On May 24, 2019 the Executive Board of the International Monetary Fund (IMF) concluded the 2018–19 Review of Facilities for Low-Income Countries Reform Proposals (“Facilities Review”) and the companion Review of the Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Countries (“Financing Review”).
The current framework for IMF concessional lending and program support for low-income countries (LICs), established in 2009, includes three lending facilities and one non-financial instrument. The Extended Credit Facility (ECF) is used to provide financial support to countries facing protracted balance of payments problems; the Standby Credit Facility (SCF) is used to provide financial support to countries facing actual or potential short-term balance of balance of payments needs; and the Rapid Credit Facility (RCF) is used to provide emergency financing to countries facing urgent balance of payments needs, including as a result of natural disasters, fragility or conflict situations, and other adverse shocks. The Policy Support Instrument (PSI) is used by countries that have a broadly stable macroeconomic position who wish to provide a signal to private investors and development partners regarding the strength of their economic policies along with a framework for provision of Fund policy advice and technical assistance.
Financial support under the IMF’s LIC facilities is provided on concessional terms, with the interest rate set at zero since 2009.1 Subsidies needed to lend at concessional interest rates are provided by the Poverty Reduction and Growth Trust (PRGT), which is administered by the IMF. The PRGT operates on a self-sustaining basis, with income from investments of the resources in the trust fund covering the costs of these subsidies over time. Given the size of the trust fund, there are annual and cumulative limits on the amounts eligible countries can borrow on concessional terms to ensure that the PRGT is not depleted.
The 2018–19 review of the LIC facilities framework reviews the experience with use of the facilities since they were established and draws lessons on how the facilities might be adjusted to better meet the needs of LICs in the context of the changing economic landscape that they face. The review takes place against the backdrop of rising income levels in most LICs, along with greater trade and financial integration of LICs into the global economy. This has implied a gradual erosion of the limits on access to concessional financing relative to LICs’ GDP levels and external financing needs since the last access increase in 2015. Several countries have experienced a sharp increase in temporary financing needs as a result of falling export prices, while the increasing frequency and intensity of natural disasters has led to greater demand for emergency financing. At the same time, debt vulnerabilities have risen across many countries, while fragility and institutional weaknesses continue to impede economic progress in a wide range of countries.
The staff papers prepared for Board discussion concluded that the general framework of IMF facilities for LICs remains broadly appropriate, while noting that some changes were warranted to respond to evolving challenges. Reforms proposed included:
- An increase in access limits and norms, within the financing constraints of the self-sustained PRGT, to address erosion of access limits.
- Better tailoring of LIC facilities to the needs of fragile and conflict-affected states and to states vulnerable to natural disasters, including through increased access to the RCF.
- Better targeting of scarce subsidy resources to the poorest and most vulnerable countries by expanding the use of blending of concessional and non-concessional financing for higher-income LICs with substantial access to international financial markets.
- Heightened attention to debt sustainability and transparency through strengthening safeguards for high access and exceptional access cases.
- Changes to some features of the SCF and ECF instruments to increase their flexibility.
The companion Financing Review paper concluded that the proposed reforms to the LIC facilities are consistent with preserving the financial self-sustainability of the PRGT, with risks evenly balanced over the medium term.
The Facilities Review is part of a wider policy work agenda related to the IMF’s engagement with LICs. It follows the May 2019 Board paper on Building Resilience in Developing Countries Vulnerable to Large Natural Disasters, draws on the findings of the 2018 Review of Program Design and Conditionality, and is coordinated with the parallel Review of the PRGT Interest Rate Structure and the upcoming review of Eligibility to Use the Fund’s Facilities for Concessional Financing, 2019.
Executive Board Assessment2
Executive Directors welcomed the opportunity to discuss reforms proposed in the Review of Facilities for Low-Income Countries (LICs) (the Facilities Review) and to review the financing of the Fund’s concessional facilities and debt relief to LICs (the Financing Review). They were encouraged that the Fund has remained actively engaged in supporting LICs during the challenging period since the 2013 review of facilities for LICs. Directors emphasized that the Fund has a key role in supporting LICs, through policy advice, financing, capacity development, and catalyzing donor support.
Directors supported the proposals to increase access to concessional financing and enhance the flexibility and tailoring of the Fund’s toolkit to country-specific needs, subject to maintaining the self-sustainability of the PRGT. To this end, Directors endorsed the package of proposals in the Facilities Review and Financing Review.
Directors broadly supported a generalized increase of one-third in access limits and norms to ensure that the Fund can provide adequate financial support to LICs as needed, while maintaining PRGT self-sustainability.
To strengthen safeguards for PRGT resources alongside the generalized access increase, Directors supported, first, the introduction of an additional trigger for applying high access (HA) procedures, and second, a strengthening of informational and timing requirements for informal HA and exceptional access (EA) Board engagement to enhance the assessment of debt sustainability and capacity to repay (paragraphs 24–26 of the Facilities Review) as well as the modifications to the access threshold trigger for a new DSA. Furthermore, most Directors supported the clarification of the market access criterion for EA under the PRGT.
Most Directors supported removing the exclusion from presumed blending for higher-income LICs at high risk of debt distress, provided they have substantial access to international financial markets on both a past and prospective basis (paragraph 31 of the Facilities Review), including the application of staff judgment in assessing prospective market access when considering blending for such members. While the severity of debt vulnerabilities is an important factor in assessing whether blended financing is appropriate, Directors generally agreed that scarce subsidy resources should be targeted to the poorest and most vulnerable LICs, noting the still favorable terms of blended financing from the GRA and the PRGT. Directors reaffirmed that, where a member accesses Fund resources in the GRA in a blend with PRGT resources, the member would be expected to meet applicable policies governing financing under the respective GRA instrument, including the expectation that the member’s policies are implemented in a manner that would lead to a strengthening of the member’s balance of payments before repurchases begin.
Directors supported the proposals to make LIC facilities more responsive to the needs of fragile and conflict-affected states (FCS). Therefore, in addition to the generalized one-third increase in access limits, they supported a doubling of the annual RCF access limit under the regular window, together with the safeguards of introducing an annual RCF access norm at 25 percent of quota and also limiting the maximum size of a single disbursement to 25 percent of quota under the regular window. Directors further endorsed the call for greater flexibility in the design of ECF-supported programs for countries that need to focus attention on near-term objectives, while meeting upper credit tranche standards and maintaining consistency with the provisions of the ECF.
To increase the scope for providing Fund support to members that experience urgent balance of payments needs from large natural disasters, Directors supported a further one-third increase in the cumulative access limits under the RCF for disbursements associated with such disasters, in addition to the generalized access increase.
Directors agreed to increase annual and cumulative access limits under the Rapid Financing Instrument (RFI) by one-third and to increase the cumulative limit by a further one-third for disbursements associated with large natural disasters, which would expand the scope for providing emergency financial support to countries that are not eligible for concessional financing while preserving broad harmonization of access limits across the RFI and RCF.
Most Directors endorsed the proposal to extend the maximum initial duration of ECF arrangements from four to five years, which could be appropriate in cases where longer-term structural reform efforts are critical to the success of the program and a well-sequenced reform plan with strong ownership is in place but noted that shorter back-to-back arrangements could often achieve broadly similar goals. They generally supported the removal of sub-limits on access for SCF arrangements that are approved on a precautionary basis and the extension of the maximum duration of SCF arrangements from two to three years. Directors also supported the proposal on automatic termination of new SCF arrangements of more than 24 months if no program review under the arrangement has been completed over a period of eighteen months.
Directors supported renaming the Economic Development Document as the Poverty Reduction and Growth Strategy (PRGS). They expressed broad support for strengthening program links to poverty reduction, including by requiring a PRGS whenever an SCF arrangement or PSI has an initial duration exceeding two years. They supported greater flexibility in the timing of PRGS requirements, including extensions for countries that need to focus limited institutional capacity on near-term measures to enhance economic and political stability.
Directors welcomed the thorough review of the financing framework to provide concessional financial support to LICs. They concurred with the assessment that the financing capacity of the PRGT has remained intact and that the proposed package of reforms of the LIC facilities can be accommodated within the self-sustained PRGT, with risks evenly balanced over the medium term. Directors stressed that the evolution of the PRGT’s lending capacity will need to be monitored carefully, and policies reviewed periodically, to ensure that PRGT self-sustainability is preserved. A number of Directors considered that, going forward, a review of the overall envelope of PRGT resources might be warranted.
Directors acknowledged that debt relief initiatives face significant funding challenges. They asked staff to explore options to address the under-funding of the Catastrophe Containment and Relief Trust. They also noted the need to mobilize new resources to finance debt relief for countries with remaining protracted arrears to the Fund once they are ready to clear arrears and participate in the HIPC Initiative.
Directors agreed the next review of the Fund’s facilities for LICs will take place on the standard five-year cycle, while access norms and limits could be reviewed earlier if warranted. Many Directors underscored that future reviews should consider all aspects of the PRGT’s architecture.
Following the conclusion of the Interest Rate Review (insert link to press release here), the revised interest rate mechanism will result in zero interest rates on credit outstanding under all PRGT facilities through mid-2021.
An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.