Questions and Answers
Last Updated: September 9, 2010
- What is the purpose of further enhancing the IMF’s financing toolkit?
- What are the main changes to the FCL? Why are they necessary?
- Is the reformed FCL targeting a new group of countries?
- What is the rationale for creating the PCL? How is it different from the FCL?
- Who do you expect will use the PCL?
- What are the qualification requirements for the PCL?
- Does the PCL have conditionality?
- What is the cost to the country for using IMF resources under the PCL?
- What are the options for countries that do not qualify for the PCL?
- What is the Global Stabilization Mechanism?
Early last year, during the depths of the global crisis, the IMF took landmark steps to reform its lending framework, including by introducing the Flexible Credit Line (FCL). Subsequent experience during the crisis has further underscored the need for effective global financial safety nets to help protect countries with sound policies from volatility and spillovers. Strengthened instruments to prevent crises and mitigate contagion in systemic events will contribute to the IMF’s mandate to secure global stability and will complement the IMF’s traditional crisis-resolution role. This enhanced lending toolkit—which broadens the availability of crisis prevention credit lines to members with sound policies—will enable the Fund to respond even more effectively to its members’ needs.
The FCL has been refined in response to suggestions from our members and building on the successful experiences with Colombia, Mexico, and Poland. The predictability of the FCL was increased by doubling the duration of the credit line (i.e., two-year arrangements with a review after twelve months are now allowed; one-year arrangements remain available, but no longer require a six-month interim review to preserve access to the credit line).
So far, the FCL has had an implicit cap on access to IMF resources of 1000 percent of quota. In order to increase flexibility by directly linking requests for access to a country’s potential or actual financing needs, this implicit access cap has been removed.
Concurrently, decisions have also been taken to strengthen procedures by requiring early Executive Board involvement in assessing the contemplated level of access and its impact on the IMF’s liquidity position.
These changes will increase the attractiveness of the FCL to very strong performing countries, thus contributing to a more effective global financial safety net.
No, the high qualification standard for the FCL remains unchanged. The FCL is still designed to be used only by countries that have very strong fundamentals, policies, and institutional frameworks.
The PCL is a dedicated instrument for countries that have sound policies but, facing moderate vulnerabilities, may not meet the high bar set by the FCL’s qualification criteria.
As a key tool for crisis prevention, the PCL is intended to provide positive market signals about members’ policies and track records through the qualification assessment. Akin to the FCL, the PCL requires an ex ante assessment of qualification, which helps signal policy strength while identifying the moderate vulnerabilities on which to focus ex post policy conditionality under the credit line.
The PCL facility has more advantages as a crisis prevention tool compared to using a precautionary SBA, which may be interpreted as requiring larger policy adjustments. The PCL, thus, provides an additional tool for sound performers that may not qualify for the FCL—filling the gap between the SBA and the FCL—and broadens the Fund’s ability to address the precautionary financing needs of members with moderate vulnerabilities, while preserving adequate safeguards.
The amounts a country could draw if needed under a PCL arrangement can be frontloaded— up to 500 percent of IMF quota may be available upon approval of a PCL arrangement, with up to a total of 1000 percent of quota becoming available after twelve months—in contrast to FCL arrangements, which do not have such caps.
All countries, irrespective of income levels, could request and benefit from using the PCL. The IMF does not engage in pre-qualification of countries; a confidential assessment is made only once a request is received from the member. The availability of this new instrument allows the IMF to meet the needs of a broader set of countries that have sound fundamentals and policies, but which still have moderate vulnerabilities (e.g., stemming from a currency peg or high dollarization; or else, from the need to bring down public debt). Countries that tap this new instrument would put in place a focused policy plan to address the remaining vulnerabilities, while signalling that their performance is solid enough to qualify for the PCL.
Qualification aims to establish that, based on their track records and policy frameworks, there is sufficient confidence that countries requesting a PCL will adapt necessary economic policies and undertake appropriate measures to reduce their remaining vulnerabilities without extensive conditionality and intensive monitoring.
At the heart of this qualification process is an assessment—conducted by IMF staff and Board—that the country does not have an actual balance of payments need at the time of the approval of the arrangement, and that the country (i) has sound economic fundamentals and policy frameworks; (ii) is implementing – and has a track record of implementing – sound policies; and (iii) remains committed to maintaining such policies in the future.
A country qualifying for a PCL arrangement is expected to perform strongly in most of the following areas and not to underperform in any of them: (i) external position and market access; (ii) fiscal policy; (iii) monetary policy; (iv) financial sector soundness and supervision; and (v) data adequacy. These five broad areas encompass the nine qualification criteria that are assessed under the FCL (see Table for details).
In addition, under no circumstances would a PCL arrangement be approved for a member facing any of the following circumstances: (i) sustained inability to access international capital markets; (ii) the need to undertake large macroeconomic or structural policy adjustments, unless these were set credibly in train before approval of the arrangement (judgment on whether an adjustment is large would be informed by the member’s own experience and that of similarly-situated members); (iii) a public debt position that is not sustainable with a high probability; or,(iv) widespread bank insolvencies.
Any assessment of qualification involves a degree of judgment. The assessment of qualification will need to take into account the great variety of members’ circumstances and the uncertainties that attend economic projections. Fund surveillance is expected to play a central role in informing qualification assessments, as qualification requires a generally positive assessment of the member’s policies by the Board in the context of the most recent Article IV consultations.
Table. Qualification: Relevant Areas, Criteria, and Indicators
|I.External Position and Market Access||1. Sustainable External Position||Gross external debt/GDP including DSA assessment; debt-stabilizing noninterest current account deficit; net external debt/GDP; short-term gross external debt/GDP; share of bank, nonbank and public sector gross external debt||2. A capital account position dominated by private flows||FDI plus portfolio inflows as a share of total inflows; ratio of private holdings of external debt to gross external debt; and private foreign holdings of domestic debt/total domestic debt||3. A track record of steady sovereign access to international capital markets at favorable terms||EMBI spread; spread between country EMBI and EMBI overall index (using latest observation and averages over previous five years); current yield on benchmark bonds; credit ratings; and last external issuance (details on amount issued/ original yield/maturity)||4. A reserve position that is relatively comfortable when the arrangement is requested on a precautionary basis||Ratio of reserves to: short-term debt (remaining maturity basis); short-term debt (remaining maturity basis) plus current account deficit; imports; and broad money|
|II. Fiscal Policy||5. Sound public finances, including a sustainable public debt position determined by a rigorous and systematic debt sustainability analysis||Public sector debt-to-GDP ratio, and debt sustainability assessment; primary and overall fiscal balance (average for the last 3/5 years); structural fiscal balances and debt-stabilizing primary balance. Assessment of MT plans anchoring fiscal policy outcomes; and overall sound institutional budgetary framework as informed by recent fiscal ROSCs, where available|
|III. Monetary Policy||6. Low and stable inflation, in the context of a sound monetary and exchange rate policy||Recent evolution of core and headline inflation and inflation expectations. Past and announced policy responses to inflationary shocks. Adequacy of monetary policy instruments to conduct monetary policy. Accountability, transparency, and communication regarding policy objectives and policy responses|
|IV. Financial sector soundness and supervision||7. Absence of bank solvency problems that pose an immediate threat of a systemic banking crisis||Capital adequacy and profitability: CAR (overall banking system and individual banks); and return on equity (overall banking system and individual banks).Liquidity and funding risks: liquid assets to total liabilities; liquid assets to short-term liabilities; loan-to-deposit ratio; and share of external funding in total liabilities. Asset quality: Credit to the private sector (real growth rate and share of GDP); and nonperforming loan ratios (overall banking system and individual banks)||8. Effective financial sector supervision||Assessment of supervisory standards and practices based on FSAP findings, where available. Assessment of legal and institutional framework and operational capacity for prompt corrective actions and emergency liquidity assistance|
|V. Data Adequacy||9. Data transparency and integrity||Subscription to the SDSS or a judgment that satisfactory progress is being made toward meeting its requirements. Routine assessments (Article IVs) of data quality and integrity|
The PCL combines qualification (which is a form of ex ante conditionality, as in the FCL) with streamlined ex post policy conditionality focused on reducing any remaining vulnerabilities. Countries requesting a PCL arrangement commit to a focused set of policies underpinned by a quantified macroeconomic framework with indicative targets. While not required, prior actions, structural benchmarks, and semi-annual quantitative performance criteria may also be established where appropriate. These policy commitments will be monitored by the Executive Board through semi-annual reviews.
The cost of using IMF resources under the PCL is the same as that under the Fund’s traditional Stand-By Arrangement (SBA) and the FCL. As long as a PCL arrangement remains precautionary, countries pay only a commitment fee that is refunded if they opt later to draw on the PCL. Commitment fees rise with the scale of financing and are about 27 basis points for lending of 1000 percent of quota.
The cost of drawing under the PCL varies with the scale and duration of financing. Considering the currently low world interest rates, the effective cost of using Fund resources under the PCL for access between 500 and 1000 percent of quota is between 2.1 and 2.7 percentage points (before duration-based surcharges apply). These interest rates exclude a flat 50 basis points service charge, which is applied to all Fund disbursements.
Countries that do not qualify for the PCL are not excluded from receiving precautionary Fund financing. When the necessary policy adjustment to address a country’s vulnerabilities precludes its use of a PCL arrangement, precautionary Fund financing can be obtained through a precautionary Stand-By Arrangement.
The IMF Executive Board had a preliminary discussion of additional reforms to improve the IMF’s ability to deal with systemic shocks, which could affect multiple countries at once. Several options to combat such threats are under consideration, including the so-called Global Stabilization Mechanism (GSM), a predictable mechanism to proactively channel commitments of financial resources to help countries ward off or cope with large-scale liquidity withdrawals and mitigate the propagation of virulent shocks in a systemic event.
The IMF Executive Board indicated its willingness to further discuss options and modalities to address systemic events in the context of a simplified GSM, as a Board-centric process that emphasizes close cooperation with relevant institutions such monetary authorities, regional institutions, and systemic risk bodies, as appropriate; relies on existing Fund instruments and policies; and makes allowance for consensual and simultaneous offers to approve FCL arrangements for multiple systemic qualifying countries.
Staff looks forward to feedback from members and other stakeholders with a view to further refining these ideas.