IMF Executive Board Approves Reform Package to Enhance Support to Low-Income Countries
IMF News, June 6, 2019
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- Published: June 6, 2019
Background
- The Executive Board concluded the 2018-19 Review of Facilities for Low-Income Countries—Reform Proposals (“Facilities Review”) and the companion Review of the Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Countries (“Financing Review”) on May 24, 2019.
- Current LIC framework (established in 2009) includes:
- Extended Credit Facility (ECF) — for protracted balance of payments problems.
- Standby Credit Facility (SCF) — for actual or potential short-term balance of payments needs.
- Rapid Credit Facility (RCF) — for emergency financing including natural disasters, fragility or conflict, and other adverse shocks.
- Policy Support Instrument (PSI) — non-financial instrument for countries with broadly stable macroeconomic positions.
- Financial support under LIC facilities is concessional with the interest rate set at zero since 2009.
- Subsidies for concessional rates are provided by the Poverty Reduction and Growth Trust (PRGT), which operates on a self-sustaining basis; annual and cumulative borrowing limits exist to protect PRGT resources.
Drivers for Reform
- Rising income levels in most LICs and greater trade and financial integration have eroded access limits relative to GDP and external financing needs since the last access increase in 2015.
- Several LICs have faced sharp temporary financing needs from falling export prices.
- Increasing frequency and intensity of natural disasters has raised demand for emergency financing.
- Debt vulnerabilities have risen across many countries.
- Fragility and institutional weaknesses persist in a range of countries.
Proposed Reforms (as summarized in the Facilities Review)
- Increase access limits and norms, within PRGT self-sustainability constraints, to address erosion of access limits.
- Better tailor LIC facilities to fragile and conflict-affected states and to states vulnerable to natural disasters, including increased access to the RCF.
- Better target scarce subsidy resources to the poorest and most vulnerable countries by expanding blending of concessional and non-concessional financing for higher-income LICs with substantial access to international financial markets.
- Heighten attention to debt sustainability and transparency by strengthening safeguards for high access (HA) and exceptional access (EA) cases.
- Change features of SCF and ECF to increase flexibility.
Executive Board Assessment and Key Decisions
- Directors endorsed the package of proposals in the Facilities Review and Financing Review, emphasizing the IMF’s role in policy advice, financing, capacity development, and catalyzing donor support.
- Access limits and norms:
- Broad support for a generalized increase of one‑third in access limits and norms.
- Safeguards and debt assessment:
- Introduce an additional trigger for applying high access (HA) procedures.
- Strengthen informational and timing requirements for informal HA and exceptional access (EA) Board engagement to enhance assessment of debt sustainability and capacity to repay (paragraphs 24‑26 of the Facilities Review).
- Modify access threshold trigger for a new DSA.
- Clarify the market access criterion for EA under the PRGT (supported by most Directors).
- Blending and targeting subsidies:
- Most Directors supported removing the exclusion from presumed blending for higher‑income LICs at high risk of debt distress, provided they have substantial access to international financial markets on both a past and prospective basis (paragraph 31 of the Facilities Review), including staff judgment on prospective market access.
- Reinforced expectation that members blending GRA and PRGT resources meet applicable GRA instrument policies and implement policies to strengthen the member’s balance of payments before repurchases begin.
- Fragile and conflict‑affected states (FCS) and RCF adjustments:
- Supported a doubling of the annual RCF access limit under the regular window.
- Introduced safeguards: an annual RCF access norm at 25 percent of quota and a limit on the maximum size of a single disbursement to 25 percent of quota under the regular window.
- Endorsed greater flexibility in ECF-supported program design for countries focusing on near‑term objectives while meeting upper credit tranche standards.
- Natural disasters:
- Supported a further one‑third increase in the cumulative access limits under the RCF for disbursements associated with large natural disasters, in addition to the generalized access increase.
- Rapid Financing Instrument (RFI):
- Agreed to increase annual and cumulative access limits under the RFI by one‑third and to increase the cumulative limit by a further one‑third for disbursements associated with large natural disasters.
- SCF and ECF duration and sub-limits:
- Most Directors endorsed extending the maximum initial duration of ECF arrangements from four to five years.
- Supported removal of sub‑limits on access for SCF arrangements approved on a precautionary basis and extension of maximum duration of SCF arrangements from two to three years.
- Supported automatic termination of new SCF arrangements of more than 24 months if no program review under the arrangement has been completed over a period of eighteen months.
- Poverty focus and documentation:
- Supported renaming the Economic Development Document as the Poverty Reduction and Growth Strategy (PRGS).
- Supported requiring a PRGS whenever an SCF arrangement or PSI has an initial duration exceeding two years, with greater flexibility in timing and extensions for countries with limited institutional capacity.
- Financing review and PRGT sustainability:
- The Financing Review concluded the proposed reforms can be accommodated within the self‑sustained PRGT, with risks evenly balanced over the medium term.
- Directors stressed monitoring the evolution of the PRGT’s lending capacity and periodic policy reviews to preserve PRGT self‑sustainability.
- Some Directors considered a future review of the overall envelope of PRGT resources might be warranted.
- Debt relief and related trusts:
- Directors acknowledged funding challenges for debt relief initiatives.
- Asked staff to explore options to address under‑funding of the Catastrophe Containment and Relief Trust.
- Noted the need to mobilize new resources to finance debt relief for countries with remaining protracted arrears to the Fund once they are ready to clear arrears and participate in the HIPC Initiative.
- Review cycle:
- Next review of the Fund’s facilities for LICs to take place on the standard five‑year cycle, while access norms and limits could be reviewed earlier if warranted.
- Many Directors underscored that future reviews should consider all aspects of the PRGT’s architecture.
Selected Technical and Operational Details
- Interest rate on PRGT credit: set at zero since 2009.
- Footnote: Following the conclusion of the Interest Rate Review (See Press Release 19/239), the revised interest rate mechanism will result in zero interest rates on credit outstanding under all PRGT facilities through mid-2021.
- Specific numerical safeguards and triggers included:
- Generalized increase of one‑third in access limits and norms.
- Doubling of the annual RCF access limit under the regular window.
- Annual RCF access norm at 25 percent of quota.
- Maximum single disbursement under the regular RCF window limited to 25 percent of quota.
- One‑third increases to RCF and RFI annual and cumulative access limits, with an additional one‑third cumulative increase for disbursements associated with large natural disasters.
- Extension of maximum initial ECF duration from four to five years.
- Extension of SCF maximum duration from two to three years.
- Automatic termination rule for SCF arrangements longer than 24 months if no program review completed over eighteen months.
Press Release No. 19/202 — IMF Communications Department — June 6, 2019
