IMF Precautionary and Liquidity Line (PLL)

February 27, 2019

The global financial crisis highlighted the need for effective global financial safety nets to help countries cope with adverse shocks. A key objective of recent lending reforms was to complement the traditional crisis resolution role of the IMF with more effective tools for crisis prevention. The Precautionary and Liquidity Line (PLL) is designed to flexibly meet the liquidity needs of member countries with sound economic fundamentals but with some limited remaining vulnerabilities which preclude them from using the Flexible Credit Line (FCL). To date, two countries, Former Yugoslav Republic of Macedonia and Morocco, have used the PLL.

Tools to meet countries’ diverse financing needs

The PLL provides financing to meet actual or potential balance of payments needs of countries with sound policies, and is intended to serve as a backstop or help resolve crises under wide-ranging situations. The PLL combines a qualification process (similar to that for the FCL but with a lower bar) with focused ex-post conditionality aimed at addressing the remaining moderate vulnerabilities identified during the assessment of qualification. Its qualification requirements signal the strength of qualifying countries’ fundamentals and policies, thus contributing to consolidation of market confidence in the country’s policy plans. PLL arrangements can have duration of either six months, or one to two years.

The six-month duration is available to address actual or potential short-term balance of payments needs of crisis bystanders that can make credible progress in addressing their vulnerabilities during the six-month period. Up to 125 percent of a member country’s quota can normally be made available upon approval of a six-month PLL arrangement. However, if a country faces an actual or potential larger short-term balance of payments need resulting from the impact of an exogenous shock, including heightened regional or global stress, access could be subject to a higher limit of 250 percent of quota per arrangement, which is also the cap for total access under six-month PLL arrangements. Successor six-month PLL arrangements may be approved for qualifying member countries if either (i) a cooling-off period of at least two years has elapsed since the date of approval of the previous six-month PLL arrangement, or (ii) the country’s balance of payments need is longer than originally anticipated due to the impact of exogenous shocks, provided that not more than one additional six-month PLL arrangement may be approved under the circumstances.

Access under PLL arrangements is subject to PLL-specific limits and caps, as well as annual and cumulative normal access limits. Limits and caps for six-month PLL arrangements are discussed above. For one- to two-year PLL arrangements, the maximum access at approval is equal to 250 percent of quota for the first year and a total of 500 percent of quota for the entire arrangement. In PLL arrangements with duration of more than one year, amounts committed during the second year can be brought forward to the first year through rephasing where needed, subject to approval by the IMF’s Executive Board during a review. Access under PLL arrangements is subject to a cumulative cap of 500 percent of quota, regardless of the duration of the arrangement. Moreover, approval of PLL arrangements with access exceeding the normal limit of 145 percent of a country’s IMF quota annually or a cumulative limit of 435 percent of its quota (net of scheduled repayments) is possible only if the country satisfies a predetermined set of criteria.

Countries with sound policies qualify

The PLL qualification process enables signaling the strength of qualifying countries’ fundamentals and policies. The core of the qualification assessment process is that the member country:

  • Has sound economic fundamentals and institutional policy frameworks
  • Is currently implementing—and has a track record of implementing—sound policies
  • Remains committed to maintaining sound policies in the future

In addition to a generally positive assessment of the country’s policies in the most recent Article IV consultations, qualification for the PLL is assessed against the same qualification criteria as an FCL arrangement, which are grouped into the following areas: (i) external position and market access; (ii) fiscal policy; (iii) monetary policy; (iv) financial sector soundness and supervision; and (v) data adequacy. While requiring strong performance in most of these areas, qualification for the PLL allows moderate vulnerabilities in one or two of these areas, while substantial vulnerabilities in any of the five areas would disqualify a member country for the PLL.

Countries experiencing any of the following conditions at approval cannot use the PLL: (i) sustained inability to access international capital markets; (ii) a need for large macroeconomic or structural policy adjustment (unless such adjustment has credibly been launched before approval); (iii) a public debt position that, with high probability, is not sustainable in the medium term; or (iv) widespread bank insolvencies.

Focused conditions to reduce remaining vulnerabilities

Countries using the PLL commit to policies aimed at reducing their remaining vulnerabilities identified in the qualification process with focused conditionality. Thus, under one- to two-year PLL arrangements, prior actions, structural benchmarks, and quantitative performance criteria will only be used when they are critical for a program’s success, and a quantified macroeconomic framework underpinned by indicative targets would allow assessment of a country’s progress toward meeting its program objectives. One- to two-year PLL arrangements are monitored through six-monthly reviews by the IMF’s Executive Board that will assess the extent to which the program remains on track to achieve its objectives. If a member country has an actual balance of payments need at the time of approval of the arrangement, access is phased through semiannual disbursements in line with the same periodicity of reviews. Six-month PLL arrangements are not monitored through reviews but could include prior actions if they are considered critical for the success of the arrangements.

Low cost to get through tough times

Commitment fee. In accessing IMF resources on a precautionary basis, countries pay a commitment fee that is refunded pro rata if they opt to draw on those resources during the relevant period. The commitment fee increases with the level of access available over a twelve-month period (15 basis points for committed amounts up to 115 percent of quota, 30 basis points on committed amounts between 115 percent and 575 percent of quota, and 60 basis points on amounts exceeding 575 percent of quota).

Lending rate. As with other drawing IMF arrangements, the lending rate comprises (1) the market determined Special Drawing Rights (SDR) interest rate and a margin (currently 100 basis points), together known as the basic rate of charge, and (2) surcharges, which depend on the amount and time that credit is outstanding. A surcharge of 200 basis points is paid on the amount of credit outstanding above 187.5 percent of quota. If credit remains above 187.5 percent of quota after three years, this surcharge rises to 300 basis points. Together, level- and time-based surcharges are designed to discourage large and prolonged use of IMF resources.

Service charge. A service charge of 50 basis points is applied on each amount drawn.