The Fund’s Support of Low-Income Member Countries-Considerations on Instruments and Financing, and PIN No. 04/40 (April 15, 2004).
The use of PRGF resources for standard PRGF operations will be referred to in this paper as the “standard PRGF,” to distinguish it from the proposed window within the PRGF Trust, called the “PRGF second window” for brevity. It should be understood that the standard PRGF and the PRGF second window would be two distinct features within the PRGF Trust. Specifically, the second window would be designed to assist PRGF-eligible countries adjust to shocks, using PRGF Trust resources.
The Trade Integration Mechanism (TIM) provides additional assurances for countries faced with certain trade-related shocks. However, the TIM is available only as an add-on policy to a Fund arrangement in the GRA or the PRGF. Additionally, the Emergency Post-Conflict Assistance is available for countries emerging from conflict seeking to restore macroeconomic stability in a situation of insufficient capacity to develop and implement a comprehensive economic program that could meet the standards of upper credit tranche conditionality.
Review of Charges and Maturities: Policies Supporting the Revolving Nature of Fund Resources.
As of end-May 2005, there were 32 current PRGF arrangements (out of 77 PRGF-eligible member countries).
Alternatively, credit tranche repayment maturities would allow PRGF Trust resources to revolve faster, and would be more consistent with the shorter-term nature of the balance of payments need; concessionality could be slightly increased by lowering the rate of charge to zero.
Approval of a standard PRGF arrangement, in contrast, requires that the Fund as Trustee be satisfied that the member has a protracted rather than an immediate balance of payments problem. To qualify for assistance, the member must present a three-year program of macroeconomic and structural adjustment derived from the member’s PRSP.
An alternative would be to broaden the qualification criteria to cover a broader range of balance of payment needs. This, however, would weaken the connection with shocks and potentially blur the distinction between the eligibility criteria under the two PRGF windows.
An accompanying paper on Policy Support and Signaling in Low-Income Countries proposes the PSI as a new signaling instrument for low-income countries (PIN No. 05/145, October 14, 2005).
The Fund has established three-year access norms of 90 percent and 65 percent of quota (equivalent to 30 percent and 22 percent of quota, on an annual basis) for first- and secondtime users of PRGF resources, respectively. More tapered access norms have been established for successive PRGF arrangements: 55 percent (18 percent, on an annual basis); 45 percent (15 percent, on an annual basis); 35 percent (12 percent, on an annual basis); and 25 percent (8 percent, on an annual basis) of quota for third, fourth, fifth, and subsequent PRGF arrangements, respectively.
Subsidized ENDA carries a grant element of 19 percent, while PRGF terms imply a grant element of 32 percent. These calculations assume a discount rate of 5 percent, which is consistent with the average long-term market interest rate since the initiation of the ESAF/PRGF.
Fund Assistance for Countries Facing Exogenous Shocks.
Access under standard PRGF arrangements is based on a set of general guidelines that include a member’s balance of payments need; the strength of its adjustment effort; its outstanding use of Fund credit and the record of such use in the past; and ability to repay the Fund. These guidelines would also apply for arrangements under the second window.
In comparison, the Executive Board has capped access under a three-year PRGF arrangement at 140 percent of a member’s quota (185 percent of quota in exceptional circumstances), and under the CFF at 45 percent of quota for either an export shortfall or a cereal import excess, or a combined limit of 55 percent of quota. No formal limits on ENDA credit have been specified although, in practice, amounts have been limited to 50 percent of quota.
Because access to Fund resources would require that the Executive Board adopt a separate decision concerning the use of resources, there would be no automatic access to Fund resources for members with a PSI. Nevertheless, the implementation of a PSI-supported program with upper credit tranche conditionality would facilitate this process as it would eliminate the time normally required to design such a program and demonstrate that it can be successfully implemented.
A guidance note on access under the PRGF, including principles for PRGF augmentation, was issued to the Board: Operational Guidance Note on Access Under the Poverty Reduction and Growth Facility.
The March discussion indicated the use of PRGF/EFF blends if (i) the member’s per capita income exceeds 75 percent of the prevailing IDA operational cutoff (currently US$895), or (ii) the member had recent or prospective medium- or long-term borrowing from private capital markets or the nonconcessional windows of official bilateral and multilateral lenders. This would currently cover 27 of the 77 PRGF-eligible members (See Box 5 of the paper listed in footnote 1).
Some 53 of 77 PRGF-eligible members currently have either an I-PRSP or a full PRSP, and the majority of the remaining countries have a PRS process underway or a draft I-PRSP under preparation. Some countries who have not initiated the PRS process have available an alternative development strategy document—such as the Transitional Results Matrix supported by the World Bank in several low-income countries under stress (LICUS)—that can help to identify priorities and that can be made consistent, relatively quickly, with the guidelines set out in Annex VI of Poverty Reduction Strategy Paper—Progress in Implementation. These guidelines envision an I-PRSP prepared primarily from existing documents and analyses—such as a macroeconomic framework, previous poverty assessments, and current development strategies. The proposed PSI guidelines also require that a PRS process be underway.
Disbursements eventually determined to have been received in the absence of a balance of payments need would be expected to be repaid within a specified period of time.
An accompanying paper estimates that, among the 77 PRGF-eligible countries, 16 are not expected to request a new standard PRGF arrangement during the period 2005-2011. In the event of an exogenous shock, these members are likely candidates for access under the second window of the PRGF Trust. As indicated in the accompanying paper on Policy Support and Signaling in Low-Income Countries, 5 of these 16 members are expected to request a PSI—in which case, a request for financing under the second window of the PRGF would not require additional staff resources. Finally, another of the 16 members is considered unlikely to request access under the second window of the PRGF, leaving the group of likely candidates at 10. Although some members currently with a standard PRGF arrangement may also request access under the second window during 2005-2011 (depending on the timing of the end of that arrangement and the shock), it is similarly possible that some members included in the group of likely candidates would, in the case of a shock, opt for a standard PRGF arrangement instead of access under the second window. On balance, the working assumption of 10 likely candidates during the period 2005-2011 appears reasonable.
Thus, this would require the consent of 17 contributors of loan resources to the PRGF Trust, 43 contributors of subsidy resources to the PRGF Trust, and 85 contributors of subsidy resources to the PRGF-HIPC Trust.
The purposes of the PRGF Trust are set out in Section I, paragraph 1 of the PRGF Trust Instrument: “The Trust shall assist in fulfilling the purposes of the Fund by providing loans on concessional terms to low-income developing members...in order to support programs to strengthen substantially and in a sustainable manner their balance of payments position and to foster durable growth, leading to higher living standards and a reduction in poverty.” The current eligibility conditions, as set out in Section II, include that: “This assistance shall be committed...in support of a three-year macroeconomic and structural adjustment program presented by the member;” and “Before approving a three-year arrangement, the Trustee shall be satisfied that the member has a protracted balance of payments problem...”