## This note provides operational guidance and background information on the use of

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### Legal framework for use of Fund resources
- Key legal conditions (Article V, Sections 3(a) and (b)):
  - A member should only purchase when it has a BoP need.
  - A member must “use” Fund resources to address the underlying BoP problem in a manner that provides adequate safeguards (i.e., ensures repayment to the Fund) (Annex I).3
- Article V, Section 3(b)(ii) — three exclusive forms of BoP need (any one sufficient):
  - (i) “balance of payments” — requires an above-the-line deficit (below-the-line transactions include official external borrowing and debt restructuring, and grants from foreign official agencies),
  - (ii) “reserves position” — requires a determination that gross (rather than net) reserves are inadequate,
  - (iii) “developments in reserves” — arises in a limited number of cases (e.g., members that issue reserve currencies).
- GRA financing (SBA, EFF, FCL):
  - Approval of an arrangement is possible without an actual BoP need.4
  - Any member requesting a purchase must represent it has some form of actual BoP need.5
  - Assessment of BoP need can require a forward-looking perspective; assessment can be conducted within a broad time horizon of one year backwards and forwards around the date of a purchase request.
- Use of resources and conditionality:
  - “Use” is broad and need not be traced to particular payments because money is fungible.
  - Use is demonstrated by implementing policies designed to resolve the BoP problem (typically via ex post conditionality and an overall macroeconomic program).
  - FCL: no ex post conditionality; strict qualification requirements serve as ex ante conditionality.
  - First credit tranche and Emergency Assistance: little conditionality but members must elaborate and implement policies to address BoP problems.
  - Reserve tranche purchases: unconditional and can be made solely on the member’s representation of BoP need.6
- Concessional financing (PRGT):
  - BoP test for SCF and RCF same as GRA financing.
  - ECF targets a “protracted BoP problem”; Fund examines components and a variety of indicators.7
  - ECF: disbursement request need not show actual BoP need at that time, though a protracted BoP need must exist at approval.
  - PRGT financing aims at stable and sustainable macroeconomic positions consistent with strong and durable growth and poverty reduction (Section I, Paragraph 1(a)).
- Summary finding:
  - If BoP-related conditions are met, Fund resources may be used within a member’s domestic economy to finance the budget—consistent with the Fund’s legal framework—for both direct budget support (via the Treasury) and indirect budget support (via the central bank).

### Analytical considerations
- Linkages between BoP and budget support:
  - Expansionary fiscal policy typically widens the current account deficit; sudden stops in capital inflows limit government access to budget financing.
  - External budget support is de facto BoP support; external loans to central banks often entail implicit budget support.
- Effects of Fund BoP support:
  - Provides liquidity that can be used to (i) build reserves and/or (ii) provide liquidity to public or private sector for external payments.
  - By relaxing external liquidity constraints, Fund support reduces the need for retrenchment in public and private savings-investment balances, enhancing domestic policy options and cushioning private sector adjustment.
  - Fund BoP support typically entails some degree of implicit budget support.
  - The extent of use of additional fiscal space is difficult to quantify without a counterfactual macroeconomic scenario.
  - Any combination of “absorption” and “spending” of Fund resources may be appropriate under different circumstances (see Annex II)8; some change in the fiscal path will often be appropriate.
- Direct versus indirect budget support:
  - Desired macroeconomic adjustment can be achieved irrespective of channel (Treasury direct or central bank indirect).
  - To build international reserves, disbursements to the Treasury can be appropriate if government saves funds as deposits at the central bank.
  - To accommodate fiscal stimulus, disbursements to the central bank can be on-lent directly or indirectly to the government.
  - Direct budget support useful when institutional or market constraints prevent appropriate fiscal policy response (e.g., independent central bank cannot lend to government; currency board or fully dollarized economies).
- Legal liability:
  - Member (state as represented by its government) is the sole obligor and liable for repayments (Article V, Section 7).
  - The fiscal agent is an agent of the member and not itself liable.

### Operational aspects of Fund budget support
- Documentation and accounting — program documents should:
  - Demonstrate existence of a BoP need through description of current and capital/financial account developments and projections, financing outlook, and reserve adequacy indicators (imports, short-term external debt, monetary aggregates, etc.).
  - Describe authorities’ objectives and proposed policy mix.
  - Include full discussion of access and how proposed access levels were determined.
  - For direct budget support: explain institutional rationale, discuss impact on central bank independence, justify consistency with Fund objectives, and discuss exit strategy and risks of prolonged dependence on Fund financing.10
  - Explain safeguards that the Fund will be repaid (see subsection IV B on safeguards issues in direct budget support cases).
- Program accounting conventions — how purchases affect NIR and NDA:
  - Typical indirect budget support: Fund purchase deposited into central bank account; no change in central bank NIR (gross reserves increase and central bank liabilities to the Fund increase) or NDA.
  - Indirect support until money is lent to Treasury: remains indirect until lending/drawdown (reduces NIR depending on sterilization and demand effects; increases NDA).
  - Indirect support where central bank assumes liability and money deposited to a Treasury account at the central bank: no immediate impact on NIR or NDA; when used by Treasury, NDA increases and NIR may fall.
  - Direct budget support where Treasury assumes liability and money deposited to Treasury account at central bank:
    - Central bank NIR increases and NDA declines (government deposits increase).
    - As government draws down deposits, NDA increases and NIR may fall depending on sterilization or reserve use.

*Prepared by Lorenzo Giorgianni, Jan Kees Martijn, Donal McGettigan, and Christian Mumssen (SPR), Ross Leckow and Ceda Ogada (LEG) and David Andrews and Tore Hauge (FIN).*

### Composite NIR and NDA treatment; channeling Fund resources
- Past programs with direct budget support (or Treasury assuming Fund liability) used composite NIR and NDA measures adding central bank and Treasury positions (example: Turkey, 2001).
- Mechanics examples:
  - Treasury assumes liability and money deposited to its account at central bank: central bank NIR increases but composite NIR unchanged (gross reserves increase while Treasury liabilities to the Fund increase).
  - Central bank NDA declines while composite NDA remains unchanged (government deposits lower central bank NDA and increase Treasury NDA).
- Fiscal agent and obligor:
  - When a purchase is made, the member is the sole obligor; fiscal agent acts as intermediary.
  - From Fund perspective, whether central bank or Treasury is fiscal agent is irrelevant; the member controls whether financing is used for budgetary support.
  - Provided BoP-related conditions in Section II are met, the fiscal agent can instruct the Fund to channel resources to Treasury, central bank, or another entity.

### B. Safeguards considerations for direct budget support
- Safeguards concerns:
  - Direct budget support raises issues including the possibility that Fund repurchases may become subject to the budget process.
- Safeguards process:
  - Program design and, for FCL arrangements, members’ policy track records are ultimate safeguards; safeguards assessments by Finance Department are used to ensure temporary and appropriate use (Annex IV).
  - Under current policy, safeguards assessments are conducted at central banks, not Treasuries, because disbursements are almost always channeled to central banks as reserves managers.
  - For budget support cases, safeguards assessments have sought assurances via a clear central bank–government framework on repayment modalities.
- Risk assessment:
  - Current risk assessment framework for exceptional access cases pays particular attention to fiscal risks (public sector debt burden and government’s ability to mobilize resources).
- Executive Board and policy review:
  - Executive Board supported focus on central banks for safeguards assessments.
  - Chairs raised concerns at August 2009 informal briefing on UFR for budgetary support; issue to be addressed in safeguards policy review in 2010.
- Interim guidance for country teams:
  - Ensure adequate safeguards via program design and platforms to strengthen fiscal transparency and accountability, including fiscal ROSCs or PEFAs where available.

### C. Communications strategy for direct budget support
- Communication objectives:
  - Minimize misperceptions that the Fund is changing direction or abandoning the BoP criterion.
- Communication content should:
  - Set out rationale for using direct budget support; explain institutional reasons and that members seeking direct support face a BoP need, part fiscal in nature.
  - Indicate that direct budget support has always been possible under appropriate circumstances and that recent crisis increased need for flexible fiscal responses.
  - Clarify that Fund provides BoP and budget support, not project-specific financing.
  - Where safeguards concerns arise, indicate continued safeguards: program policies, central bank lodging of funds and safeguard assessments, understandings on repayment modalities, fiscal targets, fiscal ROSCs and surveillance tools.

### ANNEX I — A. GRA framework (key legal and operational points)
- Purpose and Articles:
  - Article I: provide members opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity (Article I (v)).
  - Article V, Section 3(a): Fund to adopt policies on use of GRA resources and establish adequate safeguards to ensure repayment. Policies include special facilities, access, phasing, conditionality, full program financing, external arrears, debt sustainability, misreporting, safeguards assessments, post-program monitoring, repurchases and overdue obligations.
  - Article V, Section 3(b)(ii): general resources only used by a member that represents it has a BoP need because of “its balance of payments or its reserve position or developments in its reserves”.
- Existence of BoP need — three alternative criteria (exclusive):
  - “Balance of payments” when above-the-line BoP deficit exists; member given benefit of doubt in uncertainty.
  - “Reserve position” based on gross reserve level and adequacy assessed by multiple criteria (volume of foreign trade, variability, quota size, past behavior, seasonal factors, monetary aggregates, size of short-term foreign exchange liabilities).
  - “Developments in reserves” for cases like settling balances within regional bodies without a BoP deficit or need to build reserves.
- Magnitude of BoP need — categories:
  - Actual need: present BoP need; member must have actual need when requesting a purchase. Actual need may be assessed within one year backwards and forwards around purchase request.
  - Prospective need: expected to arise in future, including through program implementation.
  - Potential need: may arise but not expected during the arrangement.
- Access and phasing:
  - Purchases cannot exceed actual need; access under arrangement determined based on prospective/potential needs.
  - Arrangements generally phased (FCL exception) so incremental financing links to program conditions.
- Representation and remedial action:
  - Member requesting purchase must represent BoP need in SWIFT or telex purchase request and that purchase is needed per the Articles.
  - Fund may take remedial action if need did not exist at purchase (noted this has never happened).
- Use of purchased resources:
  - Articles require purchased resources be “used” to address a BoP problem.
  - Fund does not track disbursements in practice; assurances obtained by adequate policies/program design and member’s representation.
- Safeguards:
  - Use subject to adequate safeguards about capacity to repay; strong program design with conditionality is the strongest safeguard.
  - FCL safeguards provided by strict qualification requirements.
- Summing up conditions under which Fund resources may finance the budget:
  - (i) member has an actual BoP need when making a purchase, as represented,
  - (ii) member has committed to implement policies, including in a program, to resolve its BoP problem and ensure repayment,
  - (iii) program envisages that foreign exchange purchased will be used to meet a BoP deficit or strengthen reserves.
- Within these parameters, Fund arrangement can allow member to use Fund resources domestically to finance government budget deficit; consistent with legal framework if BoP-related conditions met.
- Legal citations referenced:
  - Decision No. 71-2, adopted September 26, 1946.
  - Decision No. 1238-(61/43), adopted July 28, 1961.

### ANNEX I — B. PRGT framework (key points)
- PRGT financing purpose: considers BoP and achievement/maintenance of stable and sustainable macroeconomic positions consistent with strong and durable growth and poverty reduction (Section I, Paragraph 1(a)).
- BoP need tests under PRGT:
  - SCF and RCF: similar to GRA analysis.
  - ECF: targets a “protracted balance of payments problem” at time of approval (Section II, Paragraph 1(b)(2)).
  - Determination of “protracted BoP problem” examines components of BoP and uses a variety of indicators; analysis is flexible.
  - A member can have a protracted BoP problem even if it does not have a BoP need as defined under the Articles.
  - GRA need criteria relevant for determining amount of access under ECF (Section II, Paragraph 2(f)).
  - Amounts committed under ECF and other PRGT facilities may not exceed present need based on three GRA criteria and any prospective need expected during arrangement.
  - Normally both a protracted BoP problem and a BoP need will exist throughout an ECF arrangement (limited exceptions under Section II, paragraph 3).
- Facility-specific purposes (Section I, Paragraph 1(a)):
  - ECF: support program enabling members with a protracted BoP problem to make significant progress toward stable and sustainable macroeconomic positions consistent with strong and durable poverty reduction and growth.
  - SCF: support program for members with actual or potential short-term BoP needs to achieve, maintain or restore stable and sustainable macroeconomic positions consistent with strong and durable poverty reduction and growth.
  - RCF: support policies of members facing urgent BoP needs to enable progress toward stable and sustainable macroeconomic positions consistent with strong and durable poverty reduction and growth.
- As under GRA, PRGT resources may be used to finance government budget deficit domestically if above conditions are met.

*Source: _032310 - 19.      In past programs involving direct budget support (or Treasury assuming the Fund*

### ANNEX II. A — Analytical underpinnings: typology of how Fund liquidity is used
- Four stylized possibilities (classification acknowledges absence of a non-Fund financing counterfactual):
  - a. Don’t Absorb, Don’t Spend
    - Objective: bolster reserves.
    - BoP need: reserve levels too low or future pressure on reserves.
    - Mechanism: Fund credit to central bank; foreign exchange saved as international reserves; domestic currency counterpart not spent by government.
  - b. Absorb, Don’t Spend
    - Objective: meet private sector foreign currency demands; ease private sector financing constraints.
    - BoP need: increased private sector foreign exchange needs threaten reserves.
    - Mechanism: Fund credit to central bank; foreign exchange sold to private/public sector; domestic currency counterpart onlent by central bank to commercial banks; domestic currency counterpart not spent by government.
  - c. Absorb, Spend
    - Objective: finance higher net imports and net capital outflows from fiscal stimulus.
    - BoP need: increased public (and private) sector foreign exchange needs from accommodative fiscal stance.
    - Mechanism: Fund credit to central bank; foreign exchange sold; domestic currency counterpart onlent to government for spending.
  - d. Don’t Absorb, Spend
    - Objective: stimulate domestic economy.
    - BoP need: increased reserves provide cover against uncertain import demand potentially spurred by government spending.
    - Mechanism: Fund credit to central bank; foreign exchange saved as reserves; domestic currency counterpart onlent to government and spent.

### Some recent cases of direct budget support (selected cases)
- Hungary (November 2008)
  - Central bank independence: Yes, direct central bank lending to the government not allowed.
  - BoP need: financing of current account deficit, financial sector support, increasing gross reserves.
  - Rationale: First two SBA purchases disbursed to government via Hungarian Debt Management Office; part for bank support package; domestic currency counterpart used to meet government financing need from nonresident bond sales; sterilized via central bank bills.
- Latvia (November 2008)
  - Central bank independence: Yes, quasi currency board.
  - BoP need: loss of international reserves; bolster banking system; re-establish confidence.
  - Rationale: Acute government liquidity constraints and need to assist systemically important bank not channelable through Bank of Latvia.
- Ukraine (November 2008)
  - Central bank independence: Yes; its preservation a key program objective.
  - BoP need: rebuild gross international reserves.
  - Rationale: Sharp revenue shortfalls, lack of access to international capital markets, underdeveloped domestic bond market; direct budgetary support preferred to preserve central bank independence and prevent monetization.
- Armenia (March 2009)
  - Central bank independence: Direct central bank lending to the government not allowed.
  - BoP need: increase gross reserves and address current account deficit.
  - Rationale: Fiscal easing led to BoP pressure; augmentation transferred directly to government to avoid more severe external/domestic adjustment, worse growth, and sizeable cuts in social spending.
- Georgia (August 2009 Augmentation)
  - Central bank independence: Direct central bank lending to the government not allowed.
  - BoP need: increase gross reserves; address current account deficit amid prolonged global crisis.
  - Rationale: 2009–2010 support to finance higher fiscal deficit from sharper-than-expected slowdown; under-developed domestic financial markets make Fund financing preferable to maintain reserve coverage.
- Pakistan (August 2009 Augmentation)
  - Central bank independence: Limits on direct central bank lending to the government.
  - BoP need: strengthen gross reserves to deal with increased external risks.
  - Rationale: Augmentation designed to pave way for donor-supported relaxation of fiscal deficit target in 2009/10; program envisages that a portion of Fund credit (92 percent of quota) be used to finance social spending element of expanded budget as a bridge loan ahead of pledged donor support to reduce pressure from associated budgetary imports due to backloaded donor inflows.
- Romania (May 2009)
  - Central bank independence: Yes; direct central bank lending to the government not allowed.
  - BoP need: rebuild gross reserves and smooth current account adjustment amid large capital outflows.
  - Rationale: Half of purchases related to 1st, 2nd and 3rd reviews, totaling SDR 1.9 billion (or 17 percent of total access under the exceptional SBA program), were disbursed directly to the Ministry of Finance to finance the general government deficit. Domestic financing would have strained a relatively shallow market; no further disbursements expected to go to Ministry.

### Safeguards considerations (detailed)
- Concerns raised by using domestic counterpart for budgetary purposes:
  - Repurchase could become subject to budgetary appropriation.
  - Government must generate a budgetary surplus or borrow elsewhere to repurchase within the repurchase period.
  - Risk of undue fiscal reliance on Fund resources absent clear exit strategy.
- Role and scope of safeguards assessments:
  - Safeguards assessments are one element in package to ensure temporary and appropriate use of Fund resources.
  - Program design with quantitative performance criteria is the ultimate safeguard when a program exists.
  - Where no Fund-supported program (e.g., FCL), strict qualification requirements serve as safeguards.
  - Safeguards assessments conducted at central banks because disbursements are almost always channeled to central banks as reserves managers.
  - For direct budgetary support, assessments seek a clear central bank–government servicing framework and replication of on-lending via deposit at central bank.
  - Where NIR and NDA components sourced outside central bank, assessments seek external assurances of integrity.
  - In absence of well-defined government balance sheets, assessments call for transparent disclosure of Fund transactions in central bank financial statement notes; sometimes SDR accounts used as quasi escrow.
  - Risk assessment framework for exceptional access includes a ratio of debt service to the GRA to government revenues to capture budgetary repayment risks.
- Historical reviews and forward-looking note:
  - 2000 safeguards policy recognized members could direct disbursements to Treasury accounts; expanding scope to government agencies deemed impractical.
  - 2002 external panel suggested adapting safeguards to include fiscal issues; staff and Board did not take up.
  - 2005 policy review reaffirmed safeguards scope noting improvements in fiscal data and practical difficulties in expanding scope.
  - Next policy review planned for 2010; if direct budgetary support becomes more prominent, alternative safeguards would need consideration, building on fiscal transparency platforms (fiscal ROSCs). Forthcoming review will examine possible modifications to safeguards mandate and innovations within existing mandate.

### Recipient of Fund financing: central bank or Treasury?
- Legal and procedural points:
  - Legally, member is sole obligor and liable for repurchase/repayment; whether resources are channeled to central bank or Treasury is legally irrelevant.
  - Financial transactions must take place through designated fiscal agent (central bank for most members; member could designate Treasury).
  - Fiscal agent acts as member’s intermediary and is not legally liable; about three quarters of IMF members have designated central banks as fiscal agents.
  - Fund can make purchases available to central bank or transfer resources to Treasury account at central bank or commercial bank as instructed by fiscal agent.
  - If resources made available to central bank, it may directly or indirectly onlend to Treasury when program policies envision government spending some of the borrowing.
- Circumstances favoring channeling to the Treasury:
  - Legal restrictions on central bank lending to government combined with underdeveloped/frozen government capital market access.
  - Monetary unions where reserves must be held at a common central bank or prohibitions on extension of direct credit to member states (e.g., EMU); note 46 Fund members are part of a monetary union (Eastern Caribbean Currency Union, West African Economic and Monetary Union, Central African Monetary and Economic Union or the Euro Area).
    - On-lending restriction does not apply where WAEMU and CEMAC allow on-lending.
  - Currency boards and fully dollarized economies where central bank cannot adjust interest rates or extend credit; Fund resources typically channeled to Treasury.

*Source: _032310*

### 1.      This note provides operational guidance and background information on the use of

### 1.      This note provides operational guidance and background information on the use of 

### Legal framework for use of Fund resources
- Key legal conditions (Article V, Sections 3(a) and (b)):
  - A member should only purchase when it has a BoP need.
  - A member must “use” Fund resources to address the underlying BoP problem in a manner that provides adequate safeguards (i.e., ensures repayment to the Fund) (Annex I).3
- Article V, Section 3(b)(ii) identifies three exclusive (any one sufficient) forms of BoP need:
  - (i) “balance of payments” — requires an above-the-line deficit (below-the-line transactions include official external borrowing and debt restructuring, and grants from foreign official agencies),
  - (ii) “reserves position” — requires a determination that gross (rather than net) reserves are inadequate,
  - (iii) “developments in reserves” — arises in a limited number of cases (e.g., members that issue reserve currencies).
- For GRA financing (SBA, EFF, FCL):
  - Approval of an arrangement is possible without an actual BoP need.4
  - Any member requesting a purchase must represent it has some form of actual BoP need.5
  - Assessment of BoP need can require a forward-looking perspective to accommodate data lags; assessment can be conducted within a broad time horizon of one year backwards and forwards around the date of a purchase request.
- Use of resources:
  - Member must “use” resources to address an underlying BoP problem; “use” is broad and need not be traced to particular payments because money is fungible.
  - A member will be considered to be using Fund resources to address its BoP problem if it is implementing policies designed to resolve its BoP problem, typically through ex post conditionality and its overall macroeconomic program.
  - FCL: no ex post conditionality, but strict qualification requirements serve as ex ante conditionality.
  - First credit tranche and Emergency Assistance: entail little conditionality, but members must elaborate and implement policies to address BoP problems.
  - Reserve tranche purchases: unconditional and can be made solely on the member’s representation of BoP need.6
- Concessional financing (PRGT):
  - BoP test for SCF and RCF is the same as for GRA financing.
  - ECF targets a “protracted BoP problem”; Fund examines components of the BoP and a variety of indicators.7
  - Use of ECF resources does not require an actual BoP need at the time of disbursement request, though a protracted BoP need must exist at approval.
  - PRGT financing also aims at stable and sustainable macroeconomic positions consistent with strong and durable growth and poverty reduction (Section I, Paragraph 1(a)).
- Summary:
  - As long as BoP-related conditions are met, Fund resources may be used within a member’s domestic economy to finance the budget—consistent with the Fund’s legal framework—for both direct budget support (via the Treasury) and indirect budget support (via the central bank).

### Analytical considerations
- Linkages between BoP and budget support:
  - Fiscal and BoP financing needs are closely intertwined: expansionary fiscal policy typically widens the current account deficit; sudden stops in capital inflows limit government access to budget financing.
  - External budget support is de facto BoP support (allows higher reserves and/or larger external payments); external loans to central banks often entail implicit budget support (increases central bank credit to the economy, including to government).
- Effects of Fund BoP support:
  - Provides liquidity that can be used to (i) build reserves and/or (ii) provide liquidity to public or private sector for external payments.
  - By relaxing external liquidity constraints, Fund support reduces need for retrenchment in public and private savings-investment balances, enhancing domestic policy options (less contractionary fiscal, monetary, exchange rate policies) and cushioning private sector adjustment.
  - Fund BoP support typically entails some degree of implicit budget support (creates room for a less contractionary fiscal stance than without Fund support).
  - The extent of use of additional fiscal space is difficult to quantify without a counterfactual macroeconomic scenario.
  - Any combination of “absorption” and “spending” of Fund resources may be appropriate for addressing BoP difficulties under different circumstances (see Annex II)8; some change in the fiscal path will often be appropriate.
- Direct versus indirect budget support:
  - Desired macroeconomic adjustment can be achieved irrespective of channeling through Treasury (direct) or central bank (indirect).
  - If objective is to build international reserves, disbursements to the Treasury can be appropriate if government saves funds as deposits at the central bank.
  - If objective is to accommodate fiscal stimulus through external financing, disbursements to the central bank can be used to on-lend directly (via central bank credit) or indirectly (via looser monetary policies) to the government.
  - Direct budget support can be particularly useful or necessary when institutional or market constraints prevent appropriate fiscal policy response, e.g.:
    - An independent central bank cannot lend to central government while domestic banking sector is too shallow or fragile to provide necessary budget financing;
    - A central bank plays a relatively passive policy role (currency board or fully dollarized economies).
  - Legal liability:
    - Fund resources are made available to the member (Article V, Sections 2(a) and 3)); whether resources are channeled via Treasury or central bank, the member (the state as represented by its government) is the sole obligor to the Fund and liable for repayments (Article V, Section 7).
    - The fiscal agent (through which transactions occur) is an agent of the member and is not itself liable for repaying the Fund.

### Operational aspects of Fund budget support
- Documentation and accounting: program documents should explain the need for and role of Fund financing by:
  - Demonstrating existence of a BoP need through description of current and capital/financial account developments and projections, financing outlook, and how reserves measure up against indicators such as imports, short-term external debt, monetary aggregates, and so on.
  - Describing the authorities’ (program) objectives and proposed policy mix.
  - Including a full discussion of access and how proposed access levels have been determined.
  - In cases of direct budget support:
    - Explain institutional rationale (e.g., currency union rules, central bank independence).
    - Discuss impact, if any, on central bank independence.
    - Discuss how direct budget support is consistent with objectives underpinning use of Fund resources, including how intended use will help achieve these objectives, and justify how Fund resources will help smooth short-run economic adjustment and how overall (program) policies will help overcome BoP problem over time.
  - Discuss exit strategy, including how the member can move away from Fund financial support once the Fund arrangement ends; in direct budget support cases, take a particularly close look at risks of prolonged dependence on Fund financing.10
  - Explain how policies provide adequate safeguards that the Fund will be repaid (including addressing the member’s underlying BoP problem). See subsection IV B on safeguards issues in cases of direct budget support.
- Program accounting conventions—explanations as needed on how program targets (including on NIR and NDA) fit with objectives and whether monitoring of composite central bank–Treasury aggregates is needed:
  - Typical Fund-supported program (where budget support, if any, is indirect): Fund purchase deposited into central bank account, with no change in either NIR of the central bank (gross reserves increase, as do central bank liabilities to the Fund) or NDA (no central-bank Treasury transaction).
  - Indirect budget support until money is lent to and drawn by Treasury: remains the case until lending/drawdown (reduces NIR, with reduction dependent on sterilization and demand effects, and increases NDA).
  - Indirect budget support where central bank assumes Fund liability and money is deposited to a Treasury account at the central bank: no immediate impact on NIR (gross reserves increase, as do central bank liabilities to the Fund) or NDA (purchase credited to government’s account is offset with corresponding claim by central bank on government). When money is used by Treasury, NDA increases and, depending on sterilization or use of reserves, NIR falls.
  - Direct budget support where Treasury assumes Fund liability and money is deposited to a Treasury account at the central bank:
    - NIR of the central bank increases (gross reserves increase, while central bank liabilities to the Fund remain unchanged) and NDA declines (government deposits at central bank increase).
    - As government draws down deposits, NDA increases, and, depending on sterilization and reserve use, NIR falls.

*Prepared by Lorenzo Giorgianni, Jan Kees Martijn, Donal McGettigan, and Christian Mumssen (SPR), Ross Leckow and Ceda Ogada (LEG) and David Andrews and Tore Hauge (FIN).*

### 19.      In past programs involving direct budget support (or Treasury assuming the Fund

### 19.      In past programs involving direct budget support (or Treasury assuming the Fund 

### Composite NIR and NDA treatment; channeling Fund resources
- In past programs involving direct budget support (or Treasury assuming the Fund liability), including Turkey (2001), composite NIR and NDA measures are used as program parameters, adding together central bank and Treasury positions.
- Example mechanics:
  - Where Treasury assumes the Fund liability and the money is deposited to its account at the central bank, while central bank NIR increases, composite NIR remains unchanged (central bank gross reserves increase, while Treasury liabilities to the Fund increase).
  - Similarly, while central bank NDA declines, composite NDA remains unchanged (with increased government deposits at the central bank lowering central bank NDA and increasing Treasury NDA).
- Paragraph 20: when a purchase is made, the member (i.e., the state as represented by its government) is the sole obligor and is liable to make the necessary repurchases. The fiscal agent acts as intermediary to represent the member in its financial dealings with the Fund.
- From the Fund’s perspective, it is irrelevant whether the central bank or the Treasury is the fiscal agent, since the member country controls whether Fund financing can be used for budgetary support.
- Provided the BoP-related conditions in Section II are met, the fiscal agent—be it the Treasury or central bank—can instruct the Fund whether Fund resources should be channeled through the Treasury, the central bank, or some other entity.

### B. Safeguards considerations for direct budget support
- Direct budget support raises safeguards concerns, including the possibility that Fund repurchases may become subject to the budget process.
- Program design and, in FCL arrangements, members’ policy track records are the ultimate safeguard that the Fund will be repaid; safeguards assessments conducted by the Finance Department are also used to ensure the temporary and appropriate use of Fund resources (Annex IV).
- Under current Fund policy, safeguards assessments are conducted at central banks, not Treasuries.
  - Rationale: Fund disbursements are almost always channeled to central banks in their capacity as reserves managers, even where the money is to be used for budget support by the Treasury.
  - In cases where funds are intended for budget support, safeguards assessments have sought assurances in the form of a clear framework between central bank and government on the modalities for repayment of Fund financing.
- The current risk assessment framework for exceptional access cases, including those involving direct budget support, pays particular attention to fiscal risks such as the public sector debt burden and the ability of the government to mobilize resources.
- Executive Board deliberations:
  - The Executive Board has supported the focus of safeguards assessments on central banks.
  - At the August 2009 informal briefing on UFR for budgetary support, several chairs echoed concerns over whether these assessments are sufficient in a world of increased direct budget support.
  - This issue will be addressed as part of the safeguards policy review in 2010.
- Interim guidance for country teams: focus attention on ensuring adequate safeguards to the Fund through all means available, including program discussions and design, and existing platforms to strengthen fiscal transparency and accountability, including, where available, fiscal ROSCs or Public Expenditure and Financial Accountability reports (PEFAs).

### C. Communications strategy for direct budget support
- Fund-supported programs that entail direct budget support require clear communication on objectives and modalities to minimize misperceptions that:
  - the Fund is moving in a new direction by providing direct budget support, or
  - the Fund has abandoned the BoP criterion for Fund lending enshrined in the Articles.
- Communication should include:
  - At the outset, set out clearly to stakeholders the rationale for using direct budget support. Common element: members seeking direct budget support face a BoP need, part of which is fiscal in nature, with Fund support helping smooth the adjustment needed. Explain institutional reasons behind direct budget support provision.
  - Indicate that direct budget support has always been possible under appropriate circumstances; explain how the recent crisis has increased the need for flexible fiscal responses (and budget support) where warranted and that the move towards greater central bank independence has increased the need for direct, rather than indirect, budget support.
  - In cases where the Fund might be accused of supporting “undesirable” forms of spending, indicate that the Fund provides overall BoP and budget support, and does not provide specific project financing.
  - Where safeguards concerns are raised, indicate that the Fund continues to safeguard its resources in cases of direct budget support:
    - Policies underpinning a Fund-supported program continue to provide the ultimate safeguard, whether or not there is direct budget support.
    - In most cases of direct budget support, the funds are lodged by Treasury at the central bank, which in turn is subject to formal safeguard assessments.
    - Where there is lack of clarity, staff seeks to ensure understandings between the central bank and the government on repayment modalities to the Fund.
    - Fiscal targets and other aspects of Fund surveillance, including fiscal ROSCs, can help provide further safeguards to ensure the Fund will be repaid.

### ANNEX I. LEGAL FRAMEWORK — A. GRA framework (key legal and operational points)
- The legal framework for GRA financing is set out in the Fund’s Articles: general resources may only be used to address a member’s BoP problem. Relevant provisions:
  - Article I: purpose of GRA financing is to provide members with the “opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity” (Article I (v)).
  - Article V, Section 3(a): requires the Fund to adopt policies on use of GRA resources, including policies on stand-by or similar arrangements, that will assist members in solving their BoP problems in a manner consistent with the Articles, and establish adequate safeguards to ensure that the Fund is repaid. Policies adopted include those on special facilities, access, phasing, conditionality, full program financing, external arrears, debt sustainability, misreporting, safeguards assessments, post-program monitoring, repurchases and overdue financial obligations.
  - Article V, Section 3(b)(ii): prescribes that general resources only be used by a member that represents it has a BoP need because of “its balance of payments or its reserve position or developments in its reserves”.
- Existence of BoP need — three alternative criteria (exclusive):
  - A member has a need “because of its balance of payments” when it has an above-the-line BoP deficit. Distinction between (i) “autonomous transactions” (above the line) and (ii) financing transactions (below the line). The member is given the benefit of the doubt in cases of uncertainty.
  - A BoP need arising from a member’s “reserve position” is based on analysis of its gross reserve position in light of specific circumstances. Two questions: (i) what is the level of the member’s reserves? and (ii) are they adequate? The reserve position uses gross (rather than net) reserves and is measured at a point in time. Criteria for adequacy include volume of foreign trade, variability of exports and imports, size of quota in the Fund, past behavior of reserves, size of gross and net reserves and prospective developments, traditional reserve levels, seasonal factors, monetary aggregates, and size of short-term foreign exchange liabilities.
  - A BoP need arising from developments in reserves addresses cases where members may need Fund resources to settle balances among themselves (for example, within a regional multilateral body) without having a BoP deficit or a need to build up reserves.
- Clarifications:
  - The three BoP need criteria are exclusive; no other form of need (e.g., the need to finance a budget deficit in the absence of a BoP need) can by itself form the basis of a purchase under the Articles.
  - The criteria are alternative rather than cumulative: a member satisfies the condition of need if any of the three criteria is met.
- Magnitude of BoP need — categories:
  - Actual need: a BoP need the member is presently facing (materialized). A member must have an actual need when it requests a purchase under an arrangement. Assessment is forward-looking; actual need in the form of a BoP deficit is assessed within a broad time horizon of one year backwards and forward around the date of the purchase request.
  - Prospective need: expected to arise in the future, including through implementation of the Fund-supported program.
  - Potential need: may, but is not expected to, arise during the arrangement.
- Access and phasing:
  - Actual use of Fund resources (purchases) cannot be greater than the member’s actual need, while access under an arrangement is determined based on prospective and/or potential needs.
  - Arrangements are generally phased (FCL exception) so incremental financing is linked to conditions under the program to ensure progress in program implementation and provide safeguards to the Fund.
- Representation of need and use by member:
  - A member requesting a purchase must represent that a BoP need exists by stating in the purchase (SWIFT or telex) request that it is making the purchase in accordance with Article V, Sections 3 and 4 and with the terms of its financial arrangement; it further “represents that the purchase is needed in accordance with the provisions of the Fund’s Article of Agreements.”
  - The Fund may take remedial action after the purchase if it determines a need did not exist at the time of purchase (noted that this has never happened).
- Use of purchased resources:
  - The Articles require that resources purchased from the Fund be “used” to address a BoP problem.
  - The Fund does not attempt to track disbursements in practice; members are not required to specify intended uses and fungibility makes tracking foreign exchange difficult.
  - Assurances that Fund resources are used to address the BoP problem are obtained by (i) adequate policies and program design and (ii) the member’s representation that it will use Fund resources in accordance with the Articles and its financing arrangement.
- Safeguards:
  - Use of Fund resources is subject to adequate safeguards about the member’s capacity to repay — ultimately related to strength of policies and program design.
  - If a program is well designed and properly executed, supported by conditionality and other targets, this provides the strongest safeguard that the Fund will be repaid.
  - For the FCL (where there is no Fund-supported program), safeguards are provided by strict qualification requirements that aim to provide assurances that policies will remain strong during the arrangement’s life.
- Summing up (conditions under which Fund resources may finance the budget):
  - (i) the member has an actual BoP need when making a purchase, as represented by the member,
  - (ii) the member has committed to implement policies, including in the context of a program, that will assist in resolving its BoP problem and ensure repayment,
  - (iii) the member’s program is designed, in broad terms, in a manner that envisages that the amount equivalent to the foreign exchange purchased from the Fund will be used to meet a BoP deficit or to strengthen reserves.
- Within these parameters, a Fund arrangement can allow the member using Fund resources within the domestic economy to finance the government budget deficit. Such use may create perception issues but is consistent with the Fund’s legal framework if the BoP-related conditions above are met.
- Legal citations and decisions referenced:
  - Decision No. 71-2, adopted September 26, 1946.
  - Decision No. 1238-(61/43), adopted July 28, 1961.

### ANNEX I. LEGAL FRAMEWORK — B. PRGT framework (key points)
- PRGT financing purpose: looks not only to the BoP of eligible members but also to achievement or maintenance of stable and sustainable macroeconomic positions consistent with strong and durable growth and poverty reduction (Section I, Paragraph 1(a)).
- Tests for BoP need under PRGT facilities:
  - SCF and RCF: the test for BoP need will be similar to the analysis under GRA financing.
  - ECF (successor to PRGF): the test for BoP need is similar to the one undertaken under the PRGF (a “protracted BoP problem”).
- ECF specifics:
  - Members may receive ECF assistance if they have a “protracted balance of payments problem” at the time of approval (Section II, Paragraph 1(b)(2) of the PRGT Instrument).
  - Determination of a “protracted BoP problem” examines components of BoP rather than overall BoP and uses a variety of indicators; the analysis is flexible.
  - A member can have a protracted BoP problem even if it does not have a BoP need as defined under the Articles.
  - GRA need criteria are relevant for determining the amount of access under an ECF arrangement (Section II, Paragraph 2(f)).
  - Amounts committed under an ECF (or other PRGT facilities) may not exceed the present need of the member based on the three GRA criteria and any prospective need expected to arise during the arrangement.
  - Normally both a protracted BoP problem and a BoP need will exist throughout the period of an ECF arrangement (with limited exceptions allowing reduction of commitments under Section II, paragraph 3).
- Facility-specific purposes under PRGT Instrument (Section I, Paragraph 1(a)):
  - ECF: support a program enabling members with a protracted BoP problem to make significant progress toward stable and sustainable macroeconomic positions consistent with strong and durable poverty reduction and growth.
  - SCF: support a program enabling members with actual or potential short-term BoP needs to achieve, maintain or restore stable and sustainable macroeconomic positions consistent with strong and durable poverty reduction and growth.
  - RCF: support policies of members facing urgent BoP needs to enable them to make progress towards achieving or restoring stable and sustainable macroeconomic positions consistent with strong and durable poverty reduction and growth.
- As under the GRA, PRGT resources may be used to finance the government budget deficit domestically provided the above conditions are met.

*Source: _032310 - 19.      In past programs involving direct budget support (or Treasury assuming the Fund*

### ANNEX II. A

### ANNEX II. A — ANALYTICAL UNDERPINNINGS

### Typology of how Fund liquidity is used
- Four stylized possibilities for how the liquidity provided by the Fund is used; in practice categorization is difficult given absence of a non-Fund financing counterfactual.

- a. Don’t Absorb, Don’t Spend
  - Objective: Liquidity used to bolster reserves.
  - BoP need: Applies to members whose reserve levels are too low or who expect future pressure on reserves that would not be met by the current level of reserves.
  - Conventional lending mechanism: The Fund provides credit to the central bank, which saves the foreign exchange as international reserves. The domestic currency counterpart is not spent by the government.

- b. Absorb, Don’t Spend
  - Objective: Liquidity used to meet private sector foreign currency demands. In countries with well-functioning domestic capital markets, liquidity provision by the central bank (monetary loosening) would help ease financing constraints on the private sector, thus avoiding an undue adjustment on the private sector’s saving-investment (S-I) balance.
  - BoP need: Increased private sector foreign exchange needs make it difficult to maintain reserves at a given level. Fund support helps avoid excessive real exchange rate depreciation and import contraction. Examples include sudden stops in capital inflows and terms of trade changes resulting in high private sector import demand.
  - Conventional lending mechanism: The Fund provides credit to the central bank, which sells the foreign exchange to the private or public sector. The domestic currency counterpart is onlent by the central bank to commercial banks (supporting higher lending to the private sector). The domestic currency counterpart is not spent by the government.

- c. Absorb, Spend
  - Objective: Liquidity is used to finance higher net imports and net capital outflows resulting directly and indirectly from a fiscal stimulus plan. For example, increased government spending may entail increased government imports, or may result in portfolio outflows. In the absence of BoP support, to accommodate higher (net) national expenditure, this loosening may lead to an offsetting adjustment in the private sector S-I balance (crowding out), which would defeat the purpose of relaxing the fiscal position.
  - BoP need: Increased public (and private) sector foreign exchange needs, including through a more accommodative fiscal stance, make it difficult to maintain reserves at a given level.
  - Conventional lending mechanism: The Fund provides credit to the central bank, which sells the foreign exchange to the private or public sector. An amount equivalent to the domestic currency counterpart of Fund disbursements is onlent by the central bank to the government for spending.

- d. Don’t Absorb, Spend
  - Objective: Liquidity used to stimulate domestic economy.
  - BoP need: Increased reserves provide a cover against the uncertain import demand, which may be spurred by increased government spending. This helps prevent a possible sudden decline in reserves.
  - Conventional lending mechanism: The Fund provides credit to the central bank, which saves the foreign exchange as international reserves. An amount equivalent to the domestic currency counterpart of Fund disbursements is onlent by the central bank to the government, which spends it.

### Some recent cases of direct budget support (selected cases)
- Hungary (November 2008)
  - Central bank independence: Yes, direct central bank lending to the government not allowed.
  - BoP need justification: Multiple needs, including financing of the current account deficit, financial sector support, and increasing gross reserves.
  - Rationale for direct budget support: First two purchases under the SBA were disbursed to the government through its agent, the Hungarian Debt Management Office. Part of the resources set aside for bank support package and some lent to domestic banks. Domestic currency counterpart of part of the Fund purchase used to meet government financing need due to nonresidents reducing holdings of domestic currency government bonds. Associated increase in domestic liquidity sterilized through issuance of central bank bills.

- Latvia (November 2008)
  - Central bank independence: Yes, quasi currency board arrangement.
  - BoP need justification: Loss of international reserves, need to bolster the banking system and to re-establish confidence.
  - Rationale for direct budget support: Government faced acute liquidity constraints because of increasing fiscal deficit and need to provide liquidity assistance to a systemically important bank that could not be channeled through the Bank of Latvia.

- Ukraine (November 2008)
  - Central bank independence: Yes. Its preservation is a key program objective.
  - BoP need justification: Rebuild gross international reserves.
  - Rationale for direct budget support: Sharp revenue shortfalls, lack of access to international capital markets, and underdeveloped domestic bond market left no realistic alternatives but to finance the programmed budget deficit target using Fund resources. Direct budgetary support from the Fund preferred to indirect central bank financing to preserve central bank independence and prevent monetization mechanisms.

- Armenia (March 2009)
  - Central bank independence: Direct central bank lending to the government not allowed.
  - BoP need justification: Increase gross reserves and address the current account deficit.
  - Rationale for direct budget support: Fiscal policy eased in response to the crisis, leading to pressure on the balance of payments; augmentation resources transferred directly to the government to address resultant BoP needs. Without additional financing, Armenia would have faced more severe external and domestic adjustment, worse growth, and sizeable cuts in social spending.

- Georgia (August 2009 Augmentation)
  - Central bank independence: Direct central bank lending to the government not allowed.
  - BoP need justification: Increase gross reserves, address current account deficit in the face of a more prolonged global crisis than originally envisaged.
  - Rationale for direct budget support: Part of 2009 support and all 2010 support to be used to finance directly a higher fiscal deficit from a sharper-than-expected economic slowdown. Given under-developed domestic financial markets, Fund financing allows a less restrictive fiscal policy while avoiding funding pressures and maintaining adequate reserve coverage.

- Pakistan (August 2009 Augmentation)
  - Central bank independence: Limits on direct central bank lending to the government.
  - BoP need justification: Allow for a further strengthening of gross reserves to deal with increased risks to the external outlook.
  - Rationale for direct budget support: Augmentation designed to pave the way for donor-supported relaxation of the fiscal deficit target in 2009/10. Program envisages that a portion of Fund credit (92 percent of quota) be used to finance the social spending element of the expanded budget as a bridge loan in advance of pledged donor support to reduce pressure from associated budgetary imports as a result of backloaded donor inflows.

- Romania (May 2009)
  - Central bank independence: Yes. Direct central bank lending to the government not allowed.
  - BoP need justification: To rebuild gross reserves, while smoothing the current account adjustment in the face of large capital outflows.
  - Rationale for direct budget support: Half of purchases related to the 1st, 2nd and 3rd reviews, totaling SDR 1.9 billion (or 17 percent of total access under the exceptional SBA program), were disbursed directly to the Ministry of Finance to finance the general government deficit. Financing these amounts in the domestic market would have strained the relatively shallow domestic market, and access to foreign private financing was limited. No further disbursements under the program are expected to go to the Ministry of Finance.

### Safeguards considerations
- Use of the domestic counterpart of Fund resources for budgetary purposes raises at least three concerns regarding adequacy of safeguards to ensure repayment to the Fund:
  - First, the making of the repurchase may become subject to the budgetary appropriation process.
  - Second, within the time period for repurchase, the government will either have to generate a budgetary surplus to purchase the foreign exchange necessary to repay the Fund or borrow it from another source.
  - Third, absent a clear exit strategy, there is a risk that fiscal policy will become unduly reliant on Fund resources to finance what may be permanent expenditures.

- Role of safeguards assessments
  - Safeguards assessments are one element in the Fund’s package of safeguards aimed at ensuring the temporary and appropriate use of Fund resources.
  - In traditional Fund-supported programs, program design is the ultimate safeguard. If a program is well designed and properly executed, supported by quantitative performance criteria, this provides the strongest safeguard for repayment.
  - Where a Fund-supported program is not envisaged (e.g., FCL), safeguards are provided by strict qualification requirements that aim to assure strong policies during the arrangement.
  - Safeguards assessments are conducted at central banks because Fund disbursements are almost always channeled to central banks in their capacity as reserves managers, regardless of whether the money is channeled directly to Treasury.
  - For cases involving direct budgetary support, safeguards assessments have looked for a clear framework between central bank and government for the servicing of Fund lending so roles and obligations are transparent. Authorities have agreed that Fund purchases be deposited with the central bank to replicate on-lending as far as possible.
  - Sometimes components of NIR and NDA performance criteria are sourced outside the central bank; safeguards assessments have sought external assurances of integrity of these sources where warranted.
  - In absence of well-defined government balance sheets, safeguards assessments have called for transparent disclosure of Fund transactions in notes to the central bank’s financial statements. In some cases, members’ SDR accounts have been used as quasi escrow accounts.
  - Risk assessment framework for exceptional access cases includes assessment of main risks to member's capacity to repay the Fund targeted to each case. For cases where resources are provided for budgetary purposes, assessment pays particular attention to risks to repayment relating to fiscal sustainability such as the public sector debt burden and the ability of the government to mobilize resources. A ratio of debt service to the GRA to government revenues has been included in risk assessments to capture budgetary risks to repayment.

- Historical scope and reviews of safeguards assessments
  - At adoption of safeguards assessments policy in 2000, it was recognized members could direct Fund disbursements to official accounts of the Treasury or Ministry of Finance with commercial banks; expanding scope to government agencies was deemed impractical.
  - 2002 evaluation: external panel suggested adapting safeguards framework to include fiscal issues and other public agencies; not taken up by staff and the Board.
  - 2005 policy review reaffirmed scope of safeguards assessments, noting improvements in quality of fiscal data and practical difficulties in expanding scope.
  - Next policy review planned for 2010.
  - If direct budgetary support becomes increasingly prominent, alternative safeguards would need consideration, building on platforms to strengthen fiscal transparency and accountability, including fiscal ROSCs. The forthcoming review of the safeguards policy will examine pros and cons of possibly modifying the safeguards mandate, including potential innovations under the existing mandate.

### Recipient of Fund financing: central bank or Treasury?
- Legal and procedural points
  - Legally, when a purchase or disbursement is made, the member (the state as represented by its government) is the sole obligor and is liable to make the necessary repurchase or repayment. From the Fund’s perspective, Fund resources are made available to the member; whether channeled to central bank or government is legally irrelevant.
  - Financial transactions with the Fund must take place through a member’s designated fiscal agent, which instructs the Fund regarding to whom resources should be transferred. For most members, the central bank is the fiscal agent, but a member could designate the Treasury or similar agent.
  - The fiscal agent is an agent of the member and acts as its intermediary; the fiscal agent is not legally liable for repaying the Fund. Currently, some three quarters of IMF members have designated central banks as fiscal agents.
  - As instructed by the fiscal agent, the Fund can make purchases available to the central bank, or transfer resources to an account of the treasury or other designated entity in the central bank (or a commercial bank). If resources are made available to the central bank, it may directly or indirectly onlend to the Treasury when program policies envision government spending some of the borrowing.

- Circumstances favoring channeling to the Treasury
  - Legal restrictions: When restrictions on central bank lending to the government combined with underdeveloped or frozen government access to domestic or international capital markets prevents financing a desirable deficit level, channeling Fund resources for budget support through the Treasury is warranted (central bank open market injections may not translate into government bond purchases in a crisis).
  - Monetary unions: Reserves obtained by individual countries are often required to be held at the common central bank and may not be available for financing national BoP problems. Some monetary unions have strict prohibitions against extension of direct credit to individual member states (e.g., EMU). Where there are restrictions on on-lending, channeling Fund resources to the national Treasury is appropriate.
    - Note: There are currently 46 Fund members that are part of a monetary union (the Eastern Caribbean Currency Union, the West African Economic and Monetary Union, the Central African Monetary and Economic Union or the Euro Area).
    - This on-lending restriction would not apply to, for example, the WAEMU and the CEMAC, which do allow on-lending.
  - Currency boards and fully dollarized economies: Under these regimes the central bank cannot adjust interest rates or extend credit, complicating use of BoP financing from the Fund to address FX needs of different sectors. Consequently, central bank cannot lend to government or commercial banks; Fund resources are typically channeled to the Treasury.

*Source: _032310 - ANNEX II. A*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_032310.pdf_