IMF Executive Board Approves Proposal for a New Policy Coordination Instrument

IMF News, July 26, 2017

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On July 14, 2017 the Executive Board of the International Monetary Fund (IMF) approved the establishment of a new non-financing Policy Coordination Instrument (PCI).
Objective: further strengthen the Global Financial Safety Net (GFSN) and enhance the effectiveness of the Fund’s toolkit.

Designed to help countries unlock financing from official and private donors and creditors, and to demonstrate a commitment to a reform agenda.
Enables policy dialogue between the Fund and countries, monitoring of economic developments and policies, and Board endorsement of those policies.
Key design features draw on Fund financing arrangements and the Policy Support Instrument (PSI), with differences including:
- no eligibility criteria (it is open to the full membership);
- a more flexible review schedule;
- a review-based approach for monitoring of conditionality.

Directors generally agreed that a new non‑financial instrument could:
- enhance the effectiveness of the Fund’s toolkit;
- promote a more efficient allocation of global resources;
- help improve coordination with regional financing arrangements and across different layers of the GFSN.
Directors broadly endorsed the objective of the PCI and, with a few caveats, supported its key design features.
Directors agreed the PCI should aim to help countries design and implement a full‑fledged macroeconomic program to:
- prevent crises and build buffers;
- enhance macroeconomic stability;
- address macroeconomic imbalances.
Directors generally concurred that policies supported under the PCI should meet the standard required under an upper credit tranche (UCT) financial arrangement with the Fund.
Eligibility constraints agreed by Directors:
- PCI should be available to all member countries except those that need Fund financial support at the time of PCI approval or those with overdue obligations to the General Resources Account and the Poverty Reduction and Growth Trust (PRGT).

Directors supported a review‑based approach to monitoring program conditionality to:
- help alleviate stigma;
- streamline the review process while preserving the UCT standard and the Executive Board’s judgment regarding completion of a review.
Directors stressed safeguards to maintain signaling value and standards:
- completion of a program review under the PCI would require a Board assessment that any deviation from a quantitative or reform target was either minor or temporary, or that sufficient corrective action had been taken to achieve the objectives of the program.
- noted that the elimination of the requirement for a waiver of non‑observance in cases where program quantitative targets were not met must not weaken the positive signaling effect of the PCI or undermine the UCT standard.
Recognized that the review‑based approach proposed for the PCI would not have implications for Fund financial arrangements (this issue had been discussed and settled for financial arrangements in 2009).

Directors welcomed flexibility in PCI design:
- supported a more flexible review schedule, with a short buffer period for authorities to implement overdue policies, take corrective actions, or mobilize necessary financing to close the financing gap.
- beyond the buffer period, staff would provide an interim performance update for information to the Board.
- called for careful communication in cases where non‑completion of a review for a twelve‑month period results in an automatic termination of the PCI.

An on‑track PCI could facilitate access to Fund resources should the member experience a balance of payments need.
Concurrent use of the PCI and Fund financing under certain instruments would be possible, but:
- a few Directors saw a case for cancelling the PCI when a member requests Fund financing, noting conceptual and operational issues with such concurrent use.
Directors stressed:
- access to financing from other GFSN sources would need to respect the mandate and decision‑making process of each institution;
- staff should engage with prospective financing institutions;
- the importance of upholding the Fund’s independence and reputation.
Publication regime and misreporting framework:
- Directors supported applying the publication regime and misreporting framework similar to those for the PSI to strengthen signaling and safeguard the integrity of Fund assessments under the PCI.

Directors recognized the positive signaling effect of the PSI for PRGT‑eligible countries.
Noted potential overlaps between the PCI and the PSI; a few Directors would prefer eliminating the PSI to maintain a streamlined toolkit.
Directors broadly agreed to retain the PSI, pending a comprehensive assessment in the context of the review of facilities for low‑income countries in 2018.

Directors noted the PCI is a form of technical assistance and, as such, charging for the PCI will follow the relevant technical assistance policy.
Directors supported reviewing the instrument after:
- the approval of ten PCI‑supported programs; or
- after five years from the adoption of the PCI, whichever is triggered first;
- or earlier if warranted.

Press Release No. 17/299 — July 26, 2017 — IMF Communications Department