIC facilities, with possible changes to lending policies and

### Context and purpose
- The review of LIC facilities offers an opportunity to revisit the Fund’s concessional financing framework and may require amendments to the PRGF-ESF Trust Instrument.
- April 2008 Communiqué: IMFC called for a structured way of approaching donors and encouraged additional financial contributions so the Fund can continue to subsidize emergency assistance and capacity building to low-income members.
- Support for a review was expressed at an informal Board briefing on May 14 and the Oslo donors meeting on May 15, 2008.
- Staff will prepare follow-up papers to lay out specific modalities reflecting Executive Directors’ views.

### Existing financing arrangements
- Concessional lending has been channeled mostly through various trusts and administered accounts, separate from the Fund’s GRA operations.
- Historical evolution:
  - Mid-1970s and early 1980s: subsidized loans financed from sale of part of the Fund’s gold holdings and made through the Trust Fund and later SAF.
  - 1987 (ESAF inception): a trust arrangement with bilateral contributors providing loan and (most) subsidy resources; reflows placed in the Reserve Account to provide security to bilateral lenders.
  - 1999 (enhanced HIPC): ESAF transformed into the PRGF; additional contributions for HIPC debt relief channeled through PRGF-HIPC Trust.
  - 2005 (ESF set up): PRGF Trust purposes expanded; Loan Account extended to cover ESF principal; three separate Subsidy Accounts created.
  - 2006: two separate trusts set up to finance the MDRI, with Fund resources and transfers from the PRGF Subsidy Account.
- Emergency assistance and related instruments:
  - ENDA (outright GRA purchases historically) available to all qualifying members; in 2005, Board decided to subsidize ENDA rate of charge for PRGF-eligible members with bilateral resources.
  - EPCA initiated in 1995, financed from the GRA; in 2001, an administered account was established to receive bilateral contributions to subsidize EPCA credit to PRGF-eligible members.
- Figure 13 (descriptive): current structure includes PRGF-ESF Trust, PRGF-HIPC Trust, MDRI trusts, Reserve Account, Loan Account, various Subsidy Accounts, ENDA/EPCA administered accounts, and subaccounts (PRGF, PRGF-HIPC, HIPC, ENDA, EPCA). Debt relief distinctions noted for per capita income at or below US$380 and above US$380.

### Challenges identified
- Concessional resources are limited and could be depleted quickly; the estimated subsidization capacity of the PRGF-ESF Reserve Account offers limited ability to handle sustained high demand.
- Near- and medium-term demand for concessional financing could rise significantly, potentially exceeding available resources and Reserve Account capacity.
- Fund-raising has become increasingly ad hoc; financing structure inflexible. Example: PRGF-ESF subsidy resources cannot be used to subsidize ENDA/EPCA lending without additional contributions and donor consents.
- Emergency assistance is currently less concessional than PRGF/ESF loans; given LIC debt vulnerabilities, providing emergency assistance on PRGF-ESF terms would require additional resources and more flexible arrangements.
- Potential changes to LIC lending policies and facilities would likely require additional resources and separate financing arrangements, adding complexity.

### Reform options for consideration (overview)
- Objectives: ensure sufficient concessional resources to meet evolving LIC needs; accommodate possible changes in lending facilities; simplify and increase flexibility of financing structure.
- Two broad reform directions discussed:
  - Regularized, structured fund-raising cycles.
  - Simplified and more flexible financing architecture, including creation of general subsidy accounts or common pools.

### A structured approach to future fund-raising
- Proposal: shift from ad hoc fund-raising to regular cycles similar to IDA replenishments.
- Operational detail example: both loan and subsidy resources could be mobilized on, say, a five-year cycle to cover projected financing needs for all existing and new concessional facilities.
- PRGF-ESF Reserve Account could serve as a contingency buffer and continue to provide security to cover bilateral loans.
- Advantages listed:
  - Helps ensure sufficient resources to meet LIC financing needs.
  - Allows donors to contribute in a structured way and avoid ad hoc amendments and repeated donor consents.
  - Strengthens ability to handle unexpected spikes in demand using Reserve Account resources.
  - Unlikely to create direct competition with IDA due to relatively limited magnitude of Fund resource needs and different financing purposes.

### A simplified and more flexible financing structure
- Option 1: establish a new general subsidy account outside the PRGF-ESF Trust to receive contributions and subsidize all concessional lending, including under new facilities.
  - Existing PRGF-ESF subsidy accounts would remain open for donors wishing to earmark contributions.
  - Contributors could transfer part or all of existing PRGF-ESF subsidy contributions to the new general account.
  - Resources in the general subsidy account would be available for any type of concessional lending when specific accounts are exhausted.
- Option 2: create common pools of loan and subsidy resources to finance all concessional lending operations.
  - Would streamline the framework and provide maximum flexibility to respond to changing demands and new initiatives.
  - Would require contributors to agree that their existing contributions (Loan and Subsidy Accounts) be used for a broader range of purposes and would reduce donor ability to earmark new contributions.
- Under both approaches:
  - The PRGF-ESF Trust Instrument would need amendment to allow loan resources to be used for all types of concessional lending.
  - Reserve Account would provide security to cover all types of lending.
  - Board decisions and consents from all current loan and subsidy contributors required.
  - An Executive Board decision amending the PRGF-ESF Trust Instrument must be adopted by an 85 percent majority of the total voting power; consents required from all current contributors to the Loan and Subsidy Accounts.

### Implementation considerations and constraints
- Moving to common pools or a general account represents a departure from past practice of accommodating donor earmarking preferences.
- Reallocating subsidy resources (e.g., from PRGF-ESF Trust to subsidize emergency assistance) would require Board approval and consents from all bilateral contributors to the PRGF-ESF Trust subsidy accounts.
- Any change implicates bilateral contributors’ rights and donor preferences and would require legal/instrument amendments and broad donor agreement.

### Issues for discussion (as posed to Directors)
- Should the IMF’s facilities and financing framework become more flexible to address diverse LIC needs and heightened exposure to global volatility?
- Should the Fund maintain ability to provide both medium- and short-term concessional financing and accommodate members seeking program-based engagement with limited financing?
- Do Directors support reform of the facilities architecture to close gaps (short-term financing needs other than exogenous shocks, precautionary needs, flexible emergency support), while reducing ambiguities and limiting overlaps? If so, which of the three broad reform models should be explored in the second stage?
- Should modifications to access policies be explored in the second stage in light of erosion of access norms and greater global volatility?
- Do Directors agree that financing terms under the PRGF-ESF Trust remain appropriate, and that emergency assistance and short-term adjustment lending should be provided on the same terms? Should rules for blending concessional and GRA resources be revisited, and PRGF eligibility reviewed more regularly?
- Do Directors support making the conditionality framework under concessional facilities more flexible, including by adapting proposals made for the GRA? Should the protracted balance of payments problem standard remain relevant for medium- and longer-term adjustment lending, while a present-needs standard apply to short-term financing?
- How should the risk of insufficient concessional resources be addressed given demands from the global crisis, greater LIC exposure to volatility, and possible reforms closing gaps in the LIC facilities architecture?
- Do Directors agree to a more structured and periodic approach to fund-raising to make the concessional financing framework more flexible and allow donors to support the broad range of lending facilities? If so, which options should be explored further in the second stage?

*Source: _022509 - 74.      The review of LIC facilities, with possible changes to lending policies and instruments.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_022509.pdf_