August 10, 2009
MR. MOGHADAM: Let me just highlight some of the key issues that are contained in the reform.
Let me say first of all that these set of reforms, which are aimed at improving our engagement and effectiveness in low-income countries, are truly unprecedented in the history of the Fund, and they go well beyond the mandate that the G-20 asked the Fund to deliver. As you know, we have engaged in a series of reforms to both respond to the crisis and build a more effective IMF beyond the crisis. Today's reforms are aimed at doing precisely that in low-income countries: to help them deal with the impact of the crisis and enhance our effectiveness and engagement with low-income countries moving forward.
Let me highlight three key issues on these reforms. First of all, on the financing side, the package of reforms contains the availability of concessional financing of about $17 billion over the next 6 years. Let me just put this in a little perspective because this is a very significant increase over our normal concessional lending practices to the LICs. Let me give you one example. The average concessional lending in the Fund for the last 3 years has been about $1 billion a year. So far this year we have lent or committed about $3 billion, so more than the last 3 years put together has been committed just in the first 6 months of this year. Under this $17 billion package we expect our lending to be something around $8 billion this year and next year, and then to increase to between to $2 to $2-1/2 billion in the following 4 years. It's a very, very significant increase relative to what we have done in the past.
Let me highlight a second part of this. The Board has also approved a temporary suspension of interest between now until 2011 for countries that are eligible for concessional financing. Let me again put this in perspective. There are about 80 countries that are eligible for concessional financing from the Fund. From those countries, about 60 of them currently have outstanding credit to the Fund and all of these 60 will have their interest payments to the Fund suspended for the next 2 to 2-1/2 years until the beginning of 2011.
How do we finance all of this? We do have some concessional resources already thanks to many donors and previous funding from the Fund itself. We are also using for the first time our additional resources from gold sales that the Board has approved in principle as part of financing this package. In addition, we will also need to have some donor support for this. However, in approving the package of financing, the Board has in principle also given endorsement to the source of the financing that we will have with this, and in particular using some of our gold sales.
Finally, let me say that a very important part of the package of reforms is aimed at recognizing the diversity of the low-income membership in the Fund and recognizing that some low-income countries may not need financing from the Fund but may need simply a macroeconomic and reform framework. Some may be subject to shocks and may need a rapid concessional financing with little strings attached. Some may be subject to short-term shocks, for example, their exports may collapse or they may be subject to fallout from for example the current crisis. And some LICs would like to have long-term engagement with the Fund, possibly with financing. The package of reforms that was approved today recognizes this diversity of membership and enables us for the first time to provide for all of these circumstances. But there is also a common theme. The common theme of all of these new facilities is poverty reduction and growth. Let me perhaps stop there and I will be happy to answer any questions.
QUESTIONER: I was wondering if you could explain what the new lending instruments are about. Is it anything similar to what you provide, obviously not to the same scale to emerging economies, where you approve the lending but they do not necessarily have to tap that lending which would be different from the past?
MR. MOGHADAM: In a way, we have tried to provide the same range of facilities that we have for the emerging markets, and as you know, we did a major reform of those earlier this year in March. This new set of facilities that will be available to low-income countries very much tries to provide what we have done for the emerging markets. The short-term facility can be used in a precautionary fashion if a member wishes to do so, and of course, we have the policy support instrument already which provides if you like a signal of good policies, but it is a longer-term facility and that is currently available and will continue to be available under the new set of facilities.
QUESTIONER: May I have a follow-up of that one? There would obviously be conditions attached to this one.
MR. MOGHADAM: Even the policy support instrument does have a framework and does have a degree of conditionality which is tailored to individual circumstances. It very much depends on the individual circumstances, but, yes, it does have a framework and it does have policy commitments.
QUESTIONER: I was wondering why did you feel it was necessary to go above what the G-20 was calling for in terms of the amount that is being added to this? Is this partly in response to what member countries have said? Do you feel there is more of a demand there that had to be met?
MR. MOGHADAM: Yes, I think you put your finger on it. The demand that we have been receiving so far this year has exceeded the projections we had earlier. Let me just give you the numbers. The G-20 in London asked the Fund to provide $6 billion of concessional financing in the next 2 to 3 years. The numbers that we have as I mentioned to you go well beyond that. They are probably above $10 billion in the next 2 to 3 years, $4 billion probably this year, $4 billion next year and going just above $2 billion the year after. The reason is that the demands that we have been getting what is in the pipeline and what has materialized has been above the G-20 projection and we thought very important at this juncture for the Fund to be able to respond adequately to the needs of our low-income members, so we increased the available resources.
QUESTIONER: I had a few questions on the interest rate payments. What do you mean it is suspended? Does it mean at the end of this period it will have accumulated or it is tracked over this period? Also, talking of interest rates, when you say in the press release a mechanism for updating interest rates after 2011, what does that mean?
MR. MOGHADAM: Basically, when low-income countries borrow from the Fund, they pay a concessional interest rate on an annual basis. That interest rate currently is about .5 percent per year. So whatever their outstanding credit is, whatever they borrowed, they wow .5 percent per year in interest payments. The Board has now decided to suspend that payment until 2011. The interest payments that incur now through 2011 will be forgiven and we will use the resources that I mentioned to you as part of that $17 billion to finance that.
After that, the new facilities have a different interest structure than before. They have an interest structure that will be even lower than it is currently. They range between zero and .25. So actually beyond the crisis we have also reduced interest rates so the concessionality that these facilities will have beyond the crisis increases. Everybody realizes that world interest rates are particularly low, so we need to have a mechanism to access the concessionality. Suppose world interest rates go up. Then the mechanism that is referred to would increase the interest rate but never beyond .5 for the long-term facility that we have. And of course, if interest rates go up by more than that in the world which is likely, the concessionality of these instruments over time is likely to increase.
QUESTIONER: To a maximum of .5?
MR. MOGHADAM: The concessionality is obviously much higher than that. The concessionality right now is just in the order of 30 percent, so the concessionality if interest rates go up will increase beyond that. The interest rate of the long-term facility would be capped at .5, the short-term facility may be a bit higher than that, but the interest rate would not be increased in line with world interest rate, it will be capped at .5 and perhaps a bit higher for the short-term facility. If world interest rates go up, concessionality goes up beyond 30 percent.
QUESTIONER: You say the low range between zero and .25. Can you just detail which is one is at zero?
MR. MOGHADAM: Until the Board reviews the interest rate structure which is unlikely to happen before end of 2010 or early 2011, the long-term facility will be at zero interest rate, the short-term facility will be at .25.
QUESTIONER: I was wondering if you could address where you expect to get the resources, how much of the $1.5 billion is coming from the gold, how much do you already have, and what is your expectation as far as being able to get the SDR $9 billion from various donors?
MR. MOGHADAM: The $17 billion is a gross loans amount, so we will loan resources to be able to unlend that. Those loan have traditionally not been difficult to raise, and also for example, you as you know, we are hoping to have an SDR allocation approved by our membership soon. For example, members could also give us the SDR resources in order to use on lending as part of that $17 billion.
The difference between our normal lending and our concessional lending is that we do need subsidy resources in order to provide the concessionality to our members. Those concessional resources are usually raised through bilateral contributions by members. For example, our current PRGF is very much funded on the interest subsidy side by bilateral lending. We will launch a campaign to try and raise as much as possible in terms of bilateral resources.
In terms of gold, what the Board implicitly agreed in providing this framework is to use any excess gold profit and potentially if needed the income from investing the gold when we sell it to try and finance part of this. Very roughly speaking, the number that you quoted, 1.5, is in net present value terms, in cash terms. It is almost double that because it goes over 6 years. I would say about two-thirds of that we hope to have through profits from gold and the rest of it through some internal resources and also some bilateral support.
QUESTIONER: Two-thirds of the 1.5 or two-thirds of the three?
MR. MOGHADAM: The two numbers are the same, but 1.5 is the NPV, so two-thirds of 1.5.
QUESTIONER: How do you see those gold sales coming through? Is there a timeline here for all of that? Then I would like to ask Sayeh regarding the general outlook for the region in Africa. How are you seeing countries coping right now? Has the third wave arrived? Is this better or worse than you had projected? Also the IMF said in March that it saw financing is about $25 billion for 22 poor countries I believe it was for 2009. How does the new strategy in lending amounts fall into that?
Antoinette SAYEH: Let me start by saying of course the third wave if you want to call it that has hit Africa and many, many countries are feeling the brunt of the crisis and that explains in part why there's been such a pickup in Fund lending in these first few months to the region. We've responded very quickly to the significant terms of trade shock that a number of countries have experienced and particularly those countries are importers of commodities, and across the board we've been able to help through the reformed DSF that is now further renamed to make financing available to those countries hardest hit by the crisis.
We broadly continue to think that growth will be very weak this year in Africa, some 1.5 percent we continue to project as an overall average growth for Africa in 2009. Nigeria and South Africa account for a significant proportion of African growth. When you take those two countries out of the numbers, we project some little more than 2 percent in growth for Africa excluding South Africa and Nigeria. So it is still better than the rest of the world, but still very weak relative to what Africa ought to be doing to be able to make a market impact on poverty reduction, and certainly a lot lower than the continent has been doing in the past decade.
We now think that looking ahead to 2010 on the basis of what seems to be possibly better prospects in China and in the rest of the world, we estimate that growth could be about 4 percent for Africa next year. Of course, there are huge uncertainties around those projections. We are in the process of working on our next Regional Economic Outlook that will be available at the time of the Annual Meetings in October. Of course, the World Economic Outlook also is being worked on and the uncertainties may mean that we change those numbers come the fall, but for now we're expecting about 4 percent growth for Africa next year, still about 1.5 percent this year.
QUESTIONER: Is that 4 percent different from previous forecasts?
MS. SAYEH: It's slightly higher. We had set 3.8 percent before, and so it's slightly higher.
MR. MOGHADAM: You're well aware of the decisions made by the U.S. Congress which in a way facilitate moving forward with gold sales. As I mentioned, as the Board gave its endorsement to the financing framework for the LIC facilities, it has implicitly given its endorsement to moving forward with gold sales, but we need a formal decision of the Board as gold sales need an 85 percent majority vote by the IMF Board. We expect to have that vote before the Istanbul Annual Meetings. Obviously gold sales themselves take time, and what we have committed as part of our new income model is to have those gold sales if done the markets to be done through the central banks' sales mechanism. It is very important to make sure that the markets understand how it is part of that. That agreement of the central banks is also in process right now and so we hope that by Istanbul that will also be in place. My guess is that a decision would formally be considered and hopefully endorsed before the Istanbul Annual Meetings and then the actual sales will take place through that mechanism of central banks over time and then it could take 2 to 3 years for it to finish. But one thing I need to emphasize is that in terms of cash flow, as long as we can raise loan resources, and as I mentioned, we have usually been very successful in doing that, loan resources to unlend, given that the interest payments are gradual and given that the kind of lending we do to low-income countries has a grace period of 4 to 5 years, in terms of cash flow we will not need financing up front, we need it through time. So as gold sales are made and as income from that incurs, then that cash flow will be met. So we have a consistent framework to do it and it will be done over time.
QUESTIONER: Just to be absolutely clear, what you're saying is that the gold sales will take place in the framework of the central banks -- the formal agreement on gold sales by central banks?
MR. MOGHADAM: Definitely.
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