This paper was prepared by Jianhai Lin and Robert Price (FIN) and Andrew Berg, Carlos Leite, and Mumtaz Hussain (PDR). Ms. Weeks-Brown (LEG) provided extensive drafting suggestions.
Strengthening the Fund’s Ability to Assist Low-Income Countries Meet Balance of Payments Needs Arising from Sudden and Exogenous Shocks.
Role of the Fund in Low-Income Member Countries Over the Medium Term, Fund Assistance for Countries Facing Exogenous Shocks and (PIN No. 03/117, September 10, 2003).
For those countries with a PRGF arrangement in place, Directors agreed that the best response for assisting members facing shocks will continue to be an augmentation of the resources available under that arrangement. Directors concurred that an existing PRGF arrangement provides a suitable framework for determining the policy response to the shock, including measures to protect the most vulnerable sections of society.
Unlike the case with the PRGF, no maximum limit would be specified for ESF exceptional access. It is expected, however, that cases involving access above the 50 percent limit would be rare, and the degree of divergence limited.
In addition, the Fund would not be able to play a catalytic role in the case of aid shortfalls.
Whether a particular shock is “sudden” will need to be assessed judgmentally by staff and the Board, taking into account all relevant factors. Commodity price changes that take place over a few months, such as the recent increase in oil prices, should qualify as sudden; gradual declines that only create significant balance of payments problems when they persist over a period of years would not.
If the same sort of shock repeats itself, as with a commodity price that increases sharply then, a few years later, increases again, subsequent episodes could qualify under the ESF.
Thus, there could be no precautionary ESF.
The balance of payments need for these purposes would be the same as in the context of Article V of the Articles of Agreement, and thus would take into account the member’s balance of payments and reserves position, as well as development in its reserves.
If an existing PRGF arrangement is in place when the shock occurs, augmentation and policy adjustment would be the appropriate response, rather than ESF access.
The fact that a member might be discussing the possibility of a PRGF arrangement at the time of the shock would not in itself disqualify the member from access under the ESF but would raise the question of whether the underlying policies are indeed strong enough to support appropriate adjustment.
It may be, for example, that with the member country’s technical capacity strained by the effects of the shock, less frequent assessment missions by IMF staff may allow policymakers to focus on implementation issues.
In any case, as a general rule, the date of the second disbursement would not be earlier than two months from the initial disbursement on approval of the arrangement, and the date of the last disbursement would not be earlier than two months before the end of the arrangement (Decision No. 7925-(85/38), adopted March 8, 1985).
Even in the absence of such contingencies, the design of the program supported by the ESF should give due consideration to the need to protect the poor, often those most adversely affected by shocks.
Poverty Reduction Strategy Papers—Operational Issues. The preparation of an I-PRSP is not intended to be an onerous process, and the guidelines envision situations where the content is limited to “a government statement expressing commitment to reducing poverty, to an outline of the nature of the poverty problem and of government strategies to tackle the problem, and to a timeline and process for preparing a PRSP together with a matrix and macroeconomic framework” (op. cit., p. 21).
The potential average annual demand would be considerably higher if a few countries with the largest quotas were to request access at higher-than-expected rates under the ESF.
Of the SDR 400 million in total annual demand for shocks financing, some SDR 250 million is expected to be associated with the ESF and SDR 150 million with PRGF augmentations; this breakdown is highly sensitive to assumptions about the relative frequency of PSI and PRGF arrangements over the medium term.
The projected subsidy resources would cover subsidies for the lifetime of the loans before they are repaid