IMF Finances

Public Information Notice: IMF Board Completes Review of Fund Financial Facilities
November 30, 2000

Review of Fund Facilities -- Decisions
November 28, 2000

Statement by the Staff on Review of Fund Facilities Proposed Decisions and Implementations Guidelines IMF Executive Board Meeting
November 17, 2000

Review of Fund Facilities Proposed Decisions and Implementation Guidelines
November 2, 2000

Where Does the IMF Get its Money? -- A Factsheet

Public Information Notice (PIN) No. 00/79: IMF Board Agrees on Changes to Fund Financial Facilities - September 18, 2000

Glossary of Selected Financial Terms

Summing Up by the Acting Chairman of the IMF Executive Board
Contingent Credit Lines

IMF Executive Board Meeting
November 17, 2000

Directors have given extensive consideration to a role for the Fund in providing members with contingent credit lines (CCLs), both when the CCL was established in April of last year and on the occasion of the review of the CCL this year. The CCL is conceived essentially as an important instrument of crisis prevention, creating further incentives for the adoption of strong policies and adherence to internationally accepted standards, encouraging the constructive involvement of the private sector, and thereby reducing the risks of contagion. There are a number of elements in the CCL decision, as revised in November 2000, which require some elaboration in order to express the Board's understanding as to how they will operate.

Foremost among these elements are the four eligibility criteria referred to in paragraph 14 of the decision. As is clear from the decision, and as Directors have agreed, for a member to be eligible for the CCL, it must satisfy all four of these criteria. Directors have also agreed, however, that in assessing whether an individual criterion is satisfied, the Executive Board would take into account a range of factors, and would exercise judgment as to whether a sufficient critical mass of factors relevant to the criterion is in evidence.

Let me start with the first criterion. It is agreed that, for a member to be eligible for the CCL, the member's policies should be such that, absent a future balance of payments problem of the type for which CCL resources are intended, the member would not otherwise be expected to need to use Fund resources. This criterion would not exclude members with arrangements in place where members are treating these arrangements as precautionary or where drawings are outstanding but the need for further drawings under the arrangements is judged to have ceased as confirmed by the member.

As indicated by the second criterion, the member's policies should "have received a positive assessment from the Fund at its last Article IV consultation" and its policies should have "continued to be assessed favorably by the Fund thereafter based on economic indicators reflecting domestic stability and external sustainability, and taking into account the extent of the member's adherence to relevant internationally accepted standards." It is understood that by a "positive assessment," it is meant that the Board should have expressed its broad satisfaction with the member's policy stance and prospects, although this does not necessarily mean an assessment entirely devoid of recommendations for changes in policy. But it would be important that the Board should be of the view that the member's policies themselves would not expose it to significant risk of balance of payments pressure, and this should be true both of the member's policies in the recent past and of the policies it plans to implement in the future. This broadly satisfactory assessment should have been expressed at the time of the most recent Article IV consultation, and reaffirmed, with respect to the policies the member has been implementing and the policy plans it has framed since the Article IV consultation, at the time of the commitment of CCL resources. If the member has not already done so, the Fund would strongly encourage a member that contemplates use of the CCL to publish its Article IV staff report.

Directors are agreed that, in judging eligibility under this criterion, the Board should take into account the member's progress in adhering to relevant internationally accepted standards. The member would have subscribed to the Special Data Dissemination Standard and be judged to be making satisfactory progress toward meeting its requirements. In addition, the Board would take into account the member's adherence, or progress toward adherence, to the Basle Core Principles for Banking Supervision, and the codes of transparency in the areas of fiscal and monetary and financial policies. Other standards, some of which are still under development, could also be added as they are developed, so long as the Fund is able to assess adherence, possibly taking into account the views of other organizations. As standards are developed and experience is gained, the question of requiring adherence to certain standards could be reviewed.

The third criterion provides that a member would be eligible if it is maintaining constructive relations with its private creditors with a view to facilitating appropriate involvement of the private sector, and has made satisfactory progress in limiting external vulnerability through the management of the level and structure of its external debt. This is a complex area, and many aspects of it remain to be fully worked out. Directors have accepted that a judgmental approach to assessing overall progress in this area will be needed, and they have pointed to a number of factors and considerations that would be relevant to this criterion. For a member to be judged to have constructive relations with private creditors, for example, it would seem essential that the member not have external payments arrears on sovereign debt, nor on private debt as a result of exchange controls. In examining a member's request under the CCL, the Executive Board would take account of market assessments of the country's situation. In addition, a member should have in place, or demonstrate that it is making credible efforts toward putting in place, appropriate arrangements to involve the private sector. These might include, by way of example, (i) contingent private credit lines or similar arrangements, (ii) call options in debt instruments, which would permit the debtor to extend their maturity, (iii) terms and conditions in recent and forthcoming bond contracts that include provision for the adjustment of terms by qualified majorities, collective representation provisions, and sharing clauses, (iv) as they are developed, other debt instruments designed to provide efficient and appropriate insurance against shocks, (v) a framework for debtor-creditor discussions, (vi) effective debt management procedures, and (vii) strong domestic bankruptcy regimes. It has to be recognized that most of these arrangements are not yet in general use, and we will need both to evaluate what countries have achieved in this area relative to changing practices, and be prepared to learn from experience. As experience is gained and instruments are developed, this checklist will need to be adapted and, as in the area of standards, we could consider whether it would be possible to define more concretely a critical mass of steps that should be expected.

In assessing the member's external vulnerability and the management of its external debt profile, the Board will take into account a range of factors or "sustainability checks" including, inter alia, the evolution of the real exchange rate (to establish that this has not moved to an unsustainable level), the level and composition (currency denomination and maturity profile) of public debt (including with reference to derivatives, and with consideration of creditors"put options), the level and composition of external debt (including with reference to derivatives, and with consideration of creditors"put options), the level of gross and net international reserves, the share of short term external debt unmatched by private contingent credit lines or reserves, the net foreign asset position of commercial banks, and the evolution of domestic credit in relation to GDP. To assist the Board's assessment in this respect, the staff and the authorities should work to provide quantified "stress simulations" which will aim to take into account both potential outflows and secured inflows in the event of a crisis. The policies the member has implemented with a view to limiting vulnerability would also be taken into account. The appropriateness of the exchange rate regime will be important in this respect, but other factors will also be relevant, such as the degree to which the member has avoided bias (for instance, in its regulatory and tax system) in favor of short-term borrowing and the existence of a system to monitor private external liabilities.

The final criterion requires that a member should submit for the Board's approval "a satisfactory economic and financial program, including a quantified framework, which the member stands ready to adjust as needed." As is customary in support of a request for access to Fund resources, the member would present to the Board a description of its planned economic policies for the period for which access to CCL resources is approved, including a quarterly quantified framework that will guide its macroeconomic policies, and the structural policies it intends to implement. There would be a strong presumption that this statement of policies would be released to the public. Such policies would be expected to be of sufficient quality and strength that they would meet the standards required of drawings in the upper credit tranches. The quantified framework should be specified in such a way that the staff and the Board would be able to form a rapid assessment of the member's compliance with it and thereby facilitate the rapid release of resources upon the request for activation of the CCL. There would not, however, be a need for performance criteria or quantitative benchmarks, nor for a Technical Memorandum of Understanding or similarly detailed definitions of program targets, as long as the basis on which the authorities compiled and reported data was well understood. And while the initial consideration of the member's eligibility would assess its structural program and the progress expected under that program during the period of commitment of CCL resources, it would also not be necessary for the structural program of a member that has prequalified for the CCL to be specified to the degree of detail that would be entailed by structural benchmarks. Monitoring of the program would involve regular and timely provision of relevant data to the staff and continuous monitoring by the staff of the country's economic situation.

I turn now to the subject of access. While there is no general access limit, it is accepted that, unless warranted by exceptional circumstances and while paying due regard to the liquidity position of the Fund, commitments under the CCL would be expected to be in a range of 300–500 percent of quota.

In its consideration of a member's request for a commitment of the Fund's resources under the CCL, the Executive Board will also consider the potential impact on the Fund's liquidity position and on the level of the Fund's usable and potentially available resources over the period of the requested commitment. The Executive Board will monitor the Fund's liquidity position on a continuing basis paying particular regard to the possible evolution of commitments under the CCL as well as under the Fund's other facilities. The Executive Board will also consider in the light of experience the appropriate method to assess the impact of CCL commitments and possible purchases on the Fund's liquidity position.

CCL resources would be committed under a stand-by arrangement.1 In accordance with the principles on access under arrangements, upon Board approval of an arrangement establishing a contingent credit line, a small purchase of credit tranche resources (typically 5 percent of quota) would be immediately available. Beyond this, activation of the credit line will require a Board review. This approach would also be applied if CCL resources are committed in the context of an existing arrangement (namely an arrangement that the member treats as precautionary).

A member for which a CCL has been approved may, at any time, request access to CCL resources, which would require a special "activation" review by the Board. The Board would expeditiously complete this review, and make available the associated purchase, if it were satisfied that: (i) the member is experiencing exceptional balance of payments difficulties due to a large short-term financing need resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and the member's reserves, and (ii) these difficulties are judged to be largely beyond the member's control and to be primarily from adverse developments in international capital markets consequent upon developments in one or several other countries. In determining whether condition (ii) for the activation review had been met, the Board would verify that the member's own policies had not been a significant cause of the pressures in its balance of payments. Activation would be completed on the presumption that the member remains committed to adjusting policies to deal with any significant economic impact that may follow from contagion, with the member being given the strong benefit of the doubt in this respect. The monitoring arrangements already in place would allow the activation review to be completed rapidly. The amount to be released upon completion of the activation review would be determined and specified at the time of commitment of CCL resources, and would normally amount to one third of the total amount of resources committed under the arrangement.

The amount of the arrangement that is not made available at the activation review will be subject to such phasing and conditionality as the Fund shall determine at the time of a post-activation review. At that time, the Fund and the member would reach understandings on policies to be pursued from that point onward. In light of the nature of the crisis, conditionality for access to the remaining resources would not generally be expected to involve changes in structural policies, although it could involve continuation of those structural measures that had been agreed upon at the time of the initial consideration of the commitment of CCL resources. The post-activation review would normally follow the activation review with some lag, albeit short in most cases; but the member could request simultaneous completion of the activation and post-activation reviews if it so desired, and the Board could agree to such a request if it were satisfied that the member's situation and the Board's familiarity with and assessment of its policies warranted it.

Upon approval of the arrangement committing CCL resources, the Board will schedule a mid-term review to be completed by a specified date if the activation review is not completed before this date. After this date has passed, the mid-term review will need to be completed before a purchase associated with the activation review can be released. At the mid-term review, the Board would satisfy itself that the member was successfully implementing the economic program earlier presented to the Board and had adjusted that program appropriately in response to any changes in circumstances. In appropriate cases, it would be possible to complete the mid-term review on a lapse-of-time basis. Between occasions of formal consideration by the Board, the staff and management would be expected to remain in close consultation with the member, particularly should any untoward developments occur, and would bring the member's situation to the attention of the Board should there be concerns that slippages in the member's policies make it vulnerable to crisis. Such close consultation would help provide a signal to the member if developments affected the likelihood that the Fund would be able to complete the activation review if the relevant circumstances arose.

The CCL is an important initiative for the Fund. It involves several aspects that are new or still under development, and we will need to continue to approach it experimentally, with a view to learning and, if necessary, adapting it. The guidelines formulated in this summing up replace those set out in BUFF/99/56, dated April 24, 1999.

1However, CCL resources could also be committed under an extended arrangement in effect on June 30, 1999.