IMF Executive Board Endorses Reforms to Promote the IMF’s Capacity to Support Countries Undertaking Debt Restructurings
IMF News, April 16, 2024
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- Published: April 16, 2024
Overview
- The Executive Board endorsed recommendations of the IMF staff paper “Policy Reform Proposals to Promote the Fund’s Capacity to Support Countries Undertaking Debt Restructurings.”
- Purpose: ensure a more agile approach to IMF support for countries undertaking debt restructuring while maintaining adequate safeguards for IMF financing and reinforcing the existing architecture for debt resolution.
- Press Release No. 24/119; dated April 16, 2024.
Rationale and recent experience
- Several IMF-supported programs with debt restructurings experienced significant delays from Staff-Level Agreement to receipt of official creditor assurances required for IMF financing approval.
- Examples of time from Staff-Level Agreement to creditor assurances:
- Chad: 11 months
- Zambia: 9 months
- Sri Lanka: 6 months
- Ghana: 5 months
- Recent improvements noted, with “substantial progress in collaboration among official bilateral creditors,” but further progress remains necessary.
Five reform areas proposed in the staff paper
- (i) Clarifying when and how to apply additional safeguards under IMF’s financing into official arrears policy to help avoid delays.
- (ii) Strengthening the effectiveness and broadening applicability of financing assurances reviews when there is an ongoing debt restructuring to better encourage adequate progress.
- (iii) Establishing a more robust and agile approach for deriving financing assurances from official bilateral creditors (based on supporting and observing their processes) to establish assurances more rapidly.
- (iv) Adjusting the IMF’s Approval-in-Principle (AIP) procedures to provide a modality for IMF engagement until financing assurances are established.
- (v) Clarifying how the IMF can provide support to members facing arrears to official creditors when they also face an emergency situation, like a natural disaster.
Executive Board assessment — key findings and policy clarifications
- Directors welcomed the reforms and agreed that the proposals are reflected in Executive Board understandings in Supplement 3 of SM/24/65 to be issued shortly.
- The reforms are designed to preserve and complement existing debt resolution architecture, recognize different official creditor processes, and support creditor participation on terms consistent with restoring debt sustainability.
Lending Into Official Arrears (LIOA) — strands 1–3
- Directors agreed the LIOA policy remains broadly appropriate; current guidance on Strands 1, 2, and 3 should be retained.
- Most Directors: Strand 1 (creditor coordination through a representative standing forum such as the Paris Club or the Common Framework involving the Paris Club) should remain central.
- A few Directors stressed urgency of recognizing the G20 Common Framework more generally as a representative standing forum.
- The Fund would normally not apply Strand 3 (the three criteria) to a creditor or group with an adequately representative share of total financing contributions, especially when assessing undue negative effects on mobilizing official financing packages.
LIOA — Strand 4 (additional safeguards) and application
- Directors supported adding a fourth strand under which the Fund seeks additional safeguards where:
- an adequately representative agreement has not been reached through a representative standing forum,
- consent is not forthcoming within 4 weeks of being requested, and
- the three criteria under Strand 3 cannot be satisfied with respect to an official bilateral creditor.
- Distinction between program types:
- Normal access under the GRA or PRGT or high combined access under the GRA and PRGT: the “standard safeguards approach” applies.
- Exceptional access under the GRA or the PRGT or high combined access: the “enhanced safeguards approach” applies.
Standard safeguards approach (for normal access cases)
- Requirements include:
- Phasing of access under the arrangement (with an initial purchase or disbursement capped at low access).
- Program conditionality to support the restructuring where warranted under the Guidelines on Conditionality.
- A debtor commitment to good faith efforts to establish safeguards for Fund lending.
Enhanced safeguards approach (for exceptional/complex cases)
- In addition to the standard safeguards requirements, requires:
- A direct commitment to the Fund by a sufficient set of creditors about their restructuring intentions.
- Where such commitment is provided, arrears would be considered eliminated (for application of the LIOA policy) for both participating and non-participating creditors.
- Definition of a “sufficient set” (paragraph 22 of the paper):
- Requires participation of any standing creditor forum as well as any creditors with significant influence over the debtor.
- A creditor has significant influence when it can extract repayment on more favorable terms inconsistent with program parameters.
- Shift to enhanced safeguards is expected for complex cases with prolonged negotiations or coordination issues, or when a creditor/group either:
- (1) is unwilling to restructure claims in line with program parameters; or
- (2) views additional Fund support to the debtor’s coordination efforts as essential.
- Staff Reports should transparently explain which creditor(s) requested a shift and why; Directors stressed limiting stigma and providing granularity when available.
Comparability of treatment and arrears
- The Fund would subject any arrears arising out of exercise of a contractual comparability of treatment clause to the Fund’s non-toleration of arrears policy (paragraph 21 of the paper).
Financing Assurances Reviews — scope and strengthened role
- Financing assurances reviews will be strengthened under the LIOA and LIA policies while external arrears remain unresolved.
- Financing assurances reviews introduced:
- in cases where arrears are deemed away under Strands 1 and 4 of the LIOA policy,
- in preemptive restructuring cases involving official bilateral creditors until restructuring is complete.
- Purposes:
- Assess continued compliance with arrears and financing assurances policies.
- Assess whether the member’s adjustment efforts are undermined by debtor–creditor relations.
- Determine whether the debt situation undermines restoration of medium-term external viability and capacity to repay the Fund.
- Requests for new Fund financing should lay out expected steps and schedule for restructuring in an indicative way; subsequent reviews should detail progress against that schedule.
- Financing assurances reviews should explicitly assess whether the Fund has appropriate safeguards or needs to introduce additional safeguards, tailored to the situation and reason for delay.
- Application of Strand 1 to ongoing and future debt restructuring cases after the effective date of these policy changes will require completion of a financing assurances review until arrears are resolved.
Credible official creditor process (COCP)
- For cases where financing assurances are needed from official bilateral creditors (pre-emptive cases and Strand 1 and 4), assurances could be obtained via the Fund’s assessment that a “credible official creditor process” is underway.
- Directors emphasized the need for clear guidance on criteria for this assessment:
- Each creditor needs a robust track record of delivering timely and successful restructurings for the Fund to assess process, decisionmakers, and expected timeframe.
- In absence of sufficient information or track record, required financing assurances could continue to be satisfied by specific and credible assurances on debt relief/financing.
- COCP assessments should be transparent, evenhanded, fair, granular, and evidence-based to allow the Board to judge.
- Establishing track records for non-Paris Club creditors’ processes could move broadly at the same speed, given multiple non-PC creditors typically involved.
- In pre-emptive cases, financing assurances would only be sought from a “sufficient set” of creditors (paragraph 22 of the paper).
- Policy for preemptive restructuring cases for private creditors remains unchanged.
Exceptional circumstances under the LIOA
- Clarifications and guidance on the “exceptional circumstances” clause:
- Focus on natural disasters and a subset of other exogenous shocks, such as large or global shocks.
- Assessment of whether Fund support would advance normalization with official bilateral creditors and resolution of arrears would be based on the debtor’s commitment to make good faith efforts and to promote creditor coordination.
- Clause generally not expected to be satisfied for cases with long-standing arrears.
- No change to qualification criteria for emergency financing instruments.
- If a staff-level agreement has been reached for an upper-credit-tranche (UCT) program for a member undergoing a debt restructuring but an emergency arises requiring the UCT program to be redesigned, redesigning the UCT program may be infeasible in the emergency timeframe.
- Even in emergency situations, the best course remains to work towards a UCT program; emergency financing should not undermine efforts to secure such a program.
Approval in Principle (AIP) — clarifications
- AIP recognized as useful to bridge engagement gaps when policy agreement exists but financing assurances are lacking.
- Clarifications agreed:
- AIP decision shall specify the date by which the approval would lapse, normally no later than 4 months after approval.
- A new AIP shall only be permitted once and would normally be subject to a limit of an additional 4 months.
- The Fund would approve a new AIP only if financing assurances restoring debt sustainability are likely to be delivered and the member’s economic program is being implemented and remains on track.
- Once financing assurances are obtained, a second Executive Board decision is required to make the arrangement effective, normally adopted on a Lapse of Time basis.
- Staff should aim to bring a UCT program forward for Board consideration as fast as possible in all cases.
Implementation timing and follow-up
- Directors agreed the policy changes enter into effect immediately and apply to all future purchases and disbursements, including under existing arrangements, where relevant policies apply.
- Emphasis on careful implementation to ensure effective, transparent, and evenhanded application and to minimize increased burden on debtor countries.
- Directors called for effective communication of policy changes (including through planned Guidance), capacity development support, and cooperation with other workstreams, including the Common Framework and the Global Sovereign Debt Roundtable.
- Directors agreed to maintain review of the LIOA policy, including the present reforms, on an as needed basis.
IMF Executive Board Endorses Reforms to Promote the IMF’s Capacity to Support Countries Undertaking Debt Restructurings — Press Release No. 24/119, April 16, 2024.