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) to further strengthen the Global Financial Safety Net (GFSN) and enhance the effectiveness of the Fund’s toolkit. The decision follows a series of discussions by the Executive Board on the adequacy of the GFSN.
The new instrument is designed to help countries unlock financing from official and private donors and creditors, as well as demonstrate a commitment to a reform agenda. It will enable a policy dialogue between the Fund and countries, monitoring of economic developments and policies, as well as Board endorsement of those policies. The key design features draw on Fund financing arrangements and the Policy Support Instrument (PSI), with some differences. These include no eligibility criteria (it is open to the full membership), a more flexible review schedule, and a review-based approach for monitoring of conditionality.
Executive Board Assessment [1]
Executive Directors approved the proposal to establish the Policy Coordination Instrument (PCI), as part of the Fund’s broader effort to strengthen the global financial safety net (GFSN). They generally agreed that a new non‑financial instrument, designed for countries seeking to unlock financing from multiple sources and/or to demonstrate a commitment to a reform agenda, could enhance the effectiveness of the Fund’s toolkit, promote a more efficient allocation of global resources, and 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. They agreed that the PCI should aim to help countries design and implement a full‑fledged macroeconomic program to prevent crises and build buffers, enhance macroeconomic stability, or 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. They also agreed that the 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 the proposed modalities of the new instrument. They generally agreed that a review‑based approach to monitoring program conditionality could help alleviate stigma and streamline the review process while preserving the UCT standard and the Executive Board’s judgment regarding its decision to complete a review. Directors stressed the need to ensure that the elimination of the requirement for a waiver of non‑observance in cases where program quantitative targets were not met does not weaken the positive signaling effect of the PCI and undermine the UCT standard. Directors thus underscored that the 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. They recognized that the review‑based approach proposed for the PCI would not have implications for Fund financial arrangements, as this issue had been thoroughly discussed and settled for financial arrangements in 2009.
Directors welcomed the flexibility built into the PCI design. Specifically, they 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. Directors appreciated that, beyond the buffer period, staff would provide an interim performance update for information to the Board. They 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.
Directors noted that an on‑track PCI could facilitate access to Fund resources should the member experience a balance of payments need. While the concurrent use of the PCI and Fund financing under certain instruments would be possible, 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. A number of Directors stressed that access to financing from other GFSN sources would need to respect the mandate and decision‑making process of each institution, prompting a need for staff to engage with those prospective financing institutions. At the same time, Directors emphasized the importance of upholding the Fund’s independence and reputation. They supported applying the publication regime and misreporting framework similar to those for the PSI, which they considered important to strengthen the signaling effect of the instrument and to safeguard the integrity of Fund assessments under the PCI.
Directors recognized the positive signaling effect of the PSI for PRGT‑eligible countries. They noted, however, that the advent of the PCI could potentially give rise to overlaps between the PCI and the PSI, and for this reason, a few Directors would prefer eliminating the latter 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 that the PCI is a form of technical assistance and, as such, charging for the PCI will follow the relevant technical assistance policy. They 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, given uncertainty about the potential demand for the instrument and resource implications.
[1] An explanation of any qualifiers used in summing ups can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm
