Public Information Notice: IMF Concludes Discussion on the Review of Contingent Credit Lines,
December 19, 2003

Statement by the Staff: Completion of the Review of the Contingent Credit Lines and Consideration of Some Possible Alternatives,
November 18, 2003

Related to the CCL review:

Executive Board Assessment of Adapting Precautionary Arrangements to Crisis Prevention on June 30,2003,
July 9, 2003

Adapting Precautionary Arrangements to Crisis Prevention,
June 11, 2003

Executive Board Assessment of the Review of Contingent Credit Lines on March 14, 2003,
March 20, 2003

Review of Contingent Credit Lines,
February 11, 2003

The IMF's Contingent Credit Lines -- A Factsheet

Completion of the Review of the Contingent Credit Lines and Consideration of Some Possible Alternatives

Prepared by the Policy Development and Review Department
In consultation with other Departments
Approved by Mark Allen

November 12, 2003

The views expressed in this paper are those of the staff and do not necessarily reflect the views of the Executive Board of the IMF. The Executive Board's assessment is summarized in the Public Information Notice. Some country-specific or market-sensitive information may have been deleted from this paper, as allowed by the IMF's publication policy.

I. Introduction

1. The Contingent Credit Lines (CCL) were established in 1999 to help members with strong policies avoid contagion from capital account crises. The CCL is scheduled to expire on November 30, 2003 without having been used.

2. When the CCL review was initiated earlier this year, most Directors supported the objectives of the CCL, but agreed that as now designed it was unlikely to be effective in meeting its objectives.1 A number of Directors asked staff to explore the possibility of strengthening surveillance and improving existing Fund lending instruments to serve the purposes of the CCL. In response, staff prepared a paper on adapting precautionary arrangements for crisis prevention that was discussed by the Board on June 30.2 Also, on March 28 and again on August 20 the Board discussed how surveillance could be strengthened.3

3. The current paper proposes to conclude the CCL review. In doing so, it aims to meet the continued desire of many members for further consideration of ways to achieve some of the objectives of the CCL before it expires, as most recently expressed in the IMFC Communiqué.4 One option (Option 1) would be to extend the CCL for a short period of time while the Board considers modifications to the CCL itself. A range of options along the lines of those discussed by the Board in March 2003 (Box 1) could be reconsidered. In view of the discussion at that time and given the 85 percent majority required to extend the CCL, however, staff sees little promise that a structure can be agreed for the CCL that would both encourage its use and provide adequate safeguards to the Fund.

4. This paper focuses on three additional options. While these options would not fully achieve the objectives of the CCL—something that can probably only be done by modifying the CCL itself —they would go some distance towards this end, help to reduce the impact of eliminating the CCL, or both. The three options are not necessarily mutually exclusive.

  • Option 2—adopt a policy statement explaining that the Fund has considerable flexibility under existing facilities to provide rapid financial support for countries with strong policies that are facing balance of payments pressures;

  • Option 3—reconsider some modifications to precautionary arrangements that would make them more useful in crisis prevention, including in providing the member with significant insurance.

  • Option 4—adopt a new instrument tentatively called Enhanced Monitoring Policy that combines a more intensive monitoring process with access to Fund resources if a balance of payments need arises.

Box 1. Contingent Credit Lines

The CCL was established in May 1999 to provide members with strong economic policies with a precautionary line of defense against capital account problems that might arise from contagion.

The CCL has not been used. The main factors behind its lack of use relate to the fear that a request for a CCL could be viewed as a sign of weakness rather than strength, the risk of a negative signal from ending a CCL or from losing eligibility at a future date, and uncertainty whether the provision of Fund resources would be sufficiently automatic in the event of need. Also, many potentially qualifying countries have reduced their vulnerability to shocks through reserve accumulation, the adoption of flexible exchange rates, and other reforms, reducing the demand for a CCL. More generally, financial contagion is now seen as less of a threat. At the same time, by setting standards for strong economic policies, the CCL may have helped some members to adopt sounder policies, even without its having been used.

The March 2003 staff paper for the Review of the CCL proposed options for the CCL addressing some of the above concerns.1/ Option 1 included: (i) more transparent and objective eligibility criteria; (ii) agreement on and publication of a Board-endorsed list of qualifying countries; (iii) more automatic access to resources under the CCL; (iv) elimination of the provision that the need arise from financial contagion; and (v) an increase in the attractiveness of the terms and conditions of CCL access. Option 2 included all the elements of Option 1, except for the published list of prequalified countries, which risked putting the Fund in the role of a credit rating agency. Rather, Article IV consultations for likely candidates would include an assessment against the published eligibility criteria, but qualification would be formally established by the Board only at the time of a CCL request. The Board assessment would emphasize the policy areas that need to be strengthened to meet the eligibility criteria and provide the member greater confidence as to how the Board would respond to a request.

While there was broad support in the Board's discussion for the objectives of the CCL, many Directors, however, believed that it would not be desirable to revise the CCL along the lines of either of the preceding options. These Directors felt that there is lack of demand for the CCL, and that it would not be possible to modify the facility to encourage its use while providing the Fund with the necessary safeguards. They, therefore, preferred to let the CCL expire in November 2003. A number of other Directors preferred not to allow the facility to expire before viable alternatives were put in place.

At the time of the discussion, it was clear that the 85 percent majority required to extend the CCL beyond its sunset on November 30, 2003 did not then exist, and it was agreed that the staff would explore the possibility of strengthening surveillance and improving existing Fund lending instruments to make them more effective in crisis prevention and to strengthen the Fund's capacity to respond quickly to the needs of members with strong policies.
1/ "Review of Contingent Credit Lines" (SM/03/64, 2/12/2003); and the Summing Up by the Acting Chair (BUFF/03/38, 3/20/2003).

Option 2—Adopt a statement on the flexibility under existing Fund facilities

5. To help limit the concerns that could be raised about the Fund's capacity to help member countries suffering from contagion after the expiration of the CCL, the Fund could adopt a policy statement re-affirming that the Fund already has substantial flexibility and capacity to provide rapid financial support for its members. This flexibility and capacity is already fairly well known and accepted, and is no doubt one reason why the CCL has not been used. Nonetheless, a statement could be useful to dispel whatever concerns may exist, especially if it could:

  • Explain that the Fund stands ready to move quickly to approve the use of Fund resources and to adjust the level of access and the phasing of access to the member's need when conditions so require and permit.

  • Point to the Fund's record in helping members quickly and flexibly when needed. A case in point is Korea's 1997 stand-by arrangement, where there was an extremely short period between the realization that there was an acute problem in the second half of November 1997 to Board approval of the arrangement on December 4.5 That arrangement initially also featured bi-weekly reviews to allow rapid purchases to be combined with Board scrutiny. Similarly, the Fund moved very fast in providing assistance in other cases of acute financial distress, including in the other arrangements during the Asian crisis, in Latin America, Russia, and Turkey.

  • Point out that recent innovations in the financial architecture, improvements in market differentiation across different borrowers, and reduced vulnerability in a number of emerging market countries have to some extent reduced the need for CCLs by reducing contagion risks.

  • Emphasize that, in addition to its lending operations, the Fund promotes sound policies through its surveillance and technical assistance operations.

Option 3—Adapting precautionary arrangements

6. In June 2003, the staff proposed a set of possible modifications to precautionary arrangements aimed at making them more useful in crisis prevention and better suited to achieve some of the objectives of the CCL (Box 2). In the discussion, Directors recognized that precautionary arrangements have generally worked well, but there was not then broad support for the proposals to clarify the flexibility to use exceptional access in a precautionary setting, including through the SRF. Brazil's planned request for an extension and augmentation of its stand-by arrangement, however, raises the question about whether there is a need to reopen the discussion on a policy for the use of exceptional access in a precautionary setting (Box 3).

Box 2. Adapting Precautionary Arrangements to Crisis Prevention

On June 30, 2003, the Executive Board discussed options to adapt precautionary arrangements to help effectively in crisis prevention and in achieving some of the objectives of the CCL. The staff paper proposed1/: (i) clarifying the flexibility to use exceptional access, perhaps at levels similar to the CCL (300-500 percent of quota); (ii) adopting a phasing pattern similar to the CCL, with a large initial purchase that would remain fixed so long as the arrangement remained precautionary; (iii) modifications to make drawing rights more continuous, addressing the blackout period (when data on the performance criteria from the most recent test date are missing) that exists in all arrangements, while maintaining adequate safeguards to the Fund; (iv) for those members whose existing policy frameworks are sufficiently strong, approval of a precautionary arrangement may not require additional adjustment beyond their existing policy baseline; and (v) modifying the SRF decision and the policy on exceptional access to extend them both to situations where an exceptional balance of payments need was potential rather than actual.

While there was not broad support for a change in existing policies, it was agreed that the recently adopted criteria and procedures for exceptional access would apply to all arrangements. Many Directors were of the view that to provide a meaningful impact on market confidence where capital flows are significant, precautionary arrangements for crisis prevention are likely to need the flexibility proposed in the staff paper. However, many other Directors held the view that this might unduly encourage the use of exceptional access, and could create moral hazard problems. These Directors maintained that the Fund's signaling of its support of a member's good policies is likely to have a greater impact on market confidence than the size of precautionary arrangements.

On phasing, many Directors considered that a pattern more similar to that of the CCL would better suit precautionary arrangements for crisis prevention, and that the size of the first purchase would need to be significant to be an effective crisis deterrent. Many other Directors, however, did not see the need for a change in the normal policies on phasing, and pointed out that committing to a large first purchase entails risks, and that the Fund has sufficient flexibility to front-load or augment access as needed under appropriate circumstances.

Furthermore, many Directors were in favor of dealing with the blackout period by extending drawing rights to dates following test dates when new data became due. However, many other Directors cautioned that this would reduce safeguards for Fund resources to an unacceptable degree. Some Directors expressed interest in an approach that would provide for greater use of activation reviews, although other Directors felt that this would not provide for adequate assurances that financing would be available should a need arise. There was little interest among Directors for an approach based on high-frequency performance indicators.
1/ "Adapting Precautionary Arrangements to Crisis Prevention" (SM/03/207, 6/11/2003), and the Summing Up by the Acting Chair (BUFF/03/112; 7/9/2003).

7. The request by Brazil highlights the potential for use of precautionary arrangements with exceptional access for countries with vulnerability to balance of payments pressures but no immediate need. In Brazil's case, the precautionary arrangement is well suited to a phased exit from the use of exceptional Fund support. In such a context where the member has recently made use of exceptional access under a Fund arrangement, a substantial precautionary cushion may be justified, and the conditionality and monitoring inherent in an upper credit tranche Fund arrangement would provide additional safeguards for the Fund. A final stage in the process of moving toward a normal surveillance relationship would be post program monitoring.

8. In this light, the staff sees a case to continue the discussion on possible modifications proposed in the staff paper. Specifically, the Board could consider the following modifications, which could be developed further if there is interest:

  • Make explicit the circumstances when exceptional access could be used in precautionary settings. This could follow the exception for the case of Brazil reflecting the potential for balance of payments vulnerability in the specific circumstances where the member expects to exit from use of Fund resources.

  • Alternatively, define a somewhat broader set of circumstances for the use of exceptional access in a precautionary setting, since members that have not made exceptional use of Fund resources may face the same vulnerability as Brazil. Such access might be based on clear evidence that debt would remain sustainable even if the member needed to draw, the strength and credibility of the policy framework, and on a clear vulnerability to capital account pressures of a size that would justify exceptional access. A broader definition would also allow its use by members with strong policies which do not have a Fund arrangement (including those that would be eligible for the CCL).

  • Clarify the application of the first criterion when the need is potential rather than actual. (The first criterion states that the member is experiencing exceptional balance of payments pressures on the capital account resulting in a need for Fund financing that cannot be met within the normal limits.) One way would be to modify the criterion to make it explicit that it applies also when the need is potential. Alternatively, the Board could clarify that in a precautionary setting the criterion would only be expected to apply at the time the drawing were made (i.e., when the need becomes actual).

  • Modify the SRF to allow its use in a precautionary setting when the potential need relates to vulnerability to a capital account shock. Since the SRF charges are higher than those of normal market borrowing, this would help discourage members from using exceptional access longer than necessary.

  • Allow precautionary arrangements to include an activation tranche of fixed size and large enough to be useful if a shock should emerge.6 The phasing and conditionality associated with remaining purchases under the arrangement would only be agreed after the activation purchase was drawn.

Box 3. Exceptional Access in a Precautionary Setting-Brazil

Brazil has indicated that it will request an extension of its stand-by arrangement and an augmentation that falls under the exceptional access policy, while indicating its intention not to draw. The request is part of Brazil's exit strategy from Fund support. The arrangement would underpin continued strong policies and communicate a signal of Fund endorsement. After the smooth political transition and successful implementation of its Fund-supported program since September 2002, and with the improvement in market conditions more generally, Brazil's macroeconomic situation has improved rapidly in 2003. At the same time, the country remains vulnerable to changes in market perception and other shocks. The availability of a precautionary financial cushion provides a degree of insurance against possible shocks.

The use of exceptional access in a precautionary setting fits awkwardly within the exceptional access policies agreed over the last two years. While the Board has agreed that the four criteria for exceptional access would apply in all cases, the staff and a number of Directors were of the view that these criteria would need to be adapted to fit the specific circumstances of members with precautionary arrangements.1/ In particular, the first criterion-relating to existing exceptional balance of payments pressures on the capital account that cannot be met with normal access-is not immediately consistent in a precautionary situation. In the case of Brazil, while recognizing that the first exceptional access would not be met, the proposed extension is based on making an exception in light of Brazil's balance of payments situation and as it proceeds toward an exit from exceptional use of Fund resources. 2/
1/ "Adapting Precautionary Arrangements to Crisis Prevention" (SM/03/207, 6/11/03), and Summing Up by the Acting Chair (BUFF/03/112; 7/9/2003).
2/ The third criterion on the expectation of market re-entry was not applicable given that Brazil already has market access.

  • Make the activation purchase subject to a review to ensure adequate safeguards to the Fund. This would remove the current incentive to draw preemptively ahead of a blackout period. The activation review could be limited in scope so long as the program was considered on track before the balance of payments pressures intensified, and absent clear evidence that these pressures were self-induced.7

9. As an alternative approach, the Board could consider the possibility of keeping access within normal limits at the outset of the precautionary arrangement, but with an explicit mention by the Fund of its readiness to augment the arrangement, possibly on SRF terms, should a need arise. Such an approach would help to address concerns about Fund liquidity, moral hazard, and safeguards. The drawback is that it would offer little beyond what is already implicitly available. Members vulnerable to capital account shocks may not see sufficient reason to request such an arrangement when the Fund stands ready to approve an arrangement at short notice.

Option 4—Establish an "Enhanced Monitoring Policy"

10. A fourth option that could be considered is tentatively called the Enhanced Monitoring Policy (EMP). It would combine close and target-based monitoring with availability of Fund financing if a need should arise. While similar in some respects to the structure of the CCL, the EMP would not have the demanding prequalification or large access that led to problems with the CCL. The EMP would be intended to support close consultation between the Fund and the member, to provide a signal of Fund endorsement for the member's policies with a (limited) financial backstop, while reducing the negative signal some members perceive with Fund arrangements. Unlike the other options discussed in this paper, the financing provided under the EMP would be in the form of approval of an outright purchase and would not necessitate the approval of an arrangement. The absence of an arrangement helps distinguish the EMP from other traditional forms of financing, and it would also obviate the need for the member to pay a commitment fee.8

11. The EMP would provide for Fund financing to qualifying members in the form of a single purchase within a range of perhaps 30 to 50 percent of quota. The qualification criteria would be met if, at the time of request for a purchase: (i) the member is experiencing a balance of payments need at least as great as the amount requested and (ii) the member is successfully implementing an economic reform program, endorsed by the Fund at the outset of the EMP, that effectively meets the standards of upper credit tranche conditionality. At the time of endorsement, a specific access amount within the 30-50 range would be agreed based on the member's potential balance of payments need. The policy would provide that implementation of this economic program would be assessed through periodic monitoring, which would include quarterly internal staff assessments and semi-annual Board reviews. Should any deviations from the economic targets prove substantive, they could be brought to the attention of the Board, either at the time of these scheduled reviews or earlier if warranted. A member would not qualify to make a purchase unless the most recent review had been completed, or agreed corrective steps taken. While there would be a presumption that the Board would approve a request made by a qualifying member, a separate assessment—albeit a more abbreviated one—would still be required at the time of approval.

12. The qualification requirements for an EMP are therefore less demanding than under the CCL, with its stringent pre-qualification criteria and the policy would be available in a broader range of circumstances and for a larger set of members than the CCL.9 Successful completion of a previous Fund-supported program could help establish a track record of strong policies prior to an EMP. Indeed, like precautionary arrangements, the EMP could be particularly attractive for members that are exiting from a Fund-supported program or a series of such programs but are concerned about remaining vulnerabilities and therefore still would be helped by an external mechanism for signaling strong policies.

13. Assessments of performance would be more frequent and intensive than those provided by the normal Article IV process, but still less intensive than those provided under an upper credit tranche arrangement. A member requesting an EMP would formulate a quantified macroeconomic framework that effectively meets the standards of upper credit tranche conditionality (including with respect to debt sustainability). In many cases, the framework would also include necessary structural measures. The policy framework would be sufficiently detailed that a set of quarterly benchmarks can be derived and presented to the Board at the time of the member's request. These benchmarks would not constitute performance criteria (as there would be no commitment of resources), but would enable the authorities, the Fund, and the public to monitor progress in policy implementation, thereby facilitating a quick Fund response in the event of a request for a purchase, or triggering consultations in the event of serious deviations prior to a request for a purchase.

14. If a balance of payments need emerged, the member could request the purchase under the EMP. Board approval of this request would be based on the member's record in implementing its program. If the member were performing within the parameters of its macroeconomic program at the time it requested the activation purchase, and if its policies were judged to be adequate to the challenges then facing the member, the presumption would be that the activation purchase would be made available immediately.10 If those conditions did not apply, then the Fund and the member could reassess the policies and agree on corrective policy measures before the decision to release the drawing. As with the CCL, further purchases would be made in the context of a conventional stand-by arrangement, with access, phasing, and conditionality specified at the time of the activation or post-activation review.

15. Drawings under the EMP would be within the credit tranches, and thus subject to the access limits of 100 percent of quota annually and 300 percent of quota cumulatively. Repurchase maturities and charges would be on credit tranche terms. Purchases after the activation purchase could be made on SRF terms if these were appropriate in the circumstances.

16. Since signaling would be a key purpose of these arrangements, it is important that the authorities' program and associated staff reports be published. The standards of presumed publication for Fund-supported program documentation would apply.

Discussion of the Enhanced Monitoring Policy

17. As mentioned, an EMP would be available to members with generally sound balance of payments positions and strong policy frameworks in place. For such members, an EMP would provide an unambiguous signal of Fund endorsement. It would also provide some financial insurance, although less than under the CCL. The stigma some members find associated with Fund arrangements might be lessened, since policy implementation would not be subject to performance criteria or the standard structure of an arrangement. Moreover, there would be no need to pay a commitment fee.

18. The risks to the Fund would be mitigated through the qualification process, and the assessment made at the time of a request for a purchase. Further, access would be contained within the limits. The approval process would need to give adequate assurance that resources were being made available to a member that was in the process of solving its problems. An EMP would not contain all the CCL's high thresholds, nor a precautionary arrangement's ongoing conditionality.

19. The EMP has some features in common with the CCL, but its objectives, and the members that might find it useful, would be somewhat different from those of the CCL. The EMP shares the CCL's pattern of phasing and conditionality. However, it lacks the CCL's strict pre-qualification regime and would involve lower access. Also, it would not be tailored for any particular type of balance of payments need and would therefore be available in a larger set of circumstances and for a larger group of members.

20. EMPs would be closely related to precautionary arrangements and might well appeal to a similar group of countries. The EMP and precautionary arrangements also complement each other. The EMP could be particularly attractive to members that wish to avoid subjecting their performance to performance criteria and Fund arrangements more generally (including the need for a commitment fee). Other members might prefer a precautionary arrangement because of the extra discipline and credibility provided by formal performance criteria. The choice between an EMP and a precautionary arrangement would involve judgment on the part of the member and the Fund. One approach would be to try to define pre-qualification criteria for the EMP, but this begins to raise issues which were difficult to solve in the CCL context. Alternatively, so long as there are adequate safeguards to Fund resources, staff does not consider it necessary to specify the situations in which each instrument might be used. The EMP would increase the options available to the members, accommodating different preferences with respect to (among other things) conditionality and automaticity of access.

II. Issues for Discussion

21. This paper has presented four options to deal with the scheduled expiration of the CCL on November 30, 2003. The options for change are intended to address some of the objectives of the CCL in a way that would be more likely to be useful to the Fund's members. At the same time, it is recognized that none of these options would completely replicate the CCL in terms of the objectives or the group of likely users.

22. Directors may wish to express their views on the options presented in this paper, and in particular comment on the following questions:

  • In the context of concluding the CCL review, do Directors wish to extend the CCL beyond its scheduled expiration on November 30, 2003 (Option 1)?

  • Do Directors see value in adopting a statement on the flexibility under existing Fund facilities, in the event the CCL expires (Option 2)?

  • Do Directors wish to consider more explicitly the circumstances when exceptional access would be appropriate in precautionary settings?

  • If so, do Directors favor a narrow circumstance test based on support of a member with a strong policy record as it pursues a strategy of exiting from the use of Fund resources? Or, would Directors consider that exceptional access in precautionary settings can be appropriate also in other circumstances in support of strong and credible policy frameworks so long as the four exceptional access criteria are met?

  • Do Directors wish to modify the first exceptional access criterion—that the member is experiencing exceptional balance of payments pressures on the capital account that cannot be met within the normal access limits—to make it more directly applicable in precautionary settings? If so, do directors favor a direct change in the language, or an agreed interpretation of the existing language?

  • Do Directors wish to consider amending the SRF to allow committing SRF resources when the balance of payments need is potential rather than actual?

  • Would Directors want to give further consideration to a new policy along the lines of the Enhanced Monitoring Policy (Option 4)?

1 "Review of Contingent Credit Lines" (SM/03/64, 2/12/2003); and The Acting Chair's Summing Up (BUFF/03/38, 3/20/2003).
2 "Adapting Precautionary Arrangements to Crisis Prevention" (SM/03/207, 6/11/2003) and the Acting Chair's Summing Up (BUFF/03/112, 7/9/03).
3 "Enhancing the Effectiveness of Surveillance-Operational Responses, the Agenda Ahead, and Next Steps", (SM/03/96, 3/14/2003), and the Chairman's Summing Up (SUR/03/38, 04/08/2003), and "Strengthening Surveillance-Further Considerations" (SM/03/249, 7/14/2003) and the Acting Chair's Summing Up (BUFF/03/157, 8/27/2003). In their discussion on March 28 Directors saw a need to build on progress with vulnerability assessments by better calibrating the Fund's policy advice to measures to help members reduce their vulnerability to external shocks. They supported the analytical work underway in this area, in particular on how to cope with temporary disruptions in access to international capital markets or with sudden capital outflows. It was mentioned that staff will further explore the development of a well-defined set of criteria for sound policies to provide a more transparent and objective basis for the Fund's policy advice. Many Directors, however, saw considerable difficulty in developing such criteria without falling into a one-size-fits-all approach, and cautioned against allowing such criteria to transform Article IV consultations into a rating exercise.
4 "Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund" (9/21/2003).
5 The Fund has formal emergency procedures, adopted in 1995 and which allow an arrangement to be brought to the Board in a shorter than usual time frame. See "Summing Up by the Chairman-Emergency Financing Mechanism" (EBM/95/85, 9/12/95).
6 As with the CCL, a small purchase of 5-25 percent of quota (depending on whether the member had drawn its first credit tranche) would need to be made available at the time the arrangement was approved. The availability of such a purchase is a legal requirement to make an arrangement effective.
7 The June staff paper had also considered other options (see Box 2), but there seemed to be little support for these at the Board.
8 A relevant precedent for such a framework is the Systemic Transformation Facility, which contemplated out right purchases being made in support of programs that were not necessarily supported by formal stand-by arrangements.
9 Such a concept could also be adapted to strong PRGF-eligible members. This possibility will be considered in the next staff paper on the Fund's role in low income countries, scheduled for Board discussion in early 2004.
10 The forward- and backward- looking nature of the proposed activation review would be somewhat less automatic than that in a CCL, since an EMP has less demanding eligibility requirements.