Abstract

In addition to its general resources, the IMF has generated other resources to provide low-income developing countries with relatively long-term assistance on concessional terms. Such assistance was first made available to eligible members through the Trust Fund, and later through the Structural Adjustment Facility (SAF) and its successor, the Enhanced Structural Adjustment Facility (ESAF).44

Enhanced Structural Adjustment Facility

In addition to its general resources, the IMF has generated other resources to provide low-income developing countries with relatively long-term assistance on concessional terms. Such assistance was first made available to eligible members through the Trust Fund, and later through the Structural Adjustment Facility (SAF) and its successor, the Enhanced Structural Adjustment Facility (ESAF).44

Resources for the Trust Fund, established in 1976, were derived from a major part of the profits of the sale of a portion of the IMF’s gold by public auction in 1976–80, supplemented by transfers from some of the beneficiaries of direct distributions of gold sale profits and by income from the investment of assets (see Appendix I). Upon termination of the Trust in 1981, Trust Fund loan repayments accrued to the Special Disbursement Account (SDA), and SDA resources were used to fund the SAF, which was established in 1986.

It was recognized from the outset that the resources available under the SAF would be insufficient to support the strong and comprehensive adjustment programs that the poorest countries needed to undertake to restore and maintain balance of payments viability while achieving high and sustainable rates of economic growth. To increase the assistance available to these countries to levels commensurate with their problems, the IMF launched an initiative in June 1987 to raise additional funds from bilateral sources. For this purpose, the Executive Board established the ESAF in December 1987; the facility became operational in April 1988. The ESAF itself was extended and enlarged in December 1993, and operations under the enlargement started in February 1994. From the establishment of the ESAF until February 1994, unused amounts under the SAF were also used to finance ESAF arrangements. The SAF itself was phased out, and the last disbursement was made by end-1995.

In September 1996, the Executive Board expressed their unanimous support for the continuation of the ESAF and reached understandings to ensure such a continuation and to allow the IMF to participate in the joint IMF/World Bank Initiative for the heavily indebted poor countries (HIPCs). (See “Interim ESAF and the HIPC Initiative” below.)

Structural Adjustment Programs

Resources under the ESAF are made available in the form of highly concessional loans to support medium-term macroeconomic and structural adjustment programs. Such programs are explicitly oriented toward a lasting improvement in the external payments position and the elimination of structural imbalances and rigidities in the economies of eligible countries, many of which have suffered for many years from low rates of growth, declining per capita incomes, and, in some cases, heavy external debt burdens.

It is also intended that ESAF arrangements should play a catalytic role in mobilizing and coordinating resource flows from other multilateral and bilateral sources of finance. Central to each arrangement is the policy framework paper (PFP)—a document prepared by the national authorities, with assistance from the staffs of the IMF and the World Bank. The PFP is a forward-looking document, updated annually on a three-year rolling basis, that identifies the country’s macroeconomic and structural policy objectives, the strategy and priorities of the authorities to achieve those objectives, and the associated external financing requirements. The specific policy undertakings for the first year and general indications of policies to be pursued in the second and third years of the program are described in the paper. The document also discusses the country’s public investment program, technical assistance and financing requirements, and the external debt situation and its sustainability. It outlines the likely social and environmental impact of policy changes, along with steps that can be taken to cushion the poorest segments of the population from adverse effects. Potential creditors and donors—that is, member countries and multilateral organizations that may provide external assistance in support of adjustment programs—are often consulted in the preparation of PFPs and often draw on the completed documents as a reference in making their own decisions about financial assistance. The authorities may also make the PFP available to the general public. The PFPs are discussed by the IMF’s Executive Board and are circulated to the World Bank Board for information purposes. However, if an Executive Director of the Bank requests a discussion, the IMF’s Board discussion would follow that of the Bank Board by a week.45

The reforms to be implemented under ESAF arrangements are expected to be particularly far-reaching with regard to both macroeconomic policy measures and structural measures, with a view to achieving a substantial and sustainable strengthening of the balance of payments position and to fostering growth. More recently, greater attention has been given under ESAF-supported programs to (1) the quality and composition of public spending, in particular to better integrate social safety nets to protect the most vulnerable segments of the population, and to protect productive capital spending and high-priority spending in health and education; (2) contingency mechanisms to protect programs against adverse external shocks; and (3) well-targeted technical assistance and coordination with other multilateral institutions and donors.

During 1997, the Board approved the use of ESAF resources for commercial debt- and debt-service-reduction (DDSR) operations as an extension of the existing policy for such operations under Stand-By and Extended Arrangements. The Board agreed to incorporate into an annual ESAF Arrangement a provision for a special disbursement for the sole purpose of financing part of such an operation.46 The Board also agreed that ESAF financing for DDSR operations should be in a subsidiary role and used only if other options for financing are not available.

Internal Review and External Evaluation

An internal review and an external evaluation of the ESAF were undertaken in 1997 and 1998, respectively. The evaluations reaffirmed the fundamental view that the ESAF is a valuable instrument to assist low-income countries, while providing important lessons and a useful basis for public debate.

The internal review in mid-1997 of the 10 years of experience under SAF/ESAF-supported arrangements concluded that most of the countries that had availed themselves of these facilities had strengthened their economies materially and made them more market-oriented. Fiscal imbalances had been reduced and very high rates of inflation had been lowered. Moreover, the economic liberalization and the structural reforms promoted under the facilities had taken hold and appeared to have gained momentum. Nevertheless, many ESAF users continued to perform below their potential, with still-low average saving rates constraining investment and growth and impeding progress toward external viability, and debt-service burdens remaining unmanageably high in several countries.

The internal evaluation identified several areas where bolder reform strategies could increase national savings and reduce inflation to the single-digit range by focusing on more decisive and sustainable fiscal adjustment than had been achieved under past ESAF-supported adjustment programs. Countries that implemented forceful macroeconomic adjustment were likely to benefit most if they simultaneously adopted structural reforms to stimulate private investment and entrepreneurship. Hence, ESAF-sup-ported programs should pay particular attention to aspects of reform that directly affect private sector development, including further liberalization of foreign trade and investments, public enterprise reform, the creation of a sound banking system, and measures to strengthen property rights.

To obtain an independent outside perspective, the IMF appointed external evaluators, who used case studies to assess the experience of countries under ESAF-supported programs. With regard to national ownership of IMF-supported programs, the evaluators found that countries frequently felt a loss of control over the policy content and the pace of implementation of reform programs. The evaluators recommended steps that should be taken by national authorities to build greater policy consensus within society and suggested that IMF staff engage in an intensive and informal policy dialogue with the country’s political leadership in order to take political constraints into account when making recommendations on the policy mix. Further efforts were also needed to improve public understanding of the IMF in countries receiving ESAF support, including through public explanations of the purpose and benefits of economic programs by the governments themselves. With regard to social policies, the evaluators felt that appropriate compensatory measures should be built into programs to protect the most vulnerable groups. This would also help policymakers build a domestic consensus in favor of important but difficult reform measures.47

ESAF Terms and Access Limits

  • ESAF arrangements cover a period of three years under three annual arrangements.48

  • Disbursements of ESAF loans take place semiannually; the first semiannual disbursement is made upon approval of an annual arrangement, and the second is based on the observance of midyear performance criteria and completion of a midterm review.

  • It is the IMF’s objective that the interest charged on ESAF loans be kept at a concessional rate of ½ of 1 percent a year, and lending has been made available to eligible members at this rate. However, the rate is subject to periodic review by the Executive Board in the light of the amount of subsidy resources available.

  • ESAF loans are repaid in 10 equal semiannual installments beginning 5½ years and ending 10 years after the date of each disbursement.

Access under ESAF Arrangements is determined according to members’ balance of payments needs, the strength of their adjustment programs, their outstanding use of IMF credit, and their record of such use in the past. The initial access limit under a three-year arrangement is 190 percent of the member’s quota, or, under exceptional circumstances, up to 255 percent of quota.49 Under the extended and enlarged ESAF, it was expected that access would be lower for past users with continuing need and that it would be subject to an appropriate adjustment effort.

Eligibility for ESAF Arrangements and Conditionality

Eligibility for ESAF Arrangements has been based principally on per capita income and eligibility under the International Development Association (IDA), the concessional lending organization of the World Bank Group. The number of eligible member countries has increased from 61 in 1986, when the SAF was established, to 79 in 1998.50 Table 10 presents the current list of countries eligible to use the ESAF, as well as the amounts that these countries have borrowed under SAF and ESAF arrangements from 1986 through April 30, 1998.

Table 10.

Countries Eligible for SAF and ESAF: Loans Disbursed as of April 30, 19981

(In millions of SDRs)

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The original list included 62 members, but in May 1990 the People’s Democratic Republic of Yemen and the Yemen Arab Republic joined together to become the Republic of Yemen. Over time, some members have been added to the list while others have graduated out of it (e.g. Dominican Republic, Philippines, and St. Kitts and Nevis) as their situations have improved.

China has indicated that it does not intend to use ESAF resources in view of its strong balance of payments position.

Monitoring of programs supported by ESAF Arrangements is conducted through semiannual performance criteria. As with Stand-By and Extended Arrangements, criteria include macroeconomic indicators and important structural measures; because of the focus on reforming the economic structure, structural benchmarks are frequent.

Financing

Resources to finance lending in support of ESAF Arrangements-which consist of loans and subsidy contributions—are administered by the IMF through the ESAF Trust, The trust conducts its operations through three accounts; the Loan Account, to administer the funding needed for trust loans; the Subsidy Account, to subsidize the rate of interest paid by borrowers on loans from the trust; and the Reserve Account, to secure lenders’ claims on the trust.

Loans. The ESAF Trust borrows resources for on-lending to eligible members, with the maturity of drawings coinciding with the maturity of loans to ESAF borrowers, that is, 5½–10 years.51 Lenders have extended loans to the ESAF Trust on various interest rate terms, highly concessional in some cases, and free of any interest in one case. However, most loans to the ESAF Trust have been provided at six-month market-related interest rates, although most of these lenders have also made separate subsidy contributions, reducing the effective cost of the loans to borrowers.

Currently there is a deadline of end-December 2000 for making commitments to ESAF borrowers. It is expected that by that time or earlier, cumulative commitments to borrowers since the start of the ESAF in December 1987 will amount to SDR 10.1 billion, the current borrowing target by the ESAF Trust (of which some SDR 0.4 billion remains to be secured from lenders). Total commitments of ESAF resources to 48 borrowers under 71 ESAF Arrangements amounted to SDR 8.5 billion as of end-April 1998 (net of amounts that remained undisbursed when ESAF Arrangements expired or were canceled).52

Subsidies. The ESAF Trust finances the interest it pays out to lenders from (1) the interest paid in by borrowers, and (2) donations made by contributors to subsidize the rate of interest for borrowers. Donations have taken the form of direct grants and the net investment earnings from loans, investments, or deposits with the Subsidy Account of the ESAF Trust at concessional interest rates. Some contributors of subsidies have preferred to place concessional resources in separate accounts administered by the IMF; the difference between the earnings on the investment of these resources and the very low interest due to the contributor is used to subsidize the interest rate charged to ESAF borrowers. The ESAF Trust has sufficient resources in hand or firmly committed to subsidize down to an annual interest rate of 0.5 percent the cumulative lending target of SDR 10.1 billion.53

Reserves. To increase the security of lenders’ claims on the trust, special resources are set aside in the ESAF Trust Reserve Account. In the event of delays in payment by the trust’s borrowers, the IMF will use the resources of the Reserve Account to repay, or pay interest on, loans to the trust as these payments fall due. The Reserve Account is financed mainly from (1) repayments of SAF/ESAF loans funded by Special Disbursement Account resources, and (2) the net interest earnings on the investment of Reserve Account resources. As of April 30, 1998, the balance in the Reserve Account was SDR 2.1 billion. Resources of the Reserve Account that are determined to be in excess of its estimated needs are to be transferred to the Special Disbursement Account.

Interim ESAF and the HIPC Initiative

The resources currently available under the ESAF are expected to last until at least 1999 and perhaps somewhat longer. However, because of the protracted nature of the debt and balance of payments problems of the poorest developing countries, the need for IMF assistance on concessional terms to support the macroeconomic adjustment and structural reform efforts of these countries is expected to continue over the foreseeable future. The Executive Board has, therefore, given its unanimous support for the continuation of the ESAF as the centerpiece of the IMF’s strategy to assist its poorest members, including the Initiative to assist the Heavily Indebted Poor Countries (the HIPC Initiative). In February 1997, the IMF adopted the Instrument to Establish a Trust for Special ESAF Operations for the Heavily Indebted Poor Countries and Interim ESAF Subsidy Operations (the ESAF–HIPC Trust). The purposes of the trust are to assist eligible members that qualify under the HIPC Initiative and to subsidize the interest rate on interim ESAF operations to ESAF-eligible members.

Continuation of the ESAF

Reflecting the continued inflow of repayments from SAF loans, and also the accumulation of investment income, the resources of the ESAF Trust Reserve Account are growing and are expected to exceed ESAF Trust liabilities around the year 2005 (the guarantee provided by the Reserve Account at that point would be higher than 100 percent). The excess resources would be available to finance a self-sustained ESAF with a commitment capacity of about SDR 0.8 billion a year. Since current ESAF resources are expected to last until sometime in 2000, there will be a four-year interim period of ESAF operations (within the five-year period 2000 to 2004), with expected commitment needs of SDR I billion a year. The financing needs for the interim period are considered below together with the financing needs for the HIPC Initiative.

HIPC Initiative

In September 1996, the Interim Committee endorsed a joint report by the Managing Director and the President of the World Bank on a Program of Action to Resolve the Debt Problems of the Heavily Indebted Poor Countries (HIPCs). The centerpiece of the program is a commitment by the international community to provide enhanced debt relief to HIPCs that have established a track record of economic adjustment to help them reduce their external debt burdens to sustainable levels over the medium term. The Executive Board of the IMF agreed that its participation in the HIPC Initiative would be made principally in the form of grants financed through special ESAF operations. The grants, which would be used to pay debt-service obligations due to the IMF on a predetermined schedule, would reduce the net present value of the debt owed by the country to the IMF.54 Countries would be eligible for exceptional assistance under the Initiative if (1) they are ESAF eligible and IDA-only eligible; (2) they adopted programs of adjustment and reform supported by the IMF and the Bank in the two-year period that began October 1, 1996, after which the Initiative would be reviewed and a decision would be taken about its continuation; and (3) their external debt situation at the “completion point” (see below) would be unsustainable after the full application of traditional debt-relief measures.

To be eligible for assistance under the Initiative, members have to establish a track record, normally over six years, of strong policy performance and structural reform supported by the IMF through ESAF or extended arrangements (or on a case-by-case basis, through Stand-By Arrangements, or Rights Accumulation Programs (RAPs)). The requirement of six years of strong policy performance will be decided on a case-by-case basis, and a country may receive credit for programs that were under way prior to the adoption of the Initiative. The IMF and the World Bank would formally decide on a member’s eligibility for assistance under the Initiative typically after three years, at the decision point, subject to satisfactory assurances of coordinated action by other creditors. Exceptional assistance sufficient to ensure the country’s debt was sustainable would be delivered after successful implementation of a second period of adjustment and reform (normally three years), at the completion point. A country’s sustainability position at the completion point would be determined on the basis of the ratios of the country’s net present value (NPV) of external debt to exports and, in some cases, to government revenue, and external debt service to exports. To achieve the primary objective of the Initiative, which is to reduce the country’s debt burden to a sustainable level, these ratios would have to be reduced to certain country-specific targets within the ranges of 200–250 percent and 20–25 percent, for the NPV of external debt and external debt service to exports, respectively.

All creditors are expected to provide exceptional assistance beyond current mechanisms as necessary to achieve the objective of debt sustainability. The amount of assistance to be provided by each creditor would be decided on a case-by-case basis taking into account the need to achieve debt sustainability and equitable burden sharing, and to preserve the preferred creditor status of the multilateral institutions.

As of June 1998, the IMF had committed to deliver assistance at the completion point to Bolivia, Burkina Faso, Côte d’Ivoire, Guyana, Mozambique, and Uganda, which had reached their decision points under the HIPC Initiative, subject to satisfactory assurances from other creditors and continued satisfactory program performance. Uganda had reached its completion point in April 1998, when a grant of SDR 51.5 million ($68.9 million) was disbursed to the Umbrella Account for HIPC Operations for the purpose of servicing Uganda’s debt-service obligations to the IMF.55

Financing

As the continuation of the ESAF and the HIPC Initiative are closely linked, their financing modalities are being considered together. The principal of interim ESAF commitments of SDR 1.0 billion a year over a four-year interim period (within 2000–04) is expected to be financed either from the General Resources Account (GRA) or from a new round of bilateral lending to the ESAF Trust. The interest subsidy requirements of the interim ESAF (SDR 1.7 billion on an “as needed” basis)56 and the costs of the HIPC Initiative are to be financed from bilateral contributions to the extent possible. Significant bilateral contributions have been pledged, including through contributions based on refunds from the Second Special Contingency Account (SCA-2).57 There is agreement that if a residual need should arise in light of the amounts available from bilateral pledges, the IMF must be prepared in due course to optimize the use of its reserves to secure full financing of the interim ESAF and the HIPC Initiative. Such optimization of reserves could entail sales of an amount of the IMF’s gold up to 5 million ounces. The corpus of the profits from gold sales would be preserved and only the proceeds from the investment of the profits would be used to meet the residual financing need.

In response to the Interim Committee’s request to proceed quickly with the implementation of the HIPC Initiative, the Executive Board has amended the 1987 ESAF Trust Instrument to allow an early transfer of up to a maximum of SDR 250 million from the Reserve Account to the Special Disbursement Account for financing special ESAF operations for HIPCs. These transfers are to be made only to the extent that sufficient resources for this purpose are not immediately available from other sources. In addition, to augment the resources available in the ESAF-HIPC Trust, the Executive Board decided to forgo the reimbursement to the General Resources Account of the cost of administering the ESAF Trust in the 1997/98 financial year and to transfer SDR 40.7 million from the ESAF Trust Reserve Account to the ESAF-HIPC Trust. Also for the same purpose the Executive Board decided to forgo the reimbursement to the General Resources Account for the 1998/99 financial year and that one-fourth of the estimated cost of administering the ESAF Trust in that year be transferred after the end of each financial quarter from the ESAF Trust Reserve Account to the ESAF-HIPC Trust.

Other Administered Accounts

The IMF may establish administered accounts for purposes, such as financial and technical assistance, that are consistent with the Articles. Such accounts are legally and financially separate from all other accounts of the IMF.

The legal authority of the IMF to act as an administrator of such resources derives from Article V, Section 2(b), which empowers it, if requested, to “perform financial and technical services, including the administration of resources contributed by members, that are consistent with the purposes of the Fund.” The operations involved in the performance of such financial services cannot “be on the account of the Fund.”

The role of the IMF as trustee has proved particularly useful in enabling the creation of mechanisms to reduce the cost of access for low-income developing member countries to the facilities of the General Resources Account, as in the case of the Oil Facility Subsidy Account (1975–83) and the Supplementary Financing Facility Subsidy Account (1979–84); to provide balance of payments assistance on concessional terms, as in the case of the Trust Fund (1976–81), the ESAF Trust (1987–present), and several accounts administered by the IMF on behalf of individual members to provide contributions to the ESAF Subsidy Account; and to provide special financing to heavily indebted poor countries, as in the case of the ESAF-HIPC Trust and the Umbrella Account for HIPC Operations.

From time to time, the IMF also has decided to establish, on an ad hoc basis and as requested by members, other accounts for the administration of resources for several purposes. Accounts administered by the IMF at present are the following: (1) the Administered Account—Japan, established in 1989 to administer resources provided by Japan to assist certain countries with overdue obligations to the IMF; (2) the Administered Account for Selected Fund Activities—Japan, established in 1990 to administer resources contributed by Japan initially to finance technical assistance to member countries, including scholarships, and since 1997 also to support the IMF’s Regional Office for Asia and the Pacific (contributions are designated separately for the different purposes of the account); (3) the Framework Administered Account for Technical Assistance Activities, established in 1995 to administer resources to finance technical assistance; within this account there are subaccounts for Australia, France, Japan, and Switzerland as contributors, and Rwanda as a recipient; and (4) the Administered Account for Rwanda, established in 1995 to administer resources contributed by the Netherlands, Sweden, and the United States to reduce to the equivalent of 0.5 percent a year the charges payable by Rwanda on a CCFF purchase.58