Press Release No. 23/341

IMF Executive Board Completed the Review of the Policy Coordination Instrument and Endorsed the Proposal to Eliminate the Policy Support Instrument

October 6, 2023

Washington, DC: On October 4, 2023, the Executive Board of the International Monetary Fund (IMF) completed the review of the Policy Coordination Instrument (PCI) and endorsed the proposal to eliminate the Policy Support Instrument (PSI).

Against the backdrop of a challenging and shock-prone global environment, the Executive Board approved two key refinements to the PCI to make the PCI more fit-for-purpose while maintaining its strong signaling function. The first is to enhance the flexibility of the review schedule while ensuring regular and uninterrupted signals to markets. The second is to require articulation of the rationale for concurrent use of a Stand by Arrangement or a Stand-by Credit Facility arrangement by members with an ongoing PCI, which allows members to continue to demonstrate their commitment to a reform agenda while benefiting from access to Fund resources when needed. The Board also approved the elimination of the PSI given a demonstrated preference for the PCI as evidenced by no request for the PSI since 2015 and a universal switch by PSI users to the PCI.

The PCI is a non-financing instrument supporting policies that meet upper credit tranche standards and is designed to help countries demonstrate commitment to a reform agenda and unlock financing from other sources. The PCI enables a closer policy dialogue with the Fund, supporting countries in designing and implementing a full-fledged macroeconomic program of policies to address imbalances, prevent crises, build buffers, and enhance stability. The PCI is available to all member countries, has some flexibility around the fixed review schedule, and uses a review-based approach to monitoring conditionality.

The review showed that the PCI has served countries well and met the goals and expectations set out at its establishment in 2017. Take-up has been strong, and the PCI has played a critical role in enabling countries to maintain continuous engagement with the Fund, signal commitment to reforms, and catalyze financing from official and private creditors. For PRGT-eligible countries, the PCI has replaced the PSI as the signaling instrument of choice owing to its more attractive features and the perception by PRGT-eligible countries that it can demonstrate that they are on a path toward emerging market status. The PCI has also played an important role in facilitating access to Fund financing in the aftermath of recent shocks such as the pandemic and the war in Ukraine.

Executive Board Assessment[1]

Executive Directors welcomed the review of the Fund’s experience with the Policy Coordination Instrument (PCI) since its establishment in 2017, as well as the proposal to eliminate the Policy Support Instrument (PSI). They noted that the PCI is an important part of the Fund’s non-financing instruments, which has helped countries signal strong policy commitment to a reform agenda and unlock financing from official and private creditors.

Directors agreed that the PCI has served the membership well and broadly met the goals and expectations set out at its establishment. They also concurred that the strong policy commitment and the flexibility provided under the PCI have played an important role in facilitating access to Fund financing when needed. To ensure that it remains fit for purpose in today’s complex global environment, Directors endorsed proposals to enhance the PCI’s operational flexibility and clarity, while safeguarding its signaling of strong policy commitment.

Directors supported the proposals to enhance the flexibility of the PCI review schedule, while maintaining regular and uninterrupted signals. To reduce the risk of sending a premature off-track signal, they agreed to extend the PCI automatic termination period, based on the review frequency. This will ensure that countries can always make use of the three-month buffer before the automatic termination of the PCI. Directors also agreed to allow, in exceptional circumstances, an additional 30 days (“grace period”) beyond the regular buffer period for the completion of a review under a PCI that is on-track and where the PCI user is transitioning to a Fund arrangement. This adjustment would ensure a smoother transition, reduce administrative burdens, and have limited impact on the signaling value of the PCI. To mitigate any potential complication with the scheduled PCI review dates, Directors welcomed guidance to encourage sufficient time between the fixed review date and the next test date.

Directors saw scope for improving the modalities for concurrent use of the PCI with SBA and/or SCF arrangements. They supported the requirement to demonstrate in staff reports the relevance of retaining the PCI at approval of an SBA and/or SCF arrangement and, if the arrangement exceeds 12 months in length, at subsequent reviews. Directors also supported the clarification that the duration of an SBA and/or SCF arrangement used concurrently with a PCI can extend beyond the end date of the existing PCI and will depend on the length of financing and adjustment needs.

Directors agreed to examine, at the time of the interim review of the RST expected in April 2024, issues regarding concurrent use of the PCI with the RSF. This would allow for a holistic consideration of issues, which cut across many Fund instruments. Such issues include the appropriateness of existing safeguards to ensure that a country requesting an RSF arrangement with a concurrent PCI does not have a BoP gap, and issues of termination of RSF financing when a country transitions from a PCI to a Fund arrangement.

Notwithstanding the very positive experience among PCI users, Directors noted limited awareness of the PCI’s benefits by non-users, which may inhibit its take-up and its catalytic role. In this context, they called for an external outreach to communicate these benefits to country authorities, creditors, and the public. In addition, noting that coordination with Regional Financing Arrangements (RFAs) in the context of Fund policy support under a PCI remains untested, Directors recommended closely engaging with RFAs.

Given the lack of demand for the PSI and the universal switch of PSI users to the PCI, Directors endorsed the proposal to eliminate the PSI. While programs supported by the Fund under both instruments meet UCT-quality standards, Directors noted the strong preference of past PSI users for the PCI, given its greater flexibility, universal applicability, and the perception that it is an upgrade relative to the PSI. As such, Directors stressed the importance of clearly communicating that the elimination of the PSI is not expected to have any negative impact on PRGT-eligible countries. More generally, Directors reiterated the importance of maintaining a streamlined and coherent toolkit.

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