New loan facility will help IMF members fortify defenses against temporary capital account outflows (photo: Jens Norgaard Larsen/Scanpix Danmark)
IMF LENDING
In a press announcement, the IMF said the Short-Term Liquidity Facility (SLF) is designed to help emerging market countries with a track record of sound policies address the fallout from the crisis. The new facility, approved by the IMF's Executive Board on October 29, comes with no conditions attached once a loan has been approved and offers large upfront financing to help countries restore confidence and combat financial contagion.
"Exceptional times call for an exceptional response," said IMF Managing Director Dominique Strauss-Kahn. "The Fund is responding quickly and flexibly to requests for financing. We are offering some countries substantial resources, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position," he said.
Fallout from crisis
Until recently, emerging markets were one of the few bright spots left in a world economy hit by massive deleveraging, failing banks, and corporate profit warnings. But now, the crisis is spreading beyond the advanced economies where it originated, with emerging markets all over the world suffering from the squeeze in global financial markets. The IMF has already reached outline financing agreements with Iceland, Hungary, and Ukraine, and is in advanced talks with several other countries.
The SLF will allow the IMF to help its members at a critical time. "Even countries that have excellent track records of implementing strong macroeconomic policies have been caught up in the global financial market crisis. They need support, and the IMF is ready to give it," Strauss-Kahn said.
"The SLF will support the authorities' efforts to reduce the impact of the crisis. Approval of a request for support under the SLF will help members fortify defenses against temporary capital account outflows, boost confidence and provide needed policy space," he said.
Plugging a gap in IMF's toolkit
Despite the current surge in demand for IMF resources, there is a growing recognition that the Fund's traditional facilities may not be the optimal means of addressing short-term balance of payments pressures in every case.
"While existing Fund loan facilities offer flexibility, they are fundamentally used for countries that require both financing and policy adjustment, and not for countries that despite strong initial macroeconomic positions and policies are facing short-term liquidity pressures. This facility addresses that gap in the Fund's toolkit of financial support," Strauss-Kahn said.
IMF First Deputy Managing Director John Lipsky told an October 29 news conference in Washington that the SLF "is designed to be easy to use and very rapid for those countries where use is appropriate."
The unique features of the SLF will address the needs of emerging market countries more directly than would a traditional IMF stand-by arrangement:
• Purpose. Provide large, upfront, quick-disbursing, short-term financing to help countries with strong policies and a good track record address temporary liquidity problems in capital markets.
• Eligibility. Countries with a good track record of sound policies, access to capital markets and sustainable debt burdens may qualify (the IMF's standard debt sustainability analysis should indicate a high probability that both public and private debt will remain sustainable). Policies should have been assessed very positively by the IMF's most recent country assessment.
• Conditions. Financing is made available without the standard phasing and loan conditions of more traditional IMF arrangements. However, borrowers are expected to certify that they are committed to maintaining strong macroeconomic policies.
• Size of loan. Disbursement of IMF resources can be up to 500 percent of quota, with a three month maturity. Eligible countries are allowed to draw up to three times during a 12-month period.
Responding with all necessary financial force
The IMF's liquidity currently stands at historically high levels. But this could rapidly change as the IMF approves new lending under its more traditional facilities, and if there is wide demand for the SLF. "The IMF will respond with all the necessary financing," Strauss-Kahn said. "We are prepared to use our own resources and to work with others to generate additional resources to make sure that countries have the money they need to restore confidence and maintain stability."
The new facility is part of a wider review of the IMF's financing role in member countries, launched earlier in 2008 to make sure the Fund has the right instruments to meet countries' needs in a world characterized by growing—and increasingly complex—cross-border financial flows.
In September 2008, the IMF revamped its Exogenous Shocks Facility, which is designed to help low-income countries cope with emergencies caused by events beyond their control.
Comments on this article should be sent to imfsurvey@imf.org
