March 21, 2003
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| Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. |
On February 26, 2003, the Executive Board of the International Monetary Fund (IMF) concluded its discussions on access policy in capital account crises and its periodic review of access policies in Stand-By Credit Arrangements and the Extended Fund Facility (EFF).
Background
Increasing integration of global financial markets in the last decade has helped to finance a rapid expansion of investment and economic activity in emerging market countries, but has also exposed these countries to crises caused by rapid reversals in capital flows. The IMF has responded to the challenges posed by modern capital account crises by strengthening its crisis prevention capabilities and, in some cases by supporting member countries' efforts to resolve crises through providing large amounts of financing. Beginning with Mexico (1995), and then during the Asian crisis (1997-98) and since, the IMF has provided financing in amounts that were well above the access limits normally applying to stand-by arrangements and the EFF.1
The IMF undertook a review of access policy in the context of capital account crises to establish a stronger framework for crisis resolution, and to provide member countries and financial markets with greater clarity and predictability, including about the decisions the Fund will take in crisis management. The Executive Board's discussions took place in September 2002 and January/February 2003, on the basis of three staff papers. Summaries of the Executive Board's assessments during these sessions are provided later in this Public Information Notice.
The first paper, "Access Policy in Capital Account Crises," considers the results of economic programs supported by exceptional access to Fund resources and proposes the main elements of the strengthened framework for access policy. A number of proposals for constraints on exceptional access are considered. The paper sets out substantive criteria that would need to be met for exceptional access in capital account crises, including: (i) the existence of exceptional balance of payments pressures; (ii) assurances of a sustainable debt situation based on a thorough debt sustainability analysis; (iii) expectation of renewed access to capital markets; and (iv) strong program design and implementation. The paper sets out a number of stronger procedures for decision making, including elevating the burden of proof in justifying the proposed access level, and taking account of the high risks to the IMF.
The second paper, "Access Policy in Capital Account Crises—Modifications to the Supplemental Reserve Facility (SRF) and Follow-Up Issues Related to Exceptional Access Policy, follows up on the first paper regarding several aspects of the framework. It proposes: (i) procedures for involvement of the Executive Directors before the formal Board meeting in cases where exceptional access is considered; (ii) additional consideration of program financing, including the role of the private sector; and (iii) the use of alternative metrics in gauging the magnitude of the proposed access level. The paper also proposes to extend the maturity of purchases under the SRF by 1 year.2
In the January 2003 discussion, the Executive Board also conducted its regular review of access policy and limits based on a third staff paper: "Review of Access Policy Under the Credit Tranches and the Extended Fund Facility." This paper reviews recent experience in applying the access policies and proposes to maintain the current access limits.
Executive Board Assessment (discussion of September 6, 2002)
Directors welcomed the opportunity to consider elements of a strengthened framework for the policy on exceptional access to the Fund's resources—i.e., access that exceeds the limits under the credit tranches and the EFF. Our discussion today has focused particularly on access policy and crisis resolution in cases where a combination of adjustment and financing is likely to be sufficient to put a country on a stable medium-term path. In some other cases, a restructuring of private claims may be necessary. Our work on ways to strengthen the framework for debt restructurings—including the sovereign debt restructuring mechanism and the contractual approach—and clarifying the lending into arrears policy are separate strands for developing the crisis resolution strategy. Access policy is also closely related to our ongoing discussions on the size of the Fund, and the Twelfth General Review of Quotas, with a number of Directors noting that progress on this issue, including on the distribution of quotas, would help to address some of the concerns about exceptional access.
Directors discussed the exceptional access policy in the context of the Fund's response to the challenges arising from the increasing integration of global financial markets in the last decade. This integration has helped to support a rapid expansion of investment and activity in many emerging market countries, but has also exposed these countries to crises caused by rapid reversals of capital flows. The Fund has responded to the challenges posed by these modern capital account crises by strengthening its crisis prevention capabilities and, in some cases, by helping meet members' unusually large financing needs. Directors agreed that exceptional access will sometimes be necessary if the Fund is to provide meaningful assistance to members facing a capital account crisis, but that the policies on such access need to be strengthened to ensure that it remains exceptional. In this context, some Directors noted that the exceptional circumstances clause may continue to be needed occasionally also for balance of payments problems in the current account.
Our discussion today has been informed by the experience gained in past exceptional access cases, beginning with Mexico's Stand-By Arrangement in 1995. Several of the programs supported by exceptional access have been quite successful in helping the member achieve external viability, resume growth with limited vulnerability, and regain access to private markets, although more slowly than at first expected. In other countries, however, the combination of adjustment and exceptional access in the context of the associated political and external environment was not sufficient to avoid a restructuring of obligations. It was noted, however, that in all cases the borrowing members have remained current on their repayment obligations to the Fund. From a broader perspective, Directors also noted that, while some moral hazard is bound to be present in Fund lending, there is little evidence that the use of exceptional access in general has had large effects on moral hazard by increasing investor or country risk-taking.
Directors agreed that more clearly defined criteria regarding the appropriate use of exceptional access in capital account crises are needed to help shape the expectations of members and markets, provide a benchmark for difficult decisions regarding program design and access, safeguard Fund resources, and ensure uniformity of treatment of members. Directors generally considered that (at a minimum) the following criteria would need to be met to justify exceptional access for members facing a capital account crisis:
(i) 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;
(ii) A rigorous and systematic analysis indicates that there is a high probability that debt will remain sustainable;
(iii) The member has good prospects of regaining access to private capital markets within the time Fund resources would be outstanding, so that the Fund's financing would provide a bridge; and
(iv) The policy program of the member country provides a reasonably strong prospect of success, including not only the member's adjustment plans but also its institutional and political capacity to deliver that adjustment.
In discussing the aforementioned criteria, Directors emphasized in particular the importance of rigorous debt sustainability analyses to support requests for exceptional access. Several Directors saw scope for further strengthening the criteria so as to ensure their strict application. Directors underscored the importance of involving the private sector for program success, and a number of them expressed the view that the member's best efforts to secure private sector involvement in program financing should be an important consideration for justifying exceptional access.
A few Directors suggested further narrowing the definition of capital account crises that could warrant exceptional access by establishing a formal criterion relating to problems of contagion or the potential for systemic effects. Many other Directors, however, considered that such a criterion could create a bias toward higher access for larger members, which could not be reconciled with the principle of uniformity of treatment. Directors recognized that the Fund should be prepared to provide access above the normal limits in cases where the member's problems have regional or systemic implications, when the other criteria are met.
Directors concurred that the member's balance of payments needs remain a key criterion in determining access in individual cases, while recognizing that measurement of need in financial crises is subject to an unusual degree of uncertainty. Stocks of financial claims can be very large, and can potentially translate into a large balance of payments need. In this context, several Directors highlighted the limitations of the gross financing needs variable, which is a commonly reported measure of need in Fund-supported programs.
A number of Directors noted that, in capital account crises, access in percent of quotas has varied widely, partly because, for some members, the quota may not reflect the relative size of the economy and/or their integration into international capital markets. Most Directors considered, nevertheless, that quotas should remain the fundamental metric for access. Many Directors recognized that alternative metrics, such as GDP, exports, gross reserves, and calculated quotas, could provide additional perspectives on the scale of access in individual cases, even though they would not give unequivocal guidance. In this light, a few Directors recommended that further work be done to support assessments of the appropriate scale of access in more detail.
Most Directors agreed that even when the need was large, Fund financing in exceptional access cases had in practice covered only a portion of the gross financing need, with financing from the private sector and from other official sources filling the balance. Directors emphasized that efforts to involve private sector creditors in program financing should be continued, but it was also recognized that concerted or involuntary action by such creditors could be associated with a slow return of confidence and market access. Several Directors encouraged further consideration of the role of private sector involvement in exceptional access cases.
Directors supported strengthening the procedures for decision making on access proposals above the normal access limits to provide additional safeguards and enhance accountability, and the Board agreed to the following measures:
(i) Raising the burden of proof required in program documents as set out in the staff paper. This would include thorough discussion of need and the proposed level of access, a rigorous analysis of debt sustainability, and an assessment of the risks to the Fund arising from the exposure and its effect on liquidity;
(ii) Formalizing requirements regarding early Board consultation on the status of negotiations in exceptional access cases. The modalities of the Board's involvement will be further worked out, building on the practice under which the Board has confidential briefings on the broad strategy of the program and the case for access above normal limits before negotiations are concluded; and
(iii) Requiring an ex post evaluation by the staff of programs supported by exceptional access within a year after the end of the arrangement, with a number of Directors suggesting that the Independent Evaluation Office also consider conducting such evaluations.
Directors also considered the possibility of establishing a presumption of public disclosure of Fund staff reports on programs supported by exceptional access. A majority of the Board held the view that, in particular in these cases, there would be a high premium on increasing public understanding and credibility of the program strategy. Many other Directors, however, were concerned that moving to a presumption of publication of such staff reports might not be easily reconcilable with the need for frank assessments of the risks involved. Directors agreed to return to this issue on the occasion of the next review of the Fund's transparency policy in June 2003.
Directors discussed the possibility of requiring a supermajority of Board votes to approve exceptional access. They generally agreed that such a fundamental change to the governance structure of the Fund—which would necessitate a change in the Articles of Agreement—should not be pursued at this time. A few Directors were in favor of separating Board decisions on exceptional access from the approval of the program. Several Directors noted, however, that the merits of the access proposal could not be considered independently from the program, and cautioned against procedures that could slow the approval process.
Directors discussed the possibility of introducing a presumptive limit on cumulative exceptional access to provide an additional restraint on the use of the Fund's resources. Directors were opposed to the establishment of such a limit, noting that it could not preclude access above this limit without fundamentally constraining the Fund's capacity to respond to crises in its member countries where access above the high limit might be justified. They also pointed to a number of difficult practical hurdles that a limit or norm on exceptional access would raise, in particular, the problem of choosing the right level for a high limit, and the complexity of rules that would need to be defined around a two-tier system of access limits. Furthermore, some Directors were concerned that a presumptive access limit or norm would only be credible to the extent that it was adhered to. Past decisions on high access above the limits considered would make it more difficult to establish credibility.
Turning to prudential considerations regarding exceptional access cases, Directors agreed that more systematic and comprehensive information regarding the member country's capacity to repay the Fund and the Fund's exposure to the member country is needed to underpin judgments about the appropriateness of the proposed access levels in individual cases. In this context, Directors also considered setting a maximum absolute exposure level for a single member above which additional precautionary balances would immediately be accumulated through the burden-sharing mechanism. While a few Directors saw merit in such a proposal, most Directors opposed this idea, as it would raise difficult issues regarding the uniformity of treatment of members in terms of access. They were also concerned that using the burden-sharing mechanism could signal a lack of confidence of the Fund in the member country's economic program and ability to repay the Fund. Some Directors called for an increase in quotas to provide the Fund with adequate resources to deal with the new type of crises.
Directors also had a preliminary discussion of possible changes in the terms and conditions of Fund lending above the limits to affect incentives that apply to exceptional access cases. Most Directors agreed that the scope for increasing the rate of charge to discourage exceptional access appears limited. A number of Directors were of the view that, since some capital account crises are unlikely to reverse as quickly as foreseen in the Supplemental Reserve Facility, lending at somewhat longer maturities should be available if the Fund is to contribute effectively in some of these cases. Other Directors, however, cautioned that such proposals could blur the distinction between SRF and Stand-By Arrangement resources, and would warrant a fuller review. Many Directors also expressed interest in further considering the establishment of a presumption that SRF resources would be used when the cumulative access exceeds the limits under the credit tranches and the EFF. A few Directors also noted the importance of the policy on early repurchases in this context.
The current discussion has been fruitful in developing consensus in a number of areas. Staff will prepare a follow-up paper before the end of the year on how best to put this new framework in place, including procedures for early Board consultation in cases where exceptional access is considered, and issues related to private sector involvement in these cases. This paper will also include further consideration of the appropriate maturity of Fund lending in capital account crises, and of the related issue of the mix between SRF and Stand-By Arrangement resources. At that discussion, the Board will also conduct the regular review of access policy under the credit tranches and the EFF.
Executive Board Assessment (discussion of February 26, 2003)
Directors welcomed the opportunity to review the recent application of the Fund's access policy, as well as proposals to make operational the Fund's new strengthened framework for exceptional access in capital account crises. Together with the summing up of our discussion on September 6, 2002, this summing up will provide a new framework that will help ensure that exceptional access remains exceptional, while retaining the Fund's flexibility to provide adequate assistance to members facing a capital account crisis. The Board also decided to maintain the current access limits in the credit tranches.
• Access Policy in Capital Account Crises—Modifications to the Supplemental Reserve Facility and Issues Related to Exceptional Access Policy.
Regarding the policy on access in capital account crises, Directors discussed a number of operational aspects of the new framework whose building blocks were endorsed at their discussion on September 6, 2002. As noted at that time, the new framework establishes four substantive criteria guiding decisions on when exceptional access may be appropriate in capital account crises—events characterized by a sharp loss of investor confidence and large and disorderly outflows of capital. Directors stressed that the effectiveness of the exceptional access policy will critically depend on the consistent and rigorous application of these criteria. Directors took note of the further staff papers planned on the capacity of countries to access financial markets after debt restructuring, and on initial experience with the debt sustainability analysis.
The new framework also sets out stronger procedures for decision-making on exceptional access proposals. These procedures include increasing the burden of proof in program documentation, early and more formal Board consultations on program negotiations in exceptional access cases, and, as a rule, ex post evaluation of programs with exceptional access within one year of the end of the arrangement. Directors agreed that these procedures would apply to any exceptional access (i.e., access under any facility that exceeds the limits applying in the credit tranches and the EFF), even when the member is not experiencing a capital account crisis.
Directors saw a more formal process for Executive Board consultation at the early stages of program discussions as helpful for reinforcing careful and systematic decision-making on exceptional access cases. At the same time, however, they recognized the constraints imposed by the special circumstances under which exceptional access programs are negotiated. In particular, these programs are frequently negotiated over a very short time with a backdrop of a worsening crisis, where new information and developments may require substantial changes in the program at very short notice. Directors also agreed that management and staff should have sufficient flexibility and discretion in coming to an agreement in crisis situations without undue delay. The need to move very quickly in some situations was emphasized by several Directors. Recognizing that these constraints will affect different cases differently, Directors agreed on the following policy regarding procedures for early consultation to be followed in all cases involving access above the limits:
Once management decides that new or augmented exceptional access to Fund resources may be appropriate, it will consult with the Board promptly in an informal meeting. Directors will be provided with a concise note that sets out the following as fully as possible: (i) a tentative diagnosis of the problem; (ii) the outlines of the needed policy measures; (iii) the basis for a judgment that exceptional access may be necessary and appropriate, with a preliminary evaluation of the four substantive criteria3 applying in capital account crises, and including a preliminary analysis of external and sovereign debt sustainability; and (iv) the likely timetable for discussions. Staff will circulate this note to Executive Directors at least two hours prior to the informal session, to give Directors some time to absorb the material before meeting. This meeting will provide the basis for consultation with capitals and the issues that emerge would be addressed in a further informal session.
Additional consultations with Executive Directors will normally be expected to occur between the initial informal meeting and the Board's consideration of the staff report. The briefings will aim to keep the Board abreast of program-financing parameters, including assumed rollover rates, economic developments, progress in negotiations, any substantial changes in understandings, and any changes to the initially envisaged timetable for Board consultation. The staff will provide the Board with a separate report evaluating the case for exceptional access based on further consideration of the four substantive criteria, including debt sustainability. To the extent that program parameters are not yet agreed, this report will clearly be tentative. Where time permits, this report will be provided to the Board in advance of the circulation of program documents. In all cases, this report will be included in the program documents.
Management will consult with the Board specifically before concluding discussions on a program and before any public statement on a proposed level of access.
Strict confidentiality will need to be maintained, and public statements by members, staff and management should take special care not to prejudge the Board's exercise of its responsibility to take the final decision.
As the Board agreed in September, the staff report for an arrangement proposing exceptional access will include: a consideration of each of the four substantive criteria for exceptional access in capital account crises (including a rigorous analysis of debt sustainability); a thorough discussion of need and the proposed level of access; an assessment of the risks to the Fund arising from the exposure and its effect on liquidity; and systematic and comprehensive information on the member's capacity to repay the Fund.
Directors highlighted the unusual uncertainty and risk that is often associated with the projections of private capital flows and the difficulty this poses for program design. In such cases, it is especially important to be explicit and cautious about the assumptions underlying the projections for financing and their sensitivity to shocks. A number of Directors requested that further information be provided to the Board discussing private sector involvement in program financing. There will normally be a range of potentially applicable approaches for sustaining private sector financial flows, including voluntary efforts to overcome collective action problems among creditors, that could help meet the objectives of the program. Directors agreed that discussions of these issues would be expected to be part of the Board consultations for exceptional access cases set out above.
Directors also agreed to include in the program documentation a standard table that would gauge proposed access levels against a broader set of metrics, and complement quota based metrics. While Fund access would not be constrained to, or evaluated against, any of the indicators proposed in the paper, these indicators would provide useful additional perspective and help ensure uniformity of treatment among members. Directors agreed that a table along the lines proposed in the staff paper should be included in all requests for exceptional access with the possible inclusion of additional indicators as might be needed.
Directors considered possible changes to the maturity of repurchases under the Supplemental Reserve Facility , as well as the appropriate mix of Fund resources in capital account crises. They observed that the experience with capital account crises has shown a greater variance in the duration of countries' balance of payments need than originally expected. Most Directors expressed concern about the increased use of so-called "blends" of credit tranche and SRF resources. The Board has decided to lengthen the maturity of SRF expectations by one year and obligations by six months, and to strengthen the presumption that exceptional access in capital account crises should be provided under the SRF. A number of Directors stressed that there should be a strong presumption to use only SRF resources in all cases where exceptional access is used in capital account crises.
Directors also had an initial exchange of views about the implementation of the Fund's access policy in situations where a debt restructuring is needed. They stressed that difficult and well-informed assessments will be required to deal with financial challenges and needs that are fundamentally different from those of countries with a sustainable debt burden. In particular, the substantive criteria for exceptional access in capital account crises will generally not be met and the conditions for the use of the SRF will not apply. Directors generally agreed that access in such cases would normally be expected to be within the access limits, although there could be rare circumstances warranting exceptional access. A few Directors were hesitant to allow for any possibility of exceptional access in debt restructuring cases.
Directors agreed that the consistent implementation of the new framework for access policy will be an important contribution to the Fund's ongoing efforts to heighten the degree of clarity and predictability for both members and markets about the Fund's response in crisis resolution. They welcomed the proposal for a stock taking on the operation of this framework after one year.
• Review of Access Policy in the Credit Tranches and under the Extended Fund Facility
Directors decided to retain the current access limits applying in the credit tranches and Extended Fund Facility—100 percent of quota annually, and 300 percent of quota cumulatively. They also agreed to shift to a two-yearly cycle for the reviews of access policy, and to broaden the review to include access under the Poverty Reduction and Growth Facility, with the next review to take place by end-December 2004. A number of Directors cautioned, however, that, in view of the downside risks in the world economic outlook, the Fund's access policy would need to be monitored closely in the period ahead. Directors welcomed, in this regard, the assurance that an earlier review of access policy can take place, should this prove necessary. In addition, staff will provide a factual report on access developments by end-December 2003.
