Workers grade cashews in Mtwara, Tanzania: IMF measures will boost loan resources available to low-income countries (photo: Gideon Mendel/Corbis)
HELP FOR LOW-INCOME COUNTRIES
The IMF’s Executive Board approved the package of measures that will sharply increase the loan resources available to low-income countries. The resources—including from the planned sale of IMF gold—are expected to boost the Fund’s concessional lending to up to $17 billion through 2014, including up to $8 billion over the next two years.
In addition, the IMF announced zero interest payments up to the end of 2011 for all concessional loans to low-income members and lower interest rates on a permanent basis thereafter. A new set of lending instruments will underpin this increased support.
“This is an unprecedented scaling up of IMF support for the poorest countries, in sub-Saharan Africa and all over the world,” said IMF Managing Director Dominique Strauss-Kahn in a statement accompanying the July 29 announcement.
The crisis originated in the advanced economies and has had its most visible impact on the emerging market countries. But a third wave of the crisis has threatened the remarkable economic achievements many low-income countries have made over the past decade.
Crisis hitting hard
An IMF report on the implications of the global financial crisis for low-income countries had warned in March that the global financial crisis has hit poor countries especially hard, posing serious threats to their hard-won gains in boosting economic growth and creating a need for additional foreign financing to mitigate the impact of the crisis.
Also in March, Tanzania President Jakaya Kikwete, Strauss-Kahn, and former UN Secretary-General Kofi Annan convened a conference in Dar es Salaam of government, business, civil society, and opinion leaders to address these issues. The IMF committed at the meeting to increase its support for Africa with more financing, greater flexibility, enhanced policy dialogue, and a further strengthening of Africa’s voice in the Fund.
“We are responding with a historic set of actions in terms of support for the world’s poor. The new resources and new means of delivering them should help prevent millions of people from falling into poverty,” Strauss-Kahn said.
Comprehensive support package
As part of the response, the IMF has already more than doubled its financial assistance to low-income countries. New IMF concessional lending commitments to low-income countries through mid-July 2009 reached $2.9 billion compared with $1.5 billion for the whole of 2008.
The new measures represent a significant additional effort in the coming years. The IMF support package includes:
• Mobilization of additional resources, including from sales of an agreed amount of IMF gold, to boost the Fund’s concessional lending capacity to up to $17 billion through 2014, including up to $8 billion in the first two years. This exceeds the call by the Group of Twenty for $6 billion in new lending over two to three years.
• Interest relief, with zero payments on outstanding IMF concessional loans through end-2011 to help low-income countries cope with the crisis.
• Permanently higher concessionality of Fund financial support—with annual interest rates regularly reviewed so as to preserve a higher level of concessionality than previously.
• Doubling of average loan access limits for low-income countries
• A new set of financial instruments tailored to the diverse needs of low-income countries and better suited to meet the crisis challenges:
1. An Extended Credit Facility (ECF) to provide flexible medium-term support;
2. A Standby Credit Facility to address short-term and precautionary needs; and
3. a Rapid Credit Facility, offering emergency support with limited conditionality
In addition, the IMF’s Executive Board recently backed the Managing Director's proposal for a new general allocation of $250 billion of Special Drawing Rights into the global economy, of which more than $18 billion will help bolster the foreign exchange reserves and relax the financing constraints of low-income countries. If approved by the IMF's Board of Governors, the proposed SDR allocation would take place at the end of August.
Strauss-Kahn said that “All this represents a historic effort by the Fund to help the world’s poor.” He added that there would be greater emphasis in Fund-supported programs on poverty reduction and growth objectives across all its new lending instruments, including targets to safeguard social and other priority spending.
The new lending windows are expected to become effective later this year, when donor countries have given their final consent. At that time, existing concessional arrangements will automatically be converted into ECF arrangements. Existing arrangements under the Exogenous Shocks Facility, however, will remain in effect, and new ones that have already been prepared could still be approved during a three-month window.
More flexible conditionality
The IMF already announced this year a more flexible approach to conditionality in the programs it supports: structural reform conditions have been streamlined for all Fund-supported programs, and additional flexibility has been introduced for structural conditionality in medium-term, low-income country programs. IMF-supported programs have also accommodated larger fiscal deficits during the crisis in most low-income countries.
“Since the crisis hit, we have been listening and responding to our member countries,” said Strauss-Kahn. “The scaling up in the IMF’s support not only will help these low-income countries weather a crisis that is not of their making. Once the crisis has passed, it will also pave the way for a progress in the battle against poverty.”
Increased IMF financial assistance has been coupled with programs that include higher levels of pro-poor spending in a majority of low-income countries. Fund programs have accommodated increased fiscal deficits, and often higher spending, to meet the challenges of the food and fuel and global financial crises. Recent programs have also often contained looser monetary policy and higher inflation targets.
Role of gold sales
Some of the money to boost IMF lending to low-income countries will come from the envisaged sales of IMF gold. The IMF Executive Board will consider a plan for the Fund to sell about 400 metric tons of gold in order to create a new income model for the institution. In order to meet the financing needs of the low-income countries during the global crisis, some of the proceeds of those sales will be used to help provide new subsidy resources for the concessional lending to those countries.
Resources linked to the gold sales will be used to help fund concessional lending to low-income countries in the following ways. First, windfall profits when the gold sales take place can be used for the subsidy resources. Windfall profits would derive from gold sales at an average price in excess of $850 per ounce—that is the price assumed in the new income model as necessary to fund the model. Second, to the extent that the realized windfall profits fall short of the required contribution, the remaining amount will be generated through investment income from the endowment funded by the gold sales.
Comments on this article should be sent to imfsurvey@imf.org
