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Overview
- The Q&A provides information on the IMF’s sovereign arrears policies.
- Last Updated: May 18, 2022
- The IMF has completed the modernization of its legal and policy framework for sovereign debt restructurings in the context of IMF-supported programs.
- The amendments to the IMF’s sovereign arrears policies are intended to help members address a more complex creditor landscape and the need to increase debt transparency.
- The IMF assists countries by providing financing while members implement policies to restore medium term external viability.
Policy framework and objectives
- The sovereign arrears policies govern the conditions under which the IMF can lend to members running sovereign external arrears.
- These policies balance:
- urging members to stay current on debt payments to the extent possible and foster good creditor relations; and
- enabling the IMF to support members in economic and financial crisis to resolve balance of payments problems and restore medium-term debt sustainability.
- The arrears policies interact with IMF policies on financing assurances, debt sustainability, and market access.
Core policy instruments and scope
- The policy suite distinguishes by creditor type:
- The Non-Toleration Policy (NTP) applies to certain claims of International Financial Institutions (IFIs) and official bilateral creditors that are outside the scope of a debt restructuring.
- The Lending Into Official Arrears (LIOA) policy applies to claims of official bilateral creditors and IFIs that are within the scope of a debt restructuring.
- The Lending Into Arrears policy applies to claims of external private creditors on sovereigns.
- Definition: IFIs are defined as financial institutions with at least two sovereign members and no non-sovereign member.
Interaction between NTP and LIOA; official sector involvement
- Crucial distinction: whether official sector involvement in the debt restructuring is needed to restore debt sustainability.
- If official sector involvement is not needed:
- The NTP applies to both official bilateral creditors and IFIs.
- If official sector involvement is needed:
- For arrears to official bilateral creditors, the LIOA applies.
- For arrears to IFIs, either the NTP or LIOA applies depending on whether the IFI meets certain conditions; the IMF Executive Board decides.
Lending Into Official Arrears (LIOA) — official bilateral creditors
- When a member is in arrears to an official bilateral creditor and official sector involvement is needed, the IMF can provide financing under these conditions:
- There is a representative Paris Club agreement in place. To be representative, the agreement must provide a majority of the total financing contributions required from official bilateral creditors over the program period. When such financing assurances are received from the Paris Club, the country is no longer considered to be in arrears to either participating or non-participating creditors for purposes of the policy.
- In the absence of a representative Paris Club agreement, the IMF may provide financing if the creditor consents.
- In the absence of either a representative Paris Club agreement or creditor consent, the IMF may provide financing if all of the following criteria are met:
- prompt financial support from the IMF is deemed essential for economic stability and growth, and the member is pursuing appropriate policies;
- the debtor is making good faith efforts to reach agreement with the creditor on a contribution consistent with the parameters of the IMF-supported program, even if the creditor is unwilling to reach such an agreement; and
- the decision to provide financing despite the arrears would not have an undue negative effect on the IMF’s ability to mobilize official financing packages in future cases.
- The IMF Executive Board has provided further specific guidance on how to apply the second and third criteria.
Lending Into Official Arrears (LIOA) — IFIs
- When the NTP does not apply to an IFI, the LIOA is applied. In that case, the IMF may provide financing if:
- the institution has provided consent to Fund lending despite the arrears, or
- all three criteria listed above (under official bilateral creditors) are met.
Non-Toleration Policy (NTP) applied to selected IFIs
- In cases where official sector involvement is needed, the decision to apply the NTP to an IFI is a judgment of the IMF’s Executive Board, informed by IFI characteristics such as:
- Mandate (e.g., alignment with the IMF’s mandate to solve balance of payments problems, as would be the case if the IFI is a Regional Financing Arrangement);
- Membership (global rather than regional membership);
- Participation in the Highly Indebted Poor Countries (HIPC) Initiative;
- Exclusion from past Paris Club restructurings; and
- Exclusion from a debt treatment by a creditor committee based on a “representative standing forum” recognized under the LIOA policy in the case at hand. At present, the only recognized representative standing forum is the Paris Club.
Institutional outcomes and recent policy change
- The Lending Into Official Arrears policy as applied to official bilateral creditors was not modified; it was found to be working well and hence no changes were proposed.
- The LIOA policy was extended to some IFIs: it now also applies to IFIs in official restructuring cases when the IMF Executive Board indicates that the Non-Toleration of Arrears policy should not be applied.
- The amendments aim to help members address increased creditor complexity and the need for greater debt transparency.
References