Selected Decisions and Selected Documents of the IMF, Fortieth Issue -- The Acting Chair’s Summing Up— Poverty Reduction and Growth Trust—Review of Interest Rate Structure, Executive Board Meeting 16/91, October 3, 2016

Prepared by the Legal Department of the IMF
As updated as of April 30, 2019

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Poverty Reduction and Growth Trust

The Acting Chair’s Summing Up—Poverty Reduction and Growth Trust—Review of Interest Rate Structure, Executive Board Meeting 16/91, October 3, 2016

Executive Directors welcomed the opportunity to review the interest rate structure for loans under the Poverty Reduction and Growth Trust (PRGT) and the mechanism established in 2009, which differentiates interest rates among PRGT facilities and links these interest rates to developments in world interest rates.

Directors noted that since the PRGT mechanism was adopted, the SDR interest rate has remained well below the 2 percent threshold. The application of the 2009 interest rate mechanism would imply that the interest rate on the Extended Credit Facility (ECF) be set at zero percent for 2017–18, and the rate on the Standby Credit Facility (SCF) at 0.25 percent. Remaining credit under the Exogenous Shocks Facility (ESF), which is not part of the interest rate mechanism, would be charged 0.25 percent upon expiration of the interest rate waiver at end-December 2016.

Directors noted that the successive waivers on PRGT interest have benefited many low-income member countries as they faced a challenging global environment. During the previous review, many Directors had also noted that the possibility of a prolonged period of very low interest rates called for an early re-examination of the interest rate mechanism, including an exit strategy from repeated application of the waiver, to safeguard the self-sustaining capacity of the PRGT.

Directors agreed that a strong case remains for maintaining zero rates on the Fund’s concessional credit, given the lack of improvement in the global economic outlook for low-income countries and significant downside risks from lower commodity prices, weak external demand, and tighter financial conditions. They noted that market expectations of the timing and pace of interest rate normalization have been substantially revised down, possibly prolonging the period of very low interest rates. Directors observed that, under a very low interest rate environment, the application of the interest mechanism would result in some PRGT borrowers paying a rate on their outstanding concessional credit exceeding the PRGT’s cost of funding such credits, contrary to the concessional nature of the PRGT.

Given the aforementioned factors, Directors supported preserving the concessional nature of PRGT financing in periods of very low global interest rates. To this end, the staff proposed a modification of the 2009 interest rate mechanism, introducing an additional threshold of 0.75 percent, below which the SCF interest rate would be set to zero, along with the ECF rate hich would remain at zero until the SDR interest rate reaches 2.0 percent. As a result, both the SCF and ECF interest rates will be locked in at zero for 2017–18, and will stay at zero as long as and whenever global interest rates are very low, without requiring continual interest rate waivers. A few Directors stated that there should be an explicit agreement now on a zero interest rate for the ECF and SCF through 2020. Directors shared the view that, given current market expectations, the modified interest rate mechanism will likely keep all PRGT interest rates at zero through at least 2020, and agreed that, if the mechanism were to generate a different outcome, it would be reassessed in 2018. In addition, Directors also supported staff’s proposal to extend the zero interest rates charged on outstanding balances under the ESF for the period 2017–18.

Most Directors expressed the view that the merits and implications of unifying the interest rate structure for the SCF and ECF should be examined on a comprehensive basis and as one element of the planned review of PRGT facilities in 2018. A number of Directors proposed conducting consultations on this issue in 2017. A few felt unification should happen now. Many other Directors supported or were open to unifying the interest rate structure for the SCF and the ECF, with a few of these Directors observing that the differentiated interest rate structure in the mechanism was, inter alia, inconsistent with the practice in the GRA where SBAs and EFFs carry the same rate of charge. Directors emphasized the importance of preserving the self-sustaining PRGT framework as future proposals for revising PRGT-related policies are considered.

The next review of the PRGT interest rate mechanism is scheduled to take place by December 31, 2018, providing Directors an opportunity to assess the implications of the mechanism in light of actual interest rate developments and economic challenges facing LICs at that time, and the findings of the facilities review,


October 5, 2016

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