A. Applying the Exceptional Access Criteria

6. The staff reports for Argentina and Brazil tested these members’ requests for exceptional access against the four criteria, and neither request met all four (Table 1). Argentina’s debt was considered not to be sustainable in the absence of a restructuring (criterion 2) and prospects were not good for regaining access to international capital markets within the time Fund resources were outstanding (criterion 3). However, it had been foreseen in the exceptional access framework that countries in the process of restructuring debt would not meet all of the criteria. In approving the new framework for exceptional access in capital account crises in February 2003, Directors generally agreed that access in debt restructuring cases would normally be expected to be within the access limits, although there could be rare circumstances warranting exceptional access.⁵ For Brazil, it was recognized that there was no actual balance of payments need (as required under criterion 1) and that re-entry to private capital markets was not directly applicable since Brazil had such access.

Table 1.

Argentina, Brazil and the Four Substantive Criteria for Exceptional Access in Capital Account Crises ^1/

^1/Source: Staff reports on Argentina (EBS/03/130, Supplement 1, 9/15/2003; and Supplement 3, 9/16/03) and Brazil (EBS/03/157, 11/24/03), and the related summings up.

Table 1.

Argentina, Brazil and the Four Substantive Criteria for Exceptional Access in Capital Account Crises ^1/

	Argentina	Brazil
Criterion 1: “The member is experiencing exceptional balance of payments pressures on the capital account resulting in a need for Fund financing that cannot be met within the normal limits.”	Argentina’s exceptional access was justified on grounds of the large financing needs over the program period, mainly reflecting the need to restructure public and private debt and to rebuild reserves as well as to make repurchases to the Fund. After the crisis in 2000-01 and the government’s default in December 2001, the macroeconomic situation had stabilized and begun to improve under the transitional Fund-supported program.	In Brazil, the balance of payments need was potential rather than actual, as evidenced by the authorities’ indication to treat the arrangement as precautionary. The staff report argued that Brazil remained vulnerable to a worsening of market sentiment given its exceptionally large gross financing requirement and still weak reserves position, and a ratio of gross reserves to short-term debt below 1. The proposed access would allow Brazil to withstand a shock of about half the size of the one that it suffered in 2002-03.
Criterion 2: “A rigorous and systematic analysis indicates that there is a high probability that the debt will remain sustainable.”	Pending the debt restructuring, Argentina’s debt was not sustainable, and the Fund lends under its “lending-into-arrears”-policy. A baseline debt sustainability analysis showed that with a constant primary surplus of 3 percent of GDP during 2004-10, even with generous rollover assumptions and a complete writedown of Argentina’s previously unrestructured (Phase 2) debt, financing gaps would emerge.	For Brazil the debt was considered sustainable so long as fiscal targets were met and market confidence sustained. Although the debt dynamics remained vulnerable to unfavorable developments in macroeconomic variables, the staff’s analysis showed a decline in the public debt ratio over the medium term as long as the targeted primary fiscal surplus of about 4.25 percent of GDP was adhered to and market confidence sustained.
Criterion 3: “The member has good prospects of regaining access to private markets within the time Fund resources would be outstanding.”	Argentina was considered unlikely to re-enter international capital markets during the time Fund resources would be outstanding.	This criterion was not relevant for Brazil. The country already enjoyed access to private capital markets, and was expected to be able to quickly regain such access in the event of a sudden loss due to contagion rather than domestic policy.
Criterion 4: “The policy program of the member country provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment.”	The program was exposed to a number of significant risks, but on balance prospects for success outweighed the risks. The Board recognized as key risks the uncertain domestic political support for important structural reforms under the program, the authorities’ decision to fall temporarily into arrears with the Fund, and the lack of specificity of key fiscal and banking reforms crucial for sustainability—especially with regard to the medium-term primary surplus target and bank compensation policy.	Brazil’s program was considered to have reasonably strong prospects of success. The authorities had established a strong track record of policy performance under the 15-month SBA, and the prospects for continued strong performance were deemed to be good.

^1/Source: Staff reports on Argentina (EBS/03/130, Supplement 1, 9/15/2003; and Supplement 3, 9/16/03) and Brazil (EBS/03/157, 11/24/03), and the related summings up.

View Table

Table 1.

Argentina, Brazil and the Four Substantive Criteria for Exceptional Access in Capital Account Crises ^1/

	Argentina	Brazil
Criterion 1: “The member is experiencing exceptional balance of payments pressures on the capital account resulting in a need for Fund financing that cannot be met within the normal limits.”	Argentina’s exceptional access was justified on grounds of the large financing needs over the program period, mainly reflecting the need to restructure public and private debt and to rebuild reserves as well as to make repurchases to the Fund. After the crisis in 2000-01 and the government’s default in December 2001, the macroeconomic situation had stabilized and begun to improve under the transitional Fund-supported program.	In Brazil, the balance of payments need was potential rather than actual, as evidenced by the authorities’ indication to treat the arrangement as precautionary. The staff report argued that Brazil remained vulnerable to a worsening of market sentiment given its exceptionally large gross financing requirement and still weak reserves position, and a ratio of gross reserves to short-term debt below 1. The proposed access would allow Brazil to withstand a shock of about half the size of the one that it suffered in 2002-03.
Criterion 2: “A rigorous and systematic analysis indicates that there is a high probability that the debt will remain sustainable.”	Pending the debt restructuring, Argentina’s debt was not sustainable, and the Fund lends under its “lending-into-arrears”-policy. A baseline debt sustainability analysis showed that with a constant primary surplus of 3 percent of GDP during 2004-10, even with generous rollover assumptions and a complete writedown of Argentina’s previously unrestructured (Phase 2) debt, financing gaps would emerge.	For Brazil the debt was considered sustainable so long as fiscal targets were met and market confidence sustained. Although the debt dynamics remained vulnerable to unfavorable developments in macroeconomic variables, the staff’s analysis showed a decline in the public debt ratio over the medium term as long as the targeted primary fiscal surplus of about 4.25 percent of GDP was adhered to and market confidence sustained.
Criterion 3: “The member has good prospects of regaining access to private markets within the time Fund resources would be outstanding.”	Argentina was considered unlikely to re-enter international capital markets during the time Fund resources would be outstanding.	This criterion was not relevant for Brazil. The country already enjoyed access to private capital markets, and was expected to be able to quickly regain such access in the event of a sudden loss due to contagion rather than domestic policy.
Criterion 4: “The policy program of the member country provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment.”	The program was exposed to a number of significant risks, but on balance prospects for success outweighed the risks. The Board recognized as key risks the uncertain domestic political support for important structural reforms under the program, the authorities’ decision to fall temporarily into arrears with the Fund, and the lack of specificity of key fiscal and banking reforms crucial for sustainability—especially with regard to the medium-term primary surplus target and bank compensation policy.	Brazil’s program was considered to have reasonably strong prospects of success. The authorities had established a strong track record of policy performance under the 15-month SBA, and the prospects for continued strong performance were deemed to be good.

^1/Source: Staff reports on Argentina (EBS/03/130, Supplement 1, 9/15/2003; and Supplement 3, 9/16/03) and Brazil (EBS/03/157, 11/24/03), and the related summings up.

7. The Board may want to consider how the exceptional access criteria should apply when members are not experiencing a capital account crisis. Based on the record since 1995, the new framework for exceptional access was designed to guide and constrain decisions on access for members experiencing a capital account crisis and with little outstanding use of Fund credit. While the large Fund exposures to Argentina and Brazil were built up during crisis periods, neither member was in the midst of the sort of crisis envisaged in the framework at the time of the recent decisions to grant exceptional access, and therefore it was impossible for either to satisfy all the criteria. The following paragraphs review the circumstances when exceptional access may be considered (capital account crises; when the outstanding access is already very high; when the balance of payments need is potential rather than actual; and other situations) and propose guidelines for decision-making. Specifically, staff proposes to clarify that the four criteria continue to apply in capital account crises, and that in all other cases, access decisions be underpinned by the principles on which the four criteria are based (see paragraph 13).

(i) In capital account crises

8. Most of the requests since 1995 for exceptional access have been made by members experiencing capital account crisis, and the now high exposures of the Fund to these members were built up during such crises. Prior to the elaboration of the framework for exceptional access, decisions were based on the SRF decision, or the clause in the 1983 access policy under which the Fund may, in exceptional circumstances, approve stand-by or extended arrangements involving amounts in excess of the access limits.⁶ While the Board had refrained from defining those exceptional circumstances, the repeated use since the mid-1990s of exceptional access in capital account crises highlighted the need for a framework to guide and constrain access decisions in such situations. Experience shows that capital account crises are likely to be intermittent, but the related decisions on access are expected to remain among the most important and difficult the Fund will make. The four access criteria developed in the Board’s reviews of access policy during 2002 and 2003 remain appropriate for capital account crises.⁷

(ii) When the member has high outstanding cumulative access

9. Fund arrangements are based on an expectation that programmed adjustment and reform measures together with financing from the Fund and other sources will enable the member country to repay on schedule. This principle is particularly important when exceptional access is considered, since the Fund is taking an unusual risk, and the new policies on exceptional access are intended partly to reduce the risk that exceptional access is granted inappropriately. Nevertheless, there are some cases where the member’s balance of payments situation did not improve as quickly as originally expected, as in Argentina, Brazil, Uruguay, and Turkey.⁸

10. In cases where the balance of payments does not improve as envisaged, the Fund may be requested to provide financial assistance to support the member’s adjustment program through a subsequent arrangement. When provided in the context of an appropriate strategy to reduce Fund exposure over time, financing from the Fund may help to protect the revolving character of Fund resources. The record on repayments of high exposures to the Fund, and strategies for achieving this are considered in Section III below.

11. For a member with cumulative access above 300 percent of quota, even an arrangement providing a small amount of access is treated as involving exceptional access, whether the request exceeds the annual access limit or not. This ensures thorough consideration of any request for further access. However, in some circumstances an arrangement with relatively low, and possibly precautionary access, may be appropriate, and indeed facilitate exit from exceptional use of Fund resources.⁹

12. The choice of a policy approach involves balancing rules and discretion. There seems to be general agreement that the Fund must retain discretion to lend in emergencies, but that this should be subject to constraints. A contrasting approach to the one proposed by staff (see below) would require that all four criteria, as defined for capital account crises, would need to be met for any request for exceptional access. This would normally preclude any exceptional access except in capital account crises, including for members with high preexisting exposures. Also, limiting exceptional access to cases where a capital account crisis was under way could reduce the Fund’s role in crisis prevention. Such a policy, if applied, would be both clear and consistent with a desire to constrain the use of exceptional access within very narrow bounds. However, if circumstances arose in which the Fund found it needed to make frequent exceptions to such a policy, it would undermine an important purpose of the exercise, which was to clarify—to members and markets—the conditions under which exceptional access would be provided.

13. The staff proposes that the principles embodied in the four exceptional access criteria underpin any decisions on access when a member has a preexisting high exposure. While it is recognized that the member cannot meet all of the criteria as specified for capital account crises, any request for exceptional access would need to demonstrate that: (i) the member has an actual or potential need for Fund financing that cannot be met within the normal limits; (ii) a rigorous and systematic analysis indicates that there is a high probability that its debt will remain or be made sustainable; (iii) the prospects for achieving the necessary improvement in the balance of payments are good; and (iv) the policy program of the member provides a strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment. These principles, which are grounded in the Articles of Agreement, both allow the Fund to give members the support they need to overcome their difficulties without measures unnecessarily harmful to themselves or others, as well as to safeguard Fund resources and support a member’s capacity to repay the Fund.

14. In addition, any request for exceptional access would need to satisfy all other elements of the framework. In particular, any request would meet the requirements for early involvement of the Executive Board, and the increased burden of proof (discussed further below). There would also be a presumption that the SRF would be used for exceptional access where the balance of payments is expected to improve rapidly, although this condition will not always be satisfied.

(iii) When the member seeks a precautionary arrangement

15. The decision to meet Brazil’s request for an extension and augmentation of its stand-by reopened questions about when exceptional access in a precautionary setting might be appropriate. The request for a precautionary extension was seen as facilitating Brazil’s exit from exceptional use of Fund resources. The staff papers evaluated Brazil’s compliance with the four criteria, and recognized at the same time that, since Brazil’s balance of payments need was potential rather than actual, at least the first criterion could not be met.¹⁰ The staff is preparing a further paper on precautionary arrangements for Board discussion in June (Box 2).

(iv) Other “exceptional circumstances”

16. As set out in 1983, the Fund may approve stand-by or extended arrangements that provide for amounts in excess of the access limits in exceptional circumstances. The Board has refrained from defining those exceptional circumstances, given the varying needs of members, and the importance of the Fund being ready to respond with exceptional access in some unforeseen situations. The Fund needs to maintain the flexibility to provide exceptional access in situations that cannot be foreseen, even though any such use is expected to be very rare. As above, in all cases the principles for exceptional access listed in paragraph 13 would be applied, as well as the procedures and information requirements set out in the framework.

B. Experience with the Four Criteria, Early Board Involvement, and Increased Burden of Proof

17. With only the experience of the special cases of Argentina and Brazil it is too early to reach definitive judgments about the usefulness of the four criteria, and staff does not propose any changes in the definition of the criteria at this point. In staff’s view, the evaluation of the four criteria has added a helpful structure for the staff, management, and the Board in making judgments on exceptional access. However, in the very different cases of Argentina and Brazil, since neither country was in the throes of a capital account crisis at the time exceptional access was considered, the judgments turned less on whether the criteria were fulfilled, and more on whether exceptional access should be provided even though some criteria were not fulfilled.

18. As called for under the exceptional access policy, there was early and active Board involvement in the period leading up to the formal Board discussions on Argentina and Brazil. The Board met three times in informal sessions in the run-up to the approval of Argentina’s arrangement on September 20, 2003, and twice in the run-up to the approval of Brazil’s augmentation on December 12, 2003 (Table 2). The exceptional access framework calls for at least one such meeting. A concise staff statement was circulated in advance of each of these informal sessions, in most cases with a circulation period greater than the minimum two hours. There were also several other formal meetings on each country around the same time (e.g., reviews under the arrangements in place).

Table 2.

Formal and Informal Board Meetings, and Documents Related to Exceptional Access for Argentina and Brazil, 2003.

Source: Secretary's Department.

Table 2.

Formal and Informal Board Meetings, and Documents Related to Exceptional Access for Argentina and Brazil, 2003.

Date	Meeting	Documents
Argentina
July 28	Third Review under the SBA	Staff report (EBS/03/108, 7/18/03)
July 30	Informal Restricted Meeting	“Statement by the Staff Representative on Exceptional Access for Argentina Informal Board Meeting” (FO/DIS/03/78, 7/29/03)
August 21	Informal Restricted Meeting
August 27	Financing Assurances Review	Staff report (EBS/03/123, 8/22/03)
September 3	Informal Restricted Meeting	“Statement by the Staff Representative on Exceptional Access for Argentina Informal Board Meeting” (FO/DIS/03/92, 9/2/03)
September 10	Informal Restricted Meeting
September 20	Request for Stand-By Arrangement (in Dubai)	Staff report (EBS/03/130, 9/15/03, Supplement 1); Assessment of the Risks to the Fund and the Fund's Liquidity Position (EBS/03/130, 9/15/03, Supplement 2); and Report on Exceptional Access, EBS/03/130, 9/16/03, Supplement 3).
Brazil
September 5	Fourth Review under SBA	Staff report (EBS/03/123, 8/25/03)
October 22	Informal restricted meeting	“Statement by the Staff Representative on Exceptional Access for Brazil Informal Board Meeting” (FO/DIS/03/108, 10/21/03)
November 4	Informal restricted meeting	“Statement by the Staff Representative on Exceptional Access for Brazil Informal Board Meeting” (F0/DIS/03/114, Rev. 1, 11/4/03)
December 12	Fifth Review Under the Stand-By Arrangement and Requests for Extension and Augmentation of the Arrangement and Extension of Repurchase Expectations	Staff report (EBS/03/157, 11/24/03) (Annex I of the report contains an assessment of exceptional access); Assessment of the Risks to the Fund and the Fund's Liquidity Position (EBS/03/157, Supplement 2, 11/24/03).

Source: Secretary's Department.

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Table 2.

Formal and Informal Board Meetings, and Documents Related to Exceptional Access for Argentina and Brazil, 2003.

Date	Meeting	Documents
Argentina
July 28	Third Review under the SBA	Staff report (EBS/03/108, 7/18/03)
July 30	Informal Restricted Meeting	“Statement by the Staff Representative on Exceptional Access for Argentina Informal Board Meeting” (FO/DIS/03/78, 7/29/03)
August 21	Informal Restricted Meeting
August 27	Financing Assurances Review	Staff report (EBS/03/123, 8/22/03)
September 3	Informal Restricted Meeting	“Statement by the Staff Representative on Exceptional Access for Argentina Informal Board Meeting” (FO/DIS/03/92, 9/2/03)
September 10	Informal Restricted Meeting
September 20	Request for Stand-By Arrangement (in Dubai)	Staff report (EBS/03/130, 9/15/03, Supplement 1); Assessment of the Risks to the Fund and the Fund's Liquidity Position (EBS/03/130, 9/15/03, Supplement 2); and Report on Exceptional Access, EBS/03/130, 9/16/03, Supplement 3).
Brazil
September 5	Fourth Review under SBA	Staff report (EBS/03/123, 8/25/03)
October 22	Informal restricted meeting	“Statement by the Staff Representative on Exceptional Access for Brazil Informal Board Meeting” (FO/DIS/03/108, 10/21/03)
November 4	Informal restricted meeting	“Statement by the Staff Representative on Exceptional Access for Brazil Informal Board Meeting” (F0/DIS/03/114, Rev. 1, 11/4/03)
December 12	Fifth Review Under the Stand-By Arrangement and Requests for Extension and Augmentation of the Arrangement and Extension of Repurchase Expectations	Staff report (EBS/03/157, 11/24/03) (Annex I of the report contains an assessment of exceptional access); Assessment of the Risks to the Fund and the Fund's Liquidity Position (EBS/03/157, Supplement 2, 11/24/03).

Source: Secretary's Department.

19. Staff believes that the experience with the procedures for early Board involvement has been positive. This involvement allowed all Directors to be kept informed of the negotiations and to express concerns early on. The informal meetings also provided a mechanism for staff to hear informal views of Directors on key aspects of the program. In the run-up to the decision on Argentina, and following the second informal meeting, several Directors raised concerns with staff and management over the planned phasing of access in the proposed arrangement—a concern that was eventually reflected in a less frontloaded phasing. In Brazil’s case, the meetings gave management and staff an opportunity to discuss with the Board a number of important issues, notably the terms of the financing. Care will continue to be needed to ensure that the flexibility and discretion required by management and staff are protected in coming to an agreement on a program.

20. The Board was provided with additional information and documentation in the exceptional access requests for Argentina and Brazil. This comprised:

• A detailed justification of access, comparison of the access proposal with alternative metrics aside from quota, a more rigorous analysis of capacity to repay, including debt to the Fund as a share of total debt, and, as noted, debt sustainability analysis.

• A separate report evaluating the case for exceptional access based on further consideration of the four substantive criteria. The policy foresaw the possibility that this report could be circulated to the Board ahead of the other staff documents where time permits, and in all cases it would be included in the program documents. In the event, for both Argentina and Brazil this report was circulated at the time of the other staff documents.

• A report assessing the risks to the Fund and the Fund’s liquidity position resulting from the proposed exceptional access. In the case of Argentina, this report highlighted the risks to the Fund from the substantial exposure to Argentina and stressed that these risks are affected principally by the willingness and capacity of the government to implement the program. It also underlined the risks associated with the limited definition of policies and the adjustment contained in the program, and Argentina’s decision to fall temporarily into arrears with the Fund. In the case of Brazil, the report noted that there were risks associated with the Fund’s very large exposure to the country, notwithstanding Brazil’s good program implementation and strong payments record. The paper also stressed that augmentation of the SBA and extension of repurchase expectations implied that Brazil will continue to have access to relatively cheap Fund financing for longer, especially since the augmentation was on credit tranche rather than SRF terms.

21. The staff documents for the September 2003 decision on a stand-by arrangement for Argentina have been published, although consent from the authorities for publication of the staff documents for the first and second reviews is pending. Brazil has not consented to publication of the staff reports, although it has published the Letter of Intent. There is a high premium on increasing public understanding of the program strategy, and thus its credibility. Consistent with this, the Executive Board strengthened the Fund’s policy on publication of exceptional access staff documents. In particular, “the Managing Director will generally not recommend that the Executive Board approve a request to use Fund resources that would result in the relevant member obtaining exceptional access to the Fund’s general resources, unless that member consents to the publication of the associated staff report.”¹¹ This policy will apply to requests for new arrangements or changes in access under existing arrangements from July 1, 2004.

C. The Presumption to Use the Supplemental Reserve Facility

22. In March 2003, the Board strengthened the presumption that exceptional access in capital account crises should be provided under the SRF.¹² This presumption was adopted to help ensure Fund resources revolve quickly and to render transparent financial risks to the Fund associated with exceptional access. At the same time, there will continue to be capital account crises, for instance where the balance of payments will be expected to recover more slowly, and where the SRF terms, in particular its maturity, will not be appropriate.

23. SRF resources were not used in Argentina or Brazil because neither Argentina nor Brazil met the strict circumstances test established in the SRF decision, namely that:

“The Fund will be prepared to provide financial assistance in accordance with the terms of this section to a member that is experiencing exceptional balance of payments difficulties due to a large short-term financing need resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and the member's reserves, if there is a reasonable expectation that the implementation of strong adjustment policies and adequate financing will result, within a short period of time, in an early correction of such difficulties.”¹³

Argentina’s balance of payments need related to an earlier capital account crisis, but the member was no longer experiencing pressures that would justify use of the SRF, and credit tranche resources were used. Brazil’s request for a precautionary extension recognized that its need was potential rather than actual, as required under the SRF.¹⁴

24. Argentina’s stand-by arrangement raises unusual risks for the Fund. The staff’s assessment noted that the substantial exposure of the Fund entailed significant risks. These risks are affected principally by the willingness and capacity of the government to implement key reforms, crucial for sustainability. While Argentina’s purchases in the credit tranches are subject to the maximum surcharge of 200 basis points over the normal rate of charge, this is lower than the range of surcharges applying under the SRF (300-500 basis points). The maturity of drawings under the credit tranches, with obligations falling due at 3¼-5 years is also up to two years longer than under the SRF. At the same time, the nature of Argentina’s balance of payments need, with repayment capacity depending on, among other things, a sustainable solution to its debt problem, would make the SRF terms, in particular the repurchase schedule, inappropriate.

25. Many Directors would have preferred SRF resources to be used in the context of Brazil’s precautionary augmentation. While Brazil did not have an actual balance of payments need, it was recognized that if one arose it would be likely to be the sort envisaged in the SRF. The June 2003 staff paper on precautionary arrangements proposed modifying the SRF to allow its resources to be committed in precautionary settings, when the potential need relates to vulnerability to a capital account shock. The higher SRF charges would help discourage members from using exceptional access longer than necessary. The proposal was made in the context of a package of reforms to adapt precautionary arrangements for crisis intervention, but for which there was no broad support at the Board at that time. Most recently, in discussing the financial risks faced by the Fund in light of large exposures and increased concentration in credit, Directors noted the importance for Fund policies on access to include incentives for members to repay the Fund as their balance of payments improves, including the presumption that exceptional access will be on SRF terms.¹⁵ This issue will be taken up in the forthcoming paper on precautionary arrangements.

26. Should the SRF be used more broadly, perhaps in all arrangements with exceptional access? Exceptional access tends to increase the concentration of the Fund’s exposure and the risks the Fund faces. Given these additional risks, and the need to increase the Fund’s precautionary reserves, Directors have suggested that there be a presumption of using SRF resources for any exceptional access.¹⁶ It is not clear that the SRF can or should be used in all cases, and such a presumption should still leave room for consideration of those cases when exceptional access should be on credit tranche terms.

27. The SRF may not be an appropriate facility for use when the balance of payments problem is likely to be of a more medium-term nature, and indeed such use would be inconsistent with the terms of the facility. For instance, there are some cases where the SRF-supported strategy did not succeed as quickly as hoped for, and the Fund may decide to finance a follow-on program where balance of payments prospects require using longer-maturity credit tranche resources. In some capital account crises, capital may return quickly once the Fund-supported program helps restore confidence in the authorities’ policies and rebuild reserves. In those cases, SRF resources would be appropriate. In other crises cases, for example those associated with portfolio shifts that are unlikely to be reversed, recovery through the capital account is likely to be relatively slow.¹⁷ In such cases, the SRF terms, particularly its short maturity, could affect the speed at which market confidence returns. The current arrangements with Argentina, Brazil, Turkey, and Uruguay all reflect this.

A. Current Levels of Exposure

29. Increases in the level and concentration of Fund credit outstanding since the mid-1990s are related to the financing needs of those emerging market countries that have experienced difficulty in maintaining capital market access (Figure 1).¹⁸ While the growth of private international capital markets has facilitated investment-led growth, sudden stops in private capital flows or their reversal have contributed to sizeable gross financing requirements in some countries. The Fund has supported members’ balance of payments adjustment and very large financing requirements, and the concentration of Fund credit has increased markedly since Mexico’s SBA in 1995. Nevertheless, the current level of outstanding Fund credit—as measured against the size of world trade or world GDP—is still below its peak in the 1980s.

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Developments in Fund Credit in the GRA, 1980-2003

Citation: Policy Papers 2004, 014; 10.5089/9781498330398.007.A001

Source: IMF Finance Department.1/ Based on quota at the approval. Augmentations are included in the initial arrangements.

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30. The exceptional access arrangements approved for six members during the 1990s have been completely or largely repaid, consistent with the revolving nature of Fund resources (Figure 2).¹⁹ Only Indonesia’s outstanding Fund credit still exceeds the cumulative access limit of 300 percent of quota, but it is scheduled to drop below that level during 2004 in the context of post-program monitoring. Excluding Brazil (1998) where access never exceeded the cumulative limit, for the other cases the time above the cumulative exceptional access limit has averaged two years.

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Capital Account Crises: Fund Credit Outstanding as a Share of Quota 1/ (From crisis minus one year to crisis plus seven years)

Citation: Policy Papers 2004, 014; 10.5089/9781498330398.007.A001

Source: IMF, International Financial Statistics.1/ Countries with present arrangements (Turkey, Brazil, Argentina and Uruguay) are assumed to make remaining purchases under arrangements (unless precautionary) and to repay at expectation if not already extended.

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31. All exceptional access arrangements approved since 2000 (Brazil, Turkey, Argentina and Uruguay) are, on current schedules, at or near their respective peaks of Fund credit outstanding. Even if Brazil makes no further purchases under its now precautionary arrangement and these four members repurchase on the expectations schedule, the time above the cumulative access limit will average nearly six years.

32. The concentration of credit risk and the long period during which high access remains outstanding have at least two implications. First, longer-term use of Fund resources at high access levels slows the rate at which Fund resources revolve and could, in a tight liquidity situation, constrain access for other potential users of Fund resources. ²⁰ Second, the higher financial risk to the Fund requires higher levels of precautionary balances. The Board’s decision in 2002, reaffirmed in 2004, to double the target for precautionary balances was based on the recognition that credit risk to the Fund now derives primarily from exceptional access arrangements with middle-income countries.

B. Repurchases in Past Exceptional Access Cases

33. The reduction in exposures to the Fund of earlier uses of exceptional access provides a context in which to evaluate the adjustment strategy of current high access cases. In principle, balance of payments viability is restored through some combination of an increase in savings-investment balances (public, private, or both) and a restoration of market access that together generates the foreign exchange reserves necessary for Fund repurchases.

34. In Korea, Thailand and Indonesia nearly the entire improvement in the balance of payments came from an improvement in private savings-investment balances (Figure 3 and Tables 3 and 4). These adjustments were associated with sharp depreciations of the exchange rate, which depressed demand and led to substantial import compression. Conversely, the fiscal deficit widened, contributing negatively to adjustment, as fiscal policies were relaxed to provide some support to economic activity in the midst of sharp recessions, and reflecting the costs of banking crises. In all these cases, the extent of aggregate adjustment far exceeded projections made at the time of program approval.²¹

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Past Exceptional Access Arrangements: Balance of Payments Financing (In percent of average GDP, crisis-1 to crisis+3)

Citation: Policy Papers 2004, 014; 10.5089/9781498330398.007.A001

Source: IMF, International Financial Statistics.

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Table 3.

Factors Contributing to Repayment of Fund Credit

Source: International Financial Statistics; “IMF-Supported Program in Capital Account Crises,” IMF Occasional Paper No. 210, 2002.

^1/Program projections of the change in gross reserves between approval of program and repayment.

Table 3.

Factors Contributing to Repayment of Fund Credit

	Cumulative Balance of Payments Financing Contribution		Type Debt Restructuring	Change in Gross Reserves (In $ billions) 1/		Indicators of Fund Credit
	Current account	Capital Account		Initial projection.	Actual	Arrangement approval to peak credit outstanding (no of months)	Repay 75 percent of peak credit (no. of months)
	Mexico (1995)	Positive from T-1; Negative thereafter (higher exports and imports than projected)	Positive from T+2 Private Sector FDI and portfolio equity flows	None	15.4	29.3	10	50
Thailand (1997)	Positive from T+1 Import Compression	Negative Continuing drains from banks and other private sector	Voluntary bank credit rollover	23.0	10.6	22	38
Indonesia (1997)	Positive from T+2 Import compression	Negative Continuing drains from banks, other private sector, and portfolio equity. FDI negative from T+2	External bank credit & corporate debt restructuring	9.0	6.4	39	n.a.
Korea (1997)	Positive from T+1 Import compression	Slightly Negative Improving FDI & Portfolio equity. from t+2	External bank credit restructuring	47.3	93.9	11	27
Russia (1998)	Positive from T+1 Oil exports & Import compression	Negative All major categories negative except FDI	Sovereign domestic debt default	22.2	78.2	…	65
Brazil (1998)	Negative Gradual narrowing of current account deficit T to T+4	Positive Private sector FDI and portfolio equity. But lower than anticipated	Voluntary commercial bank credit rollover	27.4	5.3	4	12

Source: International Financial Statistics; “IMF-Supported Program in Capital Account Crises,” IMF Occasional Paper No. 210, 2002.

^1/Program projections of the change in gross reserves between approval of program and repayment.

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Table 3.

Factors Contributing to Repayment of Fund Credit

	Cumulative Balance of Payments Financing Contribution		Type Debt Restructuring	Change in Gross Reserves (In $ billions) 1/		Indicators of Fund Credit
	Current account	Capital Account		Initial projection.	Actual	Arrangement approval to peak credit outstanding (no of months)	Repay 75 percent of peak credit (no. of months)
	Mexico (1995)	Positive from T-1; Negative thereafter (higher exports and imports than projected)	Positive from T+2 Private Sector FDI and portfolio equity flows	None	15.4	29.3	10	50
Thailand (1997)	Positive from T+1 Import Compression	Negative Continuing drains from banks and other private sector	Voluntary bank credit rollover	23.0	10.6	22	38
Indonesia (1997)	Positive from T+2 Import compression	Negative Continuing drains from banks, other private sector, and portfolio equity. FDI negative from T+2	External bank credit & corporate debt restructuring	9.0	6.4	39	n.a.
Korea (1997)	Positive from T+1 Import compression	Slightly Negative Improving FDI & Portfolio equity. from t+2	External bank credit restructuring	47.3	93.9	11	27
Russia (1998)	Positive from T+1 Oil exports & Import compression	Negative All major categories negative except FDI	Sovereign domestic debt default	22.2	78.2	…	65
Brazil (1998)	Negative Gradual narrowing of current account deficit T to T+4	Positive Private sector FDI and portfolio equity. But lower than anticipated	Voluntary commercial bank credit rollover	27.4	5.3	4	12

Source: International Financial Statistics; “IMF-Supported Program in Capital Account Crises,” IMF Occasional Paper No. 210, 2002.

^1/Program projections of the change in gross reserves between approval of program and repayment.

Table 4:

Domestic Savings-Investment Adjustment in Exceptional Access Cases ^1/

(In percent of GDP)

Sources: IMF, International Financial Statistics; and various country staff reports.

^1/All changes are from the year before the crisis (t-1) to two years after the crisis (t+2), thus capturing the bulk of the period in which balance of payments recovery is to take place. For current high access cases based on latest estimates/projections in staff reports.

^2/Includes amounts remaining to be drawn from initial approval as well as new augmentations approved.

^3/Includes 50 percent of quota approved under the CCFF.

Table 4:

Domestic Savings-Investment Adjustment in Exceptional Access Cases ^1/

(In percent of GDP)

	Gross program access at approval	Change in domestic savings-investment balance				Actual exchange rate change (percent)
		Program Projection	Actual
			Total	Public sector	Private sector
Past Cases
Mexico (1995)	6.3	5.3	5.1	-1.0	6.2	57
Thailand (1997)	2.6	4.7	18.1	-4.3	22.5	33
Korea (1997)	4.4	4.3	10.4	-4.7	15.2	32
Indonesia (1997)	4.6	1.3	7.5	-2.7	10.2	70
Russia (1998) 2/ 3/	5.7	-2.0	17.9	10.7	7.2	79
Brazil (1998)	2.0	0.5	-0.3	0.7	-0.9	41
Current Cases
Argentina (2001) 2/	5.5	0.3	9.3	4.5	4.8	66
Turkey (2001) 2/	9.6	4.2	2.0	1.3	0.7	59
Brazil (2002)	6.3	1.2	4.0	0.9	3.1	41
Uruguay (2002) 2/	16.5	1.2	3.5	0.8	2.7	57

Sources: IMF, International Financial Statistics; and various country staff reports.

^1/All changes are from the year before the crisis (t-1) to two years after the crisis (t+2), thus capturing the bulk of the period in which balance of payments recovery is to take place. For current high access cases based on latest estimates/projections in staff reports.

^2/Includes amounts remaining to be drawn from initial approval as well as new augmentations approved.

^3/Includes 50 percent of quota approved under the CCFF.

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Table 4:

Domestic Savings-Investment Adjustment in Exceptional Access Cases ^1/

(In percent of GDP)

	Gross program access at approval	Change in domestic savings-investment balance				Actual exchange rate change (percent)
		Program Projection	Actual
			Total	Public sector	Private sector
Past Cases
Mexico (1995)	6.3	5.3	5.1	-1.0	6.2	57
Thailand (1997)	2.6	4.7	18.1	-4.3	22.5	33
Korea (1997)	4.4	4.3	10.4	-4.7	15.2	32
Indonesia (1997)	4.6	1.3	7.5	-2.7	10.2	70
Russia (1998) 2/ 3/	5.7	-2.0	17.9	10.7	7.2	79
Brazil (1998)	2.0	0.5	-0.3	0.7	-0.9	41
Current Cases
Argentina (2001) 2/	5.5	0.3	9.3	4.5	4.8	66
Turkey (2001) 2/	9.6	4.2	2.0	1.3	0.7	59
Brazil (2002)	6.3	1.2	4.0	0.9	3.1	41
Uruguay (2002) 2/	16.5	1.2	3.5	0.8	2.7	57

Sources: IMF, International Financial Statistics; and various country staff reports.

^1/All changes are from the year before the crisis (t-1) to two years after the crisis (t+2), thus capturing the bulk of the period in which balance of payments recovery is to take place. For current high access cases based on latest estimates/projections in staff reports.

^2/Includes amounts remaining to be drawn from initial approval as well as new augmentations approved.

^3/Includes 50 percent of quota approved under the CCFF.

35. In Russia, both the improvement in private and public savings-investment balances were significant. This reflected the debt default as well as the devaluation, followed by a fortuitous rise in the oil price and a major fiscal adjustment conducted outside a Fund arrangement (reflecting in part the loss of market access). Thus, Russia’s current account also improved strongly, although the nature of adjustment was quite different from the Asian countries.

36. Despite the improvement in the current account, the ability to replenish gross reserves—and hence the pace of repurchases—has tended to hinge on the behavior of the capital account. Where capital outflows moderate or rebound quickly after the crisis, as in the case of Korea, and enable gross reserve accumulation, repayment to the Fund tends to be speedy. Where confidence fails to recover, and net capital outflows continue, as in Indonesia and Thailand, the scope for reserve build-up is more limited and Fund repurchases are more difficult.²² In Russia, continuing net capital outflows were more than outweighed by the boom in oil exports, although neither the strength of the current account or continued weakness of the capital account was accurately foreseen at the time the arrangement (and the augmentation) was approved.

37. By contrast, in Brazil the adjustment in savings-investment balances was negative. Brazil, like Mexico, benefited from a rapid restoration of confidence and continued market access, which allowed it to continue to run current account deficits and make Fund repurchases.²³ At the same time, the build-up in reserves fell short of what had been anticipated when the arrangement was approved and, together with remaining external imbalances, contributed to renewed vulnerabilities and the need for a subsequent Fund arrangement in 2002.

38. Where capital flows provided a net source of foreign exchange, private sector non-debt-creating flows (portfolio investment and FDI) tended to be more important than debt-creating flows (Figure 4). Moreover, in countries experiencing a banking crisis, possibly associated with pervasive corporate or financial balance sheet weaknesses (Thailand, Korea, Russia and to a lesser extent Indonesia), banks and other private sector capital flows have generally been a significant foreign exchange drain for years after the crisis. The crisis triggered a reassessment of risks and rebalancing of investor’s portfolios that has not quickly reversed.²⁴

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Past Crises: Capital Account Flows

(In percent of average GDP t to t+4)

Citation: Policy Papers 2004, 014; 10.5089/9781498330398.007.A001

Source: IFS, International Financial Statistics.

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39. In several instances, efforts to take pressure off the capital account were supported by voluntary rollover or restructuring agreements. In Indonesia and Korea, agreements were reached with foreign banks to exchange existing interbank credit lines into new short- to medium-term instruments, while in Russia sovereign debt was restructured into somewhat longer maturities.²⁵ Thailand and Brazil encouraged, with various degrees of intensity, banks to roll over their credit lines but did not engage in formal restructuring

C. Strategies in Place for Repaying Exceptional Access in Current Cases

40. A realistic assessment of the capacity to repay in current exceptional access cases requires a close analysis of the assumptions underlying the balance of payments projections, as well as the underlying reforms and arrangements in place to generate the resources for Fund repurchases. Table 5 highlights the magnitude of repurchases projected for selected current access cases, against several key metrics.

Table 5.

Capacity to Repay Indicators for Selected Current High Access Cases Scheduled repurchases and charges

Source: Staff Reports.

^1/Data as reported in staff reports. SRF repurchases are on expectations schedule, unless they have already been converted to an obligations schedule. Treatment of credit tranche resources is as reported in the Staff Report, expectations for Turkey and obligations for Argentina and Uruguay.

^2/Projections of reserves for the end of the same year.

Table 5.

Capacity to Repay Indicators for Selected Current High Access Cases Scheduled repurchases and charges

		2003	2004	2005	2006	2007	2008	2009
Argentina (EBS/04/5, Supplement 1) 1/
	Billions of SDR	4.6	4.1	2.6	1.9	3.6	3.9	2.3
	In percent of exports	19.6	18.0	10.6	7.4	13.4	14.1	8.0
	In percent of gross international reserves 2/	45.5	37.5	22.3	15.1	30.0	33.6	20.2
Turkey (EBS/03/148) 1/
	Billions of SDR	1.9	3.8	5.6	7.9	1.3	0.6	0.0
	In percent of exports	3.9	7.0	9.3	12.2	1.8	0.8	0.0
	In percent of gross international reserves 2/	8.1	17.3	29.4	52.7	7.6	2.9	0.0
Uruguay (EBS/04/17) 1/
	Billions of SDR	0.1	0.2	0.3	0.7	0.6	0.4	0.2
	In percent of exports	4.8	8.8	12.9	29.4	24.7	14.8	8.5
	In percent of gross international reserves 2/	6.9	10.3	15.5	38.6	33.8	23.6	13.8

Source: Staff Reports.

^1/Data as reported in staff reports. SRF repurchases are on expectations schedule, unless they have already been converted to an obligations schedule. Treatment of credit tranche resources is as reported in the Staff Report, expectations for Turkey and obligations for Argentina and Uruguay.

^2/Projections of reserves for the end of the same year.

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Table 5.

Capacity to Repay Indicators for Selected Current High Access Cases Scheduled repurchases and charges

		2003	2004	2005	2006	2007	2008	2009
Argentina (EBS/04/5, Supplement 1) 1/
	Billions of SDR	4.6	4.1	2.6	1.9	3.6	3.9	2.3
	In percent of exports	19.6	18.0	10.6	7.4	13.4	14.1	8.0
	In percent of gross international reserves 2/	45.5	37.5	22.3	15.1	30.0	33.6	20.2
Turkey (EBS/03/148) 1/
	Billions of SDR	1.9	3.8	5.6	7.9	1.3	0.6	0.0
	In percent of exports	3.9	7.0	9.3	12.2	1.8	0.8	0.0
	In percent of gross international reserves 2/	8.1	17.3	29.4	52.7	7.6	2.9	0.0
Uruguay (EBS/04/17) 1/
	Billions of SDR	0.1	0.2	0.3	0.7	0.6	0.4	0.2
	In percent of exports	4.8	8.8	12.9	29.4	24.7	14.8	8.5
	In percent of gross international reserves 2/	6.9	10.3	15.5	38.6	33.8	23.6	13.8

Source: Staff Reports.

^1/Data as reported in staff reports. SRF repurchases are on expectations schedule, unless they have already been converted to an obligations schedule. Treatment of credit tranche resources is as reported in the Staff Report, expectations for Turkey and obligations for Argentina and Uruguay.

^2/Projections of reserves for the end of the same year.

41. Some features of the current exceptional access cases distinguish them from the previous high access cases:

• Initial sovereign debt levels are higher. Argentina’s medium-term balance of payments viability hinges significantly on the ability to restructure its debt in a sustainable manner. In Uruguay, Brazil, and Turkey, high debt levels will continue to generate large gross financing requirements, and hence considerable vulnerability to shocks or spells of market drought. Moreover, the interplay between exchange rate depreciations, public debt dynamics, and financial sector vulnerabilities is more unstable than in earlier cases (see for instance the high degree of dollarization in Uruguay).

• Managing the difficult debt dynamics will require sustained primary surpluses into the medium term. Contrary to most of the earlier exceptional access cases (where fiscal policy could be relaxed in the face of declining domestic demand), the current arrangements require a tight fiscal policy to consolidate debt dynamics.

• Three of the more recent crises (Argentina, Turkey and Uruguay) were associated with large-scale deposit runs and banking crises, whereas the banking crises in the earlier exceptional cases were less severe (only Indonesia experienced serious bank runs).²⁶ Bank crises have tended to add to the fiscal costs and to the volatility of capital flows, and have delayed a restoration of confidence.

• Members with current arrangements have on average been much less open to trade at the outset of the crisis, lessening the scope for current account adjustment, and placing a greater importance on restoring capital inflows. Exports in the five early cases were twice as large in relation to GDP as in the four current arrangements (with Turkey the notable exception, see Figure 5).

• Outstanding use of Fund resources has generally been higher at the outset of the arrangement. Contrary to previous arrangements where no, or relatively little, Fund credit had been outstanding, current high access cases had much higher levels of Fund credit outstanding when the exceptional access was approved.

• In contrast to the arrangements for Mexico, the Asian countries, and Brazil (1998), co-financing from other multilateral or bilateral sources has been small or non-existent in the recent arrangements (the availability of this co-financing in earlier cases varied, with it sometimes being provided in parallel and sometimes as a “second line of defense”). Nevertheless, the Fund’s share in countries’ gross financing requirements has been roughly unchanged—22 percent on average in the early cases compared to 25 percent in the more recent cases.²⁷ However, the Fund’s share in external debt is higher in recent cases.²⁸

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Capital Account Crises: Openness and Financing Packages

Citation: Policy Papers 2004, 014; 10.5089/9781498330398.007.A001

Sources: IMF, International Financial Statistics and staff estimates.1/ Excludes successor arrangements from the IMF.

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42. The original program strategy in the current exceptional access cases was in many respects similar to the earlier ones. That is, the sustained implementation of structural and fiscal reforms into the medium term was assumed to lead to a modest improvement in the current account (Turkey’s improvement was more substantial), an improvement in debt dynamics and, as confidence would take hold, a recovery of the capital account. The reduction in savings-investment imbalances combined with an improved investment climate was expected to allow these countries to attract continued foreign investment, and allow a gradual rebuilding of reserves to meet large Fund repurchase obligations over the medium term.

43. The programs in Argentina, Brazil (2001), Turkey and Uruguay were not initially successful in restoring market confidence, leading to requests from the authorities for augmentations in access to Fund resources, extensions of repurchase expectations, or both. In Turkey, a banking sector crisis followed by an unsuccessful defense of the crawling peg regime increased financing requirements and worsened the government’s debt position, while political instability delayed a return of confidence. In Uruguay, initial attempts to restore confidence in the financial sector failed, and the continuing capital flight ultimately depleted reserves and brought down the exchange rate. This caused substantial damage to government, financial, and corporate balance sheets. Brazil’s augmentation in 2003 took place in a somewhat different context, following a successful program, but was aimed at overcoming a period of more tenuous market access, and allowing the authorities to exit from Fund assistance. Setbacks were also experienced in previous high access cases, but they generally did not lead to augmentations.²⁹

44. In response to these setbacks, the authorities’ programs have generally been strengthened. They have targeted additional fiscal and current account adjustment, and are addressing underlying structural weaknesses, mainly in the fiscal and financial sector. In the case of Uruguay and Argentina, a formal restructuring of sovereign debt is a vital element in the revised program strategy to restore medium-term balance of payments viability, and secure future market access (Uruguay completed its debt exchange in 2003 and has already regained a degree of market access, as discussed below).

45. Provided implementation proceeds as programmed and market conditions remain broadly favorable, these countries remain on track to make repurchases as scheduled (Figure 6). Brazil and Uruguay are assumed to benefit primarily from FDI and portfolio inflows, while the Turkey program assumes a return of external financing to the corporate and banking sectors. For Argentina, the generation of foreign exchange reserves is predicated on its ability to continue to run significant current account surpluses, while exceptional debt relief should take some pressure off the capital account. Of these countries, Brazil and Turkey are projected to make net repayments to the Fund in 2004. The strategy in the four cases is discussed in more depth below.

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Selected Current Exceptional Access Arrangements: Projected BOP Financing: Sources (+) and Needs (−) (Expressed as a percent of average annual GDP over period)

Citation: Policy Papers 2004, 014; 10.5089/9781498330398.007.A001

Source: IMF staff reports.

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D. Lessons from Past and Present Cases

54. In general, all exceptional access programs in circumstances of capital account crises are designed to support the return of market confidence, thereby enabling the Fund to be repaid quickly. However, not all programs will work as anticipated, or the envisaged adjustment may take longer or shorter than expected.³⁴ As a result, Fund involvement may be longer, or shorter, than initially envisaged.

55. Notwithstanding some risks, the strategies currently in place in Brazil, Turkey and Uruguay appear to be on track, helped by a very supportive international financial environment; in Argentina conclusion of an appropriate restructuring is needed.

• In Uruguay, strong fiscal measures and reforms being undertaken in the banking sector have helped to restore stability. As a result, market confidence has increased, the banking system has experienced a reflow of deposits, the government’s borrowing spreads have declined, and market access has been substantially restored.

• In Brazil, important progress is being made in the structural reform agenda, fiscal performance is in line with program targets, and vulnerabilities continue to be addressed, including the structure of public debt. As a result, demand for Brazilian assets has been strong and the central bank has started to purchase significant amounts of foreign exchange reserves in the market.

• Turkey's economic reform program is also delivering good results. Market confidence seems to be coming back and interest rates have fallen sharply. The central bank’s reserve position continues to improve, while the Treasury's debt rollover seems manageable, at least in the current international environment.

• In the case of Argentina, macroeconomic conditions continue to improve. Sustaining the economic recovery will require continued prudent macroeconomic policy and implementation of structural reforms, and conclusion of a debt restructuring that leads to a sustainable public debt and allows the country to regain access to international capital markets.

56. Despite the progress, though, important vulnerabilities remain that could cause stress in a less benign international environment or in the face of adverse shocks. Reducing these vulnerabilities will require strict implementation of the macroeconomic policies and structural reforms under the Fund-supported programs.

57. The remainder of this section addresses some topics that emerge from the past experience.

58. Applying elements of the framework for exceptional access to preexisting arrangements. While all of the four criteria for capital account crises will not always be met, all other elements (early Board involvement, documentation requirements) apply to any request for exceptional access. However, the new framework does not formally apply to exceptional access cases approved before it came into effect, i.e., Turkey and Uruguay. Since most of the elements are designed to improve decision-making on exceptional access, they are moot once such access has been approved. However, one element of the new framework that could be extended to exceptional access cases approved before the new framework is the requirement of an ex post evaluation by the staff within one year after the end of the arrangement (see Box 1). The Independent Evaluation Office may also decide to assess the experience in exceptional access cases.

59. Additional scenarios. The difference between the ex ante and ex post repayment scenarios of past exceptional access cases highlights the role sensitivity analysis could play in providing additional perspectives. Baseline balance of payments projections tend to assume sustained policy implementation, a gradual improvement in external market conditions, and no major exogenous shocks. As is evident, actual repayment patterns may surprise both on the upside and the downside. A presentation of different scenarios could show for instance the sensitivity to different rollover or interest rate assumptions as well as specific country-relevant shocks.

60. Capacity to repay indicators. In spite of the sometimes significant margin of error that has surrounded balance of payments projections, it appears that the traditional indicators of capacity to repay remain critical.³⁵ Reserves and exports—the main metrics against which Fund debt-service continues to be measured—remain indicative of member’s capacity to generate the foreign exchange resources needed to make Fund repurchases. The use of the Fund resources in a specific sector, and the associated conditionality, may help focus attention on addressing specific underlying balance of payments vulnerabilities. In such cases, close monitoring of the sector in which the balance of payments need originated and to which Fund resources were targeted can yield important insights into the scope for overall balance of payments improvement and prospects for Fund repayment.

61. The profile of repayments to the Fund. Aside from issues relating to the strength of the diagnostic analysis and program design, alternative terms of Fund lending might play a role in smoothing out repayment humps and preventing repurchase problems. The current configuration of facilities, with a presumption to use SRF resources and with repurchases on the expectations schedule where possible, is aimed at capturing the “upside” in cases where the timing of the overall balance of payments improvement, either through adjustment or higher capital inflows, is very uncertain.³⁶ An inevitable feature of this system is that, in cases where the upside does not materialize, or indeed the balance of payments deteriorates, members may not be able to make repurchases as anticipated. The possibility of early repayment from better balance of payments developments than anticipated is also reduced or eliminated when repurchase expectations arising over a longer period of time are extended from expectations to obligations basis. (For example, in the case of Brazil, repurchases arising in 2005 and 2006 on expectations schedule were converted to obligations schedule.) Since there is a presumption that extensions would cover only repurchase expectations arising in the next twelve months, extensions of expectations arising beyond this period should only occur when the need to smooth the member’s debt-service profile is compelling.³⁷

62. Changes to the structure of Fund charges could further help capture the upside to balance of payment projections, but the Board has agreed, in the context of the 2000 Review of Facilities, not to consider such changes prior to the end of 2004. Higher charges— for example through more consistent use of the SRF—would provide further incentives to make early repurchases once the cost of other (market) financing declines. This might encourage members to repurchase ahead of a scheduled repayment hump. Staff is not proposing any changes at this time.

63. Is there scope for greater use of rollover or rescheduling agreements with the private sector in providing medium-term balance of payments relief? The role of arrangements to secure relief for the capital account is quite different for countries with acute liquidity problems than it is for those with a possibly unsustainable debt. Where balance of payments pressures are perceived to be temporary, authorities have generally encouraged private creditors to retain their exposures. Where such arrangements are formalized, this may provide an additional level of assurance about the behavior of the balance of payments under the Fund arrangement. However, where bank credit is not the dominant source of capital account financing or the source of the balance of payments pressure, the scope for replicating arrangements of the type in Korea will tend to be limited.³⁸ Moreover, country authorities have been wary to interfere with private sector decision making, for fear of further undermining confidence and exacerbating capital outflows. Supervisory authorities, for their part, have been similarly reluctant to apply pressure on banks as this may pose a conflict of interest with their prudential responsibilities.³⁹ As a corollary, in most cases, exceptional access arrangements will probably not be associated with formal measures that lock in certain capital flows.

64. Although rescheduling arrangements have in certain instances provided valuable breathing space during the crisis itself, their contribution to enhancing countries’ medium-term repayment capacity is less clear. Efforts to prevent a large reduction in net private sector capital outflows focused on achieving immediate balance of payments relief by rolling over claims falling due or replacing these with new ones. If the maturity of these new instruments is sufficiently long, this may provide some relief when Fund repurchases come due. In practice, however, the extension of maturities was generally too short to achieve this. In the case of the bank restructuring agreements with Korea, for instance, the maximum maturity of the exchanged bank loan was three years.

65. In contrast, where sovereign debts have become unsustainable, or provide significant cause for concern, a formal rescheduling or restructuring of debt may be necessary to restore balance of payments viability, and becomes a focal point of the Fund-supported program. In cases where a country’s debt has clearly become unsustainable, such as in Argentina and Russia, the ability to make Fund repurchases becomes dependent on the ability to achieve successful restructuring agreements with other private and official creditors. In these circumstances, where arrears are incurred to the private sector, purchases become contingent on a completion of financing assurances reviews, in which the progress towards achieving a restructuring agreement is assessed.⁴⁰