Abstract

The IMF provides financial assistance to a member from its general resources by selling that member the currencies of other members or SDRs. The member purchases (draws) other members’ currencies or SDRs with an equivalent amount in its own currency, which it is required to repurchase with SDRs or usable currencies after a specified period of time. For this reason, the IMF’s Articles of Agreement do not use the terminology of “loans” (or “credits”) and “repayments” but refer instead to purchases and repurchases.27 The IMF’s assistance to members does not reduce the combined total of its holdings of currencies and SDRs, although it changes its composition.

The IMF provides financial assistance to a member from its general resources by selling that member the currencies of other members or SDRs. The member purchases (draws) other members’ currencies or SDRs with an equivalent amount in its own currency, which it is required to repurchase with SDRs or usable currencies after a specified period of time. For this reason, the IMF’s Articles of Agreement do not use the terminology of “loans” (or “credits”) and “repayments” but refer instead to purchases and repurchases.27 The IMF’s assistance to members does not reduce the combined total of its holdings of currencies and SDRs, although it changes its composition.

This chapter describes the policies governing the uses of the IMF’s resources within the General Resources Account (GRA): the general terms and conditions for the use of its resources, its specific policies and facilities, and the procedures by which purchases and repurchases are made.

General Terms and Conditions

The IMF’s financial resources are made available to members through a variety of policies and financial facilities (windows), which differ mainly in the type of balance of payments need they seek to address and in the degree of conditionality attached to them. Table 7 presents the amount of financial assistance provided by the IMF to members over time under policies and facilities within the GRA; disbursements under the Structural Adjustment Facility (SAF) and the Enhanced Structural Adjustment Facility (ESAF), which are discussed in the next chapter, are also shown.

Table 7.

IMF Financial Activity

(In billions of SDRs; financial years ended April 30)

article image

Includes first credit tranche purchases and emergency assistance.

Excludes purchases under the SRF, which are presented above.

Uniformity of Access and Access Limits

The rules governing access to the use of the IMF’s general resources apply uniformly to all members. The Articles do not classify members into separate categories to prescribe rights and obligations of membership that differ according to such criteria as per capita income or stage of economic development. There is no formal distinction in the Articles between industrial and developing member countries, as in the case of such international organizations as the International Development Association (the concessional lending affiliate of the World Bank Group) and the World Trade Organization.28 Yet it is consistent with the requirement of uniform treatment for the IMF to establish special facilities to address specific balance of payments problems, as in effect it has done (see below).

The amount of access under various IMF policies and facilities is normally subject to maximum access limits specified by the IMF. The individual access of a member within those limits is determined in view of the member’s specific circumstances such as the size of the need and the strength of the country’s economic program and adjustment effort.

Balance of Payments Need

The use of all IMF resources is subject to the representation of a balance of payments need by a member.29 The IMF assesses both the balance of payments need of a member (the magnitude of financing) and the adequacy of measures to correct the underlying balance of payments disequilibrium (the adjustment program).

The concept of balance of payments need has evolved over time. Since the Second Amendment of the Articles, the concept has comprised three distinct elements: (1) the balance of payments position of a member, (2) its foreign reserve position, and (3) developments in its reserve position. The three elements are regarded as separate, and the representation of need by a member can be based on any one of these. In fact, the determination of need combines quantitative and qualitative elements, as well as analytical and judgmental factors. Reliance on judgmental factors is unavoidable because there are no precise a priori criteria for determining the appropriate level of a member’s foreign reserves.

The IMF’s policies under particular facilities may also stipulate requirements concerning characteristics of the balance of payments, beyond the requirement of need per se, as set out under Article V, Section 3(b)(ii). Such policies relate assistance to the origins and nature of the underlying balance of payments disequilibrium. For instance, the use of the Compensatory and Contingency Financing Facility (CCFF) is restricted to temporary balance of payments deficits arising from export shortfalls, increased costs of specified cereal imports, or unanticipated deviations in exogenous components of key current account variables that are largely beyond the control of the member.

Timing of Access

The Articles clearly specify that a member’s transactions with the IMF in the GRA take place wholly “on the initiative of such member” and not that of the IMF (Article V, Section 2(a)). Thus, there is no obligation on a member to approach the IMF at any specified time with a request for the use of its resources. However, this limitation does not preclude the IMF from entering into discussions with a member to explore the desirability of a request for possible use of its resources. This procedure was recognized as early as February 13, 1952, when the Executive Board endorsed the Managing Director’s statement that “the Fund [that is, the Managing Director and staff, acting in accordance with the general policies adopted by the Executive Board] itself might take the initiative in discussing with one or more members transactions which it believes suitable for the Fund and helpful to the members concerned.”

Over the years, it has come to be recognized that the efficacy of the mixture of policies of adjustment and financing (including financing from the IMF) depends largely on members’ early adoption of corrective measures. The rationale for an “early resort” to an adjustment program is to avoid the more drastic policy actions that may be needed later on, as well as to prevent contagion effects and possible systemic consequences. Similarly, Stand-By Arrangements of a precautionary type may be negotiated even before the emergence of actual balance of payments difficulties. Thus, on balance, the spirit and intent of the IMF’s policy on the use of its general resources are to encourage an early resort to the IMF by members experiencing balance of payments difficulties.

Conditionality

Once the IMF has determined the balance of payments need of a member and its eligibility to draw on resources under one or more facilities, the IMF must be satisfied that the member can meet its repayment obligations to the IMF.30 It therefore provides financial resources to members on certain conditions designed to encourage appropriate economic adjustment and ensure that the member’s use of IMF credit is temporary and that it will have the capacity to repay the IMF on time. These conditions are meant to reduce a member’s balance of payments deficit to a manageable size while fostering economic growth, employment, and financial stability and eliminating restrictions on international trade and payments.

Consequently, policy benchmarks and performance criteria, often referred to as conditionality, represent a crucial element in the use of IMF resources by members. Conditionality seeks to ensure that the member’s policies are adequate to achieve a viable balance of payments position and sustainable economic growth over a reasonable period; that steps are taken toward structural adjustment, as necessary; and that, in addressing balance of payments and structural problems, financing and adjustment work in tandem.

The IMF’s guidelines on conditionality, which are reviewed periodically, stipulate that the IMF, in designing adjustment programs, is required to pay due regard to the domestic social and political objectives of member countries and to their economic priorities and circumstances. In its most recent review in July 1994 of the experience with conditionality in IMF-supported adjustment programs, the Executive Board concluded that the guidelines on conditionality adopted in 1979 continued in general to provide an appropriate basis for IMF policies on the use of its resources.

Conditionality may vary with individual programs, as well as with the types of policies or facilities used; it is not a rigid and inflexible set of operational rules. For example, a lower degree of conditionality is associated with the financing of strictly temporary shortfalls in members’ export receipts under the Compensatory Contingency Financing Facility than under upper credit tranche arrangements (see section on “Financial Policies and Facilities”). The guidelines also provide for the incorporation of review and consultation clauses, the inclusion of performance clauses, and the phasing of purchases in Stand-By Arrangements that go beyond the first credit tranche and in Extended Arrangements.

Performance during the period of a Stand-By or Extended Arrangement in support of a member’s adjustment program is monitored by means of performance criteria (see the Glossary). The conditionality guidelines specify that performance criteria should be limited to those economic variables necessary to ensure that the objectives of IMF-supported programs are met. Performance criteria are normally confined to macroeconomic variables and to those necessary to implement specific provisions of the IMF’s Articles or policies adopted under them. Performance criteria may also relate to other (microeconomic) variables when these have a bearing on the effectiveness of the member’s adjustment program because of their macroeconomic impact.

The broad objective of balance of payments adjustment policies as embodied in IMF-supported programs is to achieve a current account position that can be sustained by normal capital flows, without resort to restrictions on trade and payments or payments arrears. In response to the substantial changes in the nature and magnitude of economic disequilibria facing members, IMF-supported programs have for several years placed more emphasis on structural reform and the achievement of sustainable economic growth. More recently, the financial crises of 1994–95 and 1997–98 have resulted in an increased focus on (1) the soundness of countries’ financial sectors and the need for strengthening banking supervision, prudential norms, and/or regulation, and (2) the role of the globalization of financial markets in external crises and the need for IMF involvement in supervision and management of orderly capital account liberalization.

Phasing of Purchases

The term phasing refers to the practice of making the IMF’s resources available in installments over the period of an arrangement. Phasing applies under a Stand-By Arrangement beyond the first credit tranche, or under an Extended Arrangement. Once a Stand-By or an Extended Arrangement is approved, the amount of resources under the arrangement is released in installments (usually quarterly), depending on the observance of performance criteria, the completion of reviews with the IMF, or both. Phasing, like performance criteria, is intended to make conditionality effective, and the two together not only provide safeguards for the proper use of IMF resources but also enable a member to demonstrate to other lenders that its adjustment program is being implemented and warrants continued support.

The broad pattern of phasing is agreed upon with the member. Basically, the choice is between even phasing and uneven phasing (that is, uneven because of some element of front-loading or back-loading), depending on the balance of payments need and the path and speed of adjustment. Although these choices are made on a case-by-case basis, normally resources are fairly evenly spread over the arrangement period. The frequency of purchases may also be affected by the length of lags in the reporting of data relating to performance criteria. In exceptional cases, back-loading of purchases may be appropriate if various constraints preclude early adoption of adjustment measures.

Repurchase Policies

The length of the use of the IMF’s general resources is designed to safeguard the revolving character of the IMF’s resources and its liquidity. The periods for repurchase of a member’s currency and the number of repurchases made during each year vary with the different policies and facilities and the source of financing (Table 8). Historically, the stretching of the repurchase period beyond the standard three-year to five-year period prescribed in the Articles, or the shortening of the repurchase period, has reflected the adaptation of IMF policies to the changing needs and circumstances of members. For instance, the longer period of repurchase under the Extended Fund Facility reflects the longer period required for structural adjustment programs to take hold.31 The short period for repurchase under the Supplemental Reserve Facility is appropriate for cases where implementation of strong adjustment policies is expected to result in a restoration of confidence and an early correction of difficulties within a short period of time. The IMF, at its discretion, can change the period of repurchases.32

Table 8.

Terms for Use of Resources in the General Resources Account1

article image

For use of resources financed by borrowed resources under the enlarged access policy terminated in November 1992, repurchases would be made in 8 semiannual installments in a period of 3½ to 7 years.

The one-year repurchase obligation applies when the CSF commitment, combined with the amount committed under the traditional element of the arrangement, would result, when purchased, in the IMF’s holdings exceeding 200 percent of quota. Otherwise, a one-year repurchase expectation applies to the first tranche. A three-month expectation applies to the additional tranches. Such three-month expectations can be extended for additional three months, with Board approval, for a maximum of three extensions, as long as the CSF remains in operation. For Stand-By Arrangements with more than one year but less than 18 months until expiration, the repurchase obligation/expectation for purchases in the first tranche is one year, or set to coincide with the expiration of the arrangement, whichever is longer.

The repurchases are expected to be made within 1–1½ years after a purchase; however, the IMF may, upon a member’s request, decide to extend each such repurchase expectation by up to one year. There is an obligation to repurchase within 2–2½ years after a purchase.

Although purchases from the IMF have fixed maximum repurchase schedules, the Articles prescribe that the use of IMF resources by a member normally be reversed before these fixed maturity dates if the balance of payments and reserve position of the member improve. The IMF has the authority to postpone the date for the discharge of a repurchase by a majority of the votes cast, provided that the postponement does not cause the repurchase to exceed the maximum repurchase period. Postponement beyond the maximum repurchase period would be considered only in the event that the IMF determines that discharge on the due date would result in exceptional hardship for the member and if the longer period for repurchase is consistent with the revolving nature of the use of IMF resources. Such a decision requires approval by a 70 percent majority of the total voting power.33

A member is free to repurchase at any time the IMF’s holdings of its currency corresponding to prior purchases. At the discretion of the member, advance repurchases can be attributed to any outstanding purchases. In this way, a member is free to reduce the IMF’s holdings of its currency corresponding to prior purchases and thereby reduce or eliminate its obligation to pay charges to the IMF. Repurchases can be made, at the choice of the repurchasing member, in SDRs or in currencies selected by the IMF according to the policies and procedures for the use and receipt of currencies under the IMF’s quarterly operational budget.34

The IMF has adopted guidelines on early repurchases that apply on a uniform basis to all IMF members. These guidelines are based on the provisions of Article V, Section 7(b), which states that members whose balance of payments and reserve position have improved, and that are judged “sufficiently strong” in the context of the quarterly operational budget and designation plan, are expected to make repurchases. However, in order to guard against an expectation of an early repurchase by a member that has only recently made a purchase and that may be experiencing only a temporary improvement in the balance of payments, early repurchases are not expected in the First two quarters following a purchase. The amount expected to be repurchased is based on the level of a member’s gross external reserves and on the changes in these reserves in the most recent six-month period for which data are available. If a member’s position is judged by the IMF to be sufficiently strong for the purposes of a quarterly operational budget and designation plan, the member’s position will normally be considered to have improved sufficiently for early repurchases to be expected.35 It is, however, important to note that a repurchase expectation is not an obligation. Nevertheless, certain consequences may arise in case of noncompliance. In particular, the Executive Board may, pursuant to policies that would need to be adopted, and after consulting the member, represent to the member that it should make a repurchase. Such a representation would then give rise to a repurchase obligation rather than a repurchase expectation.

Under the Supplemental Reserve Facility (SRF), there is an obligation to repurchase in two equal installments within 2 and 2½ years after a purchase is made. However, it is expected that repurchases will be made one year earlier, that is, within 1 and 1½ years after the purchase, unless the IMF, upon request by the member, decides to extend each such repurchase expectation by up to one year. Because the SRF was not designed to deal exclusively with short-term crises, this feature aims at adjusting the repurchase schedule to the actual path of improvement of the capital account as confidence is restored.

Also, in the case of use of IMF resources to establish a currency stabilization fund, for outstanding purchases above a certain level, repurchases would initially be expected to be made within a period of three months but the Executive Board can extend this period within certain limits. (See “Currency Stabilization Funds” below.)

A repurchase expectation may arise in four other contexts.

  • Under the Compensatory and Contingency Financing Facility, if a member makes a purchase on the basis of estimated data for the shortfall in export earnings or excess in cereal import costs, and if the actual data, once they are available, indicate that the purchase exceeded the amount that would have been available had actual data been used, the member is expected to repurchase promptly an amount equivalent to the difference.

  • Second, under the Buffer Stock Financing Facility (BSFF), a purchase is subject to repurchase in advance of the normally scheduled dates when, and to the extent that, the international buffer stock organization concerned makes a refund of contributions or transfers stocks of the relevant commodity to the member.

  • Third, in the event that a member makes a purchase under an IMF arrangement that it was not entitled to make by the terms of the arrangement (a noncomplying purchase), the member is required to take corrective action either by making an early repurchase or by requesting that the IMF use its currency in transactions and operations of the IMF, unless the IMF decides that the circumstances justify the continued use of the purchased resources. A noncomplying purchase would arise if a member were permitted to make a purchase because, on the basis of information available at the time, the IMF was satisfied that the conditions applicable to the purchase under the arrangement, including the performance criteria, had been observed, but, on the basis of information subsequently available, it became evident that the conditions of the arrangement had not actually been met.

  • Finally, expectations of early repurchase may also arise with respect to purchases of additional resources under Stand-By or Extended Arrangements (augmentation) and to purchases of amounts set aside under such arrangements to support operations involving debt and debt-service reduction, if the member fails to use the resources for the specified purposes or if there is a subsequent derailment of the program.

Financial Policies and Facilities

The IMF’s financial resources are made available to members from the GRA under a number of policies, some of which are referred to as facilities, depending on the type of underlying balance of payments problem and the terms and degree of conditionality associated with them. Access to these resources is subject to limits in relation to a member’s quota, except that for the Supplemental Reserve Facility (SRF) no access limits have been specified (Table 9). When the limits are applicable, access is determined within these limits taking into account the strength of the member’s adjustment policies, its balance of payments need, and its capacity to repay the IMF. For convenience, all policies under which members use IMF resources are referred to here as facilities.

Table 9.

Access Limits1

(In percent of IMF quota)

article image

Limits effective as of April 30, 1998.

Access under arrangements including a CSF element is up to a combined limit of 100 percent of quota including any access under the Stand-By or Extended Arrangement.

Provides for exceptional financing beyond the annual and cumulative limits under the credit tranches and the EFF.

If the balance of payments position, apart from the effects of the export shortfall (or cereal import costs), is satisfactory, a limit of 65 percent of quota applies to either the export earnings shortfall or the excess cereal import cost, with a joint limit of 80 percent of quota.

Access limit over a three-year period; see Chapter IV.

Reserve Tranche Policies

The first “facility” in the GRA, the reserve tranche, stands apart from the others in that a member’s reserve tranche is part of its own reserves, and a purchase of IMF resources in the reserve tranche does not constitute a use of IMF credit (see Chapter II, Figure 2). Reserve tranche purchases are limited to a member’s reserve tranche position in the IMF (before the Second Amendment of the Articles, known as the “gold tranche”), which is equal to the amount by which a member’s quota exceeds the IMF’s holdings of its currency after excluding those holdings that reflect the member’s use of IMF credit (and those held in the IMF No. 2 Account that do not exceed 1/10 of 1 percent of quota). Reserve tranche positions are liquid claims of members on the IMF that arise in part from the reserve asset payments for quota subscriptions, but also from the sale by the IMF of the currencies of members in strong external positions to meet the demand for use of IMF resources by other members in need of balance of payments support. The rationale for the exclusion of currency holdings reflecting use of IMF credit in calculating the reserve tranche position is to enable members to make purchases under credit policies without compelling them to use their reserve tranche position, which, as reserve assets rather than a credit facility, is available for use at the discretion of the member.

Purchases in the reserve tranche are subject to balance of payments need. The IMF has no power, however, to challenge a member’s representation of need for use of the reserve tranche before the transaction. Furthermore, a reserve tranche purchase is not subject to conditionality, charges, or an expectation or obligation to repurchase.

Credit Tranche Policies

Early in its history, in 1952, the IMF decided that access to credit would be made available to members in tranches (segments), with each equivalent to 25 percent of quota. A member could make purchases in four credit tranches. A first credit tranche purchase raises the IMF’s holdings of the purchasing member’s currency arising from the use of IMF credit to no more than 25 percent of quota. The three subsequent tranches, each equivalent to 25 percent of quota, were known as upper credit tranches. Over time, and particularly with the introduction of the Extended Fund Facility in 1974andthe enlarged access policy in 1981, outstanding use of IMF resources substantially above 100 percent of quota under the credit tranches has been permitted; accordingly, the term “upper credit tranches” has come to refer generally to any use of IMF resources beyond the first credit tranche.

The segmentation in terms of first and upper credit tranches underscores the basic notion of commensurate graduation of conditionality as a member’s purchases become larger. The IMF adopts a more liberal attitude in making resources available in the first credit tranche than in the upper tranches, provided that the member is making reasonable efforts to solve its balance of payments problems. Requests for use of resources beyond the first credit tranche require substantial grounds for expecting that the member’s balance of payments difficulties will be resolved within a reasonable time. Such use is almost always made under a Stand-By or an Extended Arrangement (see below). Phasing of purchases, performance criteria, and reviews apply to the use of IMF resources in the upper credit tranches, but not in the first credit tranche, even under a Stand-By Arrangement.36

Stand-By and Extended Arrangements

An IMF arrangement (Stand-By or Extended) is a “decision of the Fund by which a member is assured that it will be able to make purchases” from the GRA “in accordance with the terms of the decision during a specified period and up to a specified amount” (Article XXX(b)). An arrangement is not a contract. However, the use of IMF resources carries with it the obligation to pay charges and to repurchase in accordance with the applicable schedule.

The use of IMF resources under a Stand-By or an Extended Arrangement is subject to the observance of economic performance criteria and possibly reviews of progress under the economic program supported by the arrangement. The performance criteria typically include budgetary and credit ceilings, avoiding restrictions on current international payments and transfers, limits on the amount and maturity of new short- and medium-term external debt, avoiding external payments arrears or a schedule for reducing existing external payments arrears, and maintaining minimum levels of net foreign reserves. Less frequently, performance criteria may be directly linked to certain actions, such as specific reforms in a tax law or the financial sector deemed necessary to attain the objectives of the economic program. Arrangements other than those in the first credit tranche generally provide for the total amount of purchases covered by the arrangement to be made available or “phased” over time, normally at quarterly intervals (although shorter intervals are possible, and there can be six-month intervals for Extended Arrangements as noted below). The nonobservance of performance criteria interrupts the right of a member to make further purchases under the arrangement.

The typical Stand-By Arrangement is designed to provide short-term balance of payments assistance for deficits of a temporary or cyclical nature. Stand-By Arrangements usually cover a period of one to two years (although they can be for periods of less than a year or up to three years), with quarterly performance criteria and semiannual reviews. Repurchases are scheduled 3¼ to 5 years after each purchase.

Balance of payments difficulties may also arise from structural maladjustments in production and trade and widespread cost and price distortions. Such maladjustments generally take longer to correct—for instance, when new investments in particular sectors or institutional changes are required. To take account of members in such circumstances, the Extended Fund Facility (EFF) was established in September 1974 to provide assistance to meet balance of payments deficits over longer periods and in amounts larger in relation to quota than available under the credit tranche policies. (Until then, the maximum available under tranche policies had been 100 percent of quota.) Commitments by members to a medium-term framework of adjustment implicit in such Extended Arrangements also encourage other creditors (multinational as well as private) to consider financial arrangements of longer duration, which, in turn, foster a longer planning horizon for the adjustment process. Because conditions that would make an Extended Arrangement appropriate are more likely to apply to developing countries, the Executive Directors noted that the EFF, in its formulation and administration, was likely to be beneficial for developing country members in particular. Like all IMF facilities, however, it is available for all members that can satisfy the requisite criteria of the facility.

Members requesting an Extended Arrangement are expected to present a program outlining their objectives and policies for the whole period of the arrangement, as well as detailed statements of the policies and measures that will be followed during each year to meet the objectives of the program. The Executive Board at its June 1988 review of the EFF considered the issue of strengthening the facility’s effectiveness in supporting comprehensive programs of macroeconomic and structural reforms and catalyzing other sources of finance, and adapted the facility to allow initial three-year Extended Arrangements to be lengthened to four years, if requested by the member, in order to facilitate sustained policy implementation over the medium term. In a July 1994 review of Stand-By and Extended Arrangements, the Executive Board reaffirmed the appropriateness of the IMF’s general approach to adjustment and reform.37

Reflecting the emphasis under these arrangements on structural reforms over an extended period, disbursements and performance criteria can be phased at semiannual intervals, provided that appropriate monitoring of macroeconomic developments is ensured, normally in the form of the member’s meeting quarterly benchmarks. Repurchases are made over a period of 4½ to 10 years after the date of each purchase.

After the Ninth Review of Quotas took effect, the IMF’s access policy and access limits (including under special facilities) were reviewed and revised by the Executive Board in November 1992. Access limits for purchases under the credit tranches and the EFF were set as follows: an annual limit of 68 percent of quota, with a cumulative limit (net of repurchases) of 300 percent of quota, in both cases excluding purchases under the special facilities.38 In October 1994, the Executive Board raised the annual limit to 100 percent for a period of three years (subject to annual reviews), while maintaining the cumulative limit at 300 percent. These limits have remained unchanged since then, except for the introduction in December 1997 of the Supplemental Reserve Facility (see below). Access policy and limits are reviewed annually. Limits are not to be regarded as targets, and the amount of access in individual cases may vary according to the circumstances of the member. In exceptional cases, the IMF may approve Stand-By or Extended Arrangements that exceed the access limits.

Emergency Financing Mechanism

In view of the increasing speed with which balance of payments difficulties have developed and spread in recent years, the IMF has adapted its procedures. In September 1995, the Executive Board established an Emergency Financing Mechanism to strengthen the IMF’s ability to respond rapidly to a member facing a crisis in its external accounts and seeking IMF support of a strong macroeconomic adjustment program. The mechanism sets out exceptional procedures to expedite Board approval of financial support while ensuring the conditionality required. These procedures are expected to be used only in circumstances that require an immediate response from the IMF, such as a high potential for spillover or contagion effects. In addition, readiness of the member to engage in accelerated negotiations with the IMF on implementing corrective measures, and its record of past cooperation, affect the speed of the IMF’s response. It is recognized that large and front-loaded access to IMF resources may be necessary in some cases where this mechanism is activated. The mechanism was employed in dealing with the impact of the Asian crisis, in the approval and review of IMF arrangements for Thailand, Indonesia, Korea, and more recently, Russia.

Supplemental Reserve Facility

During the recent Asian crisis, which was accompanied by an unprecedented level of demand for IMF resources, the IMF established the Supplemental Reserve Facility (SRF) to provide financial assistance to members experiencing exceptional balance of payments difficulties due to a large short-term need resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and the member’s reserves. For the use of the facility by a member, there should be a reasonable expectation that the implementation of strong adjustment policies and adequate financing will result in an early correction of such difficulties.

Financing under the SRF is provided under a Stand-By or an Extended Arrangement in addition to the other resources made available under those arrangements. Access under the SRF is not subject to the usual annual and cumulative access limits, but is determined on the basis of the financing needs of the member, its capacity to repay, the strength of its program, and its record of past use of IMF resources and cooperation with the IMF. The IMF’s liquidity position is also to be taken into account.

To minimize moral hazard, a member using resources under the SRF is encouraged to seek to maintain the participation of creditors, both official and private, until the pressure on the balance of payments ceases. The decision establishing the facility also states that all options should be considered to ensure appropriate burden sharing.

Financing is committed for up to a year and generally available in two or more purchases. The obligation to repurchase is within 2 to 2½ years from the date of each purchase, but the member is expected to repurchase one year before the due date unless the IMF decides, upon the member’s request, to extend each such repurchase expectation by up to one year. The repurchase expectation established under the SRF is distinct from, and in addition to, the repurchase expectation of Article V, Section 7(b) of the Articles—that is, the expectation that a member will normally make repurchases as its balance of payments and reserve position improve.39 During the first year following approval of financing under the facility, the rate of charge levied on purchases under the SRF is 300 basis points a year above the regular rate of charge applied on other use of IMF resources, as adjusted for burden sharing. The rate increases by 50 basis points at the end of the first year and every six months thereafter, until it reaches 500 basis points.

Financing for Debt and Debt-Service Reduction

To reinforce the debt strategy adopted in the wake of the debt crisis of the early 1980s, and to pave the way for an early restoration of normal access to capital markets, in appropriate cases the IMF has provided support for debt- and debt-service-reduction operations in conjunction with adequate flows of new money from the private sector. The Executive Board approved guidelines for such operations in May 1989. These guidelines are reviewed periodically and have evolved in the light of experience.

IMF support for debt-reduction operations is linked to medium-term adjustment programs with a strong element of structural reform, adopted in the context of Stand-By or Extended Arrangements, and also (since 1997) in the context of arrangements under the Enhanced Structural Adjustment Facility. Particular reference is made to three elements: the strength of economic policies; the scope for voluntary, market-based debt-reduction operations that would help the country regain access to credit markets and attain external viability with growth; and an assessment that such operations represent an efficient use of scarce resources.40

As regards the particular modalities of IMF support, in appropriate cases part of a member’s access under an Extended or Stand-By Arrangement can be set aside to finance operations involving a reduction of principal or interest support, or an arrangement can be augmented with additional resources. The exact amount of the set-aside is determined on a case-by-case basis, but in most cases represents about 25 percent of access on the basis of existing access policy. Additional resources of up to 30 percent of a member’s quota can be provided to a member to finance the same operations for which IMF resources under an arrangement can be set aside, where such support would be decisive in facilitating further cost-effective operations and catalyzing other resources, consistent with significant further progress toward external viability.41 Since 1989, eight members have made purchases totaling SDR 3.0 billion for financing debt- and debt-service-reduction operations.

Currency Stabilization Funds

Currency Stabilization Fund (CSF) financing, which may be considered only in cases of high inflation, is intended to supplement a member’s reserves temporarily in support of a comprehensive exchange-rate-based stabilization strategy aimed at reducing inflation rapidly. Financial resources are within the context of an upper credit tranche or Extended Arrangement (or in parallel to an ESAF Arrangement). The most appropriate exchange arrangements to be supported by a CSF would be an exchange rate peg with relatively narrow margins or a preannounced crawl that would limit the discretionary use of the exchange rate. The CSF element of support under an arrangement is limited to 100 percent of quota (a sublimit under the access limits applicable to Stand-By and Extended Arrangements). IMF support would normally be available in four equal tranches, with flexibility to raise access under the first tranche up to 35 percent of the total amount.

CSF purchases are subject to a one-year repurchase obligation if the combined amount purchased under the traditional and CSF elements of the arrangement would raise the IMF’s holdings of the member’s currency beyond 200 percent of quota. First tranche CSF purchases that, combined with purchases under the traditional Stand-By component, do not raise the IMF’s holdings of the member’s currency above 200 percent of quota are subject to a one-year repurchase expectation.42 In addition, CSF purchases beyond the first tranche are subject to repurchase expectations within three months, a period that can be extended upon the member’s request by the approval of the Board up to three times for three-month periods, so long as the CSF remains in operation. Failure to comply with a repurchase expectation precludes further use of the IMF’s general resources until the expectation is satisfied. Repurchases reconstitute the member’s right to request a new use of resources under the facility. Charges on CSF purchases are the same as under Stand-By and Extended Arrangements.

Documentation to establish a CSF should specify precise reporting requirements, including daily reporting of key financial variables (such as exchange rates, interest rates, exchange market turnover, and reserves). Activation of the CSF element of an arrangement requires a determination by the Executive Board that the conditions (regarding exchange rate, fiscal and monetary policies, financing of the program, and monitoring and reporting procedures) are appropriate. As of July 1998 no occasion had arisen for the IMF to provide financial support for currency stabilization funds.

Emergency Assistance Related to Natural Disasters and Postconflict Cases

Balance in external accounts can be temporarily but severely disturbed by sudden and unforeseeable natural disasters (such as earthquakes, hurricanes, drought, or pest infestation). The IMF’s experience has shown that effective and timely emergency assistance in the form of quick outright purchases can be provided to members through the flexible application of existing IMF policies, provided that the member is cooperating with the IMF to find a solution to its balance of payments difficulties. Consequently, no formal facility has been established to address the need for emergency assistance.

The following procedures have been followed since 1982, when broad guidelines for emergency assistance were discussed. Emergency assistance is limited to the equivalent of one credit tranche, although in exceptional cases larger amounts can be made available. The amount of an emergency purchase is to be taken into account in determining the size of any additional use of IMF resources by a member under a subsequent Stand-By or Extended Arrangement, or under the CCFF. Repurchases are due 3¼ to 5 years from the dates of purchases. A member requesting emergency assistance must describe the general corrective economic policies that it proposes to follow and indicate its intention to avoid introducing or intensifying exchange and trade restrictions.

In the nine cases between 1982 and 1992 for which the IMF provided emergency assistance, the disasters substantially affected the balance of payments positions of the members, relative both to members’ quotas and to the value of members’ international trade. In most cases emergency assistance was followed by an arrangement with the IMF under one of its regular facilities; in a few cases, appropriate measures were taken in consultation with the IMF but without further use of its resources.

In 1995, the policy on emergency assistance was expanded to cover postconflict situations. Although in general the existing guidelines on emergency assistance would apply in postconflict cases, IMF assistance may be provided when a member’s institutional and administrative capacity has been disrupted as a result of the conflict, but (1) there is still sufficient capacity for planning and policy implementation and a demonstrated commitment on the part of the authorities; (2) there is an urgent balance of payments need to help build reserves and meet essential external payments; and (3) IMF support could be catalytic and is part of a concerted international effort. Part of the international response must be a comprehensive technical assistance program, including institution-building aspects, and provision for its financing. Conditions for the assistance include a statement of economic policies, a quantified macro-economic framework to the extent possible, and a statement of the authorities’ intention to move as soon as possible to an upper credit tranche Stand-By or Extended Arrangement, or to an arrangement under the Enhanced Structural Adjustment Facility (ESAF) (see Chapter IV), The use of emergency assistance is to be framed in a manner that will pave the way toward the adoption of an upper credit tranche Stand-By or Extended Arrangement or to an ESAF Arrangement. So far, assistance for Albania. Bosnia and Herzegovina, Rwanda, and Tajikistan has been provided under this facility.

Special Facilities

The IMF has developed special facilities that seek to provide additional assistance for certain specific balance of payments difficulties. Drawings under each such facility do not reduce or otherwise affect the amounts that a member can draw under the credit tranches or Extended Arrangements. However, when members draw upon more than one IMF facility, there cannot be double financing of the same balance of payments need. As in the case of all other IMF facilities, when providing resources under the special facilities due attention is paid to the member’s capacity to meet its overall obligations to the IMF. The following subsections review the Compensatory and Contingency Financing Facility, the Buffer Stock Financing Facility, and the Systemic Transformation Facility.43

Compensatory and Contingency Financing Facility (CCFF). The IMF established the Compensatory and Contingency Financing Facility (CCFF) in 1988. The CCFF superseded the Compensatory Financing Facility established in 1963, yet kept its essential features. Under the CCFF, the IMF continues to assist members experiencing temporary shortfalls in export earnings (and service receipts on an optional basis), and temporary excesses in cereal import costs that are largely attributable to circumstances beyond the members’ control. The CCFF also includes a feature, introduced in 1988, called the “external contingency mechanism” that gives members that have entered into adjustment programs supported by the IMF the opportunity to protect themselves from unexpected external disruptions, such as sudden movements in export earnings and import prices, and unexpected increases in international interest rates. In December 1990, the IMF introduced a temporary oil import element to compensate members for sharp increases in the cost of their petroleum imports that were temporary and beyond their control. Use of the oil element lapsed in June 1992.

The amounts of financing available to a member under the CCFF are 30 percent of quota each on account of the export shortfall and the external contingency elements, and 15 percent of quota for the cereal import cost element. In addition, members may choose to apply an “optional tranche” of 20 percent of quota to supplement any of the three elements. The access level of 65 percent of quota applies for financing of either export shortfalls or cereal import costs (or both) in cases where the member’s balance of payments difficulties are due only to the effects of an export shortfall or an excess in cereal import costs—that is, when there is no need for adjustment policies. Otherwise, there are various lower sublimits for access, depending on the extent of cooperation by the member with the IMF in solving its balance of payments difficulties. There is a combined maximum limit of 80 percent of quota on the use of any two of the three elements of the CCFF, and a combined maximum limit of 95 percent of quota on the use of all three elements. Repurchases take place 3¼ to 5 years after the respective purchases. The present components of the CCFF—compensatory financing for export shortfalls and for excesses in cereal costs, and contingency financing—are described below.

The compensatory financing element of the CCFF provides financial assistance to members experiencing, for reasons beyond their control, balance of payments difficulties resulting from temporary declines in commodity export earnings below their medium-term trends. Compensatory financing is available to all members; however, its beneficiaries tend to be exporters of primary products whose export earnings are especially susceptible to temporary cyclical fluctuations in price, changes in demand, and changes in output owing to exogenous factors, such as adverse weather and pest infestation. The original Compensatory Financing Facility established in 1963 applied only to merchandise exports, and beginning in 1979 it became possible to include earnings from tourism and workers’ remittances. In 1981, coverage was extended to difficulties caused by excesses in cereal import costs. In December 1990, under the CCFF, eligibility for compensatory financing was expanded to all services where adequate data are available (most notably, earnings from pipelines, canal transit fees, shipping, transportation, construction, and insurance).

A member seeking compensatory financing under the CCFF would have immediate access to a purchase of up to 30 percent of quota, if the export shortfall is temporary, largely attributable to circumstances beyond the member’s control, and if the member satisfies the requirement of willingness to cooperate with the IMF. The optional tranche will become available, in general, if the member’s policies meet upper credit tranche criteria. If the member’s record of cooperation with the IMF to find solutions to its balance of payments difficulties has not been satisfactory, different limits apply linked to a test of cooperation.

The export shortfall is calculated as the amount by which export earnings in the shortfall year are below the geometric average of export earnings for a five-year period centered on the shortfall year (that is, normally, the latest 12-month period for which actual data are available). Exports for the two post-shortfall years are based on projections worked out between IMF staff and the member country’s authorities (with a limit, for the purpose of calculating the shortfall, of 20 percent increase over exports in the two pre-shortfall years). An excess in cereal import costs is calculated as the amount by which the cost of cereal imports in a given year exceeds the arithmetic average of the cost of cereal imports for the five years centered on that year.

A member is required to submit a request for compensatory financing not later than six months after the end of the shortfall or excess year. Estimated data may be used for up to the entire shortfall or excess year, but if estimated data are used for nine months or more, access will be phased over two purchases. If, on the basis of actual data for the shortfall or excess year, the member is found to have been overcompensated, it will be expected to make a prompt repurchase.

The contingency financing element of the CCFF aims to improve the prospects that adjustment programs can be kept on track in the face of adverse exogenous developments by means of an appropriate blend of additional financing and adjustment. Contingency mechanisms are attached to IMF arrangements, and financing is provided to cover part of the net effect on a member’s external current account of unanticipated changes in key external variables that are highly volatile and can be easily identified. The variables covered include export earnings, import prices, and interest rates. Variables such as workers’ remittances and tourism receipts are also covered if they are important elements in the member’s current account. Deviations in the variables covered by a contingency mechanism are measured in relation to projections in the underlying program (the baseline projection). The contingency mechanism is triggered once cumulative deviations exceed a threshold level.

The triggering of a contingency mechanism leads to automatic adjustments to the performance criteria for net international reserves and, as appropriate, other variables. In the event of an unfavorable deviation, the Executive Board will also decide whether to provide contingency financing, taking into account any offsetting positive developments in variables that were not included in the contingency mechanism, the appropriateness of the member’s policies in light of its changed circumstances, whether there is a balance of payments need, and whether the program continues to be adequately financed.

In the event of a deviation in favor of the member, the program’s target for net international reserves is automatically increased. Although this would ordinarily suffice, the Executive Board may also, or as an alternative, decide to reduce the remaining access under the IMF arrangement. In such cases, the member will have the option of making an early repurchase instead.

The maximum amount that a member may draw for contingency financing is 30 percent of quota, or up to 50 percent of quota if the optional tranche is included, subject to the cumulative access limits described above. Contingency financing generally would not exceed 70 percent of access under the associated arrangement. There is also a cumulative limit of 25 percent of quota for contingency financing on account of deviations in interest rates.

There has been very limited use of the contingency financing mechanism in IMF arrangements.

Buffer Stock Financing Facility (BSFF). Buffer stock schemes are intended to help reduce the variability of export earnings of participating countries. The IMF has no legal power to finance buffer stock organizations directly, or to engage in any transactions with them, but it can assist a member that needs to contribute to them. The IMF established in June 1969 the BSFF, under which it makes its resources available to members to finance their contributions to international commodity buffer stock schemes that satisfy certain criteria, including those approved by the Economic and Social Council of the United Nations.

Under the BSFF, the IMF’s resources are available to members, subject to balance of payments need, for financing commodity stock building and operating expenses of buffer stock agencies, and refinancing any short-term debts as a result of stock building or operational activities and expenses. A member may have outstanding purchases under the BSFF of up to 35 percent of quota. In accordance with the criteria set forth in the decision establishing the BSFF, the IMF has so far authorized the use of its resources in connection with buffer stocks of tin, sugar, and natural rubber. No use has been made of this facility since January 1984.

Systemic Transformation Facility (STF). Designed to assist transition economies, the Systemic Transformation Facility was a temporary IMF facility in effect between 1993 and 1995 to provide financing to member countries facing balance of payments difficulties arising from severe disruptions of their international trade and payments arrangements owing to a shift away from significant reliance on state trading at nonmarket prices toward multilateral, market-based trade. Use of the facility was open to members that had experienced a severe disruption in their traditional trade and payments arrangements manifested by (1) a sharp fall in total export receipts; (2) a substantial and permanent increase in net import costs, particularly for energy products; or (3) a combination of both. Disruptions were deemed to be “severe” when they were equivalent to at least 50 percent of the member’s quota. For use of the facility, significant policy actions were expected, including prior actions as appropriate.

Access under the facility was limited to 50 percent of quota, provided in two equal purchases. The rate of charge was the same as for other uses of the IMF’s general resources, and the repurchase period, beginning 4½ years and ending 10 years after the purchase, was the same as under the EFF. Total use of IMF resources under the facility amounted to SDR 4.0 billion.