While the balance of evidence suggests that the IMF has in most cases played a helpful role in supporting growth and reducing poverty in its LIC members, it is also clear that, with over 900 million people worldwide projected to remain on the edge of poverty in 2015, progress in too many cases has been too slow and uneven. Moreover, in the coming years the needs of LICs will continue to change as they integrate into the global economy, as the overall aid architecture evolves, and as technological change creates new opportunities but also new vulnerabilities. This section reviews ongoing discussions on the financing of the IMF’s work in LICs, and considers possible improvements to the framework under which the Fund engages with those countries.
Financing
Demand for concessional financing from the IMF is inherently unpredictable. As we saw from the dramatic increase in lending between 2007 and 2009, unexpected exogenous events can have a major impact on demand for IMF-supported programs even when LICs themselves maintain broadly appropriate economic policies. Nevertheless, there are certain discernible broad trends that will have a major impact on demand for IMF program engagement in LICs:
Continued global uncertainty in the near term. The financing needs of LICs are likely to remain elevated until the financial and economic issues in Europe are resolved, and until growth is more firmly entrenched in the United States and other major economies. Moreover, the financial buffers of LICs remain diminished relative to the period before 2008.
Continued graduation of countries from the IMF’s concessional financing terms. Based on projected GDP growth rates from the IMF’s World Economic Outlook and an assumption of growth trending toward the low-income average over the long term, slightly over half of the current Poverty Reduction and Growth Trust (PRGT)–eligible countries would be expected to graduate from eligibility to receive concessional support from the IMF over the next 20 years (Figure 4.1).
Projected Number of Countries Eligible for Support under the Poverty Reduction and Growth Trust
Source: IMF staff calculations and projections.Projected Number of Countries Eligible for Support under the Poverty Reduction and Growth Trust
Source: IMF staff calculations and projections.Projected Number of Countries Eligible for Support under the Poverty Reduction and Growth Trust
Source: IMF staff calculations and projections.Declining reliance on continuous access to IMF finance. Most of the remaining PRGT-eligible countries should continue to graduate out of repeated ECF use toward nonfinancial instruments such as the PSI. However, as we saw during the recent crisis, such countries could still have reason to access IMF financing on an intermittent basis when they are hit by shocks. Indeed, as such countries grow and become increasingly open, the amount of financing they require in the face of a given shock will tend to increase until they graduate.
Ongoing need for assistance in selected countries. Certain countries, particularly fragile states and those emerging from conflict, may still require repeated RCF and ECF support before they are able to strengthen their macroeconomic positions sufficiently that they no longer require longer-term Fund financing.
Current Financing Framework
IMF concessional lending to low-income countries is financed from the PRGT, which in turn is funded by bilateral members’ contributions or transfers and by various contributions originating from the IMF itself that are approved by the membership. The IMF Executive Board took a decision in September 2012 that would increase annual lending capacity to LICs to an estimated SDR 1.25 billion (Figure 4.2) on a self-sustained basis (i.e., without a further infusion of resources to the PRGT). Absent a persistent change in trends, this is sufficient to meet the average projected base level demand for PRGT resources over the next 20 years.1 The three key elements of the financing package adopted by the IMF Executive Board were
Poverty Reduction and Growth Trust Average Annual Lending Commitments, 1988–2035
(In billions of Special Drawing Rights)
Source: IMF staff calculations and projections.Poverty Reduction and Growth Trust Average Annual Lending Commitments, 1988–2035
(In billions of Special Drawing Rights)
Source: IMF staff calculations and projections.Poverty Reduction and Growth Trust Average Annual Lending Commitments, 1988–2035
(In billions of Special Drawing Rights)
Source: IMF staff calculations and projections.Use of the windfall profits from the recent gold sales;2
Contingent measures that could be triggered during periods of high demand, including additional bilateral contributions; and
A presumption that any future changes to the LIC lending facilities would be designed in a manner that is consistent with maintaining the self-sustainability of the PRGT.
Modalities
The empirical work suggests that the IMF’s facilities for LICs appropriately include a diverse set of tools, including some that focus on medium-term policy support and others that focus on short-term financing. It highlights the benefits of the ECF and PSI, which can provide policy support over the medium term. It also underlines that, whether or not a country has an ECF or PSI in place, Fund financing may need to be provided quickly and on an appropriate scale when urgent balance of payments needs arise, either through augmentations of the ECF or support under the SCF or RCF. It can also be inferred that, in the absence of shocks or urgent financing needs, ECF arrangements and precautionary SCF arrangements can have a significant value for LICs, even at low access levels, as they can provide both policy support (through well-designed macroeconomic programs) and insurance (through the possibility of disbursements in the event that shocks arise).
The IMF also recently conducted a review of its facilities to assess whether the new framework put in place in 2009 is working effectively. The review concluded that the 2009 reforms had been broadly successful in closing gaps and creating a streamlined architecture that met the needs of LICs. The review also concluded that, coupled with a doubling of access, the IMF was able to mount an effective response to LICs’ needs during the global financial crisis (IMF, 2012a, 2013). The review advanced a set of concrete proposals to improve the tailoring and flexibility of Fund facilities and instruments for LICs while, in the aggregate, keeping the demand for resources within the self-sustaining capacity of the PRGT in normal times while also preserving the integrity of the LIC facilities architecture and meeting the objective of simplicity. The proposals that were adopted entailed
Increasing the scope for blending subsidized resources from the PRGT with general resources of the Fund in order to preserve concessional resources for the poorer LICs;
Facilitating access to Fund resources when external shocks unexpectedly increase financing needs through a streamlined process to request augmentations between reviews;
Enhancing operational flexibility through streamlined modalities.
Policy Challenges
Looking ahead, the IMF will have to consider what it can do to further strengthen the links between programs and the goals of growth and poverty reduction, while at the same time respecting countries’ ownership of their development agendas. Experience shows that while fast growth has lifted all boats to some degree or another, it has been less successful in lifting up the poorest segments of society. While remaining committed to the goal of generating growth, the Fund needs to deepen its understanding of which policies foster sustainable and inclusive growth. Lessons learned need to make their way into the design of future IMF-supported programs. Under this overarching objective, several areas of interest can be of particular relevance for LICs:
Many LICs need to have appropriate tools to calibrate investment policies and determine the appropriate use of scarce public resources while enhancing capacity to evaluate, select, and execute public investment projects.
Financial sector surveillance and risk monitoring will continue to be areas of IMF responsibility and expertise and will become even more critical as LICs become more financially integrated with the rest of the world and more prone to financial crises. In addition, the Fund has an important role to play in frontier LICs that are ready to access capital markets.
Given the key role that natural resources can play as drivers of future growth in some LICs, the IMF can play an important role in helping countries design stronger macroeconomic frameworks, including the choice of appropriate fiscal rules that help address volatility while ensuring long-term sustainability.
The previous financing strategy assumed elevated lending of SDR 2 billion a year up to 2014 (during the global financial crisis) and a sharp drop in 2015 to SDR 700 million a year thereafter.
Since transfers of gold profits cannot be made directly to the PRGT, the money will be distributed in the first instance to the membership, but only after assurances are received that 90 percent of the amount will be remitted back to the PRGT.
