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IMF Survey Vol.30, September 2001
Article

Financial facilities: Restructured financing facilities reflect changing global economic environment

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 2001
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The IMF provides financial assistance to member countries with temporary balance of payments problems; it does not provide financing for specific purposes or projects, as development banks typically do (see “IMF at a glance” page 1, for purposes of the IMF). The IMF’s financial assistance enables the member to rebuild its reserves or to make larger payments for imports and other external purposes than would have been possible without it. Financing must be approved by the Executive Board.

The IMF provides two kinds of financial assistance: nonconcessional and concessional. Nonconcessional assistance is made available to member countries under a number of policies and facilities, whose terms reflect the severity and duration of the balance of payments problem that the facility is designed to address (see box, pages 12-13). An individual line of credit normally takes the form of a financial arrangement with the member, under which the IMF gives assurance to the member that it will provide funding in accordance with the terms of the arrangement.

Separately, the IMF also provides concessional (low-interest) loans to low-income member countries through the Poverty Reduction and Growth Facility (PRGF) and provides grants or loans to qualifying members under the Heavily Indebted Poor Countries (HIPC) Initiative to help reduce their external debt.

IMF credit outstanding, financial years 1997/2001

(Billion SDRs)

Note: The IMF’s financial year begins on May 1 and ends on April 30.

Data: IMF, Annual Report, 2001

Regular financing facilities

The IMF provides financing to members from a revolving pool of funds consisting of members’ subscriptions, which are held in the General Resources Account (GRA). The recipient member uses its own currency to “purchase” reserve assets (in the form of widely accepted foreign currencies and SDRs) from the IMF. These assets are usually deposited in the member’s central bank and can then be used in the same manner as all other international reserves. The IMF levies charges on the financing, and repayment periods vary by facility. To repay, members “repurchase” their own currency from the IMF. The amount of financing a member can obtain from the IMF (access limits) is generally based on its quota.

IMF credit is subject to the recipient country’s observance of specific economic and financial policy conditions, depending on the relative size of the financing involved. For drawings of up to 25 percent of a member’s quota (called the first “credit tranche”), members must demonstrate that they are making reasonable efforts to overcome their balance of payments difficulties. Drawings above 25 percent of quota (upper credit tranche drawings) are made in installments as the member meets certain established performance targets. Such drawings are normally associated with Stand-By or Extended Fund Facility Arrangements. The IMF has also developed special facilities that seek to provide additional nonconcessional assistance for certain specific balance of payments difficulties.

Executive Board review

The IMF Executive Board discussed the IMF’s non-concessional facilities in March 2000, agreeing to eliminate a number of little-used and obsolete facilities and to streamline the Compensatory Financing Facility. That discussion led to a general review aimed at adapting the IMF’s facilities to the changing nature of the global economy. The review culminated, in November 2000, with the Board deciding to

  • make the terms of the as yet unused Contingent Credit Lines (CCL) Facility more attractive to potential users by scaling back the monitoring arrangements for qualifying members; simplify conditions for completing the “activation” review to assure members of more automatic disbursement of resources; reduce the overall surcharge on CCL resources; and lower the commitment fee for all large arrangements. A review of the CCL Facility will be conducted in November 2002.

  • discourage excessive use of IMF funds, as well as free up funds for use by other members, with surcharges on credit outstanding above a threshold level in the credit tranches and under the Extended Fund Facility.

  • encourage early repayment of IMF financing, with the introduction of time-based repayment expectations. Although members will continue to be required to meet the obligatory repayment schedule, they are expected to repay on an earlier schedule. Generally, a country able to repay by the earlier date signals a stronger-than-expected improvement in its external position. Those unable to meet the repayment expectation may request an extension at any time; however, if the Board does not approve an extension and the member fails to meet the original repayment expectation, its right to make further drawings, including under ongoing credit arrangements, would be suspended automatically. Experience with early repayment expectations will be reviewed by November 2005.

  • enhance monitoring in member countries with large outstanding obligations to the IMF after the expiration of an IMF-supported program to monitor their continued progress toward external viability. Countries in which credit outstanding exceeds

100 percent of quota after the expiration of the arrangement would be subject to post-program monitoring until credit falls below that threshold.

IMF financial facilities

Credit tranches and Extended Fund Facility

  • Credit tranche (1952): Designed to address balance of payments difficulties that are short term or cyclical; length of Stand-By Arrangements is typically 12-18 months with a legal maximum of 3 years.

Access limits: Annual: 100 percent of quota; cumulative: 300 percent of quota

Maturities (early repayment) / (obligatory repayment): 2¼ -4 years / 3¼ -5 years

Charges: GRA rate of charge + level-based surcharges: 100 basis points on amounts above 200 percent of quota, and 200 basis points above 300 percent of quota

Conditions: Member adopts policies that provide confidence that its balance of payments difficulties will be resolved within a reasonable period.

Phasing and monitoring: Quarterly purchases contingent on observance of performance criteria and other conditions

  • Extended Fund Facility Arrangement (1974): Provides longer-term assistance to support structural reforms that address longer-term balance of payments difficulties. Extended Fund Facility Arrangements have upper credit tranche conditionality for access above 25 percent of quota.

Access limits: Annual: 100 percent of quota; cumulative: 300 percent of quota

Maturities (early repayment) / (obligatory repayment): 4½ -7 years / 4½ -10 years

Charges: GRA rate of charge + level-based surcharges: 100 basis points on amounts above 200 percent of quota, and 200 basis points above 300 percent of quota

Conditions: Member adopts 3-year program, with structural agenda, and provides annual detailed statement of policies for the next 12 months

Phasing and monitoring: Quarterly or semiannual purchases contingent on observance of performance criteria and other conditions

Special facilities

  • Supplemental Reserve Facility (1997): Provides short-term assistance to members with balance of payments difficulties related to a sudden and disruptive loss of market confidence.

Access limits: None; this facility is available only when access under associated regular arrangement would otherwise exceed either annual or cumulative limit

Maturities (early repayment) / (obligatory repayment): 1-1½ years / 2-2½ years

Charges: GRA rate of charge + 300 basis points rising to 500 after 2½ years

Conditions: Available only in context of a regular arrangement with associated program and with strengthened policies to address a loss of market confidence

Phasing and monitoring: Facility available for one year; front-loaded access with two or more purchases; subsequent purchases subject to conditionality

  • Contingent Credit Lines (1999): Serves as a precautionary line of defense for members with strong track records of good policies in normal times to help them resist external financial contagion.

Access limits: None, but expected to be 300-500 percent of quota in practice

Maturities (early repayment) / obligatory repayment): 1-1½ years / 2-2½ years

Charges: GRA rate of charge + 150 basis points rising to 350 after 2½ years

Conditions: Eligibility criteria: (1) no balance of payments need from the outset; (2) positive assessment of policies by the IMF; (3) constructive relations with private creditors and satisfactory progress in limiting external vulnerability; (4) satisfactory economic program

Phasing and monitoring: Resources approved for up to one year. Small purchase (5-25 percent of quota) available on approval. Presumption that one-third of committed resources will be released on activation, with the disbursement of the remainder determined by a post-activation review.

  • Compensatory Financing Facility (1963): Covers a shortfall in a member’s export earnings and services receipts as well as an excess in cereal import costs that are temporary and arise from events beyond the members’ control. This facility was streamlined in 2000, with the elimination of the contingency component of the former Compensatory and Contingency Financing Facility.

Access limits: Maximum 45 percent of quota for each element–export shortfall and excess cereal import costs–for a combined limit of 55 percent of quota

Maturities (early repayment) / (obligatory repayment): 2¼—4 years / 3¼—5 years

Charges: GRA rate of charge; not subject to surcharges

Conditions: Available only when a member has an arrangement with upper credit tranche conditionality or when its balance of payments position, apart from its export shortfall, is otherwise satisfactory

Phasing and monitoring: Typically disbursed over a minimum of six months in accordance with the phasing provisions of the arrangement

  • Emergency assistance

1. Natural disasters (1962): Provides quick, medium-term assistance to members with balance of payments difficulties related to natural disasters.

2. Postconflict (1996): Provides quick, medium-term assistance for balance of payments difficulties related to the aftermath of civil unrest or international armed conflict

Access limits: 25 percent of quota, though larger amounts can be made available in exceptional cases

Maturities (early repayment) / (obligatory repayment): No early repayment expectation / 3¼-5 years

Charges: GRA rate of charge; not subject to surcharges possibility of interest subsidy if financing is available

Conditions: Reasonable efforts to overcome balance of payments difficulties, and focus on institutional and administrative capacity building to pave the way toward an upper credit tranche arrangement or an arrangement under the Poverty Reduction and Growth Facility

Phasing and monitoring: None

Facility for low-income members

  • Poverty Reduction and Growth Facility (1999): Provides longer-term assistance for deep-seated, structural balance of payments difficulties; aims at sustained, poverty-reducing growth (replaced the Enhanced Structural Adjustment Facility, created in 1987).

Access norms and limits: Norm for first-time users, 90 percent of quota; others, 65 percent of quota; maximum, 40 percent of quota; exceptional maximum, 185 percent

Maturities (early repayment) / (obligatory repayment): No early repayment expectation / 5½-10 years

Charges: Concessional interest rate: ½ of 1 percent a year; not subject to surcharges

Conditions: Based on a Poverty Reduction Strategy Paper (PRSP) prepared by the country in a participatory process, and integrating macro, structural, and poverty-reduction policies

Phasing and monitoring: Semiannual (or occasionally quarterly) disbursements contingent on observance of performance criteria and reviews

Member support in 2000/2001

Favorable global economic and financial conditions contributed to a decline in new IMF commitments in financial year 2001, to SDR 14.5 billion from SDR 23.5 billion in financial year 2000. The IMF approved nine new Stand-By Arrangements during financial year 2001, committing a total of SDR 2.1 billion (as of August 15, 2001, SDR 1 = $1.28038) and increased its commitments by SDR 11 billion under two Stand-By Arrangements already in place. It approved one new Extended Fund Facility Arrangement, for the former Yugoslav Republic of Macedonia, in the amount of SDR 24 million in combination with a PRGF arrangement in the amount of SDR 10.3 million. The commitment under Yemen’s Extended Fund Facility Arrangement was reduced by SDR 33 million.

The IMF’s largest commitments during the year were for augmentations of existing Stand-By Arrangements for Argentina and Turkey, including shorter-term financing under the Supplemental Reserve Facility (SRF). In December 2000, the amount available under the arrangement for Turkey was augmented by SDR 5.8 billion under the SRF to address the loss of market confidence. In May 2001, the IMF committed an additional SDR 6.4 billion of credit tranche resources to Turkey. In January 2001, Argentina’s Stand-By Arrangement was increased by SDR 5.2 billion, of which SDR 2.1 involved SRF resources, to support the country’s reforms and improve its access to international capital markets.

In many instances, members indicate that they do not intend to draw on funds that the IMF commits to them under nonconcessional facilities and regard the lines of credit as purely precautionary. Drawings were made under only 16 of the 37 Stand-By and Extended Fund Facility Arrangements in place during the financial year. At the end of April 2001, undrawn balances under the 25 Stand-By and Extended Fund Facility Arrangements still in effect amounted to SDR 38.349 billion, about half of the SDR 73.298 billion committed. Besides the large number of precautionary arrangements, this also reflects the fact that some arrangements have gone off track.

The IMF provided a modest amount of financing under its facility for emergency assistance during the year. Three countries–Republic of Congo, Sierra Leone, and the Federal Republic of Yugoslavia—received emergency postconflict assistance amounting to SDR 138 million.

During the financial year, the IMF disbursed SDR 9.4 billion in assistance, the bulk of which went to Argentina and Turkey. A number of countries repaid SDR 11.2 billion in funds, including some extended to them during the 1997-99 financial crisis. The amount repaid during the financial year more than offset the amount disbursed, leaving IMF credit outstanding at the end of April 2001, at SDR 42.2 billion, slightly lower than a year earlier and about SDR 18 billion below the peak reached during the financial crisis in 1997/98.

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