The IMF Approves Policy Reforms and Funding Package to Support Low Income Countries in a Sustainable Manner
IMF News, October 21, 2024
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- Published: October 21, 2024
Reforms approved — purpose and scope
- Aim: bolster the Fund’s capacity to support Low-Income Countries (LICs) in addressing balance of payments needs, while restoring the self-sustainability of the Poverty Reduction and Growth Trust (PRGT).
- Reforms detailed in the staff paper “2024 Review of the Poverty Reduction and Growth Trust (PRGT) Facilities and Financing—Reform Proposals.”
- Changes address increasing economic heterogeneity of LICs and the PRGT’s acute funding shortfall driven by higher lending volumes and rising funding costs.
Long-term lending envelope and funding targets
- Endorsed long-term self-sustained annual PRGT lending envelope: SDR 2.7 billion (about $3.6 billion).
- Target to facilitate generation of PRGT subsidy resources: SDR 5.9 billion (about $8 billion) in 2025 present value terms through a framework to distribute GRA net income and/or reserves over the next five years.
- Context: annual lending commitments rose to an average of SDR 5.5 billion since 2020, compared with about SDR 1.2 billion during the preceding decade.
- Without reforms, PRGT self-sustained lending capacity projected to decline to about SDR 1 billion a year by 2027.
Interest rate mechanism, access norms, and safeguards
- New tiered interest rate mechanism:
- Maintains interest-free lending to the poorest countries.
- Charges a modest, still concessional, positive interest rate to better-off LICs in proportion to the SDR interest rate, with a higher concessional element for more vulnerable higher‑income LICs with more limited market access.
- Applies to all new ECF and SCF arrangements and outright disbursements under the RCF approved beginning on May 1, 2025.
- Outstanding PRGT credit and new disbursements under existing PRGT arrangements and RCF financing approved through April 30, 2025, are exempt from the new mechanism.
- Access norm and limits:
- Access norm set at 145 percent of quota to help anchor the average size of future arrangements and overall lending volume.
- Annual and cumulative limits for PRGT normal access remain at 200 and 600 percent of quota, respectively.
- Return of access norm to 145 percent of quota effective January 1, 2025.
- Safeguards:
- Strengthened and streamlined framework for policy safeguards, consolidating High Access Procedures and Enhanced Safeguards into a framework centered around the access norm.
- Strengthened safeguards effective from January 1, 2025.
Financing framework and resource mobilization
- Components endorsed by Directors:
- A five‑year suspension of PRGT administrative expenses reimbursement to the GRA.
- A Multi‑Year Distribution Plan for a cumulative amount of SDR 6.9 billion of GRA net income or reserves to be achieved through annual distribution decisions of specific amounts subject to the financial conditions of the GRA.
- Establishment of an Interim Placement Administered Account (IPAA) to which such amounts would be transferred from the GRA and temporarily placed and administered pending sufficient assurances by members for new commitments of PRGT subsidy resources.
- Principal amounts become available to members for disposition based on quota shares once assurances equivalent to 90 percent of the aggregate amount have been reached.
- Expected outcome:
- Such distributions projected to help generate an additional SDR 5.9 billion (in 2025 present value terms) in subsidy resources, conditional on members’ assurances to provide their share (or equivalent) of the GRA distributions to benefit the PRGT subsidy accounts.
- Supplementary resource sources:
- Additional bilateral subsidy contributions.
- Subsidy savings from the new interest rate mechanism.
- Financing from a proposed further five‑year suspension of PRGT administrative expenses reimbursement to the GRA.
- Directors’ views on financing:
- Some Directors not in position to provide assurances at the current juncture; contingency planning urged.
- Many Directors emphasized that relying on GRA distributions should not be viewed as a permanent solution; continued bilateral contributions from high‑income countries important.
- Option of using limited gold sales could be revisited in the medium‑ to longer‑term.
Executive Board assessment — program design, demand, and monitoring
- Recognition:
- Fund, with World Bank and partners, plays key role for LICs via policy support, capacity development, concessional financing, and catalyzing donor support.
- Exceptionally high demand for concessional financing since 2020, amid sharply higher funding costs, has put PRGT finances under intense strain.
- Demand outlook:
- While lending should decline from recent highs as LICs recover and implement reforms, demand for PRGT financing will remain significantly above pre‑pandemic levels in a more shock‑prone world.
- Program design emphasis:
- Success of PRGT programs hinges on strong design and implementation: size and composition of fiscal adjustments, mobilization of domestic resources, protection of priority areas including social spending and growth‑enhancing public investment, governance, and structural reforms.
- Directors looked forward to forthcoming Review of Program Design and Conditionality.
- Monitoring and contingency:
- Annual reviews of PRGT resource adequacy to monitor trends in loan demand and resources.
- If resources fall short or demand exceeds expectations substantially for an extended period, Executive Board could introduce contingency measures via ad‑hoc PRGT review.
- Targeted mid‑term review in three years to assess early experience with new interest rate mechanism.
Eligibility, access criteria, and other targeted policy changes
- PRGT eligibility framework:
- Remains broadly adequate; Directors concurred with list of PRGT‑eligible countries.
- Refinement to five‑year period and data sources used to assess past market access to allow inclusion of more recent data; modification effective immediately and applied to presumed blending market access determinations.
- Restoration, effective immediately, of assessment of absence of serious short‑term vulnerabilities for all PRGT‑eligible countries before graduation decisions.
- Targeted policy changes effective immediately:
- Adjustment to Policy Safeguards for High Combined Credit Exposure to align its debt sustainability criterion with GRA Exceptional Access (GRA‑EA) policy for LICs that meet market access criterion under GRA‑EA.
- Extension to end‑December 2025 of current cumulative access limits of the Rapid Credit Facility (RCF) (supported by most Directors).
- Recommendation to conduct a comprehensive review of the policy on Poverty Reduction Strategies in 2025.
- Automatic adjustments:
- Agreement with staff‑proposed automatic adjustment of access limits and other quota‑based thresholds when the 16th GRQ becomes effective.
Directors’ perspectives and communication
- Broad support for the reform package while some Directors favored different calibrations:
- A few Directors would have preferred a lower lending envelope.
- Some favored a small positive charge for the poorest LICs as a price signal; others preferred maintaining zero interest rates for small developing states or emergency RCF financing.
- Some preferred a two‑tiered mechanism based solely on income.
- Some preferred greater concessionality for higher income LICs.
- Communication:
- Emphasized need for sound and transparent communication strategy highlighting objective of securing a self‑sustainable PRGT and that commitments from members to contribute their share of the distribution to the PRGT will be requested following conclusion of this PRGT review.
- Review cycle:
- Next general review of the Fund’s facilities for LICs to take place on the standard five‑year cycle.
Key statistics and dates (preserved exactly)
- Long-term annual PRGT lending envelope: SDR 2.7 billion (about $3.6 billion).
- PRGT subsidy resources target: SDR 5.9 billion (about $8 billion) in 2025 present value terms.
- Average annual lending commitments since 2020: SDR 5.5 billion.
- Average annual lending commitments during preceding decade: about SDR 1.2 billion.
- Projected PRGT self‑sustained lending capacity without reforms by 2027: about SDR 1 billion a year.
- New access norm: 145 percent of quota (effective January 1, 2025).
- PRGT annual and cumulative normal access limits: 200 and 600 percent of quota, respectively.
- Application date for new interest rate mechanism to new arrangements and disbursements: beginning on May 1, 2025.
- Exemption cutoff for outstanding PRGT credit and new disbursements under existing arrangements and RCF financing: approved through April 30, 2025.
- Multi‑Year Distribution Plan cumulative amount: SDR 6.9 billion of GRA net income or reserves.
- Required assurances threshold for principal amounts availability: 90 percent of the aggregate amount.
- Extension of current cumulative RCF access limits: to end‑December 2025.
- Targeted mid‑term review timing: in three years.
Source: Press Release No. 24/389, October 21, 2024 — IMF Communications Department.