The IMF offers financial assistance to members to help them correct balance of payments problems and to sof ten the impact of reform. The IMF’s financing is provided through both its general resources and its concessional financing facility (Enhanced Structural Adjustment Facility (ESAF)), which is administered separately. The extension of IMF credit is subject to Executive Board approval and, in most cases, to the member’s commitment to take steps to address the causes of its payments imbalance. A member’s access to IMF resources is set in proportion to its quota.
Members using the IMF’s general resources “purchase” (or draw) SDRs or other members’ currencies by paying an equivalent amount of their own currency. The IMF levies charges on these drawings and requires that, within a specified time, members “repurchase” (or buy back) their own currency from the IMF using other members’ currencies or SDRs. Concessional financing under the ESAF is provided in the form of low-interest loans and under the Initiative for Heavily Indebted Poor Countries (HIPC) (see page 19) in the form of grants.
Credit tranche policies
The most basic form of IMF financial support is provided under the credit tranche policy. A country experiencing balance of payments difficulties can draw an amount equivalent to the first 25 percent of its quota (or “first credit tranche”) by demonstrating that it is taking reasonable steps to overcome its balance of payments problems. Financing under the second, third, and fourth credit tranches (“upper credit tranches”) is normally associated with a Stand-By or an Extended Arrangement with the IMF.
Stand-By Arrangements. Under a Stand-By Arrangement, a country implements, usually for one to two years, a program that includes macroeconomic policy changes to resolve its balance of payments problems. The country, in consultation with the IMF staff, designs the program to achieve its goals. To receive the financing, the member must meet performance criteria that mark its successful implementation of the program. These criteria—which allow both the member and the IMF to assess progress and may signal the need for further corrective policies—generally cover ceilings on government budget deficits, credit, and external debt, as well as targets for reserves. The country repays the money it has borrowed over 3¼-5 years.
In 1998/99, the IMF approved commitments under seven Stand-By Arrangements totaling SDR 14.3 billion. The largest new Stand-By Arrangement, SDR 13.0 billion for Brazil, included SDR 9.1 billion available until December 1999 under the Supplemental Reserve Facility (see page 14). New Stand-By Arrangements were also approved for Bosnia and Herzegovina (SDR 61 million), El Salvador (SDR 38 million), Uruguay (SDR 70 million), and Zimbabwe (SDR 131 million). The Stand-By Arrangement for Indonesia was augmented by SDR 1.0 billion. As of April 30, 1999, nine countries had Stand-By Arrangements from the IMF, with total commitments of SDR 32.7 billion and undrawn balances of SDR 8.6 billion.
Extended Fund Facility (EFF). The IMF provides financial support to its members for longer periods and in generally larger amounts under the Extended Fund Facility. Extended Arrangements, which normally run for three years but can be extended for a fourth, are designed to correct balance of payments problems that stem largely from structural problems and take longer to correct. The repayment period is 4½-10 years.
In 1998/99, the IMF approved commitments under five Extended Arrangements totaling SDR 14.1 billion. The largest new Extended Arrangement was SDR 4.7 billion for Indonesia; it was later augmented by SDR 0.7 billion. Extended Arrangements were also approved for Bulgaria (SDR 0.6 billion), Jordan (SDR 0.1 billion), and Ukraine (SDR 1.6 billion). The Extended Arrangement for Russia was augmented by SDR 6.3 billion, but was subsequently canceled in March 1999. As of April 30, 1999, 12 countries had Extended Arrangements, with commitments of SDR 11.4 billion and undrawn balances of SDR 7.3 billion.
In 1998/99, new commitments of IMF resources under Stand-By and Extended Arrangements amounted to SDR 28.4 billion, of which nearly one-half was approved for Brazil and about one-fifth each for Indonesia and Russia.
Buffer Stock Financing Facility. Under this facility, the IMF helps members that are heavily dependent on commodity exports to meet their financial commitments under international agreements designed to smooth volatile commodity prices. No drawings have been made under this facility for the past 15 years.
Compensatory and Contingency Financing Facility (CCFF). The compensatory element of the CCFF provides timely financing to members experiencing temporary shortfalls in export earnings or an excess in cereal import costs, attributable to circumstances largely beyond their control. This element of the facility has been used particularly by commodity exporters. The contingency element helps members with IMF arrangements keep their adjustment programs on track when they are faced with unexpected adverse external disruptions, such as declines in export prices and increases in import prices or in international interest rates. Receipts from tourism and workers’ remittances may also be covered if they are a significant component of the member’s current account.
During 1998/99, four countries—Azerbaijan, Jordan, Pakistan, and Russia—drew a total of SDR 2.6 billion under the CCFF.
Supplemental Reserve Facility (SRF). In December 1997, the Executive Board established the Supplemental Reserve Facility in response to the unprecedented demand for IMF resources resulting from the Asian crisis. The SRF is intended to help member countries experiencing exceptional balance of payments problems created by a large short-term financing need. Such a need may result from a sudden and disruptive loss of market confidence and take the form of pressure on the member’s capital account and reserves. Assistance is available when there is a reasonable expectation that strong adjustment policies and adequate financial support will enable a country to correct its balance of payments difficulties in a short time.
The SRF is likely to be used when a country’s outflows are large enough to create a risk of contagion that could potentially threaten the international monetary system. In approving a request for the use of resources under the SRF, the IMF takes into account the financing provided by other creditors. To minimize moral hazard, a member using resources under the SRF is encouraged to maintain the participation of both official and private creditors until the pressure on its balance of payments eases.
Financing under the SRF, available in the form of additional resources under a Stand-By or an Extended Arrangement, is committed for up to one year and is generally available in two or more drawings. The first drawing is available when financing is approved, normally at the same time the corresponding arrangement is approved. Countries drawing under the SRF are expected to repay within 1-1½ years of the date of each purchase. The Board may, however, extend this repayment period by up to one year. For the first year, members are subject to a surcharge of 300 basis points above the regular rate of charge on IMF loans. This surcharge is increased by 50 basis points at the end of that period and every six months thereafter until it reaches 500 basis points.
The IMF first activated the SRF in December 1997, committing SDR 9.95 billion to Korea as part of its Stand-By Arrangement. In July 1998, the IMF committed SDR 4 billion to Russia under the SRF as part of the augmentation of its Extended Arrangement, and in December 1998, SDR 9.1 billion was committed to Brazil under the SRF as part of its Stand-By Arrangement.
Contingent Credit Lines. In April 1999, the Board endorsed the creation of Contingent Credit Lines as a precautionary line of defense to help members with fundamentally sound and well-managed economies that may be threatened by balance of payments problems arising from a sudden and disruptive loss of market confidence caused by contagion (see box, page 16).
Euro launch has operational implications
The euro, a common currency for the 11 countries that participate in European Economic and Monetary Union, was launched on January 1, 1999. The IMF has designated the euro a “freely usable” currency that is expected to play an important role in international financial transactions once euros replace countries’ national currencies. In addition to the euro—which replaces the deutsche mark and the French franc—the other currencies the IMF considers to be freely usable are the Japanese yen, the pound sterling, and the U.S. dollar.
The IMF’s Articles of Agreement define a freely usable currency as “a member’s currency that the IMF determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets.” This designation has implications for financial operations and transactions between the IMF and its members. When a member engages in a transaction with the IMF involving a freely usable currency, it may obtain that currency from the issuing member or other sources, such as the commercial market. The country issuing the freely usable currency, if approached, undertakes to provide its currency to the buyer, but the exchange rate is not guaranteed.
The IMF, after consulting with the 11 euro-area members, determined that the same representative exchange rate definition for the euro would apply to all of them. This rate is the rate for the euro against the U.S. dollar as published daily by the European Central Bank. As of January 1, 1999, the IMF redenominated its holdings of the currencies of euro-area members to euros from the existing national currencies. Before these changes took effect, the IMF informed all its members of the procedures for the exchange of the euro and that it would conduct in euros all financial transactions involving the currencies of the euro-area members.
Enhanced Structural Adjustment Facility (ESAF). This facility was established in 1987 as a successor to the Structural Adjustment Facility (SAF), created in 1986, and was extended and enlarged in February 1994. Through the ESAF, the IMF provides concessional financial support for low-income member countries with persistent balance of payments problems.
ESAF resources are intended to support strong medium-term structural adjustment programs. Eligible members seeking ESAF resources must develop, with the assistance of the staffs of the IMF and the World Bank, a policy framework paper (PFP) outlining a three-year adjustment program. The PFP, which is a document of the national authorities, is updated annually; it describes the authorities’ economic objectives, strategies for achieving those objectives, and associated external financing needs and major sources of financing. The PFP is intended to ensure a consistent framework for economic policies and to attract financial and technical assistance in support of the adjustment program.
Adjustment measures under ESAF-supported programs are expected to strengthen a country’s balance of payments position substantially and foster growth during the three-year period. Monitoring under ESAF Arrangements is conducted through quarterly financial and structural benchmarks. In 1998, the structure of ESAF Arrangements was modified to allow closer monitoring through semiannual or quarterly performance criteria, reviews, and disbursements. ESAF loans are usually disbursed semiannually, initially upon approval of an arrangement and subsequently based on the observance of performance criteria and after the completion of a review. ESAF loans are repaid in 10 equal semiannual installments, beginning 5½ years and ending 10 years after the date of each disbursement. The interest rate on ESAF loans is 0.5 percent a year.
In 1998/99, the IMF approved 10 new ESAF Arrangements with commitments totaling SDR 0.9 billion—for Albania, Bolivia, the Central African Republic, The Gambia, Guyana, Honduras, the Kyrgyz Republic, Rwanda, Tajikistan, and Zambia. Six ESAF Arrangements were augmented by a total of SDR 0.1 billion. As of April 30, 1999, 35 ESAF Arrangements were in effect. Cumulative commitments under all SAF and ESAF Arrangements approved since 1986 (excluding undisbursed amounts under expired and canceled arrangements) totaled SDR 11.1 billion as of April 30, 1999, compared with SDR 10.3 billion a year earlier. Total ESAF disbursements in 1998/99 amounted to SDR 0.8 billion, compared with SDR 1.0 billion in 1997/98, bringing cumulative SAF and ESAF disbursements through April 30, 1999, to SDR 9.0 billion. Since April 30, 1999, four new ESAF Arrangements have been approved: for Ghana (SDR 155 million), Mali (SDR 46.7 million), Mauritania (SDR 42.5 million), and Mozambique (SDR 58.8 million). The current ESAF Arrangement for Albania was also augmented by SDR 10 million and that for Georgia, by SDR 5.6 million.
IMF grants observer status to European Central Bank
In connection with the launch of the euro, the Executive Board granted observer status at the IMF to the European Central Bank (ECB) effective January 1, 1999. The ECB was invited to send a representative to attend Board discussions on the following topics:
IMF surveillance under Article IV over the common monetary and exchange rate policies of the euro area,
IMF surveillance under Article IV over the policies of individual euro-area member countries,
the role of the euro in the international monetary system,
the world economic outlook,
international capital markets reports, and
world economic and market developments.
The ECB was also invited to send a representative to Board meetings on the agenda items recognized by the ECB and the IMF to be of mutual interest in fulfilling their mandates.
Financing the ESAF Trust. The resources to finance lending in support of ESAF Arrangements are kept separate from the general resources of the IMF and are administered by the IMF as Trustee of the ESAF Trust. ESAF operations are conducted through three accounts with separate functions. The ESAF Trust borrows resources through the Loan Account for onlending to eligible members under ESAF Arrangements, with the maturity of drawings on lenders coinciding with the maturity of loans to ESAF borrowers. Lenders have extended loans to the ESAF Trust on different interest rate terms: market rates in most cases, free of interest in one case, and highly concessional rates in some others. Most lenders making loans at market-related interest rates have made separate contributions to reduce the interest rate charged to borrowers.
Subsidy contributions (including a contribution from the IMF’s Special Disbursement Account in 1994) are channeled through the Subsidy Account and have taken the form of direct grants or deposits at concessional interest rates. These funds are invested by the Trust, with the subsidy contribution on the latter being equal to the interest rate differential. Resources are set aside in the Reserve Account to provide security for lenders’ claims on the Trust against the risk of nonpayment by borrowers. The resources in the Reserve Account result mainly from repayments of SAF loans and the part of ESAF loans financed with SAF resources that ultimately originated from the profits of gold sales undertaken by the IMF in 1976–81.
Making the ESAF self-sustaining. Based on the broad agreement that the ESAF is, and will remain, the center-piece of the IMF’s support for the poorest countries, including in the context of the HIPC Initiative, the Executive Board in 1996 agreed on a framework for the continuation of ESAF operations. Under current projections, available ESAF resources are expected to be fully committed by end-2000. A self-sustained ESAF, with a commitment capacity of about SDR 0.8 billion a year, would begin in the year 2005, or perhaps earlier, financed from the IMF-owned resources set aside in the Reserve Account, which will become available as ESAF lenders are repaid. This leaves an interim period of about four years during which financing of an estimated SDR 1.4 billion “as needed” would have to be mobilized to cover interest subsidies. In addition, financing needs for special ESAF operations under the proposed enhanced HIPC Initiative are estimated to be SDR 2.6 billion, “as needed.”
Other IMF policies and procedures
In specific circumstances that cannot be adequately addressed under its regular and special facilities, the IMF extends financing to member countries under several special mechanisms. These include the Emergency Financing Mechanism, support for currency stabilization funds, and emergency assistance to members facing balance of payments difficulties arising from sudden and unforeseeable natural disasters or following civil conflicts.
Emergency Financing Mechanism (EFM). The EFM consists of procedures that allow for quick Executive Board approval of IMF financial support while ensuring the conditionality necessary to warrant such support. It is to be used in rare circumstances representing, or threatening, a crisis in a member’s external accounts that requires an immediate IMF response. The EFM was established in September 1995 and was used in 1997 for the Philippines, Thailand, Indonesia, and Korea and in July 1998 for Russia.
Support for currency stabilization funds. In September 1995, the IMF decided to make available financial support for the establishment of currency stabilization funds to help bolster confidence in countries’ exchange-rate-based stabilization strategies—preferably, an exchange rate peg with relatively narrow margins or a preannounced crawl. So far, however, the IMF has not provided this type of assistance to any member country. For a currency stabilization fund to play its intended role, economic policies must be tight enough for inflation to be compatible with the targeted exchange rate anchor; thus, little use of the currency stabilization fund for exchange market intervention is to be expected.
IMF support for a currency stabilization fund would be conditional on
fiscal adjustment and credit creation consistent with targeted inflation,
appropriate measures to deal with backward-looking automatic wage and other indexation schemes,
a high degree of current account convertibility and an open trade regime and other measures to encourage the return of flight capital,
contingency plans to deal with large capital account outflows or inflows,
integrated management of foreign exchange reserves and intervention policy, and
other structural and institutional elements designed to reduce inflation sharply.
Emergency assistance. The IMF can provide emergency financial assistance to a member facing balance of payments difficulties caused by a natural disaster. Emergency assistance is available through outright purchases, usually limited to 25 percent of quota, provided that the member is cooperating with the IMF to find a solution to its payments problems.
In 1995, the policy on emergency assistance was expanded to cover countries emerging from political turmoil, civil unrest, or armed international conflict that are unable to implement regular IMF-supported programs because of damage to their institutional and administrative capacity. In addition to the quick-disbursing emergency financial assistance, the IMF also provides macroeconomic policy advice and technical assistance designed to restore the country’s ability to implement policy.
In April 1999, the Executive Board discussed ways to enhance assistance to postconflict countries and agreed on steps to improve the terms of emergency financial assistance to postconflict countries. It also agreed that the IMF, in implementing its strategy on overdue financial obligations, would take into account the special difficulties faced by postconflict countries in arrears.
During 1998/99, the IMF provided emergency post-conflict assistance totaling SDR 19 million to the Republic of Congo and Sierra Leone, and emergency assistance totaling SDR 202 million to help Bangladesh, the Dominican Republic, Haiti, Honduras, and St. Kitts and Nevis cope with natural disasters.