Press Release: IMF Enhances Crisis Prevention Toolkit

IMF News, August 30, 2010

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The International Monetary Fund (IMF) expanded and enhanced its lending tools to help contain the occurrence of financial crises.
The Executive Board decided to:
- increase the duration and credit available under the existing Flexible Credit Line (FCL); and
- establish a new Precautionary Credit Line (PCL) for members with sound policies who nevertheless may not meet the FCL’s high qualification requirements.
Purpose: encourage countries to approach the IMF earlier to help prevent crises and protect them during systemic crises; reward countries that implement strong policies; broaden availability of credit lines to a wider spectrum of countries.

Background: The FCL was created by the IMF in March 2009 as part of an overhaul of its lending framework; dedicated to members with very strong fundamentals, policies, and track records of policy implementation; allows flexibility to draw on the line upon approval or to treat it as precautionary without ongoing policy conditions (see Press Release No. 09/85).
Executive Board-approved enhancements include:
- Doubling the duration of the credit line:
- FCL arrangements can now be approved for either one year, or two years with an interim review of qualification after one year;
- previously they were either for six months, or one year with an interim review after six months.
- Removing the implicit cap on access of 1000 percent of a member’s IMF quota, with access decisions based on individual country financing needs.
- Strengthening procedures by requiring early Executive Board involvement in assessing the contemplated level of access and the impact of such access on the IMF’s liquidity position.

Purpose: available to a wider group of members than those that qualify for the FCL; permits access to precautionary resources for members that may still have moderate vulnerabilities in one or two qualification dimensions.
Qualification is assessed in five broad areas:
- (i) external position and market access,
- (ii) fiscal policy,
- (iii) monetary policy,
- (iv) financial sector soundness and supervision, and
- (v) data adequacy.
Features of the PCL include:
- Streamlined ex post conditions designed to reduce any economic vulnerabilities identified in the qualification process, with progress monitored through semi-annual program reviews.
- Frontloaded access with up to 500 percent of quota made available on approval of the arrangement and up to a total of 1000 percent of quota after 12 months.

The Fund recently revamped its facilities for low-income countries in July 2009 (see Press Release No. 09/268).
Ongoing work: ensure the IMF can respond rapidly and effectively in the event of a systemic shock where chain reactions and spillovers could threaten global economic stability.
- The Executive Board had a preliminary discussion of several options under a Global Stabilization Mechanism—a framework aimed at enhancing the IMF’s ability to channel liquidity proactively to members affected by a systemic event, in conjunction with bilateral and regional liquidity support arrangements.
- Discussions of these options will continue.

Dominique Strauss-Kahn, IMF Managing Director:
- “These decisions expand and reinforce the IMF’s crisis-prevention toolkit and mark an important step in our ongoing work with our membership to strengthen the global financial safety net. The enhanced Flexible Credit Line and new Precautionary Credit Line will enable the Fund to help its members protect themselves against excessive market volatility.”
- “The revamped financing toolkit rewards countries that implement strong policies. We expect that the availability of these credit lines to a broader spectrum of countries will contribute to a more stable international monetary system.”
Context: The reforms align with the G20 agenda item to strengthen the global financial safety net for its meeting in Seoul, Korea in November 2010; the government of Korea has taken a leading role.

Press Release No. 10/321, August 30, 2010.