The global financial crisis highlighted the need for effective global financial safety nets to help countries cope with adverse shocks. A key objective of recent lending reforms was to complement the traditional crisis resolution role of the IMF with more effective tools for crisis prevention. The Precautionary and Liquidity Line (PLL) is designed to flexibly meet the liquidity needs of member countries with sound economic fundamentals but with some limited remaining vulnerabilities which precludes them from using the Flexible Credit Line (FCL). To date, two countries, Former Yugoslav Republic of Macedonia and Morocco, have used the PLL.
Tools to meet countries’ diverse financing needs
The PLL provides financing to meet actual or potential balance of payments needs of countries with sound policies, and is intended to serve as insurance or help resolve crises under wide-ranging situations. The PLL combines a qualification process (similar to that for the FCL but with a lower bar) with focused ex-post conditionality aimed at addressing the remaining moderate vulnerabilities identified during qualification. Its qualification requirements signal the strength of qualifying countries’ fundamentals and policies, thus contributing to consolidation of market confidence in the country’s policy plans.
PLL arrangements can have duration of either six months, or one to two years. The six-month duration is available for countries with actual or potential short-term balance of payments needs that can make credible progress in addressing their vulnerabilities during the six-month period. Up to 250 percent of a member country’s quota can normally be made available upon approval of a six-month PLL arrangement. However, if a country’s balance of payments need results from the impact of an exogenous shock, including heightened regional or global stress, access could be higher (see below). Renewal of six-month PLL arrangements is normally possible only after a two-year cooling-off period from the date of approval of the previous six-month PLL arrangement.
For one- to two-year PLL arrangements, the maximum access at approval is equal to 500 percent of quota for the first year and a total of 1000 percent of quota for the entire arrangement. In PLL arrangements with duration of more than one year, amounts committed during the second year can be brought forward to the first year through rephrasing where needed, subject to approval by the IMF’s Executive Board during a review.
Countries with sound policies qualify
The PLL qualification process enables signaling the strength of qualifying countries’ fundamentals and policies. The core of the qualification assessment process is that the member country:
- Has sound economic fundamentals and institutional policy frameworks
- Is currently implementing—and has a track record of implementing—sound policies
- Remains committed to maintaining sound policies in the future
In addition to a generally positive assessment of the country’s policies in the most recent Article IV consultations, qualification for the PLL is assessed against the same qualification criteria for an FCL arrangement, which are grouped into the following areas: (i) external position and market access; (ii) fiscal policy; (iii) monetary policy; (iv) financial sector soundness and supervision; and (v) data adequacy. While requiring strong performance in most of these areas, qualification for the PLL allows moderate vulnerabilities in one or two of these areas, while substantial vulnerabilities in any of the five areas would disqualify a member country for the PLL.
Countries experiencing any of the following conditions at approval cannot use the PLL: (i) sustained inability to access international capital markets; (ii) a need for large macroeconomic or structural policy adjustment (unless such adjustment has credibly been launched before approval); (iii) a public debt position that, with high probability, is not sustainable in the medium term; or (iv) widespread bank insolvencies.
Liquidity window for crisis bystanders
A six-month PLL arrangement with higher access up to 500 percent of quota could be approved in exceptional circumstances where a member country has an increased actual or potential balance of payment need that is of a short-term nature due to the impact of exogenous shocks, including heightened regional or global stress conditions. Under such circumstances, one additional successor six-month PLL arrangement could be approved without observing the cooling-off period, while maintaining the cumulative access limit of 500 percent of quota under all six-month PLL arrangements.
Focused conditions to reduce remaining vulnerabilities
Countries using the PLL commit to policies aimed at reducing their remaining vulnerabilities identified in the qualification process with focused conditionality. Thus, under one- to two-year PLL arrangements, prior actions, structural benchmarks, and quantitative performance criteria will only be used when they are critical for a program’s success, and a quantified macroeconomic framework underpinned by indicative targets would allow assessment of a country’s progress toward meeting its program objectives. One- to two-year PLL arrangements are monitored through six-monthly reviews by the IMF’s Executive Board that will assess the extent to which the program remains on track to achieve its objectives. If a member country has an actual balance of payments need at the time of approval of the arrangement, access is phased through semiannual disbursements in line with the same periodicity of reviews. Six-month PLL arrangements are not monitored through reviews but could include prior actions if they are considered critical for the success of the arrangements.
Low cost to get through tough times
Commitment fee. Resources committed under PLL arrangements are subject to a commitment fee levied at the beginning of each 12 month period on amounts that could be drawn in the period (15 basis points for committed amounts up to 200 percent of quota, 30 basis points on committed amounts above 200 percent and up to 1000 percent of quota, and 60 basis points for access in excess of 1000 percent of quota). These fees are refunded if the amounts are drawn during the course of the relevant period.
Lending rate. 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 carry a surcharge of 200 basis points, paid on the amount of credit outstanding above 300 percent of quota. If credit remains above 300 percent of quota after three years, this surcharge rises to 300 basis points, and is designed to discourage large and prolonged use of IMF resources.
Service charge. A service charge of 50 basis points is applied on each amount drawn.