Annex The Enhanced Monitoring Policy (EMP)
1. The Enhanced Monitoring Policy (EMP), as discussed in SM/03/372, would provide close Fund monitoring without formal performance criteria, and limited contingent financing in case of a need. While the EMP is intended for use by any member, the following discussion focuses primarily on its application to PRGF-eligible members. For low-income member countries with strong policy framework and sound external positions and that are making transition towards a pure surveillance relationship with the Fund, EMP would be available to provide unambiguous Fund signals to donors on the members’ policy implementation, as well as give some financing assurance when need arises.
2. Low-income and other members using the EMP would have access to GRA financing in the form of a single purchase from the credit tranches. The financing provided under the EMP would be in the form of approval of an outright purchase and would not necessitate the approval of an arrangement. The purchase would be approved, if, at the time of the request: (i) the member is experiencing a balance of payments need at least as great as the amount requested, and (ii) the member is successfully implementing an economic reform program, endorsed by the Fund at the outset of the EMP, that effectively meets the standards of upper credit tranche conditionality. At the time of the endorsement, a specific amount would be agreed based on the member’s potential balance of payments need. Consistent with the intention to set the standard for policies under the EMP at a level consistent with upper credit tranche conditionality and assuming that the balance of payments need is at least that large, 30 percent of quota would be the norm for the purchase for low-income members. The purchase is intended to provide the member with quick access to financial resources as a safety net. The availability of this contingent financing would also enhance the credibility of the signal to donors because of the Fund’s financial commitment.
3. Program design and monitoring under the EMP would closely mirror that of PRGF or GRA arrangements. Low-income members would be expected to continue the PRSP process and prepare PRSP documents. There would be an initial assessment of the country’s economic situation and policy stance before an EMP would be put in place. Members would agree to a medium-term macroeconomic framework, together with near-term targets on key macroeconomic variables for the next year. Reflecting donors’ relatively greater interest in the Fund’s assessment of macroeconomic policies, EMP monitoring would not generally feature many structural targets, and countries with a substantial structural agenda would generally not be considered good candidates for the EMP. As under a PRGF arrangement, economic developments and policy implementation would be monitored through quarterly comparisons of performance against quantitative targets and semi-annual Executive Board review. These targets would not constitute performance criteria (as there would be no commitment of resources) but would enable the authorities, the Fund, and the public to monitor progress in policy implementation, thereby providing unambiguous signals to donors. They would also facilitate a quick Fund response in the event of a request for purchase, or triggering consultations when there were serious deviations. Should there be substantive deviations from the economic targets, they could be brought to the attention of the Board, either at the time of the scheduled reviews or earlier if warranted.
4. If a balance of payment need arises, the member could request the purchase. Board approval of this request would be based on the member’s record in implementing the program. If the member were performing within the parameters of its macroeconomic program at the time it requested the activation purchase and if its policies were judged to be adequate to the challenge facing the member, the presumption would be that the activation purchase would be made available immediately. If these conditions did not apply, then the Fund and the member would reassess the policies and agree on corrective actions before the first purchase could be made. While there would be a presumption that the Board would approve a request made by a qualifying member, a separate assessment (albeit a more abbreviated one) would be required.
5. Further purchases could be made in the context of a standard Fund financial arrangement. Access, phasing, and conditionality would be specified at the time of the activation or post-activation request for an arrangement and would depend on the type of arrangement (such as a regular PRGF arrangement, PRGF/EFF blend, or GRA facility). Policy discussions and additional commitments would normally focus on the specification of forward-looking policies needed to address the causes of the balance of payments need, and the policy framework would be extended to cover the full period of the arrangement.
6. Executive Board documentation and review under the EMP for low-income members would closely mirror that for PRGF arrangements. Low-income members would still be expected to continue the PRSP process, and a PRSP document would need to be endorsed by the Boards of the Fund and Bank, consistent with guidelines on their timing for PRGF arrangements. An up-to-date PRSP document would not be a requirement for the EMP; however, it would be needed in the event that a low-income member under the EMP developed a balance of payments need and would need to move to a PRGF arrangement or PRGF/EFF blend. Requests for an EMP, as well as subsequent requests for conclusion of reviews, should be made in documents similar to LOI/MEFPs, and reviews would be scheduled at approximately semiannual intervals. Staff reports would be prepared in support of Board discussions for these reviews, with a recommendation as to whether or not the review should be concluded. Given the key purpose of signaling through these arrangements, standards of presumed publication for Fund-supported program documentation would apply.
7. The Enhanced Monitoring Policy differs from the Enhanced Monitoring Procedure proposed early in the context of the signaling discussion in that the EMP proposed here entails a Fund-monitored program (i.e., the Executive Board would be as fully involved in the EMP as with a PRGF arrangement). In contrast to track-record staff-monitored programs, the EMP framework would be agreed only with strong performers and would entail policy commitments and implementation standards at least as high as those needed to justify Fund arrangements.
Exercising any of these options would require a decision by the Executive Board with an 85 percent majority of the total voting power and the consent of all 17 bilateral creditors to the Loan Account of the PRGF Trust.
The Role of the Fund in Low-Income Member Countries Over the Medium Term (SM/03/257, 7/22/03) and Fund Assistance for Countries Facing Exogenous Shocks (SM/03/288, 8/11/03).
Concluding Remarks by the Chair—Role of the Fund in Low-Income Member Countries Over the Medium Term, and Fund Assistance for Countries Facing Exogenous Shocks (BUFF/03/164, 9/5/03). See also the Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund, 9/21/03.
In 1993, the Fund contributed SDR 400 million to the Subsidy Account of the Trust (Decision No. 10531-(93/170) SAF, December 15, 1993 Selected Decisions, 27th Issue, page 413).
See Report by the Managing Director on Options for Financing a Continuation of the ESAF (ICMS/Doc/46/96/9, 4/19/96) and Concluding Remarks by the Acting Chairman—Financing the Fund’s Participation in the HIPC and PRGF Initiatives—Update on the Status of Contributions and Loan Resources (BUFF/00/149, 9/13/00).
See The Chairman’s Summing Up of the Decision on the Enhancement of the Structural Adjustment Facility—Operational Arrangements (EBM/87/171, 12/15/87).
See Continued Financing and Adaptation of the ESAF (EBS/95/130, 08/04/95).
At the present low market interest rates, the grant element of PRGF loans has fallen to about 27 percent, below the concessionality threshold of 35 percent. Indeed, even if the interest rate on PRGF loans were reduced to zero, the grant element would rise to only 30 percent.
See, for example, Continued Financing and Adaptation of the ESAF (EBS/95/130, 8/4/95).
Summing Up by the Chairman—The Role of the Fund (EBM/95/75, 8/2/95).
The current 6-month SDR CIRR average rate is 4.04 percent, valid through February 2004.
None of the alternatives in this paper for modifications to the Fund’s instruments are expected to affect the framework for Fund collaboration with the World Bank or the division of responsibilities between the two institutions.
Decision No. 8845-(88/61) ESAF, 4/20/88 and BUFF/99/01, (1/5/99). Staff is not proposing to modify these limits. The paper does, however, propose to update and extend access norms (i.e., expected average levels of access) which have been more influential in practice.
These norms represent neither an entitlement nor a maximum, but are intended to provide general guidance for access decisions (BUFF/99/01). References to PRGF access limits and norms refer to total access over a three-year arrangement. Thus, the norm of 90 percent of quota for a first time user is roughly equivalent to average annual access of 30 percent of quota. In contrast to access limits for GRA facilities, there are no annual or cumulative access limits under the PRGF.
“Blend” arrangements entail having simultaneous PRGF and EFF arrangements in support of a single Fund-supported program and conditionality.
The Executive Board provided for the possibility of blending PRGF resources with the Fund’s general resources and has reaffirmed the role for PRGF blends on several occasions (Box 4). Most recently, the 1998 amendments to the PRGF architecture—to align the PRGF more closely with the EFF—were motivated in substantial part by a desire to simplify PRGF/EFF blending in the expectation of an increase in such arrangements (Distilling the Lessons of the ESAF Reviews, EBS/98/105, 6/16/98 and BUFF/98/62, 7/14/98). Nevertheless, while PRGF blends have been used in eight of 132 PRGF arrangements approved from 1988 through end-December 2003, there has been only one blend among the 52 PRGF arrangements approved since the 1998 amendments went into force.
There have been shifts from PRGF/EFF blend to PRGF-only access and vice versa even for individual members. For example, Azerbaijan, Guyana, and Pakistan all had PRGF access blended with GRA access in the 1990s but had unblended PRGF access in arrangements approved in 2001 and 2002. Conversely, Sri Lanka had a PRGF-only arrangement in 1991 but a PRGF/EFF blend in 2003. For Azerbaijan, the decision to have the 1996 program supported by blend arrangement was based on prospective oil revenues, but the 2001 PRGF arrangement was not blended with EFF resources, even though the oil revenue was in more immediate prospect.
Amongst eligible members so far under the PRGF, Pakistan has the largest quota. While it has access to substantial private market and non-concessional official borrowing and has had two PRGF/EFF blended arrangements in the past, it currently has a PRGF-only arrangement in place.
Excluding limited “enclave” projects with government borrowing or guarantees for parastatal enterprise participation in commercial joint ventures.
Fund assessments are already available in the context of surveillance through publication of PINs and staff reports and through ad hoc assessment letters or consultative group statements; however, some donors and international financial institutions may prefer a more structured assessment.
As early as 1993, low access PRGF arrangements, with access at “very low levels,” have been proposed for members with little balance of payments need but continuing need for structural reform (ESAF Successor—Operational Modalities and Program Design Issues, EBS/93/178, 11/16/93). However, no PRGF arrangement prior to 2002 had access below 35 percent of quota other than the PRGF portion of a PRGF/EFF blend with FYR Macedonia.
ESAF Successor—Operational Modalities and Program Design Issues (EBS/93/178); Distilling the Lessons of the ESAF Reviews (EBS/98/105, 6/16/98; BUFF/98/62, 7/14/98).
Need as a Condition for the Use of Fund Resources (SM/94/299, 12/16/94), and Distilling the Lessons of the ESAF Reviews (EBS/98/105, 6/16/98 and BUFF/98/162, 7/14/98). See Box 3 for a summary of the earlier discussion.
The shortcomings of precautionary PRGF arrangements in general apply to low-access precautionary PRGF arrangements, with the first two drawbacks partly reduced.
If it chose to do so, a member could unilaterally refrain from requesting disbursements under a PRGF arrangement. This could be done without raising the legal complications noted above.
The Acting Chair’s Summing Up—Completion of the Review of Contingent Credit Lines and Consideration of Some Possible Alternatives (BUFF/03/213, 12/03/03).
See Review of the Contingent Credit Lines—Conclusions (SM/03/372, 11/12/03) and The Acting Chair’s Summing Up—Completion of the Review of Contingent Credit Lines and Consideration of Some Possible Alternatives (BUFF/03/213)
Most low-income members have no GRA purchases outstanding; thus, the entire first credit tranche would remain available even without the EMP. Given the smaller balance of payment needs and possibly less resilient debt profile of low-income members compared to more advanced economies, the 30 percent access corresponds to the lower end of the 30 to 50 percent of quota financing range proposed in the context of CCL review.
The Fund introduced PPM in late 2000 for members with outstanding GRA credit in excess of 100 percent of quota at the expiration of their arrangements. PPM was designed to provide early warning of policies which could call into question a member’s continued progress toward external viability and imperil repayment of outstanding Fund resources. PPM entails two annual consultation reports (one of which would normally be in the context of the Article IV consultation), as long as outstanding use of Fund resources is in excess of 100 percent of quota. While PPM is presumed when the 100 percent threshold is exceeded, it is not automatic; a decision would normally be taken at the time of the last review of the expiring arrangement. One consideration for not applying PPM in an individual case would be the high likelihood of a successor arrangement.
Even where outstanding PRGF resources exceed 100 percent of quota, they generally do not exceed it by much. Of the 22 members noted above, only three had outstanding access as high as 150 percent of quota (Armenia, Kyrgyz Republic, and Tanzania at 153, 160, and 152 percent of quota, respectively).
Given that the EMP would imply closer monitoring of members than PPM, it would not be necessary to also apply PPM.
Concluding Remarks by the Chair—Role of the Fund in Low-Income Member Countries Over the Medium Term, and Fund Assistance for Countries Facing Exogenous Shocks (BUFF/03/164).
Of the nine countries that have received emergency post-conflict assistance, three made initial purchases of 25 percent of quota. The remaining 6 countries made purchases that were tranched into two segments, the smallest purchase being 10 per cent of quota.
There also needs to be a more systematic evaluation of performance under the post-conflict program and of administrative and policy-implementation capacity before moving to a PRGF arrangement. The latter could involve a requirement that staff reports for requests for PRGF arrangements following on post-conflict assistance include an explicit staff assessment, drafted in consultation with the relevant technical assistance departments, of the country’s capacity for undertaking a PRGF-supported program.
See Summing up by the Acting Chairman—Fund Assistance to Post-Conflict Countries (BUFF/99/48, 04/09/99).
Concluding Remarks by the Chair—Role of the Fund in Low-Income Member Countries Over the Medium Term, and Fund Assistance for Countries Facing Exogenous Shocks (BUFF/03/164, 09/05/03).
In recent years, PRGF augmentations have been the normal approach to addressing shocks in PRGF-eligible countries. Augmentations—the vast majority of which have been in response to an exogenous shock—have been approved for roughly one quarter of all PRGF arrangements as of end-August 2003. The median size of augmentations has been 10 percent of 12th Review quotas, with a maximum and minimum of 37 percent and 3.7 percent of quota, respectively. Taking into account extensions of arrangements and periods where PRGF arrangements were off track, augmentations of on-track PRGF arrangements have been approved in slightly more than one year out of six. This frequency of augmentation is lower than some estimates of the frequency of adverse shocks in low-income members; estimates presented in Fund Assistance for Countries Facing Exogenous Shocks (SM/03/288, 8/11/03) put the likelihood of natural disasters and adverse commodity shocks at one per 2.5 years and one per 3.3 years, respectively. This discrepancy may reflect low-income members’ access to grants or loans on more concessional terms than the PRGF.
Countries meeting the criteria for blended access, as set out in Box 4, could receive a subsidy to cover only part of the difference between the GRA rate of charge and the PRGF 0.5 percent rate.
For reasons discussed in the CFF Review paper, the stand-alone mode of CFF assistance is rarely likely to be appropriate; since the balance of payments assistance will normally need to be associated with an adjustment program, stand-by or PRGF assistance can be tailored to meet the member’s needs.
Concluding Remarks by the Chair—Role of the Fund in Low-Income Member Countries Over the Medium Term, and Fund Assistance for Countries Facing Exogenous Shocks (BUFF/03/164, 09/05/03).
This approach was used as the basis for projecting demand for PRGF resources for the period of 2002–05. For more information on this approach, see Continued Financing and Adaptation of the ESAF (EBS/95/130, 08/04/95).
These estimates exclude commitments under initial PRGF arrangements immediately following the future clearance of arrears by Liberia and Somalia, but take into account additional concessional assistance needed under subsequent arrangements. Box 9 provides more detailed analysis on the resources required to address the arrears and debt problems of these protracted arrears cases.
A paper on a Trade Integration Mechanism with implications for access to PRGF resources was issued separately.
This could, however, reflect a selection bias in that the strongest performers were able to reach their HIPC completion points earlier.
Executive Board decisions on PRGF-eligibility decisions are not directly tied either to per capita income estimates or IDA-eligibility decisions. However, in practice, Fund decisions on PRGF eligibility have generally tended to follow trends in per capita income relative to the IDA operational cutoff and have taken IDA-eligibility decisions into account. It is assumed here that current policies and practices will continue in this regard.
The most recent area department projections indicate that several additional countries would likely refrain from requesting further PRGF arrangements upon expiration of their current arrangements over the period 2004–06.
ODA is expected to increase from 0.23 percent of DAC members’ gross national income in 2002 to 0.29 percent in 2006.
It is difficult at this point to project the impact of a stand-by-like window within the PRGF, should the Executive Board decide to pursue this alternative. The proposed Trade Integration Mechanism is also likely to increase the demand for PRGF resources.
Should Zimbabwe clear its arrears and be declared PRGF-eligible, it might also request use of PRGF resources.
These calculations exclude India, which, while PRGF-eligible, has agreed not to tap the Fund’s concessional resources. If the calculations were to exclude Nigeria as well, the quota share would drop to only 12 percent.
The assumption of Reserve Account coverage at the 40 percent level is based on historical precedent, rather than a legal requirement. This level is high by any risk management standard. Staff could, therefore, propose that it be lowered, but, as shown in Table 7, the impact on the lending capacity of the future PRGF from a lower coverage ratio is small.
While the Fund has long envisaged that the continuation of the Fund’s concessional operations beyond the interim PRGF could be financed from the resources accumulating in the Reserve Account of the PRGF Trust, a decision by the Executive Board (adopted by an 85 percent majority of the total voting power) would be needed to authorize the use of Reserve Account resources for this purpose, since such resources, which originated from net proceeds of gold sales in the late 1970s, are subject to the requirements of Article V, Section 12(f) of the Fund’s Articles of Agreement. Moreover, since the primary purpose of the Reserve Account is to provide security to creditors to the Loan Account of the PRGF Trust, any use of Reserve Account resources, before they are sufficient to cover all liabilities of the PRGF Trust to those creditors, will require their consent (17 creditors).
Projected financing capacities presented in these sections are based on the actual Reserve Account balance as of August 2003 and an assumed rate of return on investment of Reserve Account resources of 5 percent per annum in perpetuity.
For all financing options considered in this section, this assumption is maintained.
Through FY2004, the cost of administering PRGF operations, included in the administrative budget, is not reimbursed to the GRA (Decision 12065-(99/130)), and the resources thus saved are transferred to the PRGF-HIPC Trust as the Fund’s share of contribution to the Trust. To avoid a higher regular rate of charge to recover this foregone income, the cost has been excluded from the target income, and charged as an offset to income from surcharges, if available.
For the option which combines new bilateral loan resources with the self-sustained PRGF, the Executive Board has discretion in deciding whether the GRA should be reimbursed for the administrative expenses associated with that part of the lending financed by new bilateral loans.
Article V, Section 12(i) states that the GRA shall be reimbursed “from time to time” for administrative expenses of the SDA based on a “reasonable” estimate of such expenses, implying flexibility in the pattern of reimbursement.
For example, if a large quota country, such as Pakistan, were to unexpectedly request assistance from the Fund in the future, the Fund would not be able to provide significant grants without preempting their use for other low-income countries, thus implying that such countries might request access to the GRA.
This self-sustained lending capacity is lower under this option than under the pure self-sustained option of about SDR 660 million per year, since Reserve Account resources are needed to (i) subsidize the interest rate on additional bilateral loans down to 0.5 percent per annum; and (ii) extend the security coverage to include the additional loan resources.
While GRA lending does not require Reserve Account security coverage, this option could have implications for precautionary balances that would have to be carefully studied.
In fact, Germany made its contribution to the PRGF-HIPC Trust dependent upon no use of the Fund’s general resources for financing interim PRGF-type operations (EBS/00/188, 8/31/00).
Report by the Managing Director on Options for Financing a Continuation of the ESAF (ICMS/Doc/46/96/9, 4/19/96), and Concluding Remarks by the Acting Chairman—Financing the Fund’s Participation in the HIPC and PRGF Initiatives—Update on the Status of Contributions and Loan Resources (BUFF/00/149, 9/13/00).
Summing Up by the Chairman—Operational Modalities and Funding Alternatives for an ESAF Successor—Preliminary Considerations (BUFF/93/15, 4/12/93).
Although the operations of the PRGF Trust are not on the account of the Fund, the Fund, as Trustee, has provided, from the SDA, the resources for the Reserve Account of the Trust to provide the security to lenders. The Fund, on the other hand, would bear the credit risk directly under the subsidized GRA option without the cover provided by the Reserve Account, which could require an increase in the Fund’s precautionary balances.
See footnote 61.
During the August 27, 2003 Board discussion, a few Executive Directors proposed that the lending capacity of the future PRGF be maintained at the current level in real terms until 2015. Based on an assumed discount rate of 5 percent, this would imply a commitment capacity of SDR 1.3 billion per year in 2010, rising to SDR 1.7 billion per year by 2015.