The Short-term Liquidity Line: A New IMF Tool to Help in the Crisis

IMF Blog, April 22, 2020

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The COVID-19 pandemic has severely disrupted the global economy and tightened financial conditions dramatically.
Emerging markets experienced unprecedented portfolio outflows in terms of both size and speed, with a record of about $100 billion.
Many markets were effectively frozen in some cases, creating sizable demand for U.S. dollar liquidity and sharp liquidity shortages.
A short-term liquidity problem can quickly become a deeper and longer-lasting solvency problem.
Major central banks extended bilateral swap lines to each other and to more countries than during the global financial crisis; the New York Federal Reserve’s repo program provides dollar liquidity to several more countries.
The Fed and other central banks cannot provide swaps for all countries, leaving many emerging market IMF members still experiencing liquidity shortages or facing the risk of occasional “sudden stops.”

The IMF established the Short-term Liquidity Line (SLL), the first addition to the IMF’s financing toolkit in almost ten years.
The SLL provides a reliable and renewable credit line, without ex post conditionality, to members with very strong fundamentals and policy frameworks—the same qualification criteria as the Flexible Credit Line.
The SLL is designed to address a special balance-of-payments need—potential, moderate, and short-term—reflected in capital account pressures following external shocks.
Signing up for an SLL signals the IMF’s endorsement of a country’s very strong policy frameworks and institutions, which can:
- Lower their borrowing costs.
- Provide support during volatile times.
- Help reduce future financing needs by arresting moderate-sized liquidity problems before they evolve into bigger problems.
Estimated current total demand for the SLL from several countries could be up to $50 billion.
The $50 billion estimate is characterized as a far more modest portion of the IMF’s $1-trillion firepower than would be required if the same group of countries had to come for IMF-supported programs.
Addressing needs early can limit future needs and adverse spillovers to other countries.

The SLL features revolving access allowing repeated drawdown and repayment during its 12-month duration.
The facility operates unlike a traditional loan and can be likened, in some respects, to a credit card, where money can be drawn and replenished up to a limit.
The SLL is renewable: successor arrangements are possible for as long as the member continues to qualify and has the special balance-of-payment need.
Fee structure example:
- Setup fee of 8 basis points, that is, $800,000 for a $1-billion credit line.
Illustrative fiscal savings:
- If a qualifying member has $20 billion in public debt and lowers borrowing costs by just 1 basis point by getting the SLL, their savings would be $2 million.
- The $2 million could be deployed toward critical healthcare and social safety net needs instead of debt servicing.

The establishment of the SLL demonstrates the IMF’s commitment to supporting members that do not always have access to other liquidity lines, complementing IMF reforms to enhance emergency financing and provide debt relief for the poorest members.
The SLL reflects membership willingness to put differences aside and unite during the crisis.
Although the SLL had been years in the making, the IMF’s Executive Board was able to unite around a proposal and approve the facility in a matter of days.
Decisive action like the SLL is framed as necessary to address the needs of countries, large and small, as they confront the economic fallout from the COVID-19 pandemic.

The Short-term Liquidity Line: A New IMF Tool to Help in the Crisis — Geoffrey W.S. Okamoto, April 22, 2020.