Short-term Liquidity Line (SLL)

April 22, 2020

As demand for liquidity has grown, and global uncertainty has increased, the IMF has established a new Short-term Liquidity Line (SLL) as part of its COVID-19 response. The SLL aims to minimize the risk of shocks evolving into deeper crises and spilling over to other countries.

The Short-term Liquidity Line is designed to be a liquidity backstop for members with very strong policy frameworks and fundamentals, who face potential, moderate, short-term liquidity needs because of external shocks that generate balance of payment difficulties. This liquidity backstop complements the IMF’s lending toolkit and other elements of the global financial safety net.

Liquidity backstop

The SLL was established as a special facility in the IMF General Resources Account (GRA). It is designed to provide liquidity support and has several innovative features, including revolving access:

  • The SLL is designed for potential, moderate, short-term balance of payment (BoP) needs related to capital account pressures that could arise frequently from external developments (rather than “home-grown” shocks). Access is capped at 145 percent of quota (normal annual access limit).

  • Individual SLL arrangements will be approved for a period of 12 months, and successor arrangements could be approved for as long as the member continues to qualify and have the special BoP need.

  • The SLL has revolving access, which enables repeated (partial or full) purchases and repurchases within and across SLL arrangements. Repurchases would reconstitute the member’s right to purchase up to the maximum access approved.

Low cost, especially when used on a precautionary basis

  • The SLL has a special fee structure, which includes a non-refundable commitment fee of 8 basis points (bps) and a service charge of 21 bps.

  • The SLL is cheaper than the Flexible Credit Line (FCL) at the same access level when used purely on a precautionary basis.

  • If a member draws on the SLL, the normal charges and level-based surcharges apply. If the member draws the arrangement twice (repeated use is envisaged given the nature of the shock that the SLL is designed to address), costs are comparable to the cost of the FCL at similar access levels.

  • There would be also cost savings relative to reserves, and likely benefits from lower yields on public debt given the positive signal on policy strength.

More innovative features to meet countries’ needs

  • The SLL requires no ex-post conditionality and no reviews, similar to the FCL.

  • The Board approves the extension of an “offer.” The offer is contingent on the authorities’ “acceptance” with a signed written communication within two weeks.

  • Sole signatory of the Central Bank in the written communication is possible, if certain requirements are met. Since BoP needs are expected to be limited in scale and require only a fine-tuning of policies, the Central Bank is typically the agency in control of relevant policy levers (such as exchange rate adjustments, FX intervention, and/or interest rate changes).

For members with very strong policies and fundamentals

 

 

Table 1. Comparison of the Key Features of the SLL and FCL

 

 

SLL
Short-term Liquidity Line

FCL
Flexible Credit Line

Facility

Special facility

Credit tranches

Objective

Provide “swap-like” liquidity support to very strong members for special BOP needs

Allow very strong members to deal with any type of BOP needs

BOP need

Potential moderate short-term BOP difficulties reflected in pressure on the capital account and the member’s reserves resulting from volatility in international capital markets

Any

Qualification

Based on an assessment of:

  • Very strong fundamentals and institutional policy frameworks
  • Very strong policies: in the past, currently, and commitment to maintaining them

Repurchase period

12 months

3¼–5 years

Access

Up to 145 percent of quota; revolving access

No access limit

Duration of arrangement

12 months

1 or 2 years

Charges and fees

A special fee structure would apply:

  • Nonrefundable commitment fee   (8 bps)
  • Service charge (21 bps)
  • Normal rate of charge
  • Normal schedule for level-based surcharges. SLL does not count towards time-based surcharges

 

The usual charges and fees that apply under the credit tranches:

  • Normal schedule for commitment fees that are refundable on drawings (15 bps up to 115 percent of quota, 30 bps from 115 to 575, and 60 bps above 575)
  • Normal service charge (50 bps)
  • Normal rate of charge
  • Normal surcharge schedule

Activation

Board approves the “extension of an offer,” and the arrangement enters into effect upon the Fund confirming receipt of the signed written communication from the member, including the acceptance of the “offer” and policy commitments; no prior informal Board meeting required

Upon Board approval of the request for the arrangement; prior informal Board meeting required

Signatory

Given the more limited anticipated adjustment (if needed), sole central bank signatory of the written communication possible in certain cases

Both the central bank and the government generally sign the written communication given the broad nature of BOP needs that can be addressed under the FCL

Ex-post
conditionality

None

None

Reviews

None

Annual review to assess qualification for two-year arrangements

Successor arrangements

No restrictions, upon Board assessment of continued qualification and existence of special potential BoP need

Exit expected as global risk declines