Appendix I. Consultative Process
The proposed reform of the Fund’s facilities for LICs has benefited from feedback provided by country authorities, donors, civil society, and academics. This appendix summarizes issues raised during three events that were part of this consultative process.
Survey of the Fund’s Mission Chiefs. In January 2009, mission chiefs for all LICs that have received IMF missions during the past four years (2005–08) were asked to report on issues raised by authorities and civil society on the architecture of Fund facilities.
Survey responses reported that country authorities, donors, and civil society organizations had noted gaps in the current architecture of the Fund’s facilities, including: (i) the absence of a policy support instrument for low-income countries that are not considered mature stabilizers and do not have an immediate balance of payments need; (ii) the absence of an instrument providing concessional financing for non post-conflict fragile states; (iii) the lack of an instrument providing short-term concessional financing to address needs from domestic pressures and/or policy slippages that do not qualify a country for the ESF; (iv) the absence of an instrument providing precautionary access to concessional financing; and (v) the absence of an emergency concessional rapid-access facility. It was also noted that there had been little criticism of the level of concessionality in Fund programs for low-income countries, though with some notable exceptions.
Seminar for Country Authorities. On April 26, 2009, the authorities of 22 low-income countries met in Washington to discuss the reform of the IMF’s facilities for LICs. The discussion focused on three key themes: (i) the urgency for reform of the Fund’s financing facilities for LICs in light of the serious global financial crisis; (ii) the importance of devising facilities that can respond in a more flexible manner to LICs’ resource needs; and (iii) the need to continue reassessing the structure and scope of conditionality.
While strong support emerged for retaining a PRGF-like instrument, there was general consensus that the Fund’s LIC toolkit needed to be redesigned. In particular, participants saw a need for facilities that could provide financing on more flexible terms and support programs of shorter duration, including a new concessional instrument for short-term financing needs. It was also noted that a precautionary facility could make a useful contribution in both preventing liquidity pressures and responding to the spillovers from the global crisis. A precautionary facility would both help maintain private-sector and donor confidence and provide for the rapid disbursement of financial assistance if a need were to materialize.
Though participants did not see a strong need to change concessionality of Fund’s lending, there was a general view that the specific financial terms of the proposed new concessional facilities should not necessarily be the same as those of the PRGF, which was designed to respond to situations quite different from the current crisis. While Poverty Reduction Strategy Papers (PRSPs) were generally seen as useful, there were doubts about their role in crisis situations. In particular, in a context of financing needs arising from sudden shocks, such as the recent crisis, PRSPs were not seen as playing a crucial role, as they were usually prepared during periods in which the problems posed by the recent crisis were not contemplated. For these reasons, participants did not see the need for a direct link between the PRSP and short-term financing needs instruments.
Conference Call with Civil Society Organizations (CSOs). On May 15, 2009, a number of representatives of CSOs from around the world participated in a conference call to provide inputs on the review of the reform of Fund’s facilities for LICs. This followed earlier discussions with CSOs in late 2008 and early 2009.
There was broad agreement on the need to revisit the architecture of Fund’s facilities for LICs. In particular, several participants felt that the overall concessional resources envelope should be increased to help LICs face the impact of the global crisis. Also, in expressing the desire for augmenting the Fund’s toolkit with a Flexible Credit Line-like concessional facility, participants favored the creation of an emergency instrument with higher flexibility, rapid access, and no predefined forward-looking conditionality. A higher degree of concessionality was considered important to avoid debt problems and align Fund’s lending with other donor support
Appendix II. Stylized Comparison of Existing and Proposed Architectures
The paper was prepared by a staff team led by C. Mumssen, J.K. Martijn, and S. Fabrizio, and comprising P. Dudine, E. Gemayel, P. Jenkins, L. Kaltani, A. Martin, S. Maziad, P. Mitra, M. Sáenz, H. Weisfeld, B. Dabrowska (all SPR), P. Njoroge (FIN), I. Mouysset (LEG), and C. Lane (AFR). The work was guided by H. Bredenkamp (SPR), J. Lin (FIN), and R. Weeks-Brown (LEG).
See The Fund’s Facilities and Financing Framework for Low-Income Countries (henceforth “the framework paper”) and The Fund’s Facilities and Financing Framework for Low-Income Countries -- Supplementary Information.
The current PRGF-ESF Trust would be amended and expanded to become the PRGT. LICs that are currently PRGF eligible would become PRGT eligible. A separate paper reviewing eligibility is forthcoming.
In addition, low-income members have access to GRA financing. The Staff-Monitored Program (SMP) remains a useful tool for helping members establish a track record toward any of these facilities.
The proposed names of the new lending facilities are based on these functionalities, similar to GRA facility names. This contrasts with the current labeling of LIC facilities, based on the type of country, program objectives, or cause of the financing need, which has raised concerns about possible stigma.
A revised staff proposal was approved by the Executive Board: the precautionary option under the SCF will be activated at the beginning of 2010. This proposal is set out in Supplement 1.
Initial experience with the PSI has generally been positive, and no major changes are proposed at this time. The PSI has provided policy support to countries that have achieved sustainable macroeconomic positions and did not require Fund financing.
A protracted balance of payments problem would exist when the resolution of the underlying macroeconomic imbalances would normally be expected to last three years or more, and in any case more than two years. As is the case under the PRGF, a protracted balance of payments problem implies a financing need over the course of the arrangement, though not necessarily at the time of approval or individual disbursements.
A short-term balance of payments need is defined as an actual or potential balance of payments need associated with macroeconomic imbalances that are normally expected to be resolved within two years, and in any case in less than three years.
The delineation of the ECF and SCF on the basis of the duration of the financing and adjustment need implies that other factors typically associated with protracted or short-term needs are not used as defining criteria. For instance, while structural maladjustments would almost always be expected to underlie a protracted need, they do not per se define the protracted balance of payments problem standard, which helps avoid gaps in the new architecture.
Specifically, the PRS document would normally need to be submitted by the time of the second ECF or PSI program review. See Section II.
Use of the SCF is limited to 2½ out of any 5 years to avoid overlap with the ECF and ensure it is not used for addressing protracted balance of payments problems (see Section III).
A revised staff proposal was approved by the Executive Board: the precautionary option under the SCF will be activated at the beginning of 2010. On interest rates, the Executive Board approved a revised staff proposal with the following initial interest rate structure: 0.0/0.0/0.25 percent for the ECF, RCF, and SCF, respectively. The revised proposal is set out in Supplement 1.
While there is no explicit definition, a UCT standard program generally refers to a set of policies that are adequate to correct external imbalances and enable repayment to the Fund within the specified maturity period. In the case of the ECF, the timing of the necessary adjustment may extend over the medium- or longer term.
Recently, the Fund’s Executive Board decided that structural performance criteria will no longer be established under Fund-supported programs. See GRA Lending Toolkit and Conditionality: Reform Proposals.
This initial staff proposal was subsequently revised. The subsequent staff proposal, which was adopted by the Executive Board, is provided in Supplement 1.
Separately, the Executive Board may consider the possibility of temporary interest relief for the poorest LICs to help them address the fallout from the global crisis.
While a PSI can provide accelerated access to Fund concessional financing, it is not a substitute for a precautionary arrangement, as it does not guarantee access and does not provide for an immediate disbursement.
As discussed in the framework paper, more than a quarter of LICs were in broadly sustainable macroeconomic positions at end-2007, while a majority continue to face entrenched adjustment needs, including about a third that are still in a fragile situation.
The section was prepared by Paolo Dudine and Chris Lane.
See the framework paper and The Fund’s Facilities and Financing Framework for Low-Income Countries --Supplementary Information for an analysis of long-term macroeconomic performance of PRGF users.
Balance of payments needs that are expected to be resolved within two years would be addressed through the SCF (see below), while those that are expected to be resolved in three years or more would be addressed through the ECF. In cases where the adjustment process is expected to last two to three years, the choice between the two facilities would be determined on a case-by-case basis. For this assessment, substantial structural reform or capacity building needs, or frequently recurring financing needs would argue for an ECF.
See paragraph 8 for a definition. As discussed in paragraph 9, consistent with the increasing diversity of LICs and establishment of the SCF, it is no longer presumed a priori that every low-income country faces a protracted balance of payments problem. Consistent with the delineation of the ECF and SCF, the choice of the appropriate facility would thus depend on a judgment of whether a member has a protracted problem.
As discussed in the framework paper, this standard allows the Fund to provide predictable support in countries facing entrenched structural problems and a long adjustment process, where the phasing of needs can be difficult to assess. While the possibility of disbursements in the absence of an actual financing need implies that a member could, in principle, treat its PRGF arrangement as precautionary, the Fund has discouraged members with PRGF arrangements from eschewing available disbursements.
This provides greater flexibility to members than the current PRGF (where the extension is limited to one year) and permits continued support in a variety of circumstances, including when disbursements have been re-phased, more time is needed to implement envisaged policies or reforms, a shock has led to additional financing and adjustment needs, more time is needed to design a successor medium-term program, or the protracted balance of payments problem is expected to be resolved in less than three more years. As is currently the case, extensions can be combined with augmentations of access if warranted based on established criteria.
The current access norms for PRGF arrangements are tapered depending on the number of prior arrangements approved for the member.
A revised staff proposal was approved by the Executive Board: the initial interest rate for the ECF will be zero. This proposal is set out in Supplement 1.
The ECF is designed for countries with protracted balance of payments problems, whereas the PSI is designed for countries with a sustainable macroeconomic position without financing needs.
A poverty reduction strategy document may take the form of an interim PRSP, a PRSP preparation status report, a full PRSP or an Annual Progress Report of a PRS. As is current practice, Joint Staff Advisory Notes are required for new PRSPs. In addition, members are expected to update their PRS documents periodically. Under the ECF and PSI, for each review starting with the second review, a PRS document must have been issued to the Board normally within the previous 18 months.
As under the PRGF at present, priority spending could be monitored through indicative floors. The definition of priority spending should be established by the member, in accordance with the country’s poverty reduction and growth strategy, and hence can be expected to vary from country to country. The Fund’s policy to limit the use of wage bill ceilings is consistent with efforts to safeguard social spending.
See Public Information Notice 05/170 (
Instrument to Establish a Trust for Special PRGF Operations for the Heavily Indebted Poor Countries and Interim PRGF Subsidy Operations, Section III, paragraph 2(c).
The section was prepared by Eddy Gemayel, Aurelie Martin, and Manrique Sáenz.
See footnote 8 for a definition.
See footnote 20 for cases where the balance of payments need is expected to be resolved within two to three years.
For the purpose of this qualification criterion, the SCF cannot be used if the predominant cause of the balance of payments difficulties that underlie the short-term need is a withdrawal in financial support by donors, since short-term financing assurances are critical for achieving the objectives of an SCF arrangement.
As in the GRA, the Fund will not challenge this representation prior to the disbursement, but (as under the current ESF) it will be able to impose a repayment expectation and take other remedial measures after the disbursement if it were to determine that the disbursement took place in the absence of need.
This restriction aims to limit overlap with the ECF and ensure that the SCF is normally not used by members facing protracted balance of payments problems. In rare cases, it may be appropriate to allow for minor deviations from this rule, for instance if a member experienced three distinct large exogenous shocks in a five-year period.
A revised staff proposal was approved by the Executive Board: the precautionary option under the SCF will be activated at the beginning of 2010. This proposal was set out in Supplement 1
In contrast to the GRA’s SBA, the design of the SCF avoids “blackout periods” by allowing disbursements based on completed reviews, without the need to verify observance of performance criteria whose test dates have passed while the date for the related scheduled review has not yet passed. Any potential safeguards concerns are limited due to the relatively low access available in cases of precautionary SCF use.
The cap on precautionary access to the SCF limits possible over-commitment of scarce concessional resources. Whereas high-access precautionary arrangements may be needed in emerging market economies, given potential large capital account shocks, these risks are less prevalent in LICs.
Modification of the PSI-supported program would not be necessary in all cases, but would be appropriate if the emergence of a balance of payments need is likely to affect a country’s ability to meet program objectives.
Concurrent PSI/SCF arrangements would have modalities akin to those currently applicable when a member receives financial assistance under the ESF-HAC while maintaining a PSI with regard to program documentation and program targets. However, in contrast to existing modalities, the review schedule for concurrent use of the SCF and PSI could be aligned either based on the “fixed review cycle” of a PSI or on the more flexible review cycle of the SCF. Other PSI requirements would continue to apply, however, including the PRS requirement.
This may be useful in periods of increased uncertainty or risk.
This is consistent with the SCF’s short-term focus and current policy requirements for the ESF-HAC.
As under the ECF, priority spending could be monitored through indicative floors (see footnote 27).
The section was prepared by Paul Jenkins and Samar Maziad.
ENDA and EPCA are GRA facilities with interest subsidies available via a separate administered account for PRGF-eligible members if resources permit. Given their shorter repayment period, resources provided through these mechanisms are less concessional than the proposed RCF, even when an interest subsidy is provided.
ENDA and EPCA would continue to exist as GRA facilities to all members experiencing natural disasters or a post-conflict situation, though (as noted above) consideration could be given to replacing them with a nonconcessional version of the RCF.
The Fund’s broader (non-financial) policies and practices with respect to its engagement with countries in these situations, for example provision of technical assistance and cooperation with the international community, remain unchanged.
This is especially important in countries emerging from a conflict or other disruptive episodes, where coordination with donors is critical.
An exogenous shock is defined in the same manner as under the ESF: an event beyond the control of the authorities of the member, with a significant negative impact on the economy. In view of these considerations, qualifying exogenous events could include inter alia terms-of-trade shocks, natural disasters, shocks to demand for exports, or conflict or crisis in neighboring countries that has adverse balance of payments effects.
Accordingly, resources provided under the RCF would in all but exceptional cases be well below the balance of payments need.
For instance, in cases where the balance of payments need is expected to be protracted, RCF financing could facilitate a transition to an ECF arrangement. In this case, it may be appropriate to allow for two disbursements per year.
A revised staff proposal was approved by the Executive Board: the initial interest rate for the RCF will be zero. This proposal is set out in Supplement 1.
The lower interest rate makes the RCF somewhat more concessional than the current ESF-RAC, while the repayment period makes it significantly more concessional than the subsidized ENDA and EPCA, which are based on shorter GRA maturities. This would help safeguard debt sustainability for RCF users, many of which may face protracted financing and adjustment needs that could expose them to significant debt vulnerabilities.
This would typically only occur in case of an exogenous shock where adequate macroeconomic policies exist to address the shock, but more time is needed to bring the program back to UCT standards.
This is consistent with the current policy requirements for the ESF-RAC.
This would typically include discussion of priority spending areas in the Letter of Intent.
This would be consistent with current practice under EPCA.
The authorization is to be provided at the time when the member makes a formal written request for RCF resources.
The case-by-case approach is consistent with the current safeguards policy requirements for EPCA, where the timing and procedures for an assessment depend on the institutional and administrative capacity of the central bank. Under ESF-RAC, a commitment to undergo a safeguards assessment is required prior to initial disbursement, and the assessment should normally be completed before approval of disbursements under the RAC for a second shock within a five-year period following initial disbursement.
The section was prepared by Pritha Mitra, Linda Kaltani, and Hans Weisfeld.
Access has been at the limits in a number of recent PRGF and ESF cases. Where their needs exceeded the applicable limits of concessional financing, several LICs requested GRA financing.
In April 2009, access limits under the PRGF were increased from 140 to 280 percent of quota and exceptional access from 185 to 370 percent of quota. Access limits were increased from 75 to 150 percent of quota for the ESF-HAC, and from 25 to 50 percent for the ESF-RAC. In line with these changes, access norms under the PRGF were also increased from 90 to 140 percent of quota for first time users, 65 to 125 percent of quota for second time users, while all other norms were doubled.
The access limit of 100 percent of quota per year refers to any 12-month period, including past scheduled disbursements (not necessarily drawn upon in the case of precautionary arrangements and delayed disbursements) and future scheduled disbursements. The 300 percent of quota limit on a cumulative basis implies that total outstanding Fund concessional credit (including disbursements that were approved but not drawn in the context of a precautionary arrangement) cannot exceed 300 percent of quota at any given time.
While the PRGF had a provision for access in exceptional circumstances, it did not define the nature of those circumstances. Exceptional access was granted only in the context of arrears clearance, to Liberia and Zambia.
This criterion would be based on an assessment by the Fund that the country’s program and ability to repay the Fund are stronger than for a large majority of LICs. It would generally not be met for countries with a high risk of debt distress or those that are in debt distress as defined under the joint Bank-Fund Debt Sustainability Framework, unless expected debt relief or restructuring is projected to reduce the risk of debt distress to a moderate level or low level.
Norms for the ESAF/PRGF were introduced in 1994 to provide guidance for access decisions in cases of repeated PRGF use.
These norms apply to ECF arrangements and to 18-month SCF arrangements. For SCF arrangements of any other length, the norms will be proportionally adjusted to keep annualized average access unchanged.
This could be appropriate, for example, if access was initially constrained by a high risk of debt distress, which has later subsided.
The grant element fell from 36 percent in 2000 to 30 percent in 2008, based on the annual average CIRR.
A revised staff proposal was approved by the Executive Board, with the following initial interest rate structure: 0.0/0.0/0.25 percent for the ECF, RCF, and SCF, respectively (see Supplement 1).
Subsidized support through ENDA and EPCA is based on a ½ percent interest rate and the shorter GRA repayment period (5 year maturity and 3¼ year grace period).
Providing adequate access to meet urgent needs of members would thus have high weight in the trade-off with increased concessionality (given the limited supply of Fund concessional resources). Based on the long-term historical average CIRR discount rate of 6.4 percent, the proposed financing terms would bring the average grant element of all LIC instruments to 37 percent.
Over the past ten years, there have been only four blend arrangements (for Albania, FYR Macedonia, Liberia, and Sri Lanka).
If a member decides to replace outstanding ENDA or EPCA credit with RCF or ECF resources, these credits would also count toward the global annual and cumulative access limits.