ANNEX I. FCL Qualification Criteria
1. This annex provides the key considerations for establishing the qualification framework to access financing under the FCL, with a view to promoting a predictable and evenhanded qualification process. The qualification criteria for the FCL draw from those already established by the Executive Board for the SLF, as well as on the qualification criteria discussed by the Board in the context of the Reserve Augmentation Line (RAL).1
2. The core of the qualification framework for the FCL is an assessment that the members’ economic fundamentals, institutional policy framework, and policies are very strong. These, together with a sustained track record of very strong policy implementation, would give markets and the Fund confidence that the member would take appropriate corrective policy measures when facing an adverse shock, consistent with addressing the BOP problems it may be facing and with repaying the Fund. As the FCL can be used for any BOP problem and in the face of an actual or potential financing need, qualification for the FCL would not preclude circumstances where the member would need or plan to undertake policy adjustments.
3. Any assessment of qualification involves a degree of judgment. The assessment of the qualification criteria, noted below, will need to take into account the great variety of the member’s circumstances and the uncertainties that attend economic projections. Strong performance against all relevant criteria noted below would not be necessary to secure qualification under the FCL. However, significant shortcomings on one or more of these criteria—unless there are compensating factors, including corrective policy measures underway—could generally signal that the member is not among the strong performers for whom the FCL is intended.
ANNEX II: Determining Access in Fund-Supported Programs
1. The key criteria that govern access decisions in individual country cases are: (i) the member’s actual or potential need for Fund resources taking into account other sources of financing and the desirability of maintaining a reasonable level of reserves (Fund policy establishes that in no circumstances can access be greater than this need); (ii) the member’s capacity to repay the Fund, which takes into account the strength of its adjustment program including the extent to which it will lead to a strengthening of the member’s BOP by the time that repurchases begin to fall due; and (iii) the amount of the member’s outstanding Fund credit and its record in using Fund resources in the past. These criteria are broad and making them operational involves substantial judgment, even more so when access is requested on a precautionary basis, in which case the starting point is the risk of a plausible adverse scenario that takes into consideration the above factors (Box II.1). Access decisions also affect the availability of Fund resources, which motivate the existence of normal access limits and special procedures for higher access.
2. The starting point for deriving estimates of actual and potential BOP need, is the projection of a country’s gross borrowing requirements taking into account expected financing flows. To this end, the following considerations and indicators are normally used by Fund staff: (i) the degree and drivers of required current account adjustment, in view of the need to address underlying imbalances without, however, creating disorderly conditions; (ii) public and private debt rollover prospects using historical benchmarks of rollover rates in crisis and near-crisis situations, as well as current market expectations; (iii) prospects for FDI flows; (iv) recent trends and outlook in portfolio flows in relation to the stock of nonresident portfolio holdings; (v) current and expected deposit outflow pressures and the degree of liability dollarization in the economy; (vi) other sources of financing, including from private and other multilateral sources; and (vii) the adequacy of and desirability of maintaining a reasonable level of reserves in relation to imports, short-term debt and, for pegged exchange rate regimes, the monetary base and bank deposit.
3. Any estimate of BOP need would also be informed by assumptions on global growth and financing conditions (from the WEO and GFSR); comparisons with previous and contemporaneous crises; assumptions for peer countries and global consistency requirements; and contagion risks. In capital account crisis, access decisions are also informed by the need to bolster investor confidence—track record shows that Fund financing has tended to be too small in relation to ex post current account adjustment and short-term external debt, with programs sometimes failing to provide the hoped for catalytic role. Finally, the strength of members’ policies is critical for prospects of program success and Fund risks.
Access Decisions in HAPAs: 2000–09
The starting point for deciding access levels in precautionary arrangements has been an assessment of financing needs in a plausible adverse scenario, taking into account the factors above.1
A recent example is the 2009 precautionary SBA for El Salvador (300 percent of quota), where access was determined based on three metrics for international reserves, covering (i) a 5 percent deposit withdrawal combined with a 50 percent rollover of short-term external credit; (ii) 10 percent of bank deposits; and (iii) total bank capital (together with an approved IADB credit line).
An earlier example is Brazil, for which access under the 2003 augmentation and extension of the SBA was treated as precautionary (making 355 percent of quota available) and set at a level where reserves could withstand a shock of a three-month decline in rollover rates on external debt to 25 percent.
Under Brazil’s SBA in 2001, the access of 400 percent of quota was designed to increase reserves to a level that, along with additional fiscal and monetary policy measures under the program, would help generate market confidence in the event of a further deterioration in the international environment.
For Argentina (2000), the access level of 255 percent of quota created a buffer to cover parts of the external borrowing need of the government in case of an interruption in market access in response to volatile market conditions.
In all cases, the availability of substantial financial support from the Fund, as well as the strong policy commitments signaled by it, were meant to enhance creditor confidence, making it less likely that the arrangement would be drawn up on.1 For both Brazil (2001) and Argentina (2000), the arrangements were treated as precautionary at approval, but were later drawn upon.
4. These considerations show that there are important economic concept-based metrics that must be brought to bear rigorously in access decisions, but that judgment and flexibility are also needed in all cases, regardless of whether the need for Fund resources is actual or potential. The need for flexibility when dealing with private sector flows has been acknowledged in the past by the Executive Board, which has noted that there is a high level of uncertainty associated with the projection of private capital flows and the difficulty this poses for program design, and that making well-informed assessments on access when debt-restructuring is needed is a highly complicated task.2 Moreover, global growth and trade flow assumptions are fluid, especially in an uncertain global environment. Thus, flexibility is particularly necessary when determining the financing need and the appropriate balance between adjustment and financing in actual crisis situations, where economic variables evolve rapidly and information gaps may be substantial.
5. Based on the flexibility in the access decision framework, it is not surprising that the scale of access in relation to quota has varied considerably in past GRA arrangements—for actual or precautionary BOP need—with the median quota-based access changing from less than 50 percent for normal access cases to more than 500 percent for exceptional access (Figure 1). Likewise, in all the recent high access cases, access decisions have been based on a variety of assumptions consistent with the vastly different country-specific circumstances. While such variability may be justified (as well as the fact that quota-based access is not a “dynamic” concept since quotas do not change often), it also begs the question of whether access decisions could be more tightly justified based on a range of economic metrics and policy assessments, including because this could provide greater access predictability to members. For example, alternative metrics could be considered for capacity to repay (exports and GDP) and potential need (external debt and monetary base). However, even against these more dynamic metrics, past access has varied considerably (Figure 2).
6. Thus, while an economic concept-based metric may reflect the changing economic conditions and may be more predictable in terms of signaling access to Fund resources, a rigid adoption of economic metric ceilings may not be desirable given that there are often likely to be cases where the country-specific circumstances warrant a breach of that ceiling. Thus, there may not be a one-size-fits-all metric or formula that can be used to determine the appropriate access level for all members. A more promising and pragmatic approach may be to continue to justify proposed access levels in individual cases on the standard criteria of need and ability to repay; and also to evaluate the proposed access levels compared to previous Fund arrangements based on a range of metrics, with a rigorous justification needed for proposed access levels that are out of line with previous arrangements.
ANNEX III. Transitional Arrangements for Surcharges*
• The date of introducing the new surcharge system was subsequently revised from May 1, 2009 to August 1, 2009 and the deadline for grandfathering was delayed from April 30, 2009 to July 29, 2009. See Supplement 1 for the Decisions adopted by the Executive Board.
1. This annex describes the transitional arrangements proposed for the adoption of the new system of surcharges. It also reports illustrative calculations of the impact of alternative transitional arrangements on surcharge payments for each of the countries that would be immediately affected by the introduction of the new system of surcharges.
Subsequent to the issuance of this paper a number of the proposed Decisions were revised and endorsed by the Executive Board on 3/24/2009. The changes made to Decisions IV, VI and VIII are explained and set out in Supplement 1. A further change was made to make Decision I effective from May 1, 2009 and an editorial change was made to Decision IV paragraph 6 a (i and ii). These changes are also included in Supplement 1.
This paper was prepared by a staff team comprising C. Beaumont, M. Rossi, C. Hatch, J. Khaw, and V. Kurcova (FIN) assisted by C. Sanghani (TGS); R. Weeks-Brown, C. Ogada, Y. Liu, D. Eastman, K. Kwak, and W. Bergthaler (LEG), J. Roaf (MCM); and L. Giorgianni, G. Adler, B. Barkbu, M. Goretti, I. Halikias, W. McGrew, U. Ramakrishnan, and A. Stuart (SPR).
See Review of Access to Financing in the Credit Tranches and Under the Extended Fund Facility, and Overall Access Limits Under the General Resources Account, Review of the Fund’s Financing Role in Member Countries (2/9/08), Charges and Maturities—Proposals for Reform, and Conditionality in Fund-Supported Programs—Purposes, Modalities, and Options for Reform.
See IEO Evaluation of Structural Conditionality in IMF-Supported Programs (IEO PR/08/01, 1/3/08;); and Operational Guidance to IMF Staff on the 2002 Conditionality Guidelines (7/10/08).
As highlighted in the footnote in the introduction the proposed Decisions in this paper were revised and adopted by the Executive Board. The revised Decisions are shown in Supplement 1.
Under the Fund’s Guidelines on Conditionality (Decision No. 12864-(02/102), adopted September 25, 2002, as amended, PCs will apply to clearly specified measures that can be objectively monitored by the staff.
As a consequential change, Proposed Decision IV, Paragraph 10 would delete the provision of decision on SBAs specifying that resources in the credit tranches will “normally” be provided through a SBA.
FCL arrangements will also include a standard clause, similar to that in SBAs, for consultations between the member and the Fund on the member’s policies after the period of the FCL arrangement and for so long as the member has outstanding purchases in the upper credit tranches.
In addition to the amendments described in the text, the existing decision on performance criteria and phasing of purchases under Fund GRA arrangements is being modified in order to delete obsolete sections.
The blackout period was discussed in “Adapting Precautionary Arrangements to Crisis Prevention“ (06/11/03). This included a discussion of extending drawing rights until data become available. One issue would be how long to extend the drawing rights, taking into account the different availability dates for different performance criteria.
The sum of the Fund’s one-year forward commitment capacity as of March 5, 2009 (SDR 95.7 billion), the amount committed under the borrowing agreement with Japan ($100 billion, equivalent to SDR 68 billion) and the maximum amount that can be activated under NAB/GAB (SDR 34 billion) is SDR 197.7 billion.
Staff undertake to come back to the Executive Board at a later date with a paper reviewing the EFM in order to reduce overlaps with the procedural aspects of the exceptional access framework and clarify its use beyond GRA lending.
The average access level for the eight nonprecautionary arrangements approved since October 2008, weighted by access in SDR terms, has been 835 percent of quota.
See Review of Fund Facilities—Proposed Decisions and Implementation Guidelines (11/2/00, and PIN/00/101, 11/30/00).
This result occurs because surcharges would only be payable under the new system once new purchases exceed the 300 percent of quota threshold, regardless of credit already outstanding.
The first step in the proposed schedule is aligned with the proposed annual access limit because the commitment fee applies to amounts available to be purchased over a 12-month period.
See Review of Access Policy Under the Credit Tranches and the Extended Fund Facility (PIN/08/30, 3/7/08), and Access Policy in Capital Account Crises—Modifications to the Supplemental Reserve Facility and Follow-Up Issues Related to Exceptional Access Policy (PIN/03/37, 3/21/03).
El Salvador is not included as the authorities have indicated that they intend to treat the arrangement as precautionary.
The cumulative surcharges presented in Table I.1 assume the new system of surcharges is effective as of May 1, 2009 for those cases where members elect the new system. It is also assumed that purchases under existing arrangements are made as scheduled, and all repurchases are assumed to be made on the obligations schedule.