2023 Review of Resource Adequacy of the Poverty Reduction and Growth Trust, Resilience and Sustainability Trust, and Debt Relief Trusts

April 7, 2023

Washington, DC: Yesterday, the Executive Board of the International Monetary Fund (IMF) reviewed the resource adequacy of the Poverty Reduction and Growth Trust (PRGT), Resilience and Sustainability Trust (RST), and Debt Relief Trusts including the Catastrophe Containment and Relief Trust (CCRT). The PRGT is the Fund’s main vehicle for providing concessional loans (currently at zero interest rates) to low-income countries (LICs). The RST delivers affordable long-term financing to low-income and vulnerable middle-income countries, as well as small states, to support reforms to reduce risks to prospective balance of payments stability from climate change and pandemics. The CCRT provides grants for debt relief for the poorest and most vulnerable LICs hit by catastrophic natural disasters or public health disasters, disbursing SDR 690 million across 31 countries during the pandemic, which left its cash balance almost depleted.

PRGT finances were found to be under strain owing to substantially stronger demand for PRGT loans and sharply higher interest rates than previously envisaged; since the pandemic, the IMF has supported more than 50 low-income countries with over SDR 17 billion (about

$24 billion) in interest-free loans. The PRGT faces a shortfall of SDR 1.2 billion (about $1.6 billion) in pledges for subsidy resources and SDR 3.5 billion (about $4.7 billion) for loan resources to complete the first stage of the 2021 funding strategy. In these circumstances, a multi-pronged strategy is proposed to make the PRGT whole through a concerted push to mobilize broad-based contributions to address gaps in subsidy and loan resources in the near- term, coupled with further steps during the 2024/25 comprehensive PRGT review to put the PRGT on a sustainable footing to deliver sufficient support to LICs in the long-term.

In relation to the recently established RST, the review highlighted strong and frontloaded demand for arrangements under the Resilience and Sustainability Facility (RSF). To date, five RSF arrangements have been approved since RST operationalization on October 12, 2022, and the pipeline of potential requests is building up quickly. On the RST resource side, pledges amount to 76 percent of the loan resource target, leaving a shortfall of about SDR 6.5 billion (about $8.8 billion) in loan resources relative to the original fundraising target. In view of rapid increases in the SDR interest rate, the implications of adopting an interest rate cap at 2¼ percent for Group A countries (PRGT-eligible countries that are not required to blend their IMF financing with the General Resources Account, GRA) are also examined, finding that, even with a cap in place, RST reserve buildup would remain adequate in most scenarios.

Executive Board Assessment 1

Executive Directors welcomed the first joint annual review of resource adequacy of the Poverty Reduction and Growth Trust (PRGT), Resilience and Sustainability Trust (RST), and Debt Relief Trusts. They recognized the importance of ensuring that these Trusts are adequately funded given their vital role in helping member countries in the face of a challenging economic environment. They commended countries that already contributed to these Trusts or pledged to support them.

Directors noted the unprecedented scale of zero-interest lending that the PRGT provided to low-income countries (LICs) during 2020–22 to help them address multiple shocks, including the pandemic and the adverse spillovers from Russia’s war in Ukraine. They underscored that this critical support was upheld by the 2021 PRGT reforms, which created much-needed borrowing space for LICs.

Directors recognized that higher demand for PRGT borrowing, together with the rapid rise in global interest rates, are putting additional strains on PRGT finances. Noting that immediate implementation of some of the corrective measures envisaged under the 2021 PRGT framework could have a limited impact on PRGT finances while negatively affecting PRGT borrowers, Directors instead endorsed a multi-pronged strategy to address the PRGT’s near- term financing needs while advancing efforts required to ensure its longer-term sustainability.

As an immediate priority, Directors called for rapid progress in completing the first stage of the PRGT’s two-stage funding strategy through a concerted push to mobilize broadly burden- shared subsidy pledges totaling a further SDR 1.2 billion. Directors agreed that, where feasible, donors should direct subsidy contributions to the Subsidy Reserve Account (SRA) to gain the added benefit of bolstering the PRGT’s reserve coverage. Most Directors also saw merit in reallocations from the Subsidy Accounts to the SRA to bolster reserve coverage if needed in the future, with a few Directors calling for early consideration of this option.

Directors generally emphasized the need for enhanced monitoring of progress on subsidies and reserves to take timely actions if needed. Directors urged donors to provide the needed remaining pledges in additional loan resources (SDR 3.5 billion) under the 2021 loan fundraising round, including through SDR channeling.

Directors underlined their commitment to a self-sustained PRGT that is fully able to meet the needs of the institution’s poorest and most vulnerable members over the longer term. They noted that the 2024/25 comprehensive PRGT review would include an assessment of the appropriate long-term lending envelope as well as the options under the second stage of the funding strategy to sustainably support such PRGT lending, including potential use of Fund internal resources, which could include gold sales, gold pledges, and further suspension of PRGT reimbursement to the Fund, and distributions from Fund reserves. A number of Directors emphasized that adjustments to concessional lending terms, including a tiered interest rate structure, may be needed. Directors looked forward to technical work by staff on the full range of options available, including possible innovative solutions, to facilitate building consensus for timely progress during the 2024/25 review. Many Directors favored early consideration of internal resource use, particularly gold sales.

Directors reaffirmed that substantial progress towards the first stage of the fundraising goals would allow for an ad hoc interim review of PRGT normal access limits, which could consider the feasibility of a temporary increase in line with that recently agreed for the GRA. Given the difficult environment facing LICs, many Directors also favored deferring the next review of PRGT interest rates until the 2024/25 comprehensive PRGT review, while some other Directors preferred to complete the review in July 2023 as originally planned.

Directors recognized that CCRT debt service relief to 31 of the IMF’s poorest and most vulnerable members during 2020–22 had freed up scarce financial resources for vital spending to mitigate the impact of the pandemic. They broadly agreed on the need to address the CCRT’s severe underfunding so that it can respond to future qualifying events.

Directors welcomed initial operations of the new RST in supporting members to address structural challenges that pose risks to prospective balance of payments stability by providing long-term affordable financing. Noting the strong RST demand from a broad set of eligible members, Directors agreed that pledged resources should be made effective promptly to avoid first-come first-served incentives and ensure even-handedness. The loan resource gap of SDR 6½ billion should also be urgently filled, by seeking additional pledges that can be made effective during 2023–24.

In view of the increase in SDR interest rates, most Directors supported the introduction of a cap at 2.25 percent on the interest rate for the lowest income RST-eligible members to ensure they benefit from affordable lending terms, with a number of Directors expressing their concerns regarding its possible impact on reserve adequacy and the financial base of the trust. Directors underscored the importance of building adequate RST reserves to safeguard the reserve asset status of contributor claims, and called for close monitoring of reserve adequacy to enable the adoption of corrective measures in a timely manner when necessary, with a number of Directors calling for continued exploration of alternative options at the Interim Review of the RST.

Regarding the implementation of RST access policy, Directors noted that all RSF arrangements approved so far had been granted at maximum access. Pointing to the current loan resource gap and the strong RST demand evident from the pipeline of requests, many Directors cautioned against maximum access becoming the norm and emphasized that clear justification is crucial for access levels above the norm of 75 percent of quota, with a few Directors also emphasizing the importance of the RST’s catalytic role. Directors called for redoubled efforts to fill the fundraising gap so that access is not rationed because of lack of resources. They looked forward to a fuller discussion on initial experience with RSF arrangements, including in relation to scope and access, following the Spring Meetings.

[1] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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