Public Information Notice: IMF Reforms Financial Facilities for Low-Income Countries

IMF News, July 29, 2009

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Executive Board approved wide-ranging modifications to upgrade concessional financial facilities for low-income countries (LICs) on July 23, 2009.
Reforms establish a Poverty Reduction and Growth Trust (PRGT), replacing and expanding the previous PRGF-ESF Trust.
Changes take effect once all lenders to the Loan Account, and contributors to the Subsidy Accounts, of the PRGF-ESF Trust consent.
Rationale:
- LICs were hit by sharp increases in food and fuel prices and then by the global financial crisis.
- Reforms respond to calls from LIC members and the G-20 for swift policy action and increased assistance.
- Recent IMF steps included substantially increased assistance and more flexible, streamlined conditionality to support higher pro-poor spending.

Concessional lending expected to reach up to US$4 billion per year in each of 2009 and 2010, compared with US$1.2 billion in 2008.
Reforms aim to exceed the G20 call for additional lending of US$6 billion over the next two to three years.
A total of up to US$17 billion could be provided over the period through 2014.
For individual countries, annualized financing amounts from the IMF have been roughly doubled.

The Extended Credit Facility (ECF): successor to the PRGF; provides sustained program engagement and financing for countries facing protracted balance of payments difficulties.
The Standby Credit Facility (SCF): similar to the Stand-By Arrangement (SBA); provides financial assistance and policy support for shorter-term or episodic financing needs; allows precautionary use.
The Rapid Credit Facility (RCF): rapidly provides a limited amount of financing in response to urgent needs, with reduced conditionality.

All facilities place a strong emphasis on poverty alleviation and growth.
Countries seeking any Fund financial assistance, including under the SCF and RCF, will indicate how the program would advance poverty reduction and growth.
Country-owned poverty reduction strategies remain the basis of sustained program relationships under the ECF.
Programs will include specific targets to safeguard social and other priority spending, wherever possible.

LICs will receive exceptional relief of all interest payments on outstanding concessional loans due to the IMF through the end of 2011—effectively, an interest rate of zero on these loans for this period.
The interest rate on the Fund’s three concessional facilities for LICs will be reviewed regularly thereafter under a mechanism designed to preserve a higher level of concessionality than previously, when the interest rate on borrowing from all of the IMF’s concessional facilities was 0.5 percent.

All concessional lending consolidated in the PRGT with general and facility-specific loan and subsidy accounts and a single reserve account.
Additional loan resources of SDR 9 billion will be mobilized from bilateral contributions as under the previous framework.
New subsidy resources of SDR 1.5 billion in end-2008 net present value terms will be mobilized from the IMF’s internal resources, including use of resources linked to envisaged gold sales, and through bilateral contributions.
Directors noted projected demand for concessional lending at SDR 11.5 billion through 2014 (subject to high uncertainty).
Current borrowing limit of the PRGT of SDR 20 billion proposed to be raised to SDR 30 billion.
Loan commitment and drawdown periods to be extended to end-2015 and end-2018, respectively.
Proposed temporary measures to secure SDR 1.5 billion (end-2008 NPV terms) in subsidy resources include:
- (i) seeking bilateral contributions through a broad-based fundraising effort;
- (ii) temporarily delaying reimbursement of the GRA for PRGT administrative expenses;
- (iii) using resources from the PRGT Reserve Account while maintaining its annual self-sustained lending capacity; and
- (iv) using resources of SDR 0.5-0.6 billion (end-2008 NPV terms) linked to gold sales.

Strategy involves use of windfall profits arising from gold sales at an average price in excess of US$850 per ounce in the first instance.
If realized windfall profits fall short, the difference will be generated through investment income from the gold endowment.
Strategy aims to preserve the corpus of gold sales proceeds and the Fund’s ability to implement the new income model.
Directors noted differing views:
- Some preferred transfer of a pre-determined amount linked to gold sales.
- Others expressed concerns about using gold-linked resources or distributing dividends before precautionary balances are adequate.
Future Board decisions after completion of gold sales will provide for transfer of resources from the Investment Account to the General Resources Account, followed by distribution to members in proportion to quotas, with expectation members would allocate such distributions as subsidy contributions to the PRGT.

Directors noted LICs have been severely affected by the global crisis and that swift action and stepped-up financial support are critically needed.
Reforms encompassed:
- A comprehensive overhaul of concessional facilities;
- Increased concessionality of Fund financial support;
- Interest relief for LICs through end-2011;
- Increased flexibility of concessional financing framework; and
- A strategy to mobilize resources to boost concessional lending capacity to US$8 billion in the first two years, and US$17 billion through the medium term, including by using resources linked to gold sales.
Directors endorsed:
- Streamlined concessional facilities under a single PRGT umbrella (ECF, SCF, RCF).
- Preservation of recent doubling in access limits and norms with more flexible, consistent policies across facilities.
- Procedural safeguards for high-access financing to promote debt sustainability.
- Modification of policies for blending concessional and GRA financing.
- Increased grant element of Fund lending, including temporary interest relief.
- Periodic reviews of applicable interest rates to limit fluctuations in concessionality and subsidy costs.
Directors agreed contributors and lenders will be encouraged to provide new resources to general accounts and that new Fund contributions will be placed in the General Subsidy Account.
Existing subsidy resources in the PRGF-ESF Trust will be transferred to the ECF Subsidy Account unless otherwise requested by contributors.

Changes expected to become effective later in 2009, subject to donor consent.
Directors called for prompt mobilization of additional loan resources and consultations with lenders regarding raising the borrowing limit.
Directors agreed to review experience with the new facilities and financing framework under the PRGT no later than three years after the effective date of the decision.

Public Information Notice (PIN) No. 09/94