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
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 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:
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).
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:
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:
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.