Journal Issue

IMF Contingent Credit Lines protect countries from financial contagion

International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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At the end of April 1999, the Executive Board agreed to provide Contingent Credit Lines (CCL) as a precautionary line of defense for member countries that are implementing sound economic policies, but that may be vulnerable to the effects of crises elsewhere (contagion effect). The IMF’s approval of financing under the CCL would send the message that the IMF has confidence in the member’s economic policies as well as in its determination to adjust them if the country should be affected by contagion. The CCL is intended to serve as an instrument of crisis prevention by

  • creating further incentives for members to adopt strong policies, notably debt management and sustainable exchange rate policies, and to adhere to internationally accepted standards;

  • encouraging the private sector to remain involved in countries that are in danger of being affected by crises in other countries, thereby containing the risks of financial market contagion; and

  • signaling the IMF’s willingness to provide financing to a member struck by contagion.

The CCL provides short-term financing to help members overcome the exceptional balance of payments financing needs that can arise if, through contagion, they suffer a sudden and disruptive loss of market confidence. Such circumstances must be largely beyond the member’s control and stem primarily from adverse developments in international capital markets caused by events in other countries. The CCL represents an extension of the existing Supplemental Reserve Facility (SRF). Whereas the SRF is intended for members already in the throes of a crisis, the CCL is intended as a preventive measure for members concerned about their vulnerability to contagion but not facing a crisis at the time of commitment.

The IMF has established the following criteria for access to the CCL:

  • When the Board approves a commitment of resources, the member must be implementing policies that make it unlikely it will need to use the resources and it must not already be facing balance of payments difficulties as a result of contagion.

  • The member’s economic performance should have received a positive assessment in the most recent IMF Article IV consultation and thereafter. The assessment should take into account the member’s progress in adhering to relevant internationally accepted standards; in particular, the member should have subscribed to the Special Data Dissemination Standard and be making satisfactory progress toward meeting its requirements.

  • The member should be maintaining constructive relations with private creditors, with a view to facilitating appropriate private sector involvement, and should have made satisfactory progress in limiting its vulnerability to external developments by prudently managing its external debt and international reserves.

  • The member should submit a satisfactory economic and financial program, including a quantified framework, which the member is prepared to adjust as needed.

Financing under a CCL will be committed and provided under a Stand-By Arrangement. Upon approval of the arrangement, a small purchase of credit tranche resources is immediately available to the member. When a member requests actual use of CCL resources, the Board will conduct a special “activation” review in which it must ascertain that the member has successfully implemented its program to date but is still severely affected by a crisis that stems from contagion and is prepared to adjust its policies as needed. The IMF commits resources under the CCL for up to one year. When it conducts the activation review, it decides how much of the resources to release immediately, how the balance should be disbursed, and what conditions should be attached to the line of credit.

The CCL is not subject to general IMF access limits, but commitments under the CCL would generally be in the range of 300–500 percent of the member’s quota in the IMF.

Countries drawing under the CCL are expected to repay within 1–1½ years of the date of each disbursement, although this repayment period may be extended by up to one year. The rate of charge on purchases under the CCL includes a surcharge of 300 basis points over the rate that applies to purchases under the credit tranches and the Extended Fund Facility. The surcharge will be raised by 50 basis points at the end of the first year and every six months thereafter until it reaches 500 basis points. The IMF established the CCL for a two-year period and will review it after one year.

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