Public Information Notice: IMF Establishes an Exogenous Shocks Facility

December 8, 2005

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On November 23, 2005, the Executive Board of the International Monetary Fund (IMF) approved the establishment of the Exogenous Shocks Facility (ESF) within the Poverty Reduction and Growth Facility (PRGF) Trust. This decision follows the discussion on October 31, 2005 of a paper on the "Establishment of an Exogenous Shocks Facility Under the Poverty Reduction and Growth Facility Trust" and the discussion on August 3, 2005 of a paper on "Strengthening the Fund's Ability to Assist Low-Income Countries Meet Balance of Payments Needs Arising from Sudden and Exogenous Shocks." The decision adopted by the Executive Board will take effect once all lenders to the Loan Account, and all contributors to the Subsidy Account, of the PRGF Trust consent to the amendments. The related decision on the Multilateral Debt Relief Initiative (MDRI) will become effective at the same time.


At its September 2005 meeting, the International Monetary and Financial Committee (IMFC) endorsed the proposal to establish a window to address the absence of concessional instruments other than the PRGF in the Fund's financial assistance to low-income members facing exogenous shocks. Because shocks can have significant negative economic impacts on low-income countries, especially those whose economies lack diversification and have limited capacity to build up reserves, the international community can usefully supplement national efforts for reducing vulnerability to shocks. Recent evidence suggests that foreign assistance can be unusually effective in the aftermath of a shock, but such assistance needs to be available quickly, and it needs to be associated with sound adjustment policies and measures to reduce vulnerability to future shocks. In this context, the Fund has paid renewed attention to modalities for strengthening its assistance to low-income countries experiencing exogenous shocks. This issue has arisen in discussions of the Fund's instruments and financing for low-income countries (PIN No. 04/40), and the Fund's support of low-income member countries (PIN No. 04/110).

In concluding its discussion on Strengthening the Fund's Ability to Assist Low-Income Countries Meet Balance of Payments Needs Arising from Sudden and Exogenous Shocks, the Executive Board supported the establishment of the ESF within the PRGF Trust. The ESF is designed to provide concessional financing to low-income countries that are experiencing exogenous shocks but do not have a PRGF arrangement in place. For those countries with a PRGF arrangement in place, the Fund can enhance its support for dealing with shocks by augmenting the resources available under that arrangement. The interest rate and repayment terms for disbursements under the ESF would be the same as those under the PRGF—a low interest rate of 0.5 percent and maturity of 10 years—and arrangements under the ESF will range from one to two years.

In concluding the discussion on the Establishment of an Exogenous Shocks Facility Under the Poverty Reduction and Growth Facility Trust, the Executive Board agreed that, for purposes of the ESF, an exogenous shock would be understood to be an event beyond the control of the authorities of the member, with a significant negative impact on the economy. The Executive Board also agreed on (i) operational modalities, including phasing of performance criteria and disbursements; (ii) relationship with the country-driven Poverty Reduction Strategies; (iii) potential demand for shocks financing from the Fund; and (iv) a financial structure for the ESF. Supplement I to the report and the follow-up paper "Multilateral Debt Relief Initiative and Exogenous Shocks Facility—Proposed Decisions" further elaborate on the features of the ESF and provide specific details on the financial structure of the ESF.

Executive Board Assessment

The Executive Board's approval, on November 23, 2005, of the proposed decisions on the establishment of an Exogenous Shocks Facility (ESF) under the Poverty Reduction and Growth Facility (PRGF) Trust marks a further significant step in the development of strong instruments to allow the IMF to serve its low-income members better. The ESF is a useful addition to the Fund's toolkit for members without a PRGF arrangement because it facilitates quick access to concessional financing to low-income countries confronting sudden and exogenous shocks, while ensuring appropriate adjustment to the underlying shock and adequate safeguards for the use of PRGF Trust resources. The establishment of this facility also reflects the heightened recognition among member countries and the international donor community alike of the adverse impact of shocks on poverty reduction and growth. The meeting of November 23, which continued the discussions during the Board's August 3 and October 31, 2005 meetings, reaffirmed the consensus reached at those earlier meetings on the purpose and modalities of the ESF.

Directors noted that, for purposes of the ESF, an exogenous shock would be understood to be an event beyond the control of the authorities of the member, with a significant negative impact on the economy. While Directors did not support pre-defining a specific set of qualifying shocks, most agreed that balance of payments needs ensuing primarily from domestic policy slippages would not qualify. Directors also agreed that shocks resulting from the variability of aid flows would not normally qualify for the ESF. Some Directors considered that shocks due to shortfalls in aid flows should not be categorically excluded as they could result from factors beyond the authorities' control. In this context, it will be important that the Fund avoid undermining donor conditionality and accountability. More generally, Directors welcomed the scope for judgment by staff and the authorities in the implementation of the ESF, while noting that clear operational guidelines will be needed to ensure evenhandedness and transparency, and to allow for a continued rules-based approach in the Fund's work with its low-income members.

Directors agreed that disbursements under an ESF arrangement could be phased at semi-annual intervals or at quarterly intervals, depending on factors such as the arrangement's duration, the balance of payments need, and administrative capacity constraints on the part of the authorities. Most Directors supported the view that performance under ESF arrangements would count towards a track record of policy implementation for purposes of reaching the decision point and completion point under the enhanced HIPC Initiative—while recognizing that the PRGF should remain the main instrument to support members' ongoing policy reforms. Directors also saw the ESF as an important complement to the recently approved Policy Support Instrument (PSI). They reiterated that an on-track PSI could provide the basis for rapid access to ESF financing in the event of a shock, but access would not be automatic.

Directors recognized that, while a member may not have more than one ESF arrangement for the same shock, resources committed under an ESF arrangement may be augmented to help the member meet a larger than expected balance of payments need. Directors also agreed that the period of an ESF arrangement could be extended for up to the overall maximum two-year period.

With regard to ESF modalities, Directors considered that programs supported by the ESF need to meet the upper credit tranche conditionality standard. They recognized, however, that structural reforms could be less ambitious than under a PRGF arrangement, comprising mainly structural issues deemed important for adjustment to the shock. Most Directors agreed that use of the ESF would require that, at a minimum, an interim PRSP be in place at the time of approval of the arrangement or, in exceptional circumstances, by the time of the first review. A few Directors considered, however, that some additional flexibility may be appropriate, given the need for an immediate response to the underlying shock.

Directors endorsed the proposal that members be required to represent that they have an actual balance of payments need at the time of each disbursement under an ESF arrangement. In addition, they noted that the qualifying shock should be the primary source of an actual balance of payments need. Directors also considered appropriate the remedies that could be applied in cases where the Fund determined that a disbursement had been made in the absence of such a need.

Directors noted the substantial need for loan and subsidy resources for the ESF, and endorsed the view that the Loan Account of the PRGF Trust would have the authority to borrow resources to make loans under both the PRGF and the ESF. They agreed to keep the structure of the Reserve Account of the Trust unchanged, but to expand the coverage of the Reserve Account by allowing it to provide security for ESF loans as well. A number of Directors emphasized the need to secure new loan and subsidy resources from bilateral creditors for the ESF before the facility can be made operational, in order to ensure the viability of ongoing PRGF operations.

Directors agreed that the current PRGF Subsidy Account would be renamed the PRGF-ESF Subsidy Account so as to allow the resources in such account to be used flexibly to subsidize either PRGF or ESF loans. They noted that such a fungible use of resources in the PRGF Subsidy Account (which has been renamed the PRGF-ESF Subsidy Account) would allow for an early activation of the ESF using existing resources. This would require the consent of all 43 contributors to the PRGF Trust Subsidy Account. Directors underscored the importance of pursuing the most effective means of securing this consent, noting in this context the importance that management attaches to fund-raising from new donors for shocks financing, and of minimizing the risk of delays in the implementation of the Multilateral Debt Relief Initiative (MDRI).

Directors supported the creation of two new subsidy accounts—one to receive earmarked contributions and provide subsidies for PRGF loans only, and the other to receive earmarked contributions and provide subsidies for ESF loans only. They emphasized that the resources in the new PRGF-ESF Subsidy Account will be used only if there are no resources in the PRGF Subsidy Account or the ESF Subsidy Account.

More generally, Directors underscored the importance of sufficient donor resources to meet future demand for operations under the PRGF and the ESF, as well as for debt forgiveness under the MDRI. In this vein, they suggested that an integrated approach be adopted in assessing the overall financing need of the Fund's evolving framework of support for low-income countries.


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