The Flexible Credit Line (FCL) was designed to meet the demand for crisis-prevention and crisis-mitigation lending for countries with very strong policy frameworks and track records in economic performance. This instrument was created as part of the process of reforming how the IMF lends money to countries that find themselves in a cash crunch, with the idea of tailoring its lending instruments to the diverse needs and circumstances of member countries. To date, three countries, Colombia, Mexico, and Poland, have used the FCL. While none of the three countries have so far drawn down on these lines, the FCL has provided valuable insurance to these countries and helped boost market confidence during the period of heightened risks.
Flexibility to meet countries’ needs
A key objective of the lending reform was to reduce the perceived stigma of borrowing from the IMF, and to encourage countries to ask for assistance before they face a full blown crisis. Countries with very strong economic fundamentals and policy track records can apply for the FCL when faced with potential or actual balance of payments pressures. The flexibility provided by the FCL means that the IMF can meet a broad range of country needs:
- Qualified countries have flexibility to draw on the credit line at any time within a pre-specified period, or to treat it as a precautionary instrument.
- The FCL assures qualified countries they have large and up-front access to IMF resources with no ongoing conditions, given the strength of the policy frameworks.
- The FCL works as a renewable credit line, which could initially be for either one-or two years with a review of qualification after the first year. If a country decided to draw on the credit line, repayment would take place over a 3¼ to 5 year period.
- There is no cap on access to IMF resources, and the need for resources is assessed on a case-by-case basis.
Low cost to get through tough times
The cost of borrowing under the FCL is the same as that under the Fund’s traditional Stand-By Arrangement (SBA) and the Precautionary and Liquidity Line (PLL).
Commitment fee. In accessing IMF resources on a precautionary basis, countries pay a commitment fee that is refunded if they opt to draw on those resources. The commitment fee increases with the level of access available over a twelve month period, effectively ranging between 24 and 27 basis points for access between 500 and 1,000 percent of quota, and higher above 1,000 percent of quota.
Lending rate. As with other non-concessional IMF lending, the cost of drawing under FCL arrangements varies with the scale and duration of lending. The lending rate is tied to the IMF’s market-related interest rate, known as the basic rate of charge, which is itself linked to the Special Drawing Rights (SDR) interest rate. Large loans, with credit outstanding above 300 percent of quota, carry a surcharge of 200 basis points. If credit outstanding remains above 300 percent of quota after three years, the surcharge rises to 300 basis points. The escalation of the surcharge is designed to discourage large and prolonged use of IMF resources. Currently, the effective interest rate under the FCL (or an SBA or a PLL) for access between 500 and 1000 percent of quota—ranges between 1.9–2.5 percent, rising to about 2.3–3.2 percent after 3 years, and higher above 1,000 percent of quota1.
Service charge. A service charge of 50 basis points is applied on each amount drawn. disbursements.
Very strong performers qualify
The qualification criteria are the core of the FCL and serve to show the IMF’s confidence in the qualifying member country’s policies and ability to take corrective measures when needed. At the heart of the qualification process is an assessment that the member country:
- Has very strong economic fundamentals and institutional policy frameworks
- Is implementing—and has a sustained track record of implementing—very strong policies
- Remains committed to maintaining such policies in the future
In addition to the very positive assessment of the country’s policies in the most recent Article IV consultations, the criteria used to assess a country’s qualification for an FCL arrangement are:
- A sustainable external position
- A capital account position dominated by private flows
- A track record of steady sovereign access to international capital markets at favorable terms
- A reserve position that is relatively comfortable when the FCL is requested on a precautionary basis
- Sound public finances, including a sustainable public debt position
- Low and stable inflation, in the context of a sound monetary and exchange rate policy framework
- The absence of bank solvency problems that pose an immediate threat of a systemic banking crisis
- Effective financial sector supervision
- Data integrity and transparency
1 As of February 28, 2014 with the SDR interest rate of 0.12 percent.