## _110111

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### Background and Purpose
- Creation and timeline:
  - FCL created in March 2009.
  - PCL created in August 2010, concurrent with enhancements to FCL flexibility.
- Aim:
  - Provide flexible credit-tranche instruments for contingent or actual financing (FCL) and contingent financing only (PCL).
  - Reduce stigma and strengthen crisis prevention/mitigation by complementing members’ reserves and other backstops.
- Usage and scale:
  - Total commitments under the FCL and the PCL stand at around SDR 71 billion (more than US$110 billion).

### Objectives, Measured Impact, and Delivery
- Expected effects:
  - Bolster confidence and moderate balance of payments (BoP) pressures for users and for members perceived by markets as potential qualifiers.
- Empirical findings:
  - Spreads and exchange rate volatility fell for users, even under difficult global conditions.
  - Some non-user members perceived by markets as FCL “qualifiers” also benefited indirectly.
  - Review conclusion: PCL and FCL have had a positive impact on perceived crisis risk of recipients and positive spillovers to other members perceived as FCL qualifiers.

### Substitutability with Reserves
- Practical findings:
  - FCL users obtained successor arrangements to bolster defenses amid very adverse external conditions.
  - Some members skeptical that FCL/PCL resources could credibly complement reserves due to unpredictability in qualification.
- Assessment and recommendation:
  - FCL and PCL should not be viewed as permanent reserve substitutes.
  - They can mitigate excessive reserve buildup by providing qualifying countries an alternative to self-insurance.
  - Only an ongoing pre-qualification system would fully remove unpredictability concerns (not supported by members historically).

### Access: Assumptions, Transparency, and Justification
- Heterogeneity in shock assumptions:
  - Shock-scenario assumptions underpinning access decisions differed across arrangements, complicating cross-case comparisons.
- Methodological points:
  - Financial Stress Index (FSI) constructed as average of banking-related variables, securities-market variables, and a foreign exchange volatility measure.
  - Data covers 1980–2008 to identify demand declines more than one standard deviation relative to long-run mean (identified years: 1991, 2001 and 2009).
  - Country sample for benchmarking: 49 EMs.
  - Summary of past EM episodes: 15 percent decline in exports; 5 percent decline in FDI; 5−10 percent decline in rollover rates.
- Reserve use under adverse scenarios:
  - Colombia assumed reserves accumulated in the baseline were fully used under the adverse scenario; Mexico did not assume full reserve use; Poland intermediate; FYR Macedonia anchored minimum reserves to a reserve-adequacy metric.
  - Recommendation: anchor minimum reserve adequacy under the adverse scenario to a well-established “lower bound” (e.g., 80 percent of the Assessing Reserve Adequacy metric).
- Program duration vs. access:
  - Reserve pressure typically lasts just a few quarters; for the 11 most severe events plus 3 extreme current-crisis events, reserves stopped falling within 4 quarters.
  - Recommendation: base BoP needs and access on reserve losses over a rolling 12-month window.
- Transparency recommendations to improve comparability and evenhandedness:
  - Explicitly link proposed access to actual or potential BoP needs and justify any “cushions.”
  - Consider tools to provide comparability in choice of adverse shocks; use common distributions of externally driven crisis events.
  - Cross-check programmed reserves against standard adequacy metrics.
  - Delete market-sensitive access discussion from staff reports where warranted by Fund transparency policy.

### Access Rules, Exit, and Expectations
- FCL access rules:
  - Implicit access cap removed in 2010; absence of cap should help boost market confidence during systemic events.
  - No need identified to re-introduce FCL access caps.
- PCL access rules:
  - Hard access cap applies: limit of 500 percent of quota for a one-year arrangement at approval, augmentable up to cumulative cap of 1,000 percent of quota subject to review; for arrangements between one and two years, up to 500 percent on approval with remainder subject to six-monthly review.
  - 1,000 percent of quota cumulative cap remains high and sufficient; since 2000 no precautionary arrangements (aside from Mexico and Poland FCLs) exceeded 1,000 percent of quota.
- Exit:
  - Expectation (not mandatory) that access under successor FCL arrangements would normally decline as official and private financing prospects improve; Board could approve non-declining access in exceptional circumstances.
  - Practice: access declined only in Colombia’s second arrangement; Mexico and Poland requested higher access in early 2011.
  - Policy considerations:
    - Promote discussion and transparency about exit prospects at the outset.
    - Practical measures: members could add exit expectations in written requests; staff could discuss anticipated evolution of risks at requests/reviews.
  - Balance: greater transparency on exit must not undermine attractiveness or public-good nature of FCL/PCL.

### Qualification: Criteria, Practice, and Recommendations
- Core qualification principles:
  - FCL requires very strong economic fundamentals and institutional policy frameworks and sustained track records of implementing very strong policies.
  - PCL requires sound fundamentals and policy frameworks, with strong performance in three assessment areas and no substantial underperformance in any.
  - No bright-line numerical qualification criteria; assessments include nuanced and judgmental elements.
- Assessment practice:
  - Qualification assessments to date appear broadly appropriate.
  - Initial stages of qualification are strictly confidential; management informs the Board only after judging access may be appropriate.
  - Concerns by respondents:
    - Emerging markets view criteria as overly strict, unclear, and subjective.
    - Advanced countries and market participants favor keeping FCL bar very high to prevent moral hazard.
- Role of qualitative and forward-looking factors:
  - Qualitative/institutional factors are integral and critical given limited or no ex post conditionality for FCL and streamlined ex post conditionality for PCL.
  - Indirect market-based measure: negative “spread gaps” (actual spreads below predicted) interpreted as positive institutional attributes.
  - Recommendation: place more emphasis on qualitative and forward-looking elements (member’s ability to deal effectively with shocks) and include focused discussion of medium-term policy framework in the qualification section of staff reports.
- Use of recent surveillance:
  - Strong recommendation to use very recent Article IV reports and other tools (e.g., very recent FSAPs) wherever possible to support qualification decisions.
- Reserve adequacy as a qualification criterion:
  - Review did not find reason to remove reserve qualification criterion.
  - Suggestion: incorporate a risk-weighted reserve adequacy metric (e.g., Assessing Reserve Adequacy metric) into qualification assessments.
- Framework harmonization:
  - Consider unifying the formulation of areas assessed across FCL (nine criteria) and PCL (five areas) to improve comparability.

### Instrument Structure — Specific Design Issues and Recommendations
- “Drawing” PCL:
  - Current rule: PCL arrangements can only be approved where the member does not have an actual BoP need at approval.
  - Recommendation: allow approval of PCL arrangements when the member faces an actual BoP need to create a more coherent financing toolkit and increase flexibility.
  - Safeguards for a drawing PCL: ex ante qualification; focused ex post conditionality; prior actions where appropriate; short purchase rights (no more than six months); hard cap on access; phasing of access for arrangements longer than 12 months; safeguards assessments; exceptional access policy where relevant.
- Duration flexibility:
  - Current durations:
    - FCL: one or two years.
    - PCL: any duration between one and two years.
  - Recommendation: introduce six-month PCL arrangements to better respond to short-duration liquidity needs (crisis bystanders facing sudden external shocks).
  - Advantages: better tailoring to short-term liquidity needs and clearer signals about short-term nature of shocks.
  - Drawbacks: overly short durations could complicate access limits and review schedules.
- Commitment fees:
  - Current schedule: commitment fees rise with extent of committed funds:
    - 15 basis points for commitment up to 200 percent of quota;
    - 30 basis points for access between 200 and 1,000 percent of quota;
    - 60 basis points on higher access.
  - Arrangements are subject to same periodic charges, surcharges, commitment fees, and repurchase period (3¼ to 5 years) as the SBA.
  - Considerations:
    - Whether upward-sloping level-based fee schedule needs reform to deter unnecessarily high and protracted precautionary access.
    - A steeper, but more graduated, fee schedule is a possible reform option.
    - No strong case at present for reform; could be revisited with more experience.
  - Constraints:
    - Commitment fees are “charges” under the Articles and must be “uniform” (Article V, Section 8(d)); changes could require similar treatment across all credit tranche arrangements or redesign of FCL/PCL as special facilities outside credit tranches.

### Operational and Procedural Features
- Access and phasing:
  - Informal cap on FCL access eliminated during 2010 reform.
  - PCL access features:
    - Limit of 500 percent of quota for a one-year arrangement at approval, augmentable up to cumulative cap of 1,000 percent of quota subject to review.
    - For arrangements between one and two years, up to 500 percent on approval, with remaining amounts at beginning of second year subject to six-monthly review and possible rephasing/augmentation.
- Conditionality and reviews:
  - FCL: mainly ex ante conditionality; review after 12 months to confirm continued qualification for two-year FCLs.
  - PCL: ex ante qualification plus lighter ex post conditionality than SBAs; continuous performance criteria and semi-annual reviews; possible additional performance criteria or prior actions where required.
- Safeguards and cancellation:
  - PCL subject to standard Safeguards Assessments; safeguards procedures for FCL appear effective.
  - Arrangements may be cancelled by the member at any time; once fully drawn, arrangements expire automatically.

### Case Studies — Key Illustrations
- Colombia (FCL):
  - Three FCL arrangements approved.
  - Access history:
    - First arrangement: 900 percent of quota; SDR 6.966 billion; one year.
    - Second arrangement: 300 percent of quota; SDR 2.322 billion; one year.
    - Third arrangement: 500 percent of quota; SDR 3.870 billion; two years.
  - Main shocks assumed across arrangements included fuel and non-fuel commodity price declines, lower FDI, lower rollover rates, and worker remittances (only in third arrangement).
  - Cushion built in access: SDR 1.5 bn. (1st); SDR 0.14 bn. (2nd); SDR 0.30 bn. (3rd).
  - Reserve accumulation assumptions: 100% of baseline (negative) in 2009; 0% of baseline in 2010 (1st); 0% in 2nd and 3rd.
  - Findings: FCL contributed to stabilizing expectations, reducing bond spreads, and creating space for countercyclical policies.
- FYR Macedonia (PCL):
  - First and only PCL arrangement at time of review; approved January 19, 2011.
  - Access and duration:
    - 2011: SDR 344.5 million; 500 percent of quota.
    - 2011-2012 cumulative: SDR 413.4 million; 600 percent of quota.
    - Requested two-year arrangement.
  - Adverse scenario assumptions included lower EU growth, bank deposit outflows, loss of sovereign debt market access, and minimum gross reserve floor of 85% of ST debt at residual maturity.
  - Drawdown:
    - March 30, 2011: authorities purchased SDR 197 million (approximately €220 million, 286 percent of quota) citing impaired market access after early elections.
  - Impact: PCL helped boost market confidence; volatility of FYR Macedonia’s 2015 Eurobond yield declined markedly around approval and remained lower than most regional peers for a period.

### Survey Findings (Annex II)
- Response composition:
  - Responses from member countries representing almost 80 percent quota shares.
  - 55 percent of country responses from advanced countries; remainder from emerging markets.
  - Private sector response rate: almost 20 percent of 60 analysts contacted.
- FCL — key attractive features (average response):
  - Automatic/upfront access; lack of ex-post policy conditionality; dedicated to strong-performing countries; long repayment terms (3.25 to 5 years).
- FCL — factors inhibiting use (average response):
  - Overly strict qualification requirements; unclear/subjective criteria; stigma; absence of BoP need; expectation of exit; preference for self-insurance through reserve accumulation.
- PCL — key attractive features (average response):
  - Upfront access to contingent financing; streamlined ex-post conditionality; dedicated to strong-performing countries; long repayment terms (3.25 to 5 years).
- PCL — factors inhibiting use (average response):
  - Similar to FCL plus access limits and ex-post conditionality.
- Suggested usability improvements (average responses):
  - More flexible duration for both FCL and PCL; greater predictability of qualification; allowing PCLs for actual BoP need; consideration of commitment fee level.

### Principal Recommendations (summary)
- Emphasize qualitative and forward-looking qualification criteria, using very recent Article IVs and FSAPs where possible.
- Enhance transparency of access decisions by:
  - Explicitly linking access to actual or potential BoP needs.
  - Justifying cushions and using common distributions for adverse shocks.
  - Cross-checking programmed reserves against reserve adequacy metrics (e.g., 80 percent of the Assessing Reserve Adequacy metric).
- Allow PCL arrangements to be approved where the member has an actual BoP need at approval (subject to existing PCL safeguards).
- Introduce six-month PCL arrangements to address short-duration liquidity needs.
- Retain current FCL access rules (no cap) and maintain PCL hard caps while monitoring experience.
- Revisit commitment fee design over time; no urgent reform required but consider a steeper or more graduated schedule if warranted by experience.
- Next joint review recommended no later than three years after completion of this review, or when aggregate outstanding credit and commitments reach SDR 150 billion (staff recommendation).

*Source: Executive Summary, _110111 - Executive Summary*

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

### Executive Summary

### Background and Purpose
- Creation and timeline:
  - FCL created in March 2009.
  - PCL created in August 2010, concurrent with enhancements to FCL flexibility.
- Aim:
  - Address gaps in the Fund’s crisis prevention and resolution toolkit.
  - Provide flexible credit-tranche instruments for contingent or actual financing (FCL) and contingent financing only (PCL).
  - Reduce stigma and strengthen crisis prevention/mitigation by complementing members’ reserves and other backstops.
- Usage and scale:
  - Limited number of members have used these arrangements to date.
  - Total commitments under the FCL and the PCL stand at around SDR 71 billion (more than US$110 billion).

### Objectives and Measured Impact
- Expected effects:
  - Bolster confidence and moderate balance of payments (BoP) pressures for users and for members perceived by markets as potential qualifiers.
- Evidence from the review:
  - Spreads and exchange rate volatility fell for users, even under difficult global conditions.
  - Some non-user members perceived by markets as FCL “qualifiers” also benefited indirectly.
  - These effects provide support for the view held by members using the instruments that they have been successful.

### Substitutability with Reserves
- Practical findings:
  - FCL experience shows users obtained successor arrangements to bolster defenses amid very adverse external conditions.
  - Some members skeptical that FCL/PCL resources could credibly complement reserves due to unpredictability in qualification.
- Recommendation/assessment:
  - FCL and PCL should not be viewed as permanent reserve substitutes.
  - They can mitigate excessive reserve buildup by providing qualifying countries an alternative to self-insurance.
  - Qualification predictability can improve with experience, but only an ongoing pre-qualification system (which has lacked past member support) would fully remove unpredictability concerns.

### Access: Assumptions and Transparency
- Heterogeneity in shock assumptions:
  - Shock-scenario assumptions underpinning access decisions differed across arrangements, complicating cross-case comparisons.
- Suggested approach:
  - Enhance transparency of access decisions to facilitate comparison and evenhandedness across arrangements.
  - Compare minimum reserve levels under adverse scenarios with relevant metrics.
  - Continue basing access decisions on country-specific estimates for actual and potential BoP need.

### Instrument Structure — Key Findings and Recommendations
- Qualification
  - Current practice:
    - FCL requires members to have very strong economic fundamentals and institutional policy frameworks and sustained track records of implementing very strong policies.
    - PCL requires sound fundamentals and policy frameworks, with strong performance in three assessment areas and no substantial underperformance in any.
  - Review findings:
    - Qualification assessments to date appear broadly appropriate.
    - Some members call for increased predictability.
  - Suggested refinements:
    - Place more emphasis on qualitative and forward-looking elements (member’s ability to deal effectively with shocks).
    - Use very recent Article IV reports and other tools (for example, very recent FSAPs) wherever possible to focus qualification decisions.

- “Drawing” PCL
  - Current rule:
    - PCL arrangements can only be approved where the member does not have an actual BoP need at the time of approval.
  - Recommendation:
    - Allow approval of PCL arrangements when the member faces an actual BoP need to create a more coherent financing toolkit and increase flexibility in response to members’ needs.
  - Safeguards:
    - Existing PCL decision features—ex ante and focused ex post conditionality, relatively short purchase right duration, capped access, and phasing of access in longer arrangements—are seen as broadly adequate.
    - Qualification standards are sufficiently strong to distinguish PCL from SBAs.

- Duration flexibility
  - Current duration:
    - FCL arrangements may be approved for either one or two years.
    - PCL arrangements may be approved for periods between one and two years.
  - Recommendation:
    - Introduce more flexible PCL duration—specifically six-month PCL arrangements—to better respond to short-duration liquidity needs, notably for crisis bystanders facing sudden external shocks during periods of heightened stress and contagion.

- Commitment fees
  - Current schedule and terms:
    - Commitment fees rise with extent of committed funds: 15 basis points for commitment up to 200 percent of quota, then 30 basis points for access between 200 and 1,000 percent of quota, and 60 basis points on higher access.
    - As windows in the credit tranches, arrangements are subject to the same periodic charges, surcharges, commitment fees, and repurchase period (3¼ to 5 years) as the SBA.
  - Discussion and assessment:
    - Consideration of whether the upward-sloping level-based fee schedule needs reform to deter unnecessarily high and protracted precautionary access and to contain related liquidity risks to the Fund.
    - A steeper, but more graduated, fee schedule is considered as a possible future reform.
    - On balance, current findings do not point to a strong case at present for reforms in commitment fees, but the issue could be revisited as more experience is gained.

### Operational and Design Features Highlighted
- Access and phasing:
  - Informal cap on FCL access was eliminated during the 2010 FCL reform.
  - PCL access features a duration-based approval limit and a hard overall access cap:
    - Limit of 500 percent of quota for a one-year arrangement at approval, which can be augmented subsequently up to an overall cumulative cap of 1,000 percent of quota subject to a scheduled or ad hoc review.
    - For arrangements between one and two years, up to 500 percent of quota upon approval, with remaining amounts at the beginning of the second year subject to the relevant six-monthly review and potential rephasing/augmentation subject to review completion.
- Conditionality and reviews:
  - FCL: mainly ex ante conditionality; review after 12 months to confirm continued qualification for two-year FCLs.
  - PCL: ex ante qualification plus lighter ex post conditionality than SBAs; standard continuous performance criteria and semi-annual reviews; potential for additional performance criteria and prior actions where required.
- Safeguards and procedural notes:
  - PCL is subject to standard Safeguards Assessments; safeguards procedures applied for the FCL appear to have been effective.
  - Arrangements may be cancelled by the member at any time; once fully drawn, arrangements expire automatically.

### Methodology and Scope of the Review
- Methods used:
  - Case studies of Colombia, Mexico, Poland (FCLs), and FYR Macedonia (PCL).
  - Analytical work given limited number of arrangements.
  - Interviews with senior staff involved in arrangements.
  - Survey of country authorities (via Executive Directors’ offices) and market participants.
- Paper organization:
  - Sections covering impact analysis, reserve substitutability, access and exit issues, design review (qualification, flexibility, commitment fees), and conclusions.
  - Annex I: detailed case studies; Annex II: survey responses.

*Source: Executive Summary, _110111 - Executive Summary*

### Box 2. Summary of Principal Recommendations and Findings

### Box 2. Summary of Principal Recommendations and Findings

### A. Delivery on Objectives?
- The PCL and FCL have had a positive impact on the perceived crisis risk of recipients, and have had positive spillovers to other members perceived by markets as FCL ―qualifiers.‖

### B. Close Reserves Substitute?
- The FCL and PCL instruments are best suited to provide insurance in periods of heightened risk.

### C. Access and Exit
- More transparency is recommended in practice in determining access to facilitate comparison and evenhandedness of access decisions across arrangements. Recommendations:
  - (i) greater attention in presenting the link between access and the size of actual or potential BoP needs in individual cases;
  - (ii) consider tools to provide comparability in the choice of adverse shocks to underpin access scenarios, while also taking into account country-specific factors; and
  - (iii) cross-check programmed reserves against standard adequacy metrics.
- No need for further changes to the current FCL access rules. PCL to allow six-month arrangement with limited access.
- Further discussion and transparency about exit prospects, especially at the outset of an arrangement would underpin realistic exit expectations.
- Although not pressing, reforms to commitment fees may also help underpin exit expectations, and limit incentives for potential requests for arrangements with ―unnecessarily high‖ access.

### D. Qualification
- More focus needed on qualitative and forward-looking qualification criteria.
- Very recent completion of Articles IVs and FSAPs (and, where appropriate, ROSCs) highly recommended, to the extent possible, taking into account logistical and resource considerations.

### E. Instrument Structure
- PCL arrangements approved where member has an actual BoP need at the inception of the arrangement would allow the Fund to respond more flexibly to member needs, where countries meet all other PCL qualification requirements.
- More flexible duration—specifically six-month PCL-type arrangements—would allow the Fund to proactively channel liquidity to crisis bystanders during periods of heightened stress, thus enabling the Fund to play a more effective role in stemming contagion.

*Source: _110111 - Box 2. Summary of Principal Recommendations and Findings*

### 16.      As recognized by the Executive Board, access and exit are intimately linked. In

### _110111 - 16.      As recognized by the Executive Board, access and exit are intimately linked. In

### A. Justification of Access in FCL-PCL Cases — findings on past access decisions
- FCL and PCL access levels have broadly reflected potential BoP needs, which were strongly influenced by global risks.  
- Exogenous financial risks (proxied by an advanced economy FSI) dipped briefly in early 2010, before reverting quickly to 2009 levels in the second half of 2010.  
- Country-specific responses noted:
  - Colombia requested reduced access in its second FCL arrangement, then requested higher access in early 2011.  
  - Mexico and Poland, after initial arrangements had access implicitly ―capped‖ below desired levels, requested increased access in early 2011 reflecting rising systemic risks.  
- Adverse scenarios underpinning access decisions:
  - Access under FCL and PCL is meant to be based on plausible adverse scenarios. The FCL guidance note lists considerations including global risks, past crises, country-specific factors, and ―additional considerations‖ or ―cushions.‖  
  - Across cases, both current account and capital shocks played a role; shocks to the trade balance (including commodity prices), lower FDI, and lower liability rollover rates were common. Staff found capital shocks harder to calibrate than current account shocks, but often more important (Colombia being an exception).  
  - Assumptions underpinning shock scenarios differed markedly across country cases and were sometimes insufficiently explained in staff reports, complicating comparisons.  
  - Assumed reserve and access ―cushions‖ varied across FCL cases, with the cushion as large as a quarter of access in some cases.  
- Empirical benchmarking and severity of assumed shocks:
  - A framework was used to place implicit assumptions from FCL-PCL cases into empirical distributions of key EM access parameters, conditioned on events exogenous to domestic situations (episodes of advanced economy domestic demand compression over the past 30 years).  
  - Using this framework, assumed shock severity decreased under second FCL arrangements before increasing as global conditions worsened.  
- Reserve use under adverse scenarios:
  - Colombia’s recent FCL arrangements assumed reserves accumulated in the baseline were fully used under the adverse scenario. Mexico did not assume full reserve use; Poland was intermediate. FYR Macedonia anchored minimum reserves to a reserve-adequacy metric.  
  - In most other GRA financing cases, countries use at least part of their own reserves before or during a program. The review suggests anchoring minimum reserve adequacy under the adverse scenario to a well-established ―lower bound‖ (e.g., 80 percent of the Assessing Reserve Adequacy metric), with additional reserves generally used under an adverse scenario.  
- Program duration vs. access:
  - Reserve pressure typically lasts just a few quarters, suggesting a year is about the correct interval for adverse scenarios that determine BoP need and corresponding access.  
  - For the 11 most severe crisis events described in the initial Review of Recent Crisis Programs paper, plus three extreme events from the current crisis, reserves (excluding IMF disbursements) stopped falling within 4 quarters.  
  - Basing BoP needs and access on reserve losses over a rolling 12-month window is appropriate, even for longer-duration arrangements.  
  - The extension of FCL purchase-right duration from six to twelve months (with a maximum arrangement length of two years) does not imply access decisions should expand solely because of extended duration.

### A. Justification of Access in FCL-PCL Cases — methodological points and empirical parameters
- Financial Stress Index (FSI) construction (for each country):
  - Average of: (i) three banking-related variables (the ―beta” of banking sector stocks; the spread between interbank rates and the yield on treasury bills—the TED spread; the slope of the yield curve); (ii) three securities-market-related variables (corporate bond spreads, stock market returns, and time-varying stock return volatility); (iii) one foreign exchange variable (time-varying effective exchange rate volatility).  
- Empirical distributions and shock identification:
  - Data covers the 1980–2008 period to identify demand declines more than one standard deviation relative to the long-run mean (identified years: 1991, 2001 and 2009).  
  - For exports and FDI, distributions are estimated over the ratio between the variable and its average over the preceding three years; shocks in program documents are adjusted to be consistent with this baseline.  
  - The distributions for commodity prices are unconditional distributions of commodity price changes.  
- Country sample and variables for the proposed cross-country benchmarking:
  - Country sample: 49 EMs selected (medium sized, have market access, attract private inflows through FDI, portfolio flows and loans).  
  - Variables: eight external variables focusing on current and financial-account determinants used in past FCL access decisions: exports, FDI, commodity prices excluding fuel, fuel prices, short- and MLT public and private rollover rates.  
- Summary of past EM experience during identified episodes:
  - Relative to pre-event trends on average, EMs observed a 15 percent decline in exports, a 5 percent decline in FDI, and a 5−10 percent decline in rollover rates (larger declines for longer maturities).

### A. Justification of Access in FCL-PCL Cases — recommendations to improve transparency and comparability
- Primary recommendation: make access determination more transparent by explicitly linking proposed access to actual or potential BoP needs in staff analysis, and carefully justify any use of “cushions.”  
  - The assessment of BoP needs should be linked to a plausible and relevant adverse scenario that is global to the extent possible and also reflects country-specific circumstances.  
  - Additional access cushions—beyond those considered under the adverse scenario—should be carefully justified in all cases. (These could sometimes be negative given the catalytic nature of Fund financing.)  
- Link adverse shocks to tail risks using common distributions of externally driven ―crisis‖ events:
  - An amended guidance note (and database) could provide distributions for assumed shocks; staff should discuss severity of adverse scenario shock assumptions in this context.  
  - A similar approach, with a different distribution reflecting greater domestic-factor roles, could be considered for SBAs treated as precautionary.  
  - Non-standard considerations (e.g., expiration of credit- or swap-lines) could be incorporated into access justification.  
- Make use of reserves metrics:
  - Adverse scenarios should gauge minimum reserve levels under the adverse scenario on relevant metrics (e.g., 80 percent of the Assessing Reserve Adequacy metric or another justified reserves metric).  
- Market-sensitivity handling:
  - Delete market-sensitive access discussion from staff reports where warranted by the Fund’s transparency policy.

*Source: _110111 - 16.      As recognized by the Executive Board, access and exit are intimately linked. In (PDF chapter/section).*

### 26.      Experience to date does not suggest any need to change the current access rules.

### 26.      Experience to date does not suggest any need to change the current access rules.

### Access rules: FCL and PCL
- FCL:
  - The implicit access cap for FCL arrangements was removed in 2010 to enhance flexibility and avoid creating an expectation that this was a norm rather than a ceiling.
  - Removal of access caps provided greater assurance to members that they had access to adequate resources, increasing the attractiveness of the instrument.
  - Assuming sufficient Fund resources, the absence of an access cap, especially during systemic events, should help boost market confidence and underpin the Fund’s financing role.
  - Re-introducing FCL access caps quickly could be problematic.
  - Examples: FCL arrangements of Mexico and Poland are cited as taking advantage of higher implicit access.
- PCL:
  - A hard access cap applies to PCL arrangements as an additional safeguard for Fund resources given the moderate remaining vulnerabilities of PCL qualifiers.
  - The access limit and cap provide safeguards for members whose track record is not as strong as FCL qualifiers.
  - The safeguard is important given proposals to allow approval of PCL arrangements where the member has a present BoP need at the time of approval, and to address short-term needs through shorter duration arrangements (which would raise heightened risks if the member’s need were less short-term than envisaged).
  - The 1,000 percent of quota cumulative access cap remains high, providing sufficient scope for financing likely to be needed by qualifying members:
    - Aside from the FCL arrangements of Mexico and Poland, since 2000 there have been no precautionary arrangements with access exceeding 1,000 percent of quota.
    - Only 7 percent of all SBA arrangements (less than a third of total access) have had access above this level.
  - Hard access caps also benefit members by encouraging prompt policy adjustment and early access to private markets.
  - Survey views: deterrent effect of the hard access cap for the PCL differed between advanced and emerging markets—advanced countries saw it as largely irrelevant; emerging markets and private market respondents saw it as more of a factor limiting demand.

### Exit and expectation of declining access
- Board and Director perspectives:
  - Some Executive Directors raised concerns about the lack of an exit strategy from current and past FCL arrangements.
  - Directors favored well-communicated exit strategies from FCL arrangements; some called for articulated exit plans upon approval.
  - The 2010 summing up to The Fund’s Mandate—The Future Financing Role—Reform Proposals stated that access under the FCL "would normally be expected to decline in successor arrangements whenever improvements in official and private financing prospects have reduced the member’s potential or actual balance of payments needs in a sustained manner" (PIN/10/124).
  - This expectation sets minimum parameters for exit discussions but is not a mandatory rule; the Board could approve non-declining access in exceptional circumstances.
- Experience to date:
  - Exit in cases with successor arrangements is expected to involve declining access if warranted by improvements in external financing prospects.
  - Access in successor FCL arrangements declined only in the case of Colombia’s second arrangement.
  - Aggregate global economic risks have remained elevated since the creation of the FCL in 2009 and have not resulted in financing improvements for FCL users that would reduce their potential BoP needs on a sustained basis.
  - Directors welcomed Colombia’s lower access on the second FCL arrangement as an appropriate sign of exit, although authorities warned the perceived decline in risks may not be sustained.
  - Poland did not have an arrangement for a few months after its first FCL arrangement; market participants expected Poland to request a successor arrangement given heightened global risks. Directors questioned increased access levels under its current arrangement and the absence of an exit strategy implied by the higher level of access.
  - Similar concerns noted for the current Mexico arrangement; Mexico and Poland considered access at the implicit 1,000 percent of quota cap in place during their first two arrangements as underinsurance given systemic risks.
- Policy considerations to manage exit expectations:
  - Promote further discussion and transparency about exit prospects at the outset, possibly coupled with reforms to the commitment fee schedule, to underpin current exit expectations.
  - Suggested practical measures:
    - Members could add exit expectations in their written communications requesting FCL arrangements.
    - Staff could discuss the anticipated evolution of risks over the subsequent year or two (based on the recent WEO or GFSR) at the time of each request or review to inform access discussions for successor arrangements.
  - Balance required: greater transparency on exit must not undermine the attractiveness or public good nature of the FCL or raise risk of adverse market reaction if expected exit does not occur.
  - The possible role for commitment fees to shape access incentives and discourage large precautionary arrangements is discussed in section V.

### Qualification for FCL and PCL
- Core principles:
  - Both FCL and PCL apply rigorous qualification criteria.
  - FCL qualification: judgment based on very strong economic fundamentals and institutional policy frameworks (including a very positive assessment in the most recent Article IV consultation), sustained track record of implementing very strong policies, and commitment to maintain such policies.
  - PCL qualification: similar metrics but set lower (sound policies, generally positive Article IV assessment, track record of implementing sound policies).
  - For the PCL, lack of an actual BoP need at the time of approval is a PCL qualification criterion; members facing major capital market pressures, large adjustment needs, unsustainable public debt, or widespread bank insolvencies are disqualified.
  - No "bright line" numerical qualification criteria for either instrument; frameworks contain nuanced and judgmental elements, including in the quantitative assessment.
  - Given subjectivity, qualification discussions need to provide a suitable basis for transparency.
- Assessment practice and confidentiality:
  - Qualification assessments in each of the four FCL and PCL cases appear broadly appropriate; countries had appropriately very strong or sound policies and institutions.
  - Qualification assessments have largely relied on quantitative factors for the specific country in isolation, typically without explicit peer comparison; stronger focus on qualitative elements (institutional strength, forward-looking policy commitment) could be useful.
  - Initial stages of qualification are strictly confidential to protect members from potential negative impacts of leaks; management informs the Board only after reaching a judgment that access may be appropriate, as required under the FCL decision.
  - Some members inquired and were informed that they did not appear to qualify or that further steps were needed; none challenged decisions through the Executive Board.
  - Maintaining strict confidentiality appears merited; pre-qualification would have drawbacks, including moving the Fund toward a "rating agency" role.
- Survey and interview findings on qualification process:
  - Majority of emerging markets viewed overly strict, unclear and subjective criteria as inhibiting FCL use.
  - Advanced countries, market participants and some large emerging markets argued for keeping the FCL qualification bar very high for signaling and to prevent moral hazard.
  - For the PCL, private sector respondents noted lack of clarity over potential qualifiers compared to the FCL.
  - Concern expressed about high weight on backward-looking quantitative indicators relative to qualitative and forward-looking elements.
  - Given the instrument design, it is critical to place high weight on both backward- and forward-looking components of institutional and policy strengths.
  - Respondents saw merit in refinement of the emphasis of the qualification discussion, balancing greater qualitative emphasis with the need for transparency and predictability.

### Box 5 summary: FCL and PCL Qualification framework
- FCL and PCL qualification based on very strong (FCL) and sound (PCL) performance in:
  - Economic fundamentals,
  - Institutional policy frameworks,
  - Policy implementation.
- FCL qualification assessed against nine criteria specified in the FCL decision.
- PCL qualification assessed in five broad areas:
  - (i) external position and market access;
  - (ii) fiscal policy;
  - (iii) monetary policy;
  - (iv) financial sector soundness and supervision;
  - (v) data adequacy.
- The nine FCL criteria are encompassed by the five PCL areas.
- Framework comprises backward-looking quantitative indicators and qualitative criteria to capture robustness of macroeconomic policy frameworks.
- FCL qualification bar is very high: Annex I of the GRA toolkit notes strong performance against all criteria is not necessary but significant shortcomings in one or more criteria could generally signal ineligibility.
- PCL qualification requires strong performance in most (i.e. 3 out of 5) areas, without substantial underperformance in any.
- Given limited or no ex post conditionality for FCL (and streamlined ex post conditionality for PCL), forward-looking qualitative assessment is essential.
- Quantitative indicators used include budget deficit and public debt; inflation; current account balance and external debt; with data limitations constraining the set of indicators used.

### Quantitative assessments and potential improvements
- Quantitative indicators are key inputs but comprehensive qualitative assessments are also needed.
- FCL qualifiers generally within the group of strongest performers in the Vulnerability Exercise for Emerging Markets (VEE), but the "super strong" set is very small and evolves over time.
- There may be merit in more direct use of VEE/VEA/VE-LIC-based analysis in FCL-PCL qualification assessments as one ingredient in the overall assessment:
  - Some quantitative indicators under the five broad areas align with the quantitative VEE indicator assessment.
  - Use of VEE ratings could be achieved by reference to country-specific public, external, and financial sector indicator ratings from the most recent VEE round in any new request.
  - If used, VEE ratings should not be determinative but could add consistency and rigor since VEE/VEA/VE-LIC assessments are based on empirical thresholds associated with underlying vulnerabilities.
  - Drawbacks: VEE ratings are strictly confidential (potential cost to transparency); greater use could affect independence of VEE/VEA/VE-LIC exercises and might create pressure to change underlying methodology.
- Figures and diagrams (not reproduced here) compared FCL qualification factors and VEE indicators across external, fiscal, and financial sectors; Spring 2009 and Spring 2010 VEE Venn diagrams showed evolving samples of countries with "low" vulnerability ratings.

*Source: _110111 - 26.      Experience to date does not suggest any need to change the current access rules.*

### 37.      Qualitative factors are, however, also critical to any qualification assessment.

### _110111 - 37.      Qualitative factors are, however, also critical to any qualification assessment.

### Role of qualitative factors in FCL/PCL qualification
- Qualitative and institutional factors are integral to the current FCL/PCL qualification assessment framework, together with quantitative indicators.
- Countries with FCL or PCL arrangements could face shocks that require policy adjustment, and there is limited or no reliance on ex post conditionality to facilitate and monitor adjustment under these facilities.
- Institutional or qualitative factors are harder to gauge than quantitative factors but remain critical to qualification.

### Indirect market-based measure of qualitative factors
- Comparing actual market spreads with spreads predicted by quantitative indicators provides an indirect measure of unmeasured qualitative factors.
- Some countries—including all three FCL qualifiers—have large negative “spread gaps” (starting from an already low spread base), presumed to reflect strong qualitative attributes not captured by quantitative indicators.
- A negative difference (i.e., lower actual spreads than predicted values) can be interpreted as a positive institutional "gap".
- Caveats: liquidity of financial markets and gaps in the quantitative indicators can also affect market-based assessments.

### Improvements to staff reports and forward-looking assessments
- Many staff reports on FCL and PCL arrangements have not sufficiently highlighted qualitative and forward-looking aspects underpinning qualification within the qualification discussion section.
- Qualification discussion in FCL cases generally relied on Board assessments of the most recent Article IV consultation and letters from authorities accompanying requests.
- Recommendations for future practice:
  - Include a focused discussion, directly in the qualification assessment section, of the strength of the medium-term policy framework in all its main facets (including fiscal, financial, monetary, and external sectors).
  - Further elaboration in future requests should limit concerns over excess subjectivity and help better identify the dividing line for qualification between FCL and PCL qualifiers.
  - Additional guidance on assessing qualitative and forward-looking factors could be provided in amended FCL (and forthcoming PCL) guidance notes.

### Value of recent Article IV, FSAPs, and ROSCs in qualification
- The availability of a very recent Article IV, FSAP (and, if relevant, ROSCs) is very helpful in determination of qualification.
- FCL and PCL require taking into account judgments made in the context of “the most recent” Article IV consultations, but do not specify a time limit after which an Article IV becomes stale.
- Evidence from Board discussions:
  - FCL requests preceded by a recent Article IV consultation were more streamlined and focused on FCL-specific issues (examples: Poland and Mexico’s 2010 FCL requests).
  - Colombia’s FCL request experienced limitations when more than one year had elapsed since the Article IV discussion.
- Recommendation:
  - Where possible (bearing in mind logistical constraints), Board discussions of FCL requests should be supported by a very recent completion of an Article IV consultation.
  - FSAPs (including updates and FSAP stability modules) and relevant ROSCs should also precede FCL and PCL requests, where possible.

### Qualification-specific issues for the PCL
- Subjectivity surrounds:
  - (i) the definition of what constitutes a “substantial underperformance”; and
  - (ii) the differences between PCL and FCL qualification criteria.
- Substantial underperformance:
  - With only one PCL arrangement in place, past cases do not provide evidence on interpretation.
  - One possible approach: supplement existing judgment-based approach with an informal consideration of VEE vulnerability ratings across various categories (VEE rankings are based on weighted averages of performance across various indicators based on estimated crisis thresholds). Any such use would be supplementary, not definitive.
- FCL-PCL dividing line:
  - Ambiguity noted: the PCL has five “areas” within which qualification needs to be examined, while the FCL calls for an assessment of a minimum of nine “criteria”.
  - The nine FCL criteria are indicators within the same five areas as the PCL, pointing to close similarity.
  - Consideration could be given to unifying the formulation of the areas to be assessed across the PCL and FCL to make qualification discussions more comparable.

### Reserve adequacy as a qualification criterion
- Despite reservations by some, the review did not find reasons to remove the reserve qualification criterion from assessments.
- Rationale:
  - FCL and PCL arrangements are intended as temporary reserve supplements for periods of heightened risk.
  - Inadequate reserves for “normal times” are associated with heightened crisis vulnerabilities.
  - A recent Fund policy paper, Assessing Reserve Adequacy Metrics, suggests using a risk-weighted metric that incorporates potential reserve loss from exports, short-term debt rollover, debt and equity outflows, and resident capital flight, which outperforms other traditional metrics in predicting periods of exchange market pressure.
- Implication: a risk-weighted metric could be included in qualification assessments for reserve adequacy.

### Overall assessment and recommendations on qualification treatment
- Qualification assessments appear broadly appropriate but could be modified to avoid an overly narrow focus on quantitative indicators.
- Developing a quantitative “score card” as the sole basis for determining qualification is unlikely to work.
- Emphasize forward-looking criteria applicable to the FCL-PCL by explicitly incorporating these discussions into the qualification section of staff reports.
- Aim to have, wherever possible given logistical and resource constraints, a rigorous assessment (recent Article IV and FSAPs/updates/stability modules and ROSCs where relevant) available at the time a new arrangement is considered.
- Consider unifying the areas in which qualification is assessed for the FCL and the PCL to provide additional clarity over time.

### Instrument flexibility and the case for allowing PCLs for actual BoP need
- FCL design features (initial and as enhanced):
  - No ex post conditionality (other than a review at six months).
  - In principle uncapped access (with an expected cumulative limit of 1,000 percent of quota).
  - Ability to provide upfront financing.
  - Relatively long grace and repayment periods.
  - Possible successor arrangements subject to continued qualification.
  - Ability to be used to meet precautionary or present BoP needs upon approval.
  - Enhanced in 2010 by lengthening the duration of purchase rights to one year and removing the implicit 1,000 percent of quota access cap.
- PCL design differences (limited flexibility relative to FCL):
  - Can only be approved in the absence of actual BoP needs upon approval.
  - Involves streamlined ex post conditionality.
  - Shorter duration of purchase rights (maximum of 6 months after which completion of a review is needed to maintain access).
  - Access is subject to an annual approval limit and an overall cumulative cap and is phased in arrangements longer than 12 months.
- Areas for potential additional flexibility:
  - (i) Allow PCL arrangements to be approved to meet a present BoP need at the time of approval.
  - (ii) Allow approval of shorter PCL arrangements.
- Advantages of allowing PCLs for actual BoP need:
  - (i) Better align existing instruments and facilities, enhancing coherence of the Fund’s GRA toolkit.
  - (ii) Address difficulties of distinguishing clearly between present and potential BoP need in crisis contexts where conditions can move rapidly.
  - (iii) Provide greater flexibility and a wider set of circumstances in which the instrument can be used.
- Survey evidence:
  - Survey respondents from emerging market members were generally supportive of allowing the PCL for actual BoP needs, while advanced country respondents had more reservations.

### Case study: FYR Macedonia’s PCL arrangement (Box 7)
- Illustrates difficulty in differentiating potential and present BoP needs in highly uncertain environments.
- Timeline and issues:
  - Article IV mission in mid-November 2010 assessed Macedonia did not face a present BoP need.
  - Ireland’s crisis immediately after that assessment increased downside risk for peripheral Europe; Macedonia’s PCL Board meeting was scheduled two months later (January 2011).
  - Concerns arose that Macedonia could develop a present BoP need by the Board meeting, which would disqualify it for a PCL despite unchanged fundamentals.
  - After PCL approval, Macedonia drew under the arrangement citing impaired access to private markets needed to address external payments due to uncertainties after unexpected early elections.
- Lesson: whether a BoP need is potential or actual can shift rapidly during global crises; ex ante differentiation is often not clear-cut and can lead to denial of timely support.

*Source: IMF staff review material from the document titled "_110111 - 37.      Qualitative factors are, however, also critical to any qualification assessment."*

### 49.      In support of such a drawing PCL, existing safeguards are numerous and

### _110111 - 49.      In support of such a drawing PCL, existing safeguards are numerous and

### Safeguards for a drawing PCL
- Existing safeguards include: the combination of ex ante conditionality (qualification criteria); focused ex post conditionality to help address remaining vulnerabilities; prior actions where appropriate; short duration of purchase rights (no more than six months); a hard cap on access; and the phasing of access in arrangements longer than 12 months.
- The PCL is subject to the Fund’s policies on exceptional access (where relevant), safeguards assessments, and post-program monitoring.
- The PCL safeguards are described as almost as comprehensive as the SBA’s, with additional assurance from the qualification framework that reflects the strength of the member’s policies and fundamentals.
- A PCL arrangement approved when the member has a present BoP need would still provide adequate safeguards for Fund resources; disallowing access when actual BoP needs exist at approval is characterized as anomalous.

### Distinguishing potential versus actual BoP need
- It can be difficult in practice to distinguish between potential and actual BoP need, especially at times of market stress.
- A BoP need assessed as potential can quickly become a present need without changes in the country’s policies and fundamentals.
- A PCL approved on the basis of potential BoP needs might be drawn shortly after approval for fully defensible reasons, potentially causing public confusion and reputational cost despite the initial assessment.
- Approval of a PCL arrangement in the face of both potential and actual BoP needs would enhance GRA toolkit flexibility and attractiveness, and could reduce deterrence from stigma associated with the SBA.
- Where present BoP needs are not a signal of deeper structural problems, addressing them through a PCL could result in more effective financial engagement between the Fund and members.

### Distinction between drawing PCL and SBA
- Argument addressed: a drawing PCL would not undermine the instrument nor simply represent a “light” SBA.
- Key distinctions to remain in place:
  - Rigorous qualification criteria for PCLs (including drawing arrangements) versus no qualification criteria for SBAs.
  - Unavailability of PCL when domestically-generated BoP needs indicate substantially weakened underlying economic strengths (paralleling FCL treatment).
- In shocks that leave basic economic and policy strengths intact, no compelling reason to disallow a drawing PCL arrangement from the outset, preserving a clear dividing line from SBAs.

### Arrangement duration flexibility (FCL and PCL)
- Current rules:
  - FCL arrangements can only be approved for a period of either one or two years.
  - PCL arrangements can be approved for any duration between one year and two years.
- Advantages of allowing shorter arrangements:
  - Better tailoring to members’ needs and clearer signals about the short-term nature of shocks or time needed for credible progress.
  - For PCL-qualifying countries with remaining moderate vulnerabilities, shorter arrangements could signal confidence in near-term private market access and commitment to prompt policy adjustment.
- Drawbacks of too-short durations:
  - May complicate access limits and review schedules; menu could become overly complicated.
  - Less relevant for FCL (no access limits, no ex post conditionality outside of reviews) but could complicate review schedules.
- Proposed approach:
  - Allow limited additional duration flexibility for PCL arrangements.
  - Specifically, amend the PCL decision to allow approval of PCL arrangements with a duration of six months in cases where the member has a short-term BoP need.

### Overall conclusions on flexibility
- Refinements to the PCL could enhance coherence of the Fund’s toolkit and better respond to varied member circumstances.
- There is a coherence-based case for establishing a “drawing” PCL arrangement given difficulties in precisely assessing when crisis prevention becomes resolution and the extensive safeguards already in place.
- Approval of PCL arrangements to meet actual BoP needs at the time of approval is recommended as a welcome addition.
- Allowing limited additional flexibility in PCL duration would further enhance responsiveness.

### Commitment fees
- Current fee structure objectives: simplicity, cost recovery, and deterring unnecessarily high and prolonged precautionary access.
- Current structure: commitment fees set at 15 bps for annual access of up to 200 percent of quota; commitment fee increases to 30 basis points for access between 200 and 1,000 percent of quota; beyond which it increases to 60 basis points.
- Commitment fee is levied upon approval and refunded on a pro-rata basis if drawings are made or if the arrangement is cancelled without being drawn in full.
- Advantages of current structure: simple, transparent, and predictable.
- Potential issues: whether it strikes the right balance between supporting high precautionary financing and ensuring timely exit from Fund arrangements to safeguard Fund resources.
- Possible redesign options considered:
  - A steeper fee schedule so high access levels better reflect members’ cost of accumulating reserves (e.g., as proxied by average EMBI spreads adjusted for a term premium).
  - A more graduated fee schedule to better match marginal commitment fee with access; natural “break points” evident from historical precautionary cases.
- Drawbacks of changing the fee structure:
  - Complexity introduced by a steeper or more graduated schedule.
  - Incentive risks: excessive fee increases could reduce demand for new instruments and delay Fund engagement during shocks.
  - Spillover/legal issues: commitment fees are “charges” under the Articles and must be “uniform” (Article V, Section 8(d)); changes could require either similar changes for all arrangements in the credit tranches or redesigning FCL and PCL as special facilities outside the credit tranches.
- Survey and experience do not point to an urgent need for reform of commitment fees.

### Next review
- Executive Board decision called for a joint review of the FCL and PCL decisions by no later than August 30, 2012, or whenever aggregate outstanding credit and commitments under these two decisions reach SDR 100 billion.
- Staff recommendation for the next joint review: be undertaken no later than three years after the completion of this review, or whenever aggregate outstanding credit and commitments under these two decisions reach SDR 150 billion.
- Under existing Board policy, expected periodicity for most regular policy reviews is five years; staff considers a shorter timeframe warranted for the next FCL-PCL review.

### Conclusions and issues for discussion
- Experience suggests the FCL and, to a lesser extent, the PCL, have been successful in achieving their main objectives by providing valuable supplementary insurance during heightened systemic risk, observable in declining spreads and exchange rate volatility for users and similarly-situated neighbors.
- Remaining issues: ongoing stigma and subjectivity at the application stage; increased transparency and emphasis on qualitative and forward-looking qualification factors recommended.
- Recommendation to have rigorous assessment provided by a recent Article IV (and FSAPs/FSAP-updates/FSAP stability modules and, where relevant, ROSCs) available when a new arrangement is considered, where possible.
- Access and exit linkage: access under successor arrangements should fall as risks dissipate; better linking access to assumed adverse scenario results and centering scenario discussions on tail risks should improve transparency and comparability.
- Instrument flexibility recommendations: allow PCL arrangements for qualifying members facing an actual BoP need at approval; permit shorter duration PCL arrangements to better tailor instruments.
- Issues for Directors:
  - Do Directors agree that members have seen benefits from the creation of the FCL and PCL?
  - Do Directors agree that more emphasis should be placed on the qualitative and forward-looking criteria already built into the qualification framework, and on bringing in in-house vulnerability analysis on the quantitative side? Should Article IV timing be tailored more closely, where possible, to FCL or PCL qualification assessments?
  - Do Directors agree that PCL arrangements should be allowed for qualifying members facing an actual balance of payments need at approval?
  - Should PCL arrangement duration be made more flexible?
  - What are Directors views on a possible steeper, or more graduated, commitment fee schedule, or do they agree that the present structure remains broadly appropriate?
  - Do Directors agree that the next FCL-PCL review be undertaken jointly no later than three years from the completion of this review, or whenever aggregate outstanding credit and commitments under the two instruments reach SDR 150 billion?

*Source: _110111 - 49. In support of such a drawing PCL, existing safeguards are numerous and (PDF).*

### ANNEX I. CASE STUDIES

### ANNEX I. CASE STUDIES

### A. Colombia and the Flexible Credit Line

- Main Message
  - Since the creation of the Flexible Credit Line (FCL), three arrangements have been approved for Colombia.
  - Qualification followed from Colombia’s very strong rules-based policy framework, solid institutions, and very strong economic fundamentals.
  - With a large share of commodity exports in external trade and relatively thin financial markets, adverse risk scenarios saw the major part of potential financing requirements arising from current, as opposed to financial, account shocks.

- Contentious Issues
  - Board discussion on the request for the third arrangement proved contentious on the issues of exit and the level of access.
  - With the improved WEO and GFSR projections in April 2011, some Directors saw reserves as comfortable, raising concerns about possibly prolonged use of Fund resources under FCL arrangements.
  - The proposed increase in the access level was questioned.
  - The timing of the FCL request was difficult as more than a year had elapsed since the most recent Article IV consultation.

- Context
  - Following comprehensive reforms in the 2000s, Colombia had very strong fundamentals and institutional policy frameworks at the time of its FCL requests, including a flexible exchange rate, a credible inflation targeting regime, strong commitment to a medium-term fiscal framework, and strengthened financial supervision.
  - Economic performance prior to the recent crisis included solid real GDP growth (5½ percent on average in 2004−08), single-digit inflation, low public debt (32 percent of GDP in 2008), and a sound financial system (average capital adequacy ratio of about 15 percent).
  - After the Lehman bankruptcy the economic slowdown was sharper than envisaged: higher sovereign spreads, weaker exports and worker remittances, and a sharply depreciating exchange rate; near-term outlook cut sharply to zero growth in 2009.
  - Authorities requested an FCL arrangement in April 2009 as insurance against downside risks.
  - Second arrangement requested in April 2010 amid recovery and perceived remaining downside risk.
  - Staff concurred with the assessment and maintained the view when the third arrangement was approved in May 2011.

- Role of the FCL
  - Protracted global crisis posed risks to Colombia’s growth outlook and balance of payments; vulnerability to commodity price shocks could affect current account and commodity-related FDI flows.
  - Authorities requested FCL arrangements to boost confidence, support policies, and provide supplementary insurance.
  - Other policy responses: exchange rate flexibility and countercyclical macroeconomic policies.
  - Staff view: FCL provided useful insurance, created space for countercyclical policies without undermining market confidence, and helped ensure continued access to international capital markets on favorable terms.
  - Despite improved outlook later, authorities requested a successor FCL arrangement in response to continued heightened global uncertainty and tail risks.

- Access (determined by adverse scenarios of concurrent shocks to current and capital accounts)
  - First arrangement
    - Access: 900 percent of quota, SDR 6.966 billion, for one year
    - Shocks applied to oil prices, non-oil commodity prices, FDI flows, and rollover rates for public and private debt, to the baseline that had incorporated the shocks materialized after the Lehman bankruptcy.
    - Access presented as in line with other high-access cases, including FCL arrangements for Mexico and Poland, and, combined with reserves, providing adequate cover against these shocks.
  - Second arrangement
    - Access: 300 percent of quota, SDR 2.322 billion, for one year
    - Authorities requested lower access arguing lower probability of a negative event and more comfortable reserve positions following the SDR allocation.
    - Adverse scenario included milder shocks to the same items as under the first arrangement.
    - Some Executive Directors viewed lower access as a step toward eventual exit from the FCL; staff and authorities maintained it reflected perceived risks.
  - Third arrangement
    - Access: 500 percent of quota, SDR 3.870 billion, for two years
    - Authorities requested higher access than under the second arrangement citing larger potential impact from a similar set of shocks due to larger economy/exports and larger volatile commodity sector share.
    - Fund staff’s adverse scenario showed a larger gap from broadly the same shocks, necessitating higher access to provide the same protection.
    - Baseline assumed larger commodity-related exports and investment inflows; added shock to worker remittances had small impact (US$275 million on average out of the total estimated shortfall of US$7.6 billion).

- FCL and reserves
  - Authorities indicated it would have been impossible and undesirable to quickly build reserves equivalent to the access under the first FCL arrangement without compromising macroeconomic policy framework — implying the FCL as a substitute of sorts for higher reserves.
  - They also argued FCL was an imperfect substitute for reserves: a contingent instrument available only in the presence of a balance of payments need and, per Board decisions (BUFF/10/125), with access expected to decline as macroeconomic situation normalizes.
  - Since March 2010 authorities began accumulating reserves under a rules-based foreign exchange intervention.
  - When the third arrangement was requested, reserves had amounted to 6½ months of imports and exceeded 150 percent of the sum of external debt falling due and the current account deficit projected for 2011.

- Qualification assessment
  - Staff reports highlighted very strong economic fundamentals and institutional framework and a sustained track record of implementing sound policies.
  - Institutional framework cited: rules-based medium-term fiscal framework, inflation targeting and flexible exchange rate regimes, robust framework for financial regulation and supervision.
  - Reports did not assess framework strength in light of relevant international standards (except for data adequacy), partly because the fiscal ROSC and the FSAP were outdated.
  - Staff emphasized quantitative indicators (external debt, current account balance, FDI inflows, fiscal balance, public debt in percent of GDP, reserve numbers, capital adequacy, nonperforming loan, and provisioning ratios).
  - Forward-looking assessment made in context of debt sustainability analyses and discussion of reform of the fiscal framework.

- Impact of the FCL
  - Authorities and staff argued the FCL contributed to stabilizing expectations and created space for countercyclical policies.
  - In the review of the first arrangement, staff reported Colombia’s bond spreads had been declining consistently faster than its Latin American peers.
  - Market participants repeatedly cited the strong supportive role of the FCL in reducing perceptions of tail risks.
  - Announcement of subsequent FCL arrangements had less discernable positive impact on market indicators.
  - Colombia’s central bank analysis (“Impacto macroeconómico de la línea de crédito flexible con el Fondo Monetario Internacional,” Banco de la República, March 11, 2011) shows the first arrangement helped reduce bond spreads and increase consumer confidence, leading to higher GDP growth and lower inflation.

- Colombia: Main Assumptions Underlying FCL Access Calculation (Changes relative to baseline projections) — selected assumptions reported across FCLs (as presented)
  - Fuel prices: 20% lower (1st FCL); 15% lower (2nd FCL); 15% lower (3rd FCL)
  - Non-fuel commodity prices: 10% lower (1st); 7.5% lower (2nd); 7.5% lower (3rd)
  - Foreign Direct Investment: 15% lower in 2009; 10% lower in 2010 (1st); 10% lower (2nd); 10% lower (3rd)
  - Rollover Rates: 15 p.p. lower in 2009; further lower in 2010 (1st); 10-15 p.p. lower (2nd); 10-15 p.p. lower (3rd)
  - Worker remittances: n.a. (1st); n.a. (2nd); 7.5% lower (3rd)
  - Cushion Built in Access: SDR 1.5 bn. (1st); SDR 0.14 bn. (2nd); SDR 0.30 bn. (3rd)
  - Reserve Accumulation: 100% of baseline (negative) in 2009; 0% of baseline in 2010 (1st); 0% of baseline (2nd); 0% of baseline (3rd)

---

### B. FYR Macedonia and the Precautionary Credit Line

- Main Messages
  - The Former Yugoslav Republic of Macedonia is the first and, to date, only country to have an arrangement under the Precautionary Credit Line (PCL).
  - Qualification was based on strong performance across a variety of fiscal, monetary and financial indicators as well as overall sound institutional frameworks, but with moderate vulnerabilities remaining in the external sector and data quality.
  - Citing a loss of market access ahead of unanticipated parliamentary election, and its shallow domestic debt market, FYR Macedonia made a purchase under the arrangement in March 2011.
  - The first review under the PCL arrangement was completed in September 2011.

- Contentious Issues
  - Issues arose related to qualification for a PCL arrangement and the purchase shortly after approval.
  - On qualification, Directors were concerned about the health of the banking system (where the two largest banks are Greek), the adequacy of international reserves, and Macedonia’s ability to access the sovereign debt market.
  - By contrast, some Directors would have supported a request for an FCL arrangement.
  - On the purchase under the PCL, questions were raised whether the balance of payments need was actual, and concerns that the purchase could be driven by the Fund’s below market lending rate for GRA facilities including the PCL.

- Context
  - FYR Macedonia weathered the 2008/09 global crisis relatively well, with only a modest recession in 2009 and a rapid recovery of international reserves from their low point in Spring 2009.
  - Since 2010 the macroeconomic outlook improved: gradual recovery, rapid narrowing of the current account deficit, a moderate fiscal deficit, a sound banking sector, and broadly adequate international reserves coverage.
  - As financial turbulence in the Eurozone intensified through 2010, potential spillover risks were a major concern given large financial and trade linkages with Greece.
  - Against this backdrop, FYR Macedonian authorities sought deeper engagement with the Fund and expressed interest in the PCL immediately after its establishment in August 2010, making a formal request in December.

*Source: _ANNEX I. CASE STUDIES_, _110111 - ANNEX I. CASE STUDIES*

### 2010. An arrangement was approved on January 19, 2011.

### _110111 - 2010. An arrangement was approved on January 19, 2011.

### Role of the PCL
- The PCL arrangement was taken to provide insurance against Macedonia’s external risks.
- Despite sound fundamentals and policies and the absence of an actual balance of payment (BoP) need, external risks remained significant.
- Resources under the arrangement would help ensure Macedonia could better weather an adverse shock.
- Having a PCL arrangement in place would send a positive signal that policies were sound and that the authorities had adequate resources to draw upon if needed, which could strengthen investor confidence.

### Duration and Access
- Authorities requested a two-year arrangement with access of 500 percent of quota (SDR 344.5 million) in the first year and an additional 100 percent of quota (SDR 68.9 million) in the second year.
- Rationale for two years:
  - Perceived persistence of external risks.
  - Stronger signal from a longer insurance term.
  - Bridge parliamentary elections originally scheduled in mid-2012 (later brought forward to June 2011).
- Adverse stress scenario assumptions justifying access levels:
  - Lower EU growth in 2011−12 than in the Fall 2010 WEO baseline.
  - An outflow of bank deposits in 2011 and only a partial return in 2012.
  - Loss of access to sovereign debt markets in 2011−12.
  - International reserves could not be drawn down to below 85% of short-term external debt (at residual maturity).
- Executive Board welcomed requested access level which was below the cumulative access cap of 1000 percent of quota under a two-year PCL arrangement.
- FYR Macedonia was assessed to meet the four exceptional access criteria applicable to Fund arrangements beyond the normal access limits.

### Qualification
- Staff recommended approval of the request for a PCL arrangement.
- FYR Macedonia assessed to have a sound policy track record:
  - Successfully completed several Fund arrangements and repaid the Fund early.
  - Executive Board had a generally positive assessment in 2009 and 2010 Article IV consultations.
- Performance in qualification areas:
  - Performed strongly in three of five qualification areas without substantial underperformance in any of the five.
  - Positive elements identified:
    - (i) a sustainable public debt position, with moderate fiscal deficits;
    - (ii) low inflation within a sound monetary and exchange rate framework;
    - (iii) sound financial sector balance sheets, with adequate supervision and regulation.
  - Moderate vulnerabilities in the other two areas:
    - (i) external vulnerabilities from the current account deficit, significant market share of Greek banks, and overall exposure to developments in Europe;
    - (ii) shortcomings in data transparency and availability, including not subscribing to Special Data Dissemination Standard (SDDS), although data were adequate for surveillance and program monitoring purposes.
- At time of approval FYR Macedonia did not have an actual BoP need and did not face any of the circumstances under which the Fund may not approve a PCL.

### FYR Macedonia: Main Assumptions Underlying PCL Access Calculation (Changes relative to baseline projections)
- Cumulative Access level:
  - 2011: SDR 344.5 million; 500 percent of quota
  - 2011-2012: SDR 413.4 million; 600 percent of quota
- Trade deficit: higher by 1.7% of GDP (2011); higher by 0.6% of GDP (2012)
- Current transfers: lower by 1.3% of GDP (2011); lower by 0.4% of GDP (2012)
- FDI inflows: lower by 1.3% of GDP (2011); lower by 0.3% of GDP (2012)
- Portfolio inflows: lower by €190 million (2011); lower by €155 million (2012)
- Bank deposits: Outflow of 5% (2011); half of the bank deposit outflows in 2011 would return (2012)
- Minimum gross reserve: 85% of ST debt at residual maturity (2011); 85% of ST debt at residual maturity (2012)
- Source note: IMF staff estimates.
- Footnotes:
  - 1/ Assumes a 0.7 percent growth for the EU in 2011 and a 1.2 percent growth for the EU in 2012. Lower growth in the EU would affect the trade balance, transfers, and FDI.
  - 2/ These are equivalent to no sovereign debt market access in 2011-12.

### Ex post conditionality and program design
- Program focus: buttressing external and fiscal sustainability to limit external financing needs in an unfavorable external environment, and undertaking policy adjustments as needed in response to adverse developments.
- Arrangement includes indicative targets on the fiscal deficit and on net international reserves.
- Authorities committed in writing to:
  - improve data quality and to subscribe to SDDS;
  - strengthen the financial sector regulatory framework;
  - undertake other structural reforms to boost long-term growth potential.
- Standard performance criteria also applied.
- Directors’ concerns at Board approval:
  - Robustness of Macedonia’s fiscal financing plan for 2011.
  - Risks from mostly relying on Eurobond issuances for budget financing—need to strengthen domestic debt market.
- Staff response:
  - Developing a domestic debt market would be a long-term project with no single quick fix.
  - For the first PCL review a structural benchmark on improving debt management was added.

### Purchase (drawdown) and first review
- Purchase:
  - On March 30, 2011, the FYR Macedonian authorities purchased SDR 197 million (approximately €220 million, 286 percent of quota) under the PCL to meet the materialized BoP need, citing reduced market access and higher risks resulting from the announcement of early elections (originally scheduled in mid-2012).
  - Authorities reported impaired access to external markets and domestic markets seen as too thin and skewed to shorter duration.
- First review:
  - First review under the PCL was delayed beyond the six-month anniversary due to early elections and time needed to form the new government.
  - FYR Macedonia’s performance was assessed to be broadly consistent with the program supported by the PCL.
  - Staff assessed the March draw illustrated remaining vulnerability in external and domestic market access.
  - Strengthened conditionality recommended: improve debt management (structural benchmark on a roadmap).
  - Target for international reserves was increased to signal intention to safeguard a stronger reserve position.
  - Directors:
    - Supported completing the review and welcomed the structural benchmark on improving debt management.
    - Some questioned the existence of an actual BoP need for the March draw and were concerned the decision could have been driven by lower costs of Fund financing.
    - Raised issues on PCL design: possibility to shorten the repayment period, extend review deadlines in exceptional circumstances, and interpretation of "sustained" market access in qualification criteria.

### Impact
- The PCL helped boost market confidence in Macedonia despite financial turbulence in Greece.
- Observed market indicators:
  - The secondary market yield of FYR Macedonia’s 2015 Eurobond over that of Bunds narrowed since late 2010 (though spreads widened again in fall 2011).
  - Volatility of FYR Macedonia’s 2015 Eurobond yield declined significantly from November 2010 to approval of the PCL in January 2011; the decline in volatility was more pronounced than in other regional countries.
  - Since approval, volatility of FYR Macedonia’s 2015 Eurobond yield has remained lower than most other regional emerging markets.
- Board endorsed staff’s assessment and approved the request for a PCL arrangement.
- Some Directors suggested FYR Macedonia could qualify for an FCL, but the authorities did not request an FCL.

*Source: IMF staff report content from _110111 - 2010. An arrangement was approved on January 19, 2011.*

### ANNEX II. SURVEY RESPONSES

### ANNEX II. SURVEY RESPONSES

### Survey methodology and respondent composition
- Response coverage: responses from member countries represented almost 80 percent quota shares.
- Composition of country responses: 55 percent from advanced countries; remainder from emerging market countries.
- Institutional origin: responses from central banks and Ministries of Finance were almost evenly divided.
- Private sector outreach: survey sent to 60 private sector analysts (including academics, banks, rating agencies and hedge funds), with a response rate of almost 20 percent.
- Note on aggregation: "The aggregated responses displayed in the left column are the average of the responses received from county authorities and do not include the responses from the private sector."

### FCL — key attractive features (average response)
- Automatic/upfront access
- Lack of (ex-post) policy conditionality
- Dedicated to strong-performing countries
- Long repayment terms (3.25 to 5 years)
- Response classification labels used in the survey: Strongly Agree; Agree; Do not Agree

### FCL — factors inhibiting use (average response)
- Overly strict qualification requirements
- Unclear qualification criteria
- Subjective application of qualification criteria
- Stigma associated with use of IMF instruments
- Absence of balance of payments need
- Expectation of exit/lower access in successor arrangements
- Uncertainty about market reaction on exit
- Generalized positive signaling effect from existence of FCL reducing need for indvidual coutnry requests
- Preference for self-insurance through reserve accumulation
- Access to alternative instruments
- Do not count as reserves until drawn
- Response classification labels used in the survey: Strongly Agree; Agree; Do not Agree
- Separate reporting by respondent type: EM; AM; Private

### FCL — suggested changes to improve usability (average response)
- More flexible duration (currently 1 or 2 year)
- Greater predictability of qualification process
- Removing expectation of exit
- Longer duration of automatic access (curr. 1 yr)
- Level of commitment fees
- Response classification labels used in the survey: Strongly Agree; Agree; Do not Agree
- Separate reporting by respondent type: EM; AM; Private

### PCL — key attractive features (average response)
- Upfront access to contingent financing
- Streamlined (ex-post) conditionality
- Dedicated to strong-performing countries
- Long repayment terms (3.25 to 5 years)
- Response classification labels used in the survey: Strongly Agree; Agree; Do not Agree

### PCL — factors inhibiting use (average response)
- Overly strict qualification requirements
- Unclear qualification criteria
- Subjective application of qualification criteria
- Stigma associated with use of IMF instruments
- Absence of balance of payments need
- Uncertanty about market reaction on exit
- Access limits
- Ex-post conditionality
- Level of commitment fees
- Preference for self-insurance through reserve accumulation
- Acess to alternative instruments
- Do not count as reserves until drawn
- Response classification labels used in the survey: Strongly Agree; Agree; Do not Agree
- Separate reporting by respondent type: EM; AM; Private

### PCL — suggested changes to improve usability (average response)
- More flexible duration
- Full Flexibility of access
- Allowing PCLs for actual BoP need
- Removing expectation of exit
- Response classification labels used in the survey: Strongly Agree; Agree; Do not Agree

*Source: ANNEX II. SURVEY RESPONSES (Fund survey of country authorities on the FCL and the PCL; and staff calculations).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_110111.pdf_