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IMF Executive Board Modifies PRGT Interest Rate Mechanism and Approves Zero Rates on All Low-Income Country Lending Facilities Through end-June 2021

Author(s):
International Monetary Fund. Finance Dept.;International Monetary Fund. Strategy, Policy, & Review Department
Published Date:
June 2019
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On May 24, 2019, the Executive Board of the International Monetary Fund (IMF) reviewed the interest rates applicable to concessional credit provided under the PRGT. They considered a proposal to modify the mechanism for setting PRGT interest rates, which would unify the interest rates applicable to loans under the Extended Credit Facility (ECF) and the Standby Credit Facility (SCF), while preserving the zero-interest rate on credit outstanding under the Rapid Credit Facility (RCF). The proposed change modestly increases the overall degree of concessionality of PRGT financing while producing moderate additional subsidy costs, which can be financed within the PRGT’s self-sustaining financing envelope in the context of the full LIC facilities reform package also considered on May 24, 2019.

Since the adoption of the PRGT interest rate mechanism in 2009, no interest has been charged on outstanding PRGT credit. During the period 2010–16, the Board waived any interest on PRGT loans. For the period 2017–18, the application of the mechanism resulted in zero rates on credit under the PRGT facilities on the basis of the prevailing low global interest rates. In addition, in 2015 the Executive Board decided that no interest would be charged on loans under the Rapid Credit Facility (RCF).

Executive Board Assessment1

Executive Directors welcomed the opportunity to review the interest rates charged on credits extended from the Poverty Reduction and Growth Trust (PRGT). They agreed to align the mechanism for determining interest rates to be charged on credit provided under the Stand-by Credit Facility (SCF) with the interest rate mechanism applicable to credit provided under the Extended Credit Facility (ECF), while keeping the latter unchanged. They noted that this change is consistent with the package of reforms adopted in the parallel Review of Facilities for Low-Income Countries.

Directors noted that the change in the interest rate mechanism applicable to SCF credit would simplify the structure of interest rates on concessional lending, making it more like the structure of interest rates charged on non-concessional loans, financed through the General Resources Account (GRA). Directors agreed that the proposed changes are consistent with preserving the fundamental logic of the PRGT interest rate mechanism, while modestly increasing the overall degree of concessionality of PRGT financing. They noted that the additional subsidy costs can be financed within the PRGT’s self-sustaining financing envelope in the context of the full reform package, as discussed in the Review of the Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Countries.

Based on the revised interest rate mechanism and the most recent 12-month average SDR rate, Directors supported staff’s proposal to set interest rates on all ECF and SCF credit at zero until June 2021 in the context of a persistently low global interest rate environment. The interest rate on credit provided under the Rapid Credit Facility (RCF) was set at zero on a permanent basis in 2015. Directors also supported the staff’s proposal to waive interest rate charges on the outstanding legacy credit under the Exogenous Shocks Facility (ESF) until November 2020, by which time all the credit previously extended under the ESF is scheduled to be fully repaid, or until the time of the next review.

The next review of the PRGT interest rate mechanism is scheduled to take place no later than June 2021.

1

An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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