The terms “instrument” and “facility” are used interchangeably to refer to all Board-endorsed facilities, instruments, and policies to support LIC programs, namely the PRGF, ESF, and PSI, as well as those open to all members (EPCA, ENDA, SBA, EFF, CFF, and TIM). The review does not cover surveillance, technical assistance, SMPs, or financing provided through debt relief (i.e., HIPC/MDRI).
Review of the Fund’s Financing Role in Member Countries.
The Role of the Fund in Low-Income Countries; Statement by the Managing Director in the Role of the Fund in Low-Income Countries; Proposed Reforms to the Exogenous Shocks Facility; The Fund’s Engagement in Fragile States and Post-Conflict Countries—A Review of Experience—Issues and Options;and Implementation of the Policy Support Instrument.
Box 1 in The Fund’s Support of Low-Income Member Countries—Considerations on Instruments and Financing provides details on the early history of the Fund’s concessional assistance. Legal issues relevant to providing Fund assistance to a subset of the membership based on per capita income are discussed in The G-8 Debt Cancellation Proposal and Its Implications for the Fund.
While there is no explicit definition, a UCT standard program generally refers to a set of policies that are adequate to correct balance of payments imbalances and enable repayment to the Fund.
The main modifications were: (i) allowing the ESF to be used at the same time as a PSI, (ii) not requiring a PRSP, (iii) creating a new Rapid-Access Component under which countries hit by exogenous shocks could receive up to 25 percent of quota more quickly, and (iv) establishing a higher normal limit of 75 percent of quota for the ESF’s High-Access Component (Proposed Reforms to the Exogenous Shocks Facility).
The remainder are primarily small islands with relatively high per capita income.
Many LICs faced high debt service burdens in the 1980s and 1990s, necessitating successive Paris Club rescheduling agreements, combined with ESAF/PRGF arrangements. As shown in Figure 3, countries that have reached the HIPC completion point (initially the heaviest ESAF/PRGF) users, have required less IMF financing in recent years, reflecting a reduced debt service burden and no further need for Paris Club debt treatments.
Nine PRGFs, four ESFs, four EPCAs, three SBAs, two ENDAs, and one EFF were approved in 2008.
While omitted variable bias could play a role, the finding is relatively robust across different sub-groups (geographical, capacity, debt relief status, and initial conditions) and is apparently not driven by differences in terms of trade or transmission of world growth. It also continues to hold for alternative definitions of extensive and infrequent program use. The relatively poor initial conditions of extensive program users may be an explanatory factor, as economic policy gains may have had a relatively large impact for these countries.
In contrast to much of the literature on the impact of IMF-supported programs, this analysis focuses on the long-term impact of repeated IMF program engagement in LICs, where capacity building and debt relief play a critical role in gradually strengthening macroeconomic management and performance.
These countries are often called “mature stabilizers.” See forthcoming Supplement for methodological details.
This principle for the use of the Fund’s general resources is anchored in Article I (v).
Protracted adjustment needs have also occurred in other countries, for instance in the transition context in the 1990s. In some cases, these countries were supported by the three-year (non-concessional) EFF.
A survey of IMF mission chiefs for LICs indicates that about three quarters of low-income countries presently have a balance of payments need. Of these, 40 percent have both a long-term and one of several types of short-term needs; 30 percent have a long-term need only; and 25 percent have a short-term need only. In addition, several countries had a precautionary need (see forthcoming Supplement). In this paper, “short term” refers to two years or less and “medium- or longer-term” to three years or more.
A new policy on country contributions to Fund technical assistance (TA) will apply from May 2009. Countries with Fund financial arrangements will be exempted from the contributions policy since TA is often important for the success of programs by helping countries strengthen their institutions and implement program conditionality, which in turn helps safeguard Fund resources. The exemption will, however, not apply to LICs without arrangements or with non-financial PSIs or SMPs. The Fund is also stepping up fundraising, including for Regional Technical Assistance Centers and topical trust funds, which will likely benefit LICs.
Several Ex-Post Assessments found a positive impact of longer term program engagement on members’ strength of domestic institutions and technical capacity. See Review of Ex Post Assessments and Issues Relating to the Policy on Longer-Term Program Engagement.
Grant-financed aid is a permanent resource transfer from the donor to the recipient. Concessional loans entail both a permanent resource transfer (equivalent to the embedded grant element) and a temporary transfer (equivalent to the present value of total debt service). Concessional loans provided by development agencies are often intended to finance projects that generate an economic return that provides the resources out of which the debt service can be paid. By contrast, the interest rate subsidy for PRGF-ESF loans is primarily intended to prevent future debt problems, rather than enhancing the long-term resource envelope of the recipient.
In principle, IMF financing and development assistance provided by others can have the same impact on spending and absorption. Both an IMF loan and budget support (grant or loan) by donors are in effect balance of payments support as they provide the recipient with foreign exchange. Both can be fully spent and absorbed, which in the case of the IMF would involve additional steps, such as a central bank credit to the government, or more indirectly, a monetary expansion that allows the government to borrow from domestic banks. Other possible combinations of spending and absorption (including full saving) can in principle be replicated for both types of support through appropriate monetary policies. The main difference is that aid should usually be fully spent and absorbed (see The Macroeconomics of Managing Increased Aid Inflows—Experiences of Low-Income Countries and Policy Implications, while IMF financing should often be neither fully absorbed nor fully spent. Another difference is that repayment of an IMF loan occurs earlier than most concessional loans, implying an earlier and larger unwinding of spending and absorption.
Dorsey, Thomas, Helaway Tadesse, Sukhwinder Singh, and Zuzana Brixiova, 2008, The Landscape of Capital Flows to Low-Income Countries, IMF Working Paper 08/51.
Executive Directors looked to this review to ensure that the Fund’s instruments continue to meet the evolving needs of LICs and to consider issues such as flexibility in the PRGF as well as the possibility of a precautionary window, and the creation of a Stand-By-type instrument to support short-term stabilization in LICs.
The survey of mission chiefs (forthcoming Supplement) indicates that these gaps may be relevant in a non-negligible number of countries: short-term financing needs are expected in 37 percent of countries included in survey responses; precautionary needs in 31 percent of countries; and financing for non-post conflict fragile states and/or flexible emergency financing in 39 percent of countries. Mission chiefs also report that some country authorities, donors, and NGOs noted these gaps. Another gap perceived by mission chiefs was the lack of a pure signaling and policy support instrument for non-mature stabilizers without a financing need.
SBAs have been approved recently for PRGF-eligible countries such as Georgia, Pakistan, and Honduras. Several additional cases are expected to be considered soon. Access levels, PRSP requirements, demand for precautionary financing, income levels, and stigma may have been factors in some cases.
Honduras indicated that it would treat its SBA as precautionary. During the 2004 discussion of The Fund’s Support of Low-Income Country Member Countries—Consideration of Instruments and Financing, a precautionary PRGF was considered inappropriate, in part because it would tie up concessional resources and is at odds with the protracted balance of payments problem standard for PRGF lending.
The broader question of how the Fund should engage with fragile states was discussed in The Fund’s Engagement in Fragile States and Post-Conflict Countries—A Review of Experience—Issues and Options. The gap highlighted above is only one aspect of a possible broader strategy on fragile states, which would typically have a strong technical assistance component. The gap also applies to states not considered fragile but experiencing a period of emergency needs not caused by conflict or exogenous shocks.
For example, questions were raised in a few cases on whether the PRGF or the ESF would be more appropriate in light of the nature of the country’s adjustment need. Moreover, questions have arisen about moving from a PSI to a PRGF, combining the ESF and the EPCA, and use of the SBA by LICs.
See also: Review of Fund Facilities—Analytical Basis for Fund Lending and Reform Options.
For instance, a terms-of-trade shock might coincide with loose fiscal policies, and qualification for the ESF would depend on a judgment of the extent to which the policy stance contributed to a balance of payments need.
Movement among the three categories is expected, depending on country circumstances. While the Fund generally seeks to support progress by LICs toward macroeconomic stability and middle-income status, countries that have sustained macroeconomic stability for some time, such as PSI users, could develop a medium-term adjustment need appropriately met through a PRGF. Conversely, it is also possible that a post-conflict country that initially relies on emergency assistance might be able to move rapidly to a broadly sustainable macroeconomic position if capacity is strong.
Principles for LIC access policy are considered in Section V.A. Repayment terms for concessional instruments are generally assumed to be those of the PRGF-ESF Trust although variations in this respect could also be considered (see Section V.B). The assessment of financing needs and conditionality are considered in Sections V.C and V.D respectively. The concessional financing structure is discussed in Section VII.
A variant would be to subsidize interest on the SBA. As noted in Section V.B, shorter repayment periods could be considered for short-term adjustment lending, but this would significantly reduce concessionality and possibly aggravate debt vulnerabilities. A standard SBA would also introduce quarterly monitoring, which is rarely needed or practical in LICs. And as discussed in Section VII, the Executive Board has in the past preferred to have dedicated facilities for LICs.
The emergency facility could have a rapid access component, with outright purchases and no (ex-post) conditionality, for temporary shocks such as natural disasters. Access limits could be set at a uniform level or differentiated by the nature of the emergency. While the former would be preferable for simplicity, it may be useful to allow higher access in case of natural disasters and post-conflict situations in line with existing limits.
A possible variant of this option would be a single policy support facility with flexible length, with financing determined annually based on needs (which could be zero). This variant would allow medium-term policy support that matches financing more closely to annual balance of payments needs, similar to the ESAF. The policy support element could be offered as a technical service under Article V, similar to the PSI, while annual financing arrangements could run in parallel.
These figures exclude China and India. In addition, Afghanistan, Liberia, and Somalia were not included initially and in some subsequent calculations owing to the lack of reliable GDP data.
The initial maximum and exceptional limits on access were set at 250 and 350 percent of quota, respectively. The determination of the maximum limit was based on projections of members’ financing needs and the amount of resources available. The limits have been reduced twice in the context of the 9th and 11th quota reviews.
Review of Access to Financing in the Credit Tranches and Under the Extended Fund Facility, and Overall Access Limits Under the General Resources Account.
The survey of mission chiefs (see forthcoming Supplement) indicates that PRGF access norms (together with balance of payments needs) have been important in determining access. For a non-negligible minority, access limits have been the main determining factor. Mission chiefs considered that in more than half of program countries access norms and limits either had already become too restrictive or could become restrictive in the next three years.
Decisions on access typically take into account a combination of factors: (i) balance of payments needs; (ii) the strength of the program and the degree of the adjustment effort; (iii) outstanding concessional credit and record of use of such credit in the past; and (iv) ability to repay the Fund. In some cases access far above the norm was provided, for instance in Haiti and Togo (140 and 115 percent of quota versus norms of 65 and 55 percent of quota respectively).
The grace period and maturity of PRGF/ESF loans are 5½ and 10 years, respectively, and the interest rate is 0.5 percent per annum. At the inception of the ESAF in 1987, concessionality of the Fund’s concessional loans was estimated at about 48 percent, although the methodology for calculating grant elements has evolved since then. In recent years, as market interest rates have fallen to low levels, PRGF concessionality has declined and is currently estimated at 28 percent; a reduction to an interest rate of zero would raise the grant element to 31 percent. For comparison, IDA loans have a 0.75 percent annual interest rate, with a grace period and maturity of 10 and 40 years respectively. From the recipient’s point of view, the grant element is often higher than conventionally measured as domestic interest rates exceed world interest rates in most LICs by wide margins.
Under these guidelines, there is a presumption that a blended arrangement would be considered if either (i) a member’s per capita income exceeds 75 percent of the prevailing IDA operational cutoff, or (ii) a member had significant recent or prospective nonconcessional borrowing from private capital markets or the “hard” windows of official bilateral and multilateral lenders. If neither condition is met, there is a presumption of concessional financing only. Access to concessional resources in a blend arrangement was expected to be one half of the PRGF norms (in percent of quota). Access to GRA resources is guided by GRA access policies.
One drawback of committing PRGF financing based on a protracted balance of payments problem standard is that it ties up scarce concessional resources for three years irrespective of eventual needs since the disbursement schedule is usually not revised down in the event that needs are lower in the outer years. It has also been argued that the standard is inconsistent with treating the PRGF as precautionary.
Conditionality in Fund-Supported Programs—Purposes, Modalities and Options for Reform.
See Proposed Reforms to the Exogenous Shocks Facility—Background Information on Financing of PRGF-ESF Operations.
The Reserve Account has been financed by reflows of SAF and Trust Fund repayments, which were originally financed by the proceeds from gold sales in the 1970s. As of end-2008, the Reserve Account held a balance of SDR 3.8 billion.
For a more detailed discussion of key assumptions underlying the estimated subsidization capacity of the PRGF-ESF Reserve Account, see Estimates of PRGF-ESF Reserve Account Subsidization Capacity Under Different Assumptions.
These projections do not take into account possible financing requirements for the three protracted arrears cases (Somalia, Sudan, and Zimbabwe).
In response, several countries have responded positively, with two committing to a specific amount, while others have declined or need more time to consider.
The GFR is defined as current account deficits excluding official transfers, amortization payments, and changes in arrears and reserves. This approach was used as the basis for projecting demand for PRGF resources in 1999 and 2003. See The Fund’s Support of Low-Income Member Countries—Considerations on Instruments and Financing.
Reasons for funding the Fund’s concessional operations outside the GRA have included: (i) safeguarding the use of the Fund’s general resources as liquid reserves of the Fund’s creditors; (ii) limiting credit risk for the GRA; and (iii) allowing, in the case of the PRGF, a more flexible standard of balance of payments need.
In the recent fund-raising of subsidy resources for emergency assistance, several donors expressed a preference for diverting part of their existing contributions to the PRGF-ESF Trust to subsidize emergency assistance. This would represent a reallocation of part of existing subsidy resources in the PRGF-ESF Trust to emergency assistance (which is currently provided through the GRA) and would require Board approval and consents from all bilateral contributors to the PRGF-ESF Trust subsidy accounts.