Press Release: IMF Executive Board Approves Trade Integration Mechanism

IMF News, April 13, 2004

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The Executive Board of the International Monetary Fund (IMF) has approved the Trade Integration Mechanism (TIM).
The TIM is not a new lending facility, but a policy aimed at making Fund resources more predictably available to qualifying member countries under existing IMF facilities.
Purpose: assist member countries in meeting balance of payments shortfalls that might result from multilateral trade liberalization.

TIM is designed to mitigate short-term balance of payments concerns among some developing countries arising from multilateral liberalization, including:
- the erosion of the value of preferential access to important export markets due to broad-based tariff liberalization;
- the phasing-out of quotas in world textiles trade at the end of 2004, which could expose countries to greater competition;
- the reduction in agricultural subsidies, potentially resulting in adverse changes in food terms of trade.
The TIM does not cover balance of payments needs arising from reforms to a country's own trade regime.
Balance of payments shortfalls are described as unlikely to be large for most countries and eventually dominated by the positive impact of more open trade, but could be significant in the short run for some countries.

A qualifying member may request consideration under the TIM if it expects a net balance of payments shortfall as a result of measures implemented by other countries that lead to more open and non-discriminatory market access for goods and services.
Qualifying measures would normally be measures introduced under a World Trade Organization agreement or measures taken outside the WTO context on a nondiscriminatory basis.
The TIM will be activated in the context of:
- an upper credit tranche Stand-by Arrangement,
- an Extended Arrangement, or
- an arrangement under the Poverty Reduction and Growth Facility,

either at the time of approval of the underlying arrangement or when completing a program review under an existing arrangement.

If balance of payments shortfalls occur over several years, successive arrangements could involve the TIM.

Baseline feature:
- In reaching understandings with authorities, the IMF will give consideration to the appropriate size of access, including any need for augmentation, by taking into account the anticipated impact of trade adjustment on the member's balance of payments (baseline feature).
- The baseline impact will be identified by IMF staff, working closely with the authorities and other international institutions.
- Financing terms under the TIM will be those of the underlying facility under which access is granted.
Deviation feature:
- The IMF will be prepared to consider augmentations under arrangements subject to simplified procedures if the actual balance of payments effect turns out to be larger than anticipated under the baseline projection.
- Under the deviation feature, augmentations will be capped at 10 percent of a country's quota for the life of the arrangement.
- If deviations exceed that cap, the entire program supported by the underlying IMF arrangement may need to be re-evaluated to recalibrate the level of Fund support.
- Access augmentation under the deviation feature is not expected to be associated with a need for additional conditionality.

Conditionality associated with access incorporating a TIM baseline feature will normally be determined by the underlying arrangement; in some cases, conditionality specifically related to the adjustments supported by the TIM may be called for.
Directors noted the importance of sound external trade data to underpin the effective operation of the TIM:
- Countries availing themselves of the TIM should be encouraged to participate in the General Data Dissemination Standards.
- The Fund should stand ready to extend technical assistance to improve data quality and reporting where needed.
The Fund will continue to assist members in anticipating and managing implications of their own multilateral trade commitments through policy advice, technical assistance, and program support.

Directors highlighted the importance of close cooperation with the World Bank, given the Bank's lending initiatives to facilitate adjustment to trade reforms and strengthen institutions and infrastructure for trade.
If a member requests support from the Fund and the Bank concurrently under these new policies, Fund and Bank staffs are expected to coordinate closely to avoid duplication and ensure tailored policy advice.
Directors emphasized avoiding cross-conditionality and called for close coordination with the WTO and donors in the trade-related assistance area.
Directors also called for continued technical assistance by the Fund to help members address loss of tariff revenue resulting from trade reforms.

Directors welcomed the approach of making existing instruments available and saw merit in a more tailored mechanism to clarify how the Fund will stand ready to help members mitigate short-term balance of payments pressures stemming from trade liberalization.
Directors emphasized that the TIM needs to be used in support of an appropriate macroeconomic and structural policy framework and that the member's adjustment program should remain broadly on track for augmentations under the deviation feature to be considered.
Directors acknowledged difficulties in projecting balance of payments consequences and supported a simple and streamlined procedure for granting augmented access under the deviation feature.
Some Directors suggested the 10 percent of quota cap may be too low in certain cases; if unanticipated shortfalls exceed 10 percent of quota, the mix of adjustment and financing (including access) may need to be re-assessed in a program review.

The TIM is designed as a temporary policy to address concerns associated with the current round of multilateral trade negotiations.
Directors expected that a review of experience with the policy would occur in three years, at which time a decision will be taken on the duration of the TIM.

International Monetary Fund Press Release No. 04/73