Purpose and objective

7. The ECF provides medium- and longer-term concessional financing to LICs with protracted balance of payments problems. The purpose of an ECF arrangement is to assist PRGT-eligible member countries with a protracted balance of payments problem in implementing economic programs aimed at making significant progress toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. Such a position would be characterized by the absence of a present or prospective balance of payments need and by the domestic and external stability that is necessary to support strong and durable poverty reduction and growth. It would typically be associated with sustainable fiscal and current account balances, limited debt vulnerabilities, adequate international reserves, and sufficient policy and institutional capacity to implement appropriate macroeconomic policies. This position might still involve significant levels of donor assistance, though aid dependence would be expected to decline over time. Use of the ECF is appropriate in cases where the resolution of the entrenched macroeconomic imbalances that underlie the balance of payments problem is expected to extend over the medium or longer term, and repeated use (of the ECF and its predecessors) has been common.

8. Similar to other Fund instruments, ECF arrangements assist countries in addressing their balance of payments difficulties by providing temporary financial support (in this case, on a concessional basis) to smooth economic adjustment and avoid excess volatility. ECF resources can be used to strengthen the country’s international reserve position and loosen financing constraints for both the public and private sectors in the context of a policy framework aimed at moving toward a stable and sustainable macroeconomic position. The ECF is also expected to catalyze additional financing from donors.

Eligibility and qualification

9. Assistance under the ECF is available to all PRGT-eligible member countries¹⁴ that face a protracted balance of payments problem. In this context, a protracted balance of payments problem exists when the resolution of macroeconomic imbalances needed to establish a stable and sustainable macroeconomic position (as defined above) is expected to extend over normally three years or more. If, by contrast, a stable and sustainable macroeconomic position is expected to be established within two years or less and the member has a short-term balance of payments need, the SCF would be the appropriate instrument to support UCT-quality programs. In cases where a stable and sustainable macroeconomic position is expected to be established in more than two but less than three years, the choice between the two facilities should be determined on a case-by-case basis, keeping in mind that the minimum length for an ECF arrangement is three years and use of the SCF is normally limited to two and a half years out of any five-year period. For this assessment, substantial structural reform or capacity building needs, or frequently recurring financing needs would indicate the presence of a protracted balance of payments problem and thus argue for support under an ECF arrangement, whereas needs for a relatively front-loaded adjustment process aimed at a speedy restoration of macroeconomic stability would argue for an SCF arrangement.

10. The existence of a protracted balance of payments problem implies that balance of payments needs¹⁵ are expected to arise over the course of the arrangement, but may not be present at the time of approval or when individual disbursements are made. Although approval of an ECF arrangement is possible in the absence of present balance of payments needs, the precautionary use of the ECF is not envisaged, in contrast to the SCF. While a member is not legally required to make drawings under an ECF arrangement, the ECF is not intended to provide contingent financial support, and members have routinely drawn available amounts irrespective of present balance of payments needs. For countries that have minimal (present and/or prospective) balance of payments needs at the beginning of their program but have nonetheless medium- or longer-term adjustment needs to address a protracted balance of payments problem (e.g., due to a high debt burden or a current account deficit that is not sustainable over the longer run), a low-access ECF arrangement would be an appropriate instrument. For countries with immediate balance of payments needs (e.g., resulting from a shock) that have also medium- or longer-term adjustment needs to address a protracted balance of payments problem, an ECF (rather than SCF) arrangement should be used.

11. Qualification also requires a finding by the Board that the member is making an effort to strengthen substantially and in a sustainable manner the country’s balance of payments position, in the context of a policy program that meets UCT conditionality standards and supports significant progress toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. This requires the commitment and capacity by the authorities to implement a set of policies that is adequate to correct external imbalances and enable repayment to the Fund within the specified maturity period. Apart from the elaboration of a UCT-quality program in the Letter of Intent (LOI), Memorandum of Economic and Financial Policies (MEFP), and Technical Memorandum of Understanding (TMU), qualification requires assurances that the authorities have the capacity and commitment to implement their program, as evidenced by recent policy performance (including under a recent Fund-supported program), institutional capacity, and any other circumstances that may affect macroeconomic performance. Other requirements for the approval, extension, and implementation of an ECF arrangement are discussed further below.

12. Countries that experience a protracted balance of payments problem but are not currently in a position to meet the ECF qualification requirements, in particular the capacity to implement a three-year UCT-quality program, can build a track record for moving to an ECF arrangement through an SMP or, in case of urgent financing needs, the RCF (assuming the applicable policy commitments are in place).

Concurrent use

19. The ECF cannot be used concurrently with the SCF or PSI. Hence, any pre-existing SCF arrangement or PSI would need to be cancelled before an ECF arrangement can be approved, and vice versa. Moreover, a member cannot obtain RCF financing (or start an SMP) if an ECF arrangement is in place and on track. Should additional balance of payments needs arise during an ECF arrangement, an augmentation of access under this arrangement would typically be the appropriate response. RCF financing during an ECF arrangement can only be provided when (i) ECF disbursements are not possible, for instance due to policy slippages or delays in program discussions, (ii) qualification requirements for the RCF are met, including the existence of an urgent balance of payments need and relevant policy commitments, and (iii) the balance of payments need is primarily caused by a sudden exogenous shock. When access under the RCF exceeds 25 percent of quota in these circumstances, policies should be appropriate to address the shock. In addition, RCF-supported polices could serve as a track record to bring the SCF-supported program back on track. Similarly, in the absence of an urgent financing need, a track record could be built through an SMP. The ECF can be used concurrently with GRA financing under certain circumstances (see below).

Blending

20. Certain PRGT-eligible countries are expected to receive financial assistance through blended PRGT and GRA resources, rather than relying on fully concessional Fund financing.¹⁸ Blending can allow higher access levels (if justified by the balance of payments need and strength of the program) and provide a signal that the borrower is moving toward middle-income or emerging market status. PRGT-eligible countries, including members qualifying for an ECF arrangement, would be expected to use either fully concessional or blended resources, rather than GRA-only financing, although they are always eligible for access to the Fund’s general resources.

21. Blending of ECF and GRA resources is subject to the following presumptions and limitations:

• Blending is presumed for PRGT-eligible countries with either (i) per capita income above the prevailing operational cutoff used by IDA¹⁹ or (ii) sustained past and prospective market access and a per capita income that exceeds 80 percent of the IDA operational cutoff.²⁰ Other PRGT-eligible countries are expected to use concessional financing only.

• Blending should normally not be used for countries at a high risk of debt distress or in debt distress (as assessed by the most recent joint Bank-Fund LIC Debt Sustainability Analysis (DSA), even if per capita income or market access creates a presumption for blending.

• As a consequence of the rules on access under blended financial assistance (Section D), new three-year arrangements with total access of 75 percent of quota or below would, at least initially, not be subject to blending even if the criteria that create a presumption for blending are met.

• In exceptional circumstances, when financing needs exceed the applicable access limits, blending can be used irrespective of the per capita income, market access, and debt sustainability criteria (see Section D on access under blended financial assistance).

22. When providing financial assistance with blended resources, ECF resources will normally be provided together with GRA resources under the Extended Fund Facility (EFF). Concurrent financial assistance under an ECF arrangement and an SBA would only be expected in cases where pre-existing ECF support is supplemented by SBA financing at a later stage. This may include cases where an ECF arrangement that was initially blended with EFF financing is extended for more than a year, as arrangements under the EFF are limited to a four-year period. Financing through the RFI under the GRA during an ECF arrangement would be expected only if the ECF-supported program is off track, in which case RFI purchases would typically be combined with RCF disbursements.

23. The modalities of blended financial assistance under ECF and EFF arrangements would be broadly the same as under a stand-alone ECF arrangement. In particular, it would support a three-year economic program for countries with protracted balance of payments problems, based on a single set of program conditions, schedule of disbursements and reviews, and other requirements that largely mirror regular ECF arrangements described in this Chapter. However, there are a number of differences, including that in cases involving blended resources:

• As a practical matter, disbursements would involve both ECF and EFF resources (see Section D on access under blended financial assistance), implying lower average concessionality of the Fund’s financial support than under a stand-alone ECF arrangement;

• EFF qualification requirements must be met—for instance, the EFF requires a clearly articulated structural reform agenda (although this would also be expected in virtually all ECF cases), and to the extent that the blend pushes (annual or cumulative) access above GRA normal limits, the member would also need to meet the Exceptional Access criteria; ²¹

• In contrast to the practice under ECF arrangements, reviews under the EFF arrangement of the blended financial assistance may require waivers of applicability under certain circumstances (see Section H); and

• Each disbursement under an ECF arrangement is linked to a specific test date, whereas for extended arrangements purchases are conditioned upon observance of the PCs related to the most recent test date. There could thus be situations where resources relating to the ECF component of the blend can be disbursed (specifically, if Performance Criteria (PCs) relating to an earlier test date have been met), while resources relating to the EFF component cannot (specifically, if PCs relating to the most recent test date have not been observed) unless waivers for the non-observance are granted.

Determination of access—main criteria

25. Access is determined on a case-by-case basis based on the following standard criteria: (i) the member’s (present and prospective) balance of payments need (taking into account all projected balance of payments flows, including reserve accumulation and financing from other sources);²² (ii) the strength of its program and capacity to repay the Fund (taking into account the member’s policy plans, adjustment effort, commitment to implement the program, institutional capacity, track record of policy implementation, and country circumstances such as vulnerabilities, imbalances, and debt sustainability);²³ and (iii) the amount of outstanding Fund credit and the member’s record of past use.

26. Access may generally not exceed the member’s present and prospective balance of payments needs during the program period, and would typically be less than total financing needs, keeping in mind that ECF-supported programs are expected to catalyze financing from donors. However, in contrast to GRA financing (and the SCF and RCF), an ECF arrangement can be approved and individual disbursements can be made even in the absence of a present balance of payment need, provided that the IMF’s Executive Board has made a finding that the member is experiencing a protracted balance of payment problem at the time of approval of the ECF arrangement. Accordingly, members do not need to make a representation that they are experiencing a balance of payments need at the time they request individual disbursements.

Access norms

27. Access norms apply to access to financing under ECF arrangements (though not in cases of blended financial assistance, see Section D). There is no presumption that access under ECF arrangements approved before January 2010 (as PRGF arrangements) will be adjusted on the basis of these new norms (see guidance on the size of augmentations of access below). The access norm is 120 percent of quota per ECF arrangement for countries with total outstanding concessional IMF credit under all facilities of less than 100 percent of quota, and the norm is 75 percent of quota per arrangement for countries with outstanding concessional credit of between 100 percent of quota and 200 percent of quota. For countries whose outstanding concessional credit is above 200 percent of quota, the norms do not apply, and access is guided by consideration of the cumulative access limit of 300 percent of quota (450 percent of quota in exceptional cases), the expectation of future need for Fund support, and the repayment schedule.

28. Access norms provide general guidance and represent neither ceilings nor floors (nor entitlements). Access can deviate from the norms if warranted by standard criteria for determining access (see above). For instance, access may be above the norm in cases where balance of payments needs are noticeably larger than in most other cases of ECF use; e.g., due to a large shock. Access can also be below the norm, for example when the balance of payments need is limited, policy capacity is constrained, or debt vulnerabilities are high.

29. A special case of access below the norm concerns members with a protracted balance of payments problem but minimal present or prospective balance of payments needs over the course of the ECF arrangement. This may be the case for countries where baseline balance of payments projections do not indicate substantial financing gaps, but where external conditions are subject to significant downside risks and current trends are not considered sustainable over the longer run (e.g., unusually favorable terms of trade or aid inflows). In these cases, the practice has been to set access at standardized level of 10 percent of quota per arrangement.²⁴ This low level of access would be appropriate even when potential balance of payments needs are considered substantial (e.g., due to a risk of large adverse shocks), as the ECF arrangement can be quickly augmented once such potential needs materialize. In contrast to the SCF, the precautionary use of the ECF is not envisaged, and members have routinely drawn amounts as they become available under the ECF arrangement irrespective of present balance of payments needs.

Access limits

30. A member’s total access under all concessional facilities is subject to “global” annual and cumulative limits. This includes credit outstanding and disbursements under the ECF, SCF, RCF, and Exogenous Shocks Facility (ESF), but does not include credit outstanding under Emergency Post-Conflict Assistance (EPCA) or Emergency Natural Disaster Assistance (ENDA) even if this credit is subsidized as these resources are provided under the GRA. Specifically, total access to financing under the PRGT should normally not exceed 100 percent of quota per year across all concessional facilities. This annual access limit refers to past and future scheduled disbursements in any 12-month period, specifically (i) any actual disbursements under the RCF and past ECF and SCF arrangements at the time they became available (i.e., the date of the Board decision that makes the disbursement available), (ii) any disbursements to date that became available under the current ECF arrangement, irrespective of whether they have been drawn or not, and (iii) any future disbursements under the ECF at the scheduled availability dates. Furthermore, total access to financing under the PRGT should normally not exceed 300 percent of quota cumulatively, net of scheduled repayments. Specifically, this cumulative access limit requires that total outstanding Fund concessional credit (including disbursements that were made available but not drawn in the context of the current arrangement) cannot normally exceed 300 percent of quota at any point in time based on projected disbursements and repayments.

31. In exceptional circumstances, access above the normal limits can be made available to countries that: (i) experience an exceptionally large balance of payments need that cannot be met within the normal limits (e.g., very large external shocks, very low levels of reserves); (ii) have a comparatively strong adjustment program and ability to repay the Fund—this criterion 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 DSA, unless expected debt relief or restructuring is projected to reduce the risk of debt distress to a moderate level or low level; and (iii) do not meet the income or market access criteria for blending (see above). Exceptional access is subject to hard caps of 150 percent of quota annually and 450 percent of quota on a cumulative basis (as defined above) across all concessional facilities.

The phasing of access

32. The phasing of ECF access, determined at the time of approval of the arrangement, must take into account the applicable annual access limits, but does not have to mirror the projected evolution of balance of payments needs over the course of the arrangement. Access should normally be phased smoothly over the three-year period, but could be front-loaded (or back-loaded) if warranted based on the strength of the program and/or the time profile of balance of payments needs. A significant degree of front-loading has been applied in exceptional cases involving the repayment of emergency assistance to the Fund or arrangements approved following the clearance of overdue obligations to the Fund as part of a broader arrears clearance strategy.

33. It is standard practice for staff reports to present the balance of payments in a way that, in any given period, scheduled IMF disbursements, together with other exceptional financing items, do not exceed the overall balance of payments deficit (resulting from “autonomous transactions”) and the programmed level of reserve accumulation. In this presentation, the balance of payments would be fully financed, at least in the near term, at the time of ECF approval and completion of each review, while residual financing gaps may show in the outer years (see also Section F on financing assurances).

Access under blended financial assistance

34. When financing is blended under an ECF arrangement and an arrangement under the GRA (see Section C on the criteria that create a presumption for blending), total access is determined based on the standard criteria (see above) , implying that total access should be comparable across country cases with similar balance of payments needs, program strengths, and outstanding Fund credit, irrespective of whether the Fund’s financial assistance comes in the form of blended or PRGT-only resources. The above access norms do not apply, and access under blended financial assistance is subject to specific rules:²⁵

• Access to the concessional (ECF) component of blended financial assistance is normally half of total access, subject to a floor on annual average access under the ECF of 25 percent of quota and a ceiling of 50 percent of quota, whereas the remainder of the total access would be met by GRA financing. As a consequence, new three-year ECF arrangements with access of 75 percent of quota or below would, at least initially, not involve blending with GRA resources. However, should the criteria that create a presumption for blending apply to a country with an ECF arrangement of initially 75 percent of quota or below, augmentations of access under this arrangement may involve blended financing as discussed in the Sub-Section on augmentations under blended financial assistance below.

• At the time of approval of a new ECF arrangement that involves blended financial assistance from a GRA arrangement, each scheduled disbursement should generally involve both ECF and GRA resources. For members that do not have outstanding GRA credit at the time of approval of the arrangements, a minimum of 25 percent of quota should be made available for the first purchase under the GRA arrangement at the time of the approval of the arrangements. Subject to the above rules, the shares of ECF and GRA financing at each disbursement can be determined individually and do not have to remain constant across disbursements.

• In exceptional circumstances when the balance of payments needs are very large (for instance in case of very large shocks, large needs related to arrangements immediately following arrears clearance, repurchases of GRA emergency assistance), access to the concessional resources under blended financial assistance could exceed the normal ceiling of 50 percent of quota, and reach the annual access limit of 100 percent of quota or possibly the exceptional annual access limit of 150 percent of quota if the criteria for exceptional concessional access are met (including that the country does not meet the income or market access criteria for blending, see above).

Augmentations and reductions of access

35. Access under an ECF arrangement can be augmented to help meet a larger balance of payments need or to support a strengthening of the program. In particular, augmentation of access would often be an appropriate response to increased balance of payments needs in the context of shocks, unless the ECF-supported program is off track, in which case RCF financing may be appropriate (see Section C on concurrent use). Also, when an ECF arrangement period is extended, it would often be the case that the extension period involves balance of payments needs that were not originally included in the determination of access for the arrangement, which can provide a justification for augmentation of access. Augmentations based on the strengthening of the program could occur, for example, if access was initially constrained by a high risk of debt distress, which has later subsided. Under the Trade Integration Mechanism (TIM), augmented access not exceeding 10 percent of quota will be available to a country to compensate balance of payments shortfalls arising from trade liberalization measures implemented by other countries.²⁶

36. Determination of access for an augmentation is based on the standard access criteria, including balance of payments need and strength of the program (see above). There are no norms applicable to the size of an augmentation, although many augmentations have been in the range of 15-45 percent of quota, with a few cases well above this range. Staff reports supporting requests for augmentations should explicitly discuss the basis for the augmentation and its size, with reference to the main criteria for determining access above, as well as to access norms and limits as applicable.

37. For augmentations of arrangements that are presumed to involve blended PRGT and GRA resources, access should be set such that the total financing mix over the full course of the respective arrangement is guided by the specific rules on access under blended arrangements (see above), including that total access (post augmentation) to concessional financing would, to the extent possible, normally be half of total overall access to Fund resources, but normally not higher than 50 percent of quota and not lower than 25 percent of quota on an annual average basis.

38. Access under an ECF arrangement could in principle also be reduced rather than augmented. The Fund will not unilaterally reduce access because of developments in the member’s balance of payments, unless such developments are substantially more favorable than envisaged at the time of approval of the arrangement and the improvement for the member derives in particular from improvements in the external environment.²⁷

39. Augmentations would normally be approved at the time of a scheduled review under the arrangement. In exceptional circumstances (e.g., when severe natural disasters create urgent balance of payments needs and the next scheduled review cannot be completed in the near term), it may be possible to bring forward a scheduled review and augment access under the arrangement.

Procedural safeguards on high access requests—DSAs and informal Board meetings

40. Financing requests are subject to procedural safeguards that apply uniformly across all concessional facilities. These safeguards are aimed at protecting PRGT-eligible members’ debt sustainability and the Fund’s concessional resources.²⁸ Specifically, the staff report for any arrangement request or augmentation should provide an up-to-date assessment of the debt vulnerabilities, with an explicit reference to the impact of new borrowing from all sources, including prospective IMF disbursements. In addition:

• A DSA or DSA update is required for any financing request under the PRGT (augmentation or new arrangement) if it (i) involves exceptional access to concessional resources; or (ii) brings total access under all concessional facilities to more than 80 percent of quota, based on past and future scheduled disbursements in any 24-month period, specifically (a) any actual disbursements under the RCF, SCF, ESF, and past ECF arrangements at the time they became available (i.e., the date of the Board decision), (b) any disbursements to date that became available under the current ECF arrangement, irrespective of whether they have been drawn or not, and (c) any future scheduled disbursements under the ECF; or (iii) involves a member country with a high risk of debt distress or in debt distress. A DSA update can be prepared unilaterally by Fund staff drawing on a prior full joint Fund-Bank DSA as long as a joint DSA was prepared recently and the analysis would not result in a change of the risk of debt distress rating.

• An early informal Board meeting is required if a financing request (augmentation or a new arrangement) would (i) involve exceptional access to concessional financing or (ii) bring total access under all concessional facilities to more than 180 percent of quota, based on past and future scheduled disbursements in any 36-month period, specifically (a) any actual disbursements under the RCF, SCF, ESF, and past ECF arrangements at the time they became available (i.e., the date of the Board decision), (b) any disbursements to date that became available under the current ECF arrangement, irrespective of whether they have been drawn or not, and (c) any future scheduled disbursements under the ECF. Information to the Board would typically be in a 2-3 page note that would include (i) the factors underlying the large balance of payments need, taking into account financing from donors, (ii) a brief summary of the main policy measures and macroeconomic framework, (iii) the expected strength of the program and capacity to repay the Fund, (iv) an analysis of debt vulnerabilities, reflecting all projected debt financing, including from the Fund, (v) a reference to the impact on the Fund’s concessional resources (drawing on the latest available paper on concessional resources), (vi) the likely time table of discussion with the authorities, (vii) a selected indicators table and, if possible, the standard DSA charts. The meeting should take place before staff reaches understandings, ad referendum, with the authorities.

• In addition, staff would provide early notice to the Board, for instance in an informal country matters session, of upcoming arrangement requests or augmentations where the envisaged financing commitment, in absolute terms, would have a large impact on the Fund’s overall concessional resources.

• As an exception to these procedures, new financing requests of 10 percent or less of quota do not trigger either the need for a DSA update or a Board briefing.

Financing assurances

43. As with any other Fund arrangement, the Fund’s policy on financing assurances requires that ECF arrangements can only be approved (and reviews can only be completed) when the program is fully financed. This means that donors and creditors (both official and private) have furnished assurances that they will provide the necessary support (through new loans and/or refinancing) to meet the program financing requirements on terms consistent with the member’s return to external viability. Specifically, staff should confirm that there are no unfilled financing gaps over the 12 months immediately following the approval of the arrangement (and the completion of each review), and that there is a clear expectation that the program will be fully financed through the remainder of the arrangement period. Assurances should also be given that the member country has the capacity to repay the Fund based on medium-term projections of the balance of payments and, in the case of new arrangements or augmentations, the standardized table on indicators of the capacity to repay the Fund.

Arrears

44. Under the Fund’s policy of non-toleration of sovereign arrears to official (multilateral and bilateral) creditors,³¹ the Fund generally calls for the resolution of existing arrears to official creditors and non-accumulation of new arrears during the period of the program. Existing arrears need not necessarily be settled immediately—they can be addressed in a number of ways, depending on the type of creditor. Country teams should seek guidance from LEG and SPR on the application of the policy to specific creditors. The macroeconomic program assumptions under the ECF arrangement should be consistent with the expected resolution of existing arrears to official creditors, which implies that the authorities and the staff have common understandings on the timing and modalities of arrears clearance. The assumptions on arrears clearance do not prejudge eventual agreements between the member and official creditors. Staff should have reasonable assurances that arrears clearance understandings are realistic.

45. Arrears to private external creditors are covered by the Fund’s Lending into Arrears (LIA) policy.³² The LIA policy applies to both sovereign arrears to external private creditors and non-sovereign arrears that arise by virtue of the imposition of exchange controls. The Fund can lend, on a case-by-case basis, in a situation of sovereign arrears to private external creditors and only where: (i) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and (ii) the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors (or to facilitate a collaborative agreement between private debtors and their creditors and good prospects exist for the removal of exchange controls). Whenever the LIA policy applies, each Fund disbursement under an arrangement is subject to a financing assurances review in which the Board considers, inter alia, whether the member’s adjustment efforts are undermined by developments in creditor-debtor relations.³³

46. ECF-supported programs should also address domestic arrears as part of the overall program design. The specification of policies related to domestic arrears will depend on the country context, in particular, the fiscal framework (see Appendix II).

Overdue obligations to the Fund

47. Where a member is in arrears to the Fund in the GRA, the Special Disbursement Account, or the SDR Department, or to the Fund as Trustee (including the PRGT), a request for IMF financing, including under the ECF, will not be approved and disbursements under an existing arrangement will be suspended (PRGT Instrument, Section II, paragraph 1(e)(3) and 3(g)) until the arrears are cleared. ³⁴ After one month the Managing Director will notify the Executive Board that an obligation is overdue, and in the case of protracted arrears to the Fund (i.e., arrears of more than six months’ duration), semi-annual reports are to be issued to the Executive Board. While a member is in arrears to the Fund, policy support can only be provided through surveillance, technical assistance, and, under certain circumstances, SMPs.³⁵ Remedial measures for dealing with PRGT arrears include removal from the list of PRGT-eligible countries, declaration of noncooperation, and suspension of technical assistance.

Safeguards assessments policy

48. As a general principle staff should aim to complete a safeguards assessment prior to Executive Board approval of a new ECF arrangement. In any case, a safeguards assessment report should be completed for each new arrangement no later than the first review under the arrangement and for all augmentations for existing arrangements.³⁶ Once the first review under the program has passed, subsequent staff reports should highlight the status of assessment and, if not completed, reasons for its delay. The safeguards process involves a continuous analysis of information obtained primarily through the collection of documents, and discussions with the authorities and the central bank’s external auditors. It entails an evaluation of the central bank’s safeguards framework covering governance, auditing, financial reporting, control systems, and its legal autonomy over the life of an arrangement and for as long as Fund credit remains outstanding. Safeguards assessments recommendations may be incorporated into conditionality or structural measures under the member’s program. Close cooperation and coordination between FIN, other functional departments, and area departments is essential for the effective conduct of the safeguards process. It is important for FIN to be kept informed by area departments of safeguards issues, including logistical issues such as the timing of new arrangements and reviews.

Program objectives

49. All ECF-supported programs are aimed at making significant progress toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth (see definition in Section A). This would involve addressing, though not necessarily resolving, the country’s entrenched macroeconomic imbalances over the course of the arrangement. Specifically, ECF-supported programs should aim to maintain or move toward (i) strong and durable poverty reduction and growth, (ii) low or moderate inflation, (iii) sustainable fiscal and current account balances, (iv) limited debt vulnerabilities, (v) adequate international reserves, and (vi) sufficient policy and institutional capacity to implement appropriate macroeconomic policies.

50. The design of an ECF-supported program should be aligned with the country’s own poverty reduction and growth objectives (see further below). Specific policy objectives should be clearly articulated in the LOI/MEFP and associated staff report for a new ECF arrangement and would typically include:³⁷

• Fiscal policies, where (i) the fiscal stance is well anchored to help ensure macroeconomic stability and fiscal/debt sustainability, (ii) revenue and spending policies take due account of the country’s growth and social objectives, and (iii) budgets are guided by medium-term fiscal frameworks to the extent possible.

• Monetary policies that are consistent with inflation, exchange rate, and reserve objectives, while taking due account of cyclical considerations.

• Exchange rate policies that ensure a unified exchange rate and a real exchange rate level that is broadly in line with fundamentals, ensuring a stable and sustainable external position consistent with adequate growth.

• Financial sector policies geared toward financial stability and deepening with a view to fostering investment and forestalling financial crises.

• Public financial management reforms aimed at ensuring that resources are tracked, reported, and targeted appropriately (including by providing adequate resources for social and other priority spending), public debt management aimed at supporting debt sustainability, and revenue reforms aimed at broadening the revenue base, and enhancing tax efficiencies.

• Other structural reforms that are critical for achieving the program’s macroeconomic objectives.

Role of ECF financial support

51. The balance of payments support under ECF arrangements can assist countries in smoothing the adjustment process toward a more stable and sustainable macroeconomic position. The Fund’s financial support can be used both to strengthen the international reserve position of the member country and to provide liquidity for making external payments. By relaxing external financing constraints, the Fund’s balance of payments support in effect also loosens domestic liquidity constraints of both the public and private sector. Specifically, Fund financing reduces the need for retrenchment in the public and private savings-investment balances, thus enhancing policy options (allowing less contractionary fiscal, monetary, and exchange rate policies) and cushioning private sector adjustment (e.g., investment and import declines). The appropriate mix of financing and public/private adjustment is determined on a case-by-case basis.

52. A member may use the domestic counterpart of resources received under an ECF arrangement to finance, directly or indirectly, the budget deficit of the government. Such budget financing is consistent with the Fund’s legal framework to the extent that the member has balance of payments problems and is implementing a program that will assist it in resolving such problems. Direct budget financing³⁸ may be appropriate when (i) the program is designed in manner that envisages that the entire amount of the Fund’s financial support is used to meet a present or prospective balance of payments need, (ii) loosening fiscal financing constraints is an important macroeconomic objective under the program, and (iii) the central bank cannot or should not (for legal or institutional reasons) lend to the government while the domestic financial sector is too shallow (or not stable enough) to provide the necessary budget financing (or the central bank plays a largely passive domestic policy role, for instance under a currency board or in a fully dollarized economy). In these cases, staff reports should justify the use of the domestic counterpart of resources obtained from an ECF arrangement for budget financing where relevant and discuss safeguards implications.³⁹

Links to poverty reduction strategies and social spending

53. ECF-supported programs should be aligned with the country’s own poverty reduction and growth objectives. The following specific guidance applies to PRS linkages:⁴⁰

• Any financing request or program review under the ECF must be accompanied by a statement, normally in the LOI or MEFP, of how the program advances the country’s poverty reduction and growth objectives. It is expected that the description would be more detailed at the time of the initial program request or when a new PRSP (or I-PRSP) is produced.⁴¹ In cases where a relevant PRS document exists, this description in the LOI/MEFP could cross-reference the PRS document.

• If a PRS document exists, the ECF-supported program should be consistent with the objectives of the PRS in the context of making significant progress toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth.

• In cases where a relevant PRS document does not yet exist, the program documentation (e.g., in an attachment to the LOI or MEFP) should outline the country’s medium-term poverty reduction and growth objectives and policies. Subsequent program documents should refer to this documentation and update it as necessary.

• While a PRS document⁴² is not required at the time of initial Board consideration of the ECF arrangement, the second (and every subsequent) review can only be completed if a PRS document has been issued to the Board, normally within the previous 18 months and has been the subject of staff analysis, including in the staff report on a new ECF arrangement or on a review.

• Whenever an ECF-supported program is under consideration (including cases where support is currently provided under an SMP or RCF), staff should inform the authorities at an early stage about the relevant Definitions and Timelines for PRS Documentation requirements (Appendix V) to ensure adequate time for the PRS process.

• While not required for ECF support, staff are required to prepare a Joint Staff Advisory Note (JSANs) for PRSPs and Interim Poverty Reduction Strategy Papers (I-PRSPs) and circulate it to the Executive Board for discussion, generally within four months of the transmission of a PRSP or an I-PRSP (outside the Heavily Indebted Poor Country (HIPC) context).⁴³ For APRs, it is good practice to provide feedback in the context of an Annual Feedback Process (AFP). In cases where a JSAN has not yet been prepared, the Executive Board is not prevented from making decisions governing a member’s ECF arrangement, including the completion of reviews if the relevant preliminary staff analysis has been included in the relevant staff report for the ECF arrangement or a supplement (and the JSAN, together with the PRSP, would be discussed at the next Board meeting). Board consideration of a JSAN cannot be on a Lapse of Time (LOT) basis.⁴⁴

• More generally, and irrespective of requirements for issuance of PRS documents to the Board and related staff analysis in the context of the ECF, PRS documents should normally be produced by the country authorities on a 12-month cycle and aligned with other domestic policy cycles. In case of significant weaknesses in the PRS, including those identified in the JSAN or through the AFP, program staff reports should report how these weaknesses are being addressed. While it would be expected that any identified weaknesses in the member’s PRS would be addressed, this is not a requirement for support under the ECF.

54. Social and other priority spending should be safeguarded and, whenever appropriate, increased under ECF-supported programs. This should be monitored through explicit program targets, typically an indicative floor on social and other priority spending, whenever possible. The definition of what constitutes social or other priority spending should be consistent with the authorities’ poverty reduction and growth objectives. In cases where tracking of such expenditures is not feasible, the program documentation should report on which measures are envisaged to develop an adequate tracking system. Staff should monitor progress in establishing these tracking systems, and the program may include relevant structural benchmarks if appropriate.

Debt sustainability analysis (DSA)

55. ECF-supported programs should be underpinned by a thorough DSA to inform the elaboration of medium-term debt strategies and fiscal frameworks. Country teams should engage with the authorities in the preparation of DSAs, discuss the results, and share the final files with the relevant officials. DSAs for most LICs are usually prepared jointly with the World Bank, and country teams should also involve other relevant Multilateral Development Banks (MDBs). Joint DSAs are required for PRGT-eligible IDA-only countries; for LICs that are not IDA-only, close consultation with the Bank is recommended.

56. A fully elaborated DSA is required at least once every three years, with shorter annual updates in the interim years possible in the absence of significant changes in the macroeconomic and financial environment. Full DSAs should be prepared in periods of heightened domestic, external, or global risk. The precise timing of a DSA may be driven by program requirements. In particular, the design of debt limits under an ECF arrangement is systematically related to the assessment of countries’ debt vulnerabilities (see Appendix II). Also, as discussed above, the determination of access to the Fund’s concessional resources needs to take account of the country’s debt vulnerabilities based on the most recent DSA, and a DSA (or DSA update) may need to be prepared for higher access financing requests (augmentation or new arrangement). In cases where a DSA is required outside the regular joint Bank-Fund DSA cycle, a DSA update may be prepared unilaterally by Fund staff drawing on a prior full joint Fund-Bank DSA as long as a joint DSA was prepared recently and the analysis would not result in a change of the risk of debt distress rating.

57. DSAs for LICs should be presented as self-contained documents (see Appendix I). They should normally be prepared using the LIC Debt Sustainability Framework (DSF), although for countries with durable and substantial access to market financing, the template designed for middle-income countries can be used instead. The analysis includes three components:⁴⁵

• A forward-looking analysis (20-year projection) of debt and debt-service dynamics under a baseline scenario, alternative scenarios, and standardized stress tests;

• An explicit assessment of the risk of external debt distress (low, moderate, high, or in debt distress) based on indicative country-specific debt-burden thresholds that depend on the quality of policies and institutions in the country; and

• Recommendations on a borrowing (and lending) strategy to limit the risk of debt distress, while maximizing the resource envelope to achieve the country’s development objectives.

Collaboration with the World Bank and other development partners

58. Fund staff should consult closely with all major development partners active in the country when designing and monitoring an ECF-supported program. In addition to this routine collaboration, the Joint Management Action Plan (JMAP)⁴⁶ approved by the Boards of the World Bank and IMF calls on Bank and Fund country teams to consult with each other at least once a year in order to identify the country’s key macroeconomic and structural reform challenges and coordinate work plans in support of addressing these challenges (see Appendix I).

Conditionality principles

59. Conditionality, i.e., the set of program-related conditions, under an ECF arrangement is intended to ensure that Fund resources are provided in support of meeting the program’s objectives, with adequate safeguards to the Fund’s resources. Consistent with the Fund’s Guidelines on Conditionality,⁴⁷ conditions will normally consist of macroeconomic variables and structural measures that are reasonably within the member’s direct or indirect control and that are, generally, either (i) of critical importance for achieving the goals of the program (or for monitoring program implementation); or (ii) necessary for the implementation of specific provisions of the IMF Articles of Agreement or policies adopted under them. In some cases, conditions may be outside the Fund’s core areas of expertise, in which case a more detailed explanation of their critical importance is required.

60. ECF-supported programs must meet the UCT conditionality standard, which requires the commitment and capacity by the authorities to implement a set of policies that is adequate to correct external imbalances and enable repayment to the Fund. The appropriate adjustment path would be determined on the basis of the country’s economic circumstances and objectives, policy constraints, and the severity of the balance of payments needs. The adjustment effort required to attain full sustainability would often extend beyond the duration of the ECF arrangement. In such circumstances, conditionality would be limited to those policies that are critical to achieving the part of the overall adjustment process that is covered by the arrangement. Given its medium- to longer-term focus, the ECF will generally permit more flexibility than the SCF in the timing of these measures. For instance, if a far-reaching structural reform in a specific area is deemed critical for achieving a stable and sustainable macroeconomic position, but considered too ambitious to complete in the near term, an ECF-supported program may include certain steps that mark progress on this reform effort, without necessarily completing the entire reform.

Specification of program conditions

61. Program conditionality will include quantitative periodic and continuous PCs, and typically also quantitative and structural benchmarks, as well as prior actions if necessary (see Appendix II for detailed guidance on quantitative conditions). Conditionality is set at the time of approval of the arrangement and updated at the time of program reviews. Conditionality should normally be set (or modified) by the Board before the test date. For the establishment (or modification) of post-dated PCs, the program documents would have to be signed and circulated to the Board along with the staff report before the test date, and no information on implementation of the so established conditionality would be available at the time of the Board meeting.

62. Prior actions are measures that a member is expected to adopt prior to the Fund’s approval of an ECF arrangement, completion of a review, or the granting of a waiver with respect to a PC, when it is critical for the successful implementation of the program that such actions be taken to underpin the upfront implementation of important measures. Prior actions are to be applied parsimoniously and specified in clear, objective, and unambiguous terms. Prior actions should in principle be implemented at least five working days before the Board discussion. They should be defined in the LOI/MEFP and cross-referenced in the relevant Board Decision.

63. Quantitative PCs would normally be set on a semi-annual basis and tied to semiannual program reviews, while quantitative benchmarks (also referred to as indicative targets) would normally be specified on a quarterly basis. In exceptional cases where closer monitoring is needed, quantitative PCs and reviews could be set on a quarterly basis (see below). There is scope for some flexibility in setting the specific test dates relative to strict three/six-monthly cycles, for example when there is a need to align monitoring with national budget/reporting cycles, as long as deviations are minor. Conditionality should cover the 12 months following the Board meeting (initial approval or review). Under semi-annual monitoring, PCs would therefore normally be established for two future test dates at the time of approval of the arrangement and at each review (except for the penultimate and final reviews).

64. Quantitative periodic PCs typically include measures of net international reserves, central bank domestic assets, domestic and fiscal balances or financing, and any other macro-critical indicators. In most cases, there is also a limit on nonconcessional external debt, which could be set as a periodic or continuous PC.⁴⁸ PCs are usually subject to program adjustors that reflect deviations from projected external flows. Indicative targets should include a floor on social and other priority spending where possible and may include other indicators such as reserve money.

65. Continuous PCs always include, inter alia, commitments related to non-introduction or intensification of exchange restrictions and on non-introduction or modification of multiple currency practices. Other continuous PCs typically include the non-accumulation of external payments arrears and may include the non-contracting of nonconcessional external debt. See Appendix II, Section G, for details.

66. ECF arrangements should include an agenda for macro-critical structural reforms, with appropriate flexibility on the timing of the measures. Structural benchmarks are critical measures that are intended to serve as clear markers in the assessment of progress in the implementation of critical structural reforms in the context of a program review. Structural benchmarks should be used as parsimoniously as possible, and their macro-criticality explicitly justified in program documents, ideally in the structural benchmark table. Reviews are the primary tool for monitoring performance on the structural elements of the program, by judging progress relative to the relevant objectives.⁴⁹ Specific objectives should be defined for periods covered by individual reviews, with related structural benchmarks that are critical for achieving the program’s objectives. The appropriate number of structural benchmarks depends on a variety of country-specific factors, including the centrality of structural reforms for achieving the program’s objectives and country capacity. The use of structural PCs was discontinued in 2009.⁵⁰ Under the ECF, structural benchmarks may be targeted for implementation either by a specific test date or by the time of a specific program review.

67. Any structural benchmark that is significantly delayed can be re-dated and re-linked to the next program review, if the benchmark remains macro-critical to the program. If it seems that implementing a structural benchmark is no longer possible as defined under the program (say, due to a change in the authorities’ reform plans or other changes in circumstances), a new benchmark or a modified version of the original one may be appropriate as long as it is critical to achieve program goals.

Waivers and modifications

68. A waiver for non-observance of a PC may be granted if the Fund is satisfied that the program will nevertheless be successfully implemented—i.e., that it will achieve its goals— either because of the minor or temporary nature of the nonobservance or because of remedial actions taken by the authorities to preserve program objectives. Upon verification that a PC was not met, a request for a waiver of its nonobservance can be made by the member in the LOI. If staff supports the granting of the waiver, relevant justification would be provided in the staff report, which will also include a proposed decision on the waiver. Waivers for nonobservance are only required for quantitative PCs that are tied to the specific disbursement and to the review that is being completed (and for any standard continuous PC that has been missed). Waivers for PCs that are tied to subsequent disbursements and reviews are not required even if information on nonobservance already exists. In these cases, however, the staff report and LOI/MEFP would need to provide assurances that understandings on appropriate policies have been reached to complete the subsequent review, even though relevant PCs will need to be waived when that review is concluded.

69. Waivers of applicability could in principle be granted if the Fund is satisfied that, notwithstanding the unavailability of the information necessary to assess observance of a PC, the program will be successfully implemented and there is no clear evidence that the PC has not been met. However, in the case of the ECF, waivers of applicability would be highly unusual. Unlike purchases under the SBA and EFF, each ECF disbursement is linked to specific PC test dates and to a specific review, and thus the disbursement is not blocked—and there is consequently no need for a waiver of applicability—when a new test date passes and information on performance under it is unavailable, because such test date is linked to a future disbursement and review. While in theory a waiver of applicability could be granted for a PC at a test date linked to the current review, this would raise serious questions about the country’s capacity to provide timely data, as reviews under the ECF should generally be scheduled with sufficient time to monitor the data relevant for the applicable test dates. In arrangements with blended financing, waivers of applicability would be required for the GRA-financed arrangement if the review is being conducted after the most recent test date has passed and data are not yet available. Additionally, with respect to the GRA financial arrangement, the member may purchase any amount available based on earlier completed reviews if the purchase is requested within 45 days of the most recent test date and all the conditions specified in paragraph 2 of the Reduction of Blackout Periods in GRA arrangements decision (Decision No. 14407-(09/105)) have been met.

70. Modifications to program conditionality that has already been set by the Board may be appropriate when departures from PCs are expected to occur, for instance when basic program assumptions have not been realized or significant developments have occurred that had not been anticipated when the PCs were set, provided that the targets remain macro-critical. Requests for such modifications must be submitted to the Board before the relevant test date has been passed, and must be approved by the Board before information on the observance of the PC is available, normally in the context of a program review. In exceptional cases, modifications of conditionality can be approved by the Board outside the context of a program review, provided the authorities and staff have common understandings on appropriate policies through the next review, as documented in a revised or new LOI with an updated PC table and, where relevant, an updated TMU. This could be appropriate if the original targets are no longer appropriate due to developments beyond the authorities’ control (including staff errors). Board approval would require a staff report that discusses the reasons for the modification, including why it is proposed outside the review context, the status of the program, and relevant policy understandings.

Misreporting⁵¹

71. Misreporting occurs when members with a Fund-supported program obtain resources on the basis of inaccurate information regarding observance of quantitative or continuous PCs or prior actions (a “noncomplying disbursement”). Under the ECF arrangement, a noncomplying disbursement occurs when (i) the Fund makes a disbursement on the basis of a finding that applicable conditions established for that disbursement (which include the accuracy of the information on PCs for which waivers have been requested) have been observed and (ii) that finding later proves to be incorrect. Upon evidence that a member may have received a noncomplying disbursement, the Managing Director shall inform the member promptly. After consultation with the member, if the Managing Director determines that the member did receive a noncomplying disbursement, the Managing Director shall promptly notify the member and submit a report to the Executive Board with recommendations. The Board may decide either (a) that the member shall be expected to repay the disbursed amount, or (b) that the nonobservance will be waived. Waivers will normally be granted only when the deviation from the relevant PC or other condition was minor or temporary, or if the member had adopted additional measures appropriate to achieve the objectives supported by the relevant decision on the disbursement.

72. Whenever the Executive Board finds that the noncomplying disbursement has been made but that the nonobservance of the relevant PC or other specified condition was also de minimis; i.e., when a deviation from a PC would be so small as to be trivial with no impact on the assessment of performance under the relevant member’s program, a waiver for nonobservance shall be granted by the Executive Board.⁵² De minimis misreporting will not be published in a staff report.

Purpose of program reviews

73. Program reviews evaluate whether the program is on track to achieve its objectives. This evaluation is based on a backward-looking assessment—taking into account performance against quantitative PCs, structural and quantitative benchmarks, and prior actions— and a forward-looking assessment of the prospects for successful program implementation, in particular whether policy capacity and commitments are adequate to achieve the program’s objectives. The second (and every subsequent) review can only be completed if a PRS document has been issued to the Board, normally within the previous 18 months. At the time of the consideration of the final review under an ECF arrangement, and assuming that the protracted balance of payments problem has been resolved and no further program support from the Fund is expected, the scope of the forward-looking assessment could be more limited than for previous reviews.

74. Reviews also update the program design, in particular by specifying forward-looking policies and conditionality, and are the main vehicle for any potential modifications to program design—such as changes in access, phasing, and conditionality—as may be necessary to achieve the program’s objectives in changing circumstances. At the time of approval and for each review, the authorities’ LOI presents or updates their policy program, and a staff report provides an overall assessment of performance and policy commitments.

Timing of reviews, test dates, and disbursements

75. The timing of all reviews, test dates, and disbursements is summarized in a staff report table at the time of approval of an ECF arrangement and updated as needed at the time of reviews. Moreover, the Arrangement text attached to the staff report for the initial ECF request specifies the test dates, reviews, availability dates, and disbursements for the first year of the arrangement. The quantitative indicator table (“PC table”) attached to the LOI/MEFP should clearly identify PCs, indicative targets, and adjustors for at least a 12-month period from the Board date of the program approval or review as indicated above. Similarly, the structural benchmark table should cover measures over at least a 12-month period, clearly indicating the reviews that individual benchmarks are linked to and/or the dates for their implementation. The Decision attached to the staff report should specify all PCs and review/availability dates, normally over the next 12 months from the Board date of the program approval/review. The first disbursement is made available upon approval of the arrangement, and subsequent disbursements will be conditional on observance of the PC and a program review that confirms satisfactory progress in implementing the economic program.

76. Disbursements and reviews under an ECF arrangement are normally both semiannual, implying typically seven scheduled disbursements and six reviews (and thus six test dates with PCs). When designing the schedule of test dates, careful consideration should be given to alignment with the country’s budget cycle. There is scope for some flexibility in setting the specific review dates and test dates relative to the regular cycle, as long as deviations are minor. Small deviations from a strict six-monthly schedule can be justified, for example, by the need to align monitoring with national budget/reporting cycles. In cases where the arrangement is approved well before the first test date, e.g., four months or earlier, there may be only six disbursements and five reviews, given the time lag involved in monitoring performance criteria and preparing documentation for reviews. In exceptional circumstances, reviews and disbursements could be both at quarterly intervals, for instance in the context of significant short-term volatility and/or uncertainty. In these cases, it is also possible to shift between semi-annual and quarterly phasing during the course of an arrangement on the basis of changes in volatility and/or uncertainty. Such shifts could also be scheduled at the time of approval of a new ECF arrangement if warranted based on the projected risk profile over time.

77. The test dates for PCs must be set such that all scheduled disbursements can take place before the end of the three-year arrangement, taking into account reporting lags and preparation and circulation periods for staff reports. Similarly, the availability dates for disbursements should be set such that all data needed to confirm observance of PCs at the related test dates would have become available. Availability dates are specified in the Arrangement text and subsequent Decisions, and are summarized in the staff report table on the schedule of disbursements. Reviews cannot be completed prior to the applicable availability date.⁵³

78. The program period supported by an ECF arrangement would typically start somewhat before the Board approves the ECF arrangement,⁵⁴ and three to six months before the first test date under semiannual monitoring. The program period should normally not start more than three months prior to the Board meeting, and in any case not before the authorities and staff have discussed the parameters of the program.

79. In contrast to SBAs or EFF Arrangements, the design of an ECF arrangement avoids “blackout periods” by linking each disbursement to the completion of a specific review and to the observance of specific periodic performance criteria, and thus a disbursement is not blocked—and there is consequently no need for a waiver of applicability upon data unavailability—when a new test date passes, because such new test date applies to a future disbursement subject to completion of a future scheduled review.⁵⁵

Addressing interruptions in program implementation: track records, combined reviews, and rephasing

80. ECF-supported programs may encounter interruptions and delays. If these are caused by substantial policy slippages, it is often appropriate to establish a track record before completing the next review. As discussed in more detail in Appendix III, a track record could be informal (based on informally agreed time-bound policy actions and targets) or monitored more formally under an SMP, or, in case of urgent financing needs caused by an exogenous shock, the RCF (assuming the applicable policy commitments are in place). In some cases, bringing the program back on track may also require modification to the planned timing of disbursements and reviews. Such delays and interruptions can sometimes be addressed through extensions of the arrangement (see above), combining reviews, rephasing of access, or some combination of the three.

81. Under certain circumstances, two reviews can be combined when delays in program implementation have occurred and performance can be assessed against two test dates that were linked to successive reviews. Combining three or more reviews, while theoretically possible, would be very unusual as PCs are typically not defined for more than two future test dates under semiannual monitoring and because long-lasting deviations from program objectives would often justify cancellation of the arrangement. Combining reviews is only possible if: (i) the conditionality has been fully defined, including through applicable PCs, for these reviews and approved by the Board; (ii) data are available for measuring observance of conditionality for the reviews; and (iii) the dates specified as the earliest dates for conclusion of the reviews in the text of the arrangement have all passed. Typically, reviews are combined when the program is on track with respect to the most recent review and sufficient corrective action had been taken to offset any problems with observance of the conditions for earlier reviews. By contrast, where slippages relative to the objectives and conditionality for the most recent review are significant, it would not be appropriate to combine reviews. In such circumstances, the authorities could request cancellation of the arrangement and discussion of a support under a new instrument once conditions for such support are appropriate. Alternatively, in cases where performance relative to the objectives and conditionality for the earlier review was broadly satisfactory (or slippage has been addressed through sufficient corrective action) and program objectives can still be obtained through modifications of the program, this past review could be completed, while a new, future test date and conditionality should be established for the next review, typically combined with rephasing of access over the remainder of the arrangement.

82. Disbursements under an ECF arrangement may be rephased to change the amounts of financing provided under individual disbursements associated with specified reviews and/or change the number or timing of disbursements and reviews. If delays in program implementation cannot be accommodated by extensions or combining reviews alone, the total amount of access under the arrangement can be rephased into a new pattern of test dates and reviews, generally only after making full use of the maximum possible extension. Access should never be rephased in a manner that would make it impossible for the member to get the full, undisbursed amount under the arrangement. If delays in program implementation have been substantial and rephasing would involve compressing a very large amount of access into a short period of time (even with a potential extension of the arrangement period), it would normally be appropriate to let the current arrangement expire, or for the member to cancel it, and to proceed to a new ECF arrangement with more attainable goals, unless there has been a very sharp turnaround in performance.

Purpose and objective

84. The SCF provides concessional financing to LICs with actual or potential short-term balance of payments needs. The purpose of an SCF arrangement is to assist eligible member countries in implementing economic programs aimed at achieving, maintaining, or restoring a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. Such a position would be characterized by the absence of a present or prospective balance of payments need and by the domestic and external stability that is necessary to support strong and durable poverty reduction and growth. It would typically be associated with sustainable fiscal and current account balances, limited debt vulnerabilities, adequate international reserves, and sufficient policy and institutional capacity to implement appropriate macroeconomic policies. This position might still involve significant levels of donor assistance, though aid dependence would be expected to decline over time. Use of the SCF is appropriate in cases where a country may experience episodic, short-term financing and adjustment needs, but these needs are not expected to persist over the medium or longer term. Member countries facing potential balance of payments needs, but not presently facing a need, may request an SCF arrangement on a precautionary basis.

85. Similar to other Fund instruments, SCF arrangements assist countries in addressing their balance of payments difficulties by providing temporary financial support (in this case, on a concessional basis) to smooth economic adjustment and avoid excess volatility. SCF resources can be used to strengthen the country’s international reserve position and loosen financing constraints for both the public and private sectors in the context of a policy framework aimed at achieving a stable and sustainable macroeconomic position. Assistance under the SCF can also catalyze additional financing from donors.

Eligibility and qualification

86. Assistance under the SCF is available to all PRGT-eligible member countries⁶⁵ that experience short-term balance of payments needs, unless (i) the predominant cause of the balance of payments difficulties that underlie the financing need is a withdrawal in financial support by donors or (ii) the country faces a protracted balance of payments problem; specifically, to qualify for the SCF, there should be an expectation that the member will achieve a stable and sustainable macroeconomic position (as defined above) in normally two years or less. If, by contrast, a country has a protracted balance of payments problem where the resolution of macroeconomic imbalances needed to establish a stable and sustainable macroeconomic position is expected to persist for three years or more, an ECF arrangement would then be the appropriate instrument to support UCT-quality programs. In cases where a stable and sustainable macroeconomic position is expected to be established in more than two but less than three years, the choice between the two facilities should be determined on a case-by-case basis, keeping in mind that the minimum length for an ECF arrangement is three years and use of the SCF is normally limited to two and a half out of any five-year period assessed on a rolling basis. For this assessment, substantial structural reform or capacity building needs, or frequently recurring financing needs would indicate the presence of a protracted balance of payments problem and thus argue for support under an ECF arrangement, whereas needs for a relatively front-loaded adjustment process aimed at a speedy restoration of macroeconomic stability would argue for an SCF arrangement.

87. SCF arrangements can provide support to members experiencing actual (i.e., present or prospective) or potential balance of payments needs,⁶⁶ as long as the balance of payments need is short term rather than protracted. If at the time of approval of the SCF arrangement, a member does not presently face balance of payments needs, but such needs are expected to arise in the future (or there is a significant risk that such needs could arise in the future), the country authorities would treat the arrangement, at least initially, as precautionary. If balance of payments needs are purely potential (i.e., not present or prospective) and risks to the outlook are moderate or low, a PSI could be more appropriate. In these cases, by foregoing the Fund financing extended under a precautionary SCF arrangement and focusing on medium-term policy support and endorsement, the PSI would tend to send a stronger signal about the quality of the member’s policies and the soundness of its macroeconomic position. Individual disbursements can only be made based on the representation by the member of the existence of an actual (in this case, present) balance of payments need.

88. Qualification also requires a finding by the Board that the member is implementing, or is committed to implement, policies aimed at resolving the balance of payments difficulties it is encountering or could encounter, in the context of a policy program that meets UCT conditionality standards and aims to achieve, maintain, or restore a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction. This requires the commitment and capacity by the authorities to implement a set of policies that is adequate to correct external imbalances and enable repayment to the Fund within the specified maturity period. Apart from the elaboration of such a program in the LOI and MEFP, qualification would thus require assurances that the authorities have the capacity and commitment to implement their program, as evidenced by recent policy performance (including under a recent Fund-supported program), institutional capacity, and any other circumstances that may affect macroeconomic performance. In this context, qualification is presumed (but still would have to be established) for countries with an on-track PSI that experience or may experience a balance of payments need. Other requirements for the approval, extension, or implementation of an SCF arrangement are discussed further below.

89. Countries that are not currently in a position to meet the SCF qualification requirements, in particular the capacity to implement a UCT-quality program, can build a track record for moving to an SCF arrangement through an SMP or, in case of urgent financing needs, the RCF (assuming the applicable policy commitments are in place). Countries that have the capacity to implement a UCT-quality program, but such a program is not needed because the balance of payments need is expected to be resolved within one year and no major policy adjustments are necessary to address underlying balance of payments difficulties, have the option to request RCF financing to meet an urgent balance of payments need.

Concurrent use

96. The SCF cannot be used concurrently with the ECF. Hence, any pre-existing ECF arrangement would need to be cancelled before an SCF arrangement can be approved and vice versa. Moreover, a member cannot obtain RCF financing (or start an SMP) if an SCF arrangement is in place and on track. Should additional balance of payments needs arise during an SCF arrangement, an augmentation of access would typically be the appropriate response. RCF financing during an SCF arrangement can only be provided when (i) SCF disbursements are not possible, for instance due to policy slippages or delays in program discussions, (ii) qualification requirements for the RCF are met, including the existence of an urgent balance of payments need and relevant policy commitments, and (iii) the balance of payments need is primarily caused by a sudden exogenous shock. When access under the RCF exceeds 25 percent of quota in these circumstances, policies should be appropriate to address the shock. In addition, RCF-supported polices could serve as a track record to bring the SCF-supported program back on track. Similarly, in the absence of an urgent financing need, a track record could be built through an SMP. The SCF can be used concurrently with GRA financing under certain circumstances (see below).

97. The SCF can be used flexibly in conjunction with a PSI. While a PSI does not provide automatic access to SCF financing, qualification for the SCF would be presumed for countries with an on-track PSI that experience or may experience a balance of payments need (which could be present, prospective, or potential), provided that the relevant qualification requirements are met. An on-track PSI, with the associated UCT-conditionality standard, would also reduce the time normally required to design an SCF-supported program. There would be no need to cancel the PSI, and an SCF could run concurrently with a PSI. PSI users can also request concurrent precautionary support under the SCF, which may be useful in periods of increased uncertainty or risk. Modification of the PSI-supported program may be warranted in some cases, in particular when the changed circumstances are likely to affect a country’s ability to meet the program objectives. In case the PSI is off track, SCF approval would typically only occur when appropriate corrective actions have been taken.

98. Concurrent support under a PSI and SCF arrangement would have modalities akin to those applicable under a PSI or SCF arrangement individually with regard to program documentation and program targets. In particular, the two instruments would support an economic program based on a single set of program conditions, schedule of reviews, and other requirements that largely mirror those applicable to stand-alone SCF arrangements or PSIs. Key differences, however, include:

• The choice of duration of the SCF arrangement (between 12 and 24 months) would depend on the length of financing and adjustment needs, and would not necessarily be tied to the PSI period.

• If the expiration date of the SCF arrangement comes after that of the PSI, approval of a new PSI would normally take place only after the expiration or cancellation of the SCF arrangement, as qualification for the PSI requires a broadly stable and sustainable macroeconomic position, which would imply that no IMF financing is needed. However, a new PSI could be approved when the authorities intend to treat the SCF as precautionary. It may also be possible to extend the existing PSI for a short period to complete the final review (see Section B).

• While an SCF arrangement does not require the issuance of a PRS-related document, such a document must exist by the time of the completion of the second and subsequent reviews of a PSI.

• The review schedule for the PSI could remain on the “fixed review cycle” (see Chapter IV of this Handbook) or be aligned to the more flexible review cycle of the SCF. With a PSI remaining on the fixed cycle, the documentation for a PSI review would have to be issued to the Executive Board before the next relevant test date, irrespective of program performance and whether the review will be completed. Shifting a PSI to the SCF review schedule would require adjusting the standard PSI decision language such that a PSI review can be completed at a later stage.

Blending

99. Certain PRGT-eligible countries are expected to receive financial assistance through blended PRGT and GRA resources, rather than relying on fully concessional Fund financing.⁷⁰ Blending can allow higher access levels (if justified by the balance of payments need and strength of the program) and provide a signal that the borrower is moving toward middle-income or emerging market status. PRGT-eligible countries, including members qualifying for an SCF arrangement, would be expected to use either fully concessional or blended resources, rather than GRA-only financing, although they are always eligible for access to the Fund’s general resources.

100. Blending of SCF and GRA resources is subject to the following presumptions and limitations:

• Blending is presumed, including for precautionary SCF arrangements, for PRGT-eligible countries with either (i) per capita income above the prevailing operational cutoff used by IDA⁷¹ or (ii) sustained past and prospective market access and a per capita income that exceeds 80 percent of the IDA operational cutoff.⁷² Other PRGT-eligible countries are expected to use concessional financing only.

• Blending should normally not be used for countries at a high risk of debt distress or in debt distress as assessed by the most recent joint Bank-Fund LIC DSA, even if per capita income or market access creates a presumption for blending.

• As a consequence of the rules on access under blended financial assistance (Section D), when annual average access is 25 percent of quota or below, the resources under the SCF would, at least initially, not normally be blended with resources under the GRA, even if the criteria that create a presumption for blending are met.

• In exceptional circumstances, when financing needs exceed the applicable access limits, blending can be used irrespective of the per capita income, market access, and debt sustainability criteria (see Section D).

101. When providing financial assistance with blended resources, SCF resources will normally be provided together with GRA resources under the SBA. Financing through the RFI under the GRA during an SCF arrangement would be expected only if the SCF-supported program is off track, in which case RFI purchases would typically be combined with disbursements under the RCF.

102. The modalities of blended financial assistance under SCF and SBA arrangements would be broadly the same as those applicable under a stand-alone SCF arrangement. In particular, it would support a one- to two-year economic program for countries with short-term balance of payments needs, based on a single set of program conditions, schedule of disbursements and reviews, and other requirements that largely mirror regular SCF arrangements described in this Chapter. However, there are a number of differences, including that in cases involving blended resources:

• As a practical matter, disbursements would involve both SCF and SBA resources (see Section D on access under blended financial assistance), implying lower average concessionality of the Fund’s financial support than under a stand-alone SCF arrangement;

• SBA qualification requirements must be met—for instance, to the extent that the blend pushes (annual or cumulative) access above GRA normal limits, the member would also need to meet the Exceptional Access criteria;⁷³

• While the respective effectiveness and expiration dates of the SCF and SBA arrangements would be normally identical, there could be situations where it would be possible to blend resources under an SBA with a duration of more than 24 months with resources under a 2-year SCF (maximum length), if the SCF qualification requirements are met, including the absence of a protracted Balance of Payments need (implying that the duration of the SBA would rarely be more than a few months over the 24 months, unless the arrangement is treated as precautionary);⁷⁴

• In contrast to the practice under SCF arrangements, reviews under the SBA component of the blended financial assistance may require waivers of applicability under certain circumstances (see Section H); and

• Each disbursement under an SCF arrangement is linked to a specific test date, whereas for GRA arrangements purchases are conditioned upon observance of the PCs relating to the most recent test date. There could thus be situations where resources relating to the SCF component of the blend can be disbursed (specifically, if PCs relating to an earlier test date have been met), while resources relating to the SBA component cannot (specifically, if PCs relating to the most recent test date have not been observed) unless waivers for the nonobservance are granted.

Determination of access—main criteria

104. Access is determined on a case-by-case basis based on the following standard criteria: (i) the member’s (present, prospective, and potential) balance of payments needs (taking into account all projected balance of payments flows, including reserve accumulation and financing from other sources);⁷⁵ (ii) the strength of its program and capacity to repay the Fund (taking into account the member’s policy plans, adjustment effort, commitment to implement the program, institutional capacity, track record of policy implementation, and country circumstances such as vulnerabilities, imbalances, and debt sustainability);⁷⁶ and (iii) the amount of outstanding Fund credit and the member’s record of past use.

105. Access may not exceed the member’s present, prospective, and potential balance of payments needs during the program period, and would typically be less than total financing needs, keeping in mind that SCF-supported programs can catalyze financing from donors and creditors. Analogous to an SBA, while an SCF arrangement may be approved on the basis of present, prospective, or potential balance of payments needs (and members may choose to treat the SCF arrangement as precautionary at the time of approval), each individual disbursement requires a representation by the member of the existence of a present balance of payments need, and members will need to make a representation, normally in an LOI, that they are experiencing an actual balance of payments need at the time they request a disbursement under an SCF arrangement. As in the GRA, the Fund will not challenge this representation prior to the disbursement, but will be able to impose a prepayment expectation and take other remedial measures after the disbursement if it were to determine that the disbursement took place in the absence of a present need.

106. When an SCF arrangement is used on a precautionary basis, members retain and accumulate the rights to request disbursements during the period of the arrangement, provided they have concluded the most recent scheduled review (associated to the corresponding availability date). In contrast to SBA-supported arrangements, the design of an SCF arrangement 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. ⁷⁷

Access norms

107. Access norms apply to access to financing under SCF arrangements (though not in cases of blended financial assistance, see Section D). The access norm is 120 percent of quota per 18-month arrangement for countries with total outstanding IMF credit under all concessional facilities of less than 100 percent of quota, and the norm is 75 percent of quota per arrangement for countries with outstanding concessional credit of between 100 percent of quota and 200 percent of quota. For arrangements with a duration of more than 18 months, the norm is increased proportionally, and for arrangements with a duration of less than 18 months, the norm is decreased proportionally. For countries whose outstanding concessional credit is above 200 percent of quota, the norms do not apply, and access is guided by consideration of the cumulative access limit of 300 percent of quota (450 percent of quota in exceptional cases), the expectation of future need for Fund support, and the repayment schedule.

108. Access norms provide general guidance and represent neither ceilings nor floors (nor entitlements). Access can deviate from the norms if warranted under the standard criteria for determining access (see above). For instance, access may be above the norm in cases where balance of payments needs are noticeably larger than in most other cases of SCF use, e.g., due to a large shock. Access can also be below the norm, for example when the balance of payments need is limited, policy capacity is constrained, or when debt vulnerabilities are high.

Access limits

109. A member’s total access under all concessional facilities is subject to “global” annual and cumulative limits. This includes credit outstanding and disbursements under the ECF, SCF, RCF, and ESF, but does not include credit outstanding under ENDA and EPCA even if this credit is subsidized as these resources are provided under the GRA. Specifically, total access to financing under the PRGT should normally not exceed 100 percent of quota per year across all concessional facilities. This annual access limit refers to past and future scheduled disbursements in any 12-month period, specifically (i) any actual disbursements under the RCF and past ECF and SCF arrangements at the time they became available (i.e., the date of the Board decision that makes the disbursement available), (ii) any disbursements to date that became available under the current SCF arrangement, irrespective of whether they have been drawn or not, and (iii) any future disbursements under the SCF at the scheduled availability dates. Furthermore, total access to financing under the PRGT should normally not exceed 300 percent of quota cumulatively, net of scheduled repayments. Specifically, this cumulative access limit requires that total outstanding Fund concessional credit (including disbursements that were made available but not drawn in the context of the current arrangement) cannot normally exceed 300 percent of quota at any point in time, based on projected disbursements and repayments.

110. In exceptional circumstances, access above the normal limits can be made available to countries that: (i) experience an exceptionally large balance of payments need that cannot be met within the normal limits (e.g., very large external shocks, very low levels of reserves), (ii) have a comparatively strong adjustment program and ability to repay the Fund—this criterion 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 DSA, unless expected debt relief or restructuring is projected to reduce the risk of debt distress to a moderate level or low level; and (iii) do not meet the income or market access criteria for blending (see above). Exceptional access is subject to hard caps of 150 percent of quota annually and 450 percent of quota on a cumulative basis (as defined above) across all concessional facilities.

111. In addition to these global limits on access under all facilities under the PRGT, a sub-ceiling on access applies to SCF arrangements that are treated as precautionary. Specifically, if, at the time of approval of an SCF arrangement, there is a potential but no present or prospective balance of payments need, annualized access (total access divided by the length of the arrangement in years) would be limited to 50 percent of quota, with the possibility to augment access at a later stage should a larger present or prospective balance of payments need arise.

The phasing of access

112. The phasing of SCF access, determined at the time of approval of the arrangement, should mirror the projected evolution of balance of payments needs over the course of the arrangement and must take into account the applicable annual access limits. Access could be front-loaded (or back-loaded) if warranted based on the strength of the program and/or the time profile of the balance of payments needs. A significant degree of frontloading could be appropriate in exceptional cases involving the repayment of emergency assistance to the Fund or arrangements approved following clearance of overdue obligations to the Fund as part of a broader arrears clearance strategy.

113. It is standard practice for staff reports to present the balance of payments in a way that, in any given period, scheduled IMF disbursements, together with other exceptional financing items, do not exceed the overall balance of payments deficit (resulting from “autonomous transactions”) and the programmed level of reserve accumulation. In this presentation, the balance of payments would be fully financed, at least in the near term, at the time of SCF approval and completion of each review, while residual financing gaps may show in the outer years (see also Section F on financing assurances).

Access under blended financial assistance

114. When financing is blended under an SCF arrangement and an arrangement under the GRA (see Section C on the criteria that create a presumption for blending), total access is determined based on the standard criteria (see above) , implying that total access should be comparable across country cases with similar balance of payments needs, program strengths, and outstanding Fund credit, irrespective of whether the Fund’s financial assistance comes in the form of blended or PRGT-only resources. The above access norms do not apply, and access under blended financial assistance is subject to specific rules:⁷⁸

• Access to the concessional (SCF) component of blended financial assistance is normally half of total access, subject to a floor on annual average access under the SCF of 25 percent of quota and a ceiling of 50 percent of quota, whereas the remainder of the total access would be met by GRA financing. As a consequence, new SCF arrangements with annual average access of 25 percent of quota or below would, at least initially, not involve blending with GRA resources. However, should the criteria that create a presumption for blending apply to a country that has annual average access under an SCF arrangement of initially 25 percent of quota or below, augmentations of access under this arrangement may involve blended financing as discussed in the sub-section on augmentations below

• At the time of approval of new SCF arrangement that involves blended financial assistance from a GRA arrangement, each scheduled disbursement should generally involve both SCF and GRA resources. For members that do not have outstanding GRA credit at the time of approval of the arrangements, a minimum of 25 percent of quota should be made available for the first purchase under the GRA arrangement at the time of the approval of the arrangements. Subject to the above rules, the shares of SCF and GRA financing at each disbursement can be determined individually and do not have to remain constant across disbursements.

• In exceptional circumstances when the balance of payments needs are very large (for instance in case of very large shocks or repurchases of GRA emergency assistance), access to the concessional resources under blended financial assistance could exceed the normal ceiling of 50 percent of quota, and reach the annual access limit of 100 percent of quota or possibly the exceptional annual access limit of 150 percent of quota if the criteria for exceptional concessional access are met (including that the country does not meet the income or market access criteria for blending, see above).

Augmentations and reductions of access

115. Access under an SCF arrangement can be augmented to help meet a larger balance of payments need or to support a strengthening of the program. In particular, augmentation of access would often be an appropriate response to increased balance of payments needs in the context of shocks, unless the SCF-supported program is off track, in which case RCF financing could be appropriate (see Section C on concurrent use). Augmentations based on the strengthening of the program could occur, for example, if access was initially constrained by a high risk of debt distress, which has later subsided. Also, when an SCF arrangement period is extended, it could be the case that the extension period involves balance of payments needs that were not originally included in the determination of access for the arrangement, which may provide a justification for augmentation of access. Under the Trade Integration Mechanism (TIM), augmented access not exceeding 10 percent of quota will be available to a member country to compensate for balance of payments shortfalls arising from trade liberalization measures implemented by other countries.⁷⁹

116. Determination of access for an augmentation is based on the standard access criteria, including balance of payments need and strength of the program (see above). There are no norms applicable to the size of an augmentation, although many augmentations have been in the range of 15-45 percent of quota, with a few cases well above this range. Staff reports supporting requests for augmentations should explicitly discuss the basis for the augmentation and its size, with reference to the main criteria for determining access above, as well as to access norms and limits as applicable.

117. For augmentations of arrangements that are presumed to involve blended PRGT and GRA resources, access should be set such that the total financing mix over the full course of the respective arrangement is guided by the specific rules on access under blended arrangements (see above), including that total access (post augmentation) to concessional financing would, to the extent possible, normally be half of total overall access to Fund resources, but normally not higher than 50 percent of quota and not lower than 25 percent of quota on an annual average basis.

118. The Fund cannot unilaterally reduce access under the SCF. Reductions in access are not typically envisaged, but the authorities can request it in case of a marked and unexpected improvement in the balance of payments resulting from changes in the external environment.

119. Augmentations would normally be approved at the time of a scheduled review under the arrangement. In exceptional circumstances (e.g., when severe natural disasters create urgent balance of payments needs and the next scheduled review cannot be completed in the near term), it may be possible to bring forward a scheduled review and augment access under the arrangement.

Procedural safeguards on high access requests—DSAs and informal Board meetings

120. Financing requests are subject to procedural safeguards that apply uniformly across all concessional facilities. These safeguards are aimed at protecting PRGT-eligible members’ debt sustainability and the Fund’s concessional resources.⁸⁰ Specifically, the staff report for any arrangement request or augmentation should provide an up-to-date assessment of the debt vulnerabilities, with an explicit reference to the impact of new borrowing from all sources, including prospective IMF disbursements. In addition:

• A DSA or DSA update is required for any financing request under the PRGT (augmentation or new arrangement) if it (i) involves exceptional access to concessional resources; or (ii) brings total access under all concessional facilities to more than 80 percent of quota, based on past and future scheduled disbursements in any 24-month period, specifically (a) any actual disbursements under the RCF, ECF, ESF, and past SCF arrangements at the time they became available (i.e., the date of the Board decision), (b) any disbursements to date that became available under the current SCF arrangement, irrespective of whether they have been drawn or not, and (c) any future scheduled disbursements under the SCF; or (iii) involves a member country with a high risk of debt distress or in debt distress. A DSA update can be prepared unilaterally by Fund staff drawing on a prior full joint Fund-Bank DSA as long as a joint DSA was prepared recently and the analysis would not result in a change of the risk of debt distress rating.

• An early informal Board meeting is required if a financing request under the PRGT (augmentation or a new arrangement) would (i) involve exceptional access to concessional financing or (ii) bring total access under all concessional facilities to more than 180 percent of quota, based on past and future scheduled disbursements in any 36-month period, specifically (a) any actual disbursements under the RCF, ECF, ESF, and past SCF arrangements at the time they became available (i.e., the date of the Board decision), (b) any disbursements to date that became available under the current SCF arrangement, irrespective of whether they have been drawn or not, and (c) any future scheduled disbursements under the SCF. Information to the Board would typically be in a two to three page note that would include (i) the factors underlying the large balance of payments need, taking into account financing from donors, (ii) a brief summary of the main policy measures and macroeconomic framework, (iii) the expected strength of the program and capacity to repay the Fund, (iv) an analysis of debt vulnerabilities, reflecting all projected debt financing, including from the Fund, (v) a reference to the impact on the Fund’s concessional resources (drawing on the latest available paper on concessional resources), (vi) the likely timetable of discussion with the authorities, and (vii) a selected indicators table and, if possible, the standard DSA charts. The meeting should take place before staff reaches understandings, ad referendum, with the authorities.

• In addition, staff would provide early notice to the Board, for instance in an informal country matters session, of upcoming arrangement requests or augmentations where the envisaged financing commitment, in absolute terms, would have a large impact on the Fund’s overall concessional resources.

• As an exception to these procedures, new financing requests of 10 percent or less of quota do not trigger either the need for a DSA update or a Board briefing.

Financing assurances

124. As with any other Fund arrangement, the Fund’s policy on financing assurances⁸² requires that SCF arrangements can only be approved (and reviews can only be completed) when the program is fully financed. This means that donors and creditors (both official and private) have furnished assurances that they will provide the necessary support (through new loans and/or refinancing) to meet the program financing requirements on terms consistent with the member’s return to external viability. Specifically, staff should confirm that there are no unfilled financing gaps over the 12 months immediately following the approval of the arrangement (and completion of each review), and that there is a clear expectation that the program will be fully financed through the remainder of the arrangement period. Assurances should also be given that the member country has the capacity to repay the Fund based on medium-term projections of the balance of payments and, in the case of new arrangements and augmentations, the standardized table on indicators of the capacity to repay the Fund.

Arrears

125. Under the Fund’s policy of non-toleration of sovereign arrears to official (multilateral and bilateral) creditors,⁸³ the Fund generally calls for the resolution of existing arrears to official creditors and non-accumulation of new arrears during the period of the program. Existing arrears need not necessarily be settled immediately—they can be addressed in a number of ways, depending on the type of creditor. Country teams should seek guidance from LEG and SPR on the application of the policy to specific creditors. The macroeconomic program assumptions under the ECF arrangement should be consistent with the expected resolution of existing arrears to official creditors, which implies that the authorities and the staff have common understandings on the timing and modalities of arrears clearance. The assumptions on arrears clearance do not prejudge eventual agreements between the member and official creditors. Staff should have reasonable assurances that arrears clearance understandings are realistic.

126. Arrears to private external creditors are covered by the Fund’s Lending into Arrears (LIA) policy.⁸⁴ The LIA policy applies to both sovereign arrears to external private creditors and non-sovereign arrears that arise by virtue of the imposition of exchange controls. The Fund can lend, on a case-by-case basis, in a situation of sovereign arrears to private external creditors and only where: (i) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and (ii) the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors (or to facilitate a collaborative agreement between private debtors and their creditors and good prospects exist for the removal of exchange controls). Whenever the LIA policy applies, each Fund disbursement under an arrangement is subject to a financing assurances review in which the Board considers, inter alia, whether the member’s adjustment efforts are undermined by developments in creditor-debtor relations.⁸⁵

127. SCF-supported programs should also address domestic arrears as part of the overall program design. The specification of policies related to domestic arrears will depend on the country context, in particular, the fiscal framework (see Appendix II).

Overdue obligations to the Fund

128. Where a member is in arrears to the Fund in the GRA, the Special Disbursement Account, or the SDR Department, or to the Fund as Trustee (including the PRGT), a request for IMF financing, including under the SCF, will not be approved and disbursements under an existing arrangement will be suspended (PRGT Instrument, Section II, paragraph 1(e)(3) and 3(g)) until the arrears are cleared.⁸⁶ After one month the Managing Director will notify the Executive Board that an obligation is overdue, and in the case of protracted arrears to the Fund (i.e., arrears of more than six months’ duration), semiannual reports are to be issued to the Executive Board. While a member is in arrears to the Fund, policy support can only be provided through surveillance, technical assistance and, under certain circumstances, SMPs. Remedial measures for dealing with PRGT arrears include removal from the list of PRGT-eligible countries, declaration of noncooperation and suspension of technical assistance.

Safeguards assessments policy

129. As a general principle staff should aim to complete a safeguards assessment prior to Executive Board approval of a new SCF arrangement. In any case, a safeguards assessment report should be completed for each new arrangement no later than the first review under the arrangement and for all augmentations for existing arrangements.⁸⁷ Once the first review under the program has passed, subsequent staff reports should highlight the status of assessment and, if not completed, reasons for its delay. The safeguards process involves a continuous analysis of information obtained primarily through the collection of documents, and discussions with the authorities and the central bank’s external auditors. It entails an evaluation of the central bank’s safeguards framework covering governance, auditing, financial reporting, control systems, and its legal autonomy over the life of an arrangement and for as long as Fund credit remains outstanding. Safeguards assessments recommendations may be incorporated into conditionality or structural measures under the member’s program. Close cooperation and coordination between FIN, other functional departments, and area departments is essential for the effective conduct of the safeguards process. It is important for FIN to be kept informed by area departments of safeguards issues, including logistical issues such as the timing of new arrangements and reviews.

Program objectives

130. SCF-supported programs are aimed at achieving, maintaining, or restoring a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth (see definition in Section A).This would involve addressing and typically aiming to resolve the country’s macroeconomic imbalances over the course of the arrangement. Specifically, SCF-supported programs should aim to maintain or achieve (i) strong and durable poverty reduction and growth, (ii) low or moderate inflation, (iii) sustainable fiscal and current account balances, (iv) limited debt vulnerabilities, (v) adequate international reserves, and (vi) sufficient policy and institutional capacity to implement appropriate macroeconomic policies.

131. The design of an SCF-supported program should be aligned with the country’s own poverty reduction and growth objectives (see further below). Specific policy objectives should be clearly articulated in the LOI/MEFP and associated staff report for a new SCF arrangement and would typically include:⁸⁸

• Fiscal policies, where (i) the fiscal stance is well anchored to help ensure macroeconomic stability and fiscal/debt sustainability, (ii) revenue and spending policies take due account of the country’s growth and social objectives, and (iii) budgets are guided by medium-term fiscal frameworks to the extent possible.

• Monetary policies that are consistent with inflation, exchange rate, and reserve objectives, while taking due account of cyclical considerations.

• Exchange rate policies that ensure a unified exchange rate and a real exchange rate level that is broadly in line with fundamentals, ensuring a stable and sustainable external position consistent with adequate growth.

• Financial sector policies geared toward financial stability and deepening with a view to fostering investment and forestalling financial crises.

• Public financial management reforms aimed at ensuring that resources are tracked, reported, and targeted appropriately (including by providing adequate resources for social and other priority spending), public debt management aimed at supporting debt sustainability, and revenue reforms aimed at broadening the revenue base, and enhancing tax efficiencies.

• Other structural reforms that are critical for achieving the program’s macroeconomic objectives.

Role of SCF financial support

132. The balance of payments support under SCF arrangements can assist countries in smoothing the adjustment process toward a stable and sustainable macroeconomic position. The Fund’s financial support can be used both to strengthen the international reserve position of the member country and to provide liquidity for making external payments. By relaxing external financing constraints, the SCF’s balance of payments support in effect also loosens domestic liquidity constraints of both the public and private sectors. Specifically Fund financing reduces the need for retrenchment in the public and private savings-investment balances, thus enhancing policy options (allowing less contractionary fiscal, monetary, and exchange rate policies) and cushioning private sector adjustment (e.g., investment and import declines). The appropriate mix of financing and public/private adjustment is determined on a case-by-case basis.

133. A member may use the domestic counterpart of resources received under an SCF arrangement to finance, directly or indirectly, the budget deficit of the government. Such budget financing is consistent with the Fund’s legal framework to the extent that the member has balance of payment problems and is implementing a program that will assist it in resolving such problems. Direct budget financing⁸⁹ may be appropriate when (i) the program is designed in a manner that envisages that the entire amount of the Fund’s financial support is used to meet a present or prospective balance of payments need, (ii) loosening fiscal financing constraints is an important macroeconomic objective under the program, and (iii) the central bank cannot or should not (for legal or institutional reasons) lend to the government while the domestic financial sector is too shallow (or not stable enough) to provide the necessary budget financing (or the central bank plays a largely passive domestic policy role, for instance under a currency board or in a fully dollarized economy). In these cases, staff reports should justify the use of the domestic counterpart of resources as for budget financing where relevant and discuss safeguards implications.⁹⁰

Links to poverty reduction strategies and social spending

134. SCF-supported programs should be aligned with the country’s own poverty reduction and growth objectives. The following specific guidance applies to PRS linkages:⁹¹

• Any financing request or program review under the SCF must be accompanied by a statement, normally in the LOI or MEFP, of how the program advances the country’s poverty reduction and growth objectives. It is expected that the description would be more detailed at the time of the initial program request or when a new PRSP (or I-PRSP) is produced. ⁹² In cases where a relevant PRS document exists, this description in the LOI/MEFP could cross-reference to the PRS document.

• If a PRS document exists, the SCF-supported program should be consistent with the objectives of the PRS in the context of promoting a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth.

• In cases where a relevant PRS document⁹³ does not exist, the SCF documentation (e.g., in an attachment to the LOI or MEFP) should outline the country’s medium-term poverty reduction and growth objectives and policies. Subsequent program documents should refer to this documentation and update it as necessary.

• PRS documents are not required for the approval or review of an SCF arrangement, consistent with its short-term focus. Nonetheless, whenever a future PSI- or ECF-supported program is under consideration, staff should inform the authorities at an early stage about the relevant definitions and timelines for PRS documentation requirements (Appendix V) to ensure adequate time for the PRS process.

• More generally, PRS documents should normally be produced by the country authorities on a 12-month cycle and aligned with other domestic policy cycles. Staff are required to prepare a JSAN for PRSPs and I-PRSPs and circulate it to the Executive Board for discussion, generally within four months of the transmission of the PRSP and I-PRSP. For APRs, it is good practice to provide feedback in the context of an AFP. In case of significant weaknesses in the PRS, including those identified in the JSAN or through the AFP, program staff reports should report how these weaknesses are being addressed.

135. Social and other priority spending should be safeguarded and, whenever appropriate, increased under SCF-supported programs. This should be monitored through explicit program targets, typically an indicative floor on social and other priority spending, whenever possible. The definition of what constitutes social or other priority spending should be consistent with the authorities’ poverty reduction and growth objectives. In cases where tracking of such expenditures is not feasible, the program documentation should report on which measures are envisaged to develop an adequate tracking system. Staff should monitor progress in establishing these tracking systems, and the program may include relevant structural benchmarks if appropriate.

Debt sustainability analysis (DSA)

136. SCF-supported programs should be underpinned by a thorough DSA to inform the elaboration of medium-term debt strategies and fiscal frameworks. Country teams should engage with the authorities in the preparation of DSAs, discuss the results, and share the final files with the relevant officials. DSAs for most LICs are usually prepared jointly with the World Bank, and country teams should also involve other relevant MDBs in the preparation of DSAs. Joint DSAs are required for PRGT-eligible IDA-only countries; for LICs that are not IDA-only, close consultation with the Bank is recommended.

137. A fully elaborated DSA is required at least once every three years, with shorter annual updates in the interim years possible in the absence of significant changes in the macroeconomic and financial environment. Full DSAs should be prepared in periods of heightened domestic, external, or global risk. The precise timing of a DSA may be driven by program requirements. In particular, the design of debt limits under an SCF arrangement is systematically related to the assessment of countries’ debt vulnerabilities (see Appendix II). Also, as discussed above, the determination of access to the Fund’s concessional resources needs to take account of the country’s debt vulnerabilities based on the most recent DSA, and a DSA (or DSA update) may need to be prepared for higher access financing requests (augmentation or new arrangement). In cases where a DSA is required outside the regular joint Bank-Fund DSA cycle, a DSA update may be prepared unilaterally by Fund staff drawing on a prior full joint Fund-Bank DSA as long as a joint DSA was prepared recently and the analysis would not result in a change of the risk of debt distress rating.

138. DSAs for LICs should be presented as self-contained documents (see Appendix I). They should normally be prepared using the LIC Debt Sustainability Framework (DSF), although for countries with durable and substantial access to market financing, the template designed for middle-income countries can be used instead. The analysis includes three components: ⁹⁴

• A forward-looking analysis (20-year projection) of debt and debt-service dynamics under a baseline scenario, alternative scenarios, and standardized stress tests;

• An explicit assessment of the risk of external debt distress (low, moderate, high, or in debt distress) based on indicative country-specific debt-burden thresholds that depend on the quality of policies and institutions in the country; and

• Recommendations on a borrowing (and lending) strategy to limit the risk of debt distress, while maximizing the resource envelope to achieve the country’s development objectives.

Collaboration with the World Bank and other development partners

Fund staff should consult closely with all major development partners active in the country when designing and monitoring a SCF-supported program. In addition to this routine collaboration, the JMAP⁹⁵ approved by the Boards of the World Bank and IMF calls on Bank and Fund country teams to consult with each other at least once a year in order to identify the country’s key macroeconomic and structural reform challenges and coordinate work plans in support of addressing these challenges (see Appendix I).

Conditionality principles

139. Conditionality, i.e., the set of program-related conditions, under an SCF arrangement is intended to ensure that Fund resources are provided in support of meeting the program’s objectives, with adequate safeguards to the Fund’s resources. Consistent with the Fund’s Guidelines on Conditionality,⁹⁶ conditions will normally consist of macroeconomic variables and structural measures that are reasonably within the member’s direct or indirect control and that are, generally, either (i) of critical importance for achieving the goals of the program or for monitoring program implementation, or (ii) necessary for the implementation of specific provisions of the IMF Articles of Agreement or policies adopted under them. In some cases, conditions may be outside the Fund’s core areas of expertise, in which case a more detailed explanation of their critical importance is required.

140. SCF-supported programs must meet the UCT conditionality standard, which requires the commitment and capacity by the authorities to implement a set of policies that is adequate to correct external imbalances and enable repayment to the Fund. The appropriate adjustment path would be determined on the basis of the country’s economic circumstances and objectives, policy constraints, and the severity of the balance of payments needs. The adjustment effort required to attain full sustainability would not be expected to extend much beyond the expiration date of the SCF arrangement, and would often fall fully within the arrangement period. In any case, conditionality should be limited to those policies that are critical to achieving the part of the overall adjustment process that is covered by the arrangement. Given its focus on restoring sustainability in the short term, the SCF will generally permit less flexibility than the ECF in the timing of these measures.

Specification of program conditions

141. Program conditionality will include quantitative periodic and continuous PCs, and typically also quantitative and structural benchmarks, as well as prior actions if necessary (see Appendix II for detailed guidance on quantitative conditions). Conditionality is set at the time of approval of the arrangement and updated at the time of program reviews. Conditionality should normally be set (or modified) by the Board before the test date. For the establishment (or modification) of post-dated PCs, the program documents would have to be signed and circulated to the Board along with the staff report before the test date, and no information on implementation of the so established conditionality would be available at the time of the Board meeting.

142. Prior actions are measures that a member is expected to adopt prior to the Fund’s approval of an SCF arrangement, completion of a review, or the granting of a waiver with respect to a PC, when it is critical for the successful implementation of the program that such actions be taken to underpin the upfront implementation of important measures. Prior actions are to be applied parsimoniously and specified in clear, objective, and unambiguous terms. Prior actions should in principle be implemented at least five working days before the Board discussion. They should be defined in the LOI/MEFP and cross-referenced in the relevant Board Decision.

143. Quantitative PCs would normally be set on a semiannual basis and tied to semiannual program reviews, while quantitative benchmarks (also referred to as indicative targets) would normally be specified on a quarterly basis. In circumstances where closer monitoring is needed, quantitative PCs and reviews could be set on a quarterly basis (see below). There is scope for some flexibility in setting the specific test dates relative to strict three/six-monthly cycles, for example when there is a need to align monitoring with national budget/reporting cycles, as long as deviations are minor. Conditionality should cover the 12 months following the Board meeting (initial approval or review). PCs would therefore normally be established for two future test dates at the time of approval of the arrangement and at each review (except for the penultimate and final reviews) under semiannual monitoring. Similarly, under quarterly monitoring, PCs should normally be set for four future test dates, and in any case not less than for two future test dates.

144. Quantitative periodic PCs typically include measures of net international reserves, central bank domestic assets, domestic and fiscal balances or financing, and any other macro-critical indicators. In most cases, there is also a limit on nonconcessional external debt, which could be set as a periodic or continuous PC.⁹⁷ PCs are usually subject to program adjustors that reflect deviations from projected external flows. Indicative targets should include a floor on social and other priority spending where possible, and may include other indicators such as reserve money.

145. Continuous PCs always include, inter alia, commitments related to non-introduction or intensification of certain exchange restrictions and on non-introduction or modification of multiple currency practices. Other continuous PCs typically include the non-accumulation of external payments arrears and may include the non-contracting of nonconcessional external debt. See Appendix II, Section G, for details.

146. SCF arrangements should cover structural reforms that are deemed to be critical for achieving a stable and sustainable macroeconomic position in the short term. Structural benchmarks are critical measures that are intended to serve as clear markers in the assessment of progress in the implementation of critical structural reforms in the context of a program review. Structural benchmarks should be used as parsimoniously as possible, and their macro-criticality explicitly justified in program documents, ideally in the structural benchmark table. Reviews are the primary tool for monitoring performance on the structural elements of the program, by judging progress relative to the relevant objectives.⁹⁸ Specific objectives should be defined for periods covered by individual reviews, with related structural benchmarks that are critical for achieving the program’s objectives. The appropriate number of structural benchmarks depends on a variety of country-specific factors, including the centrality of structural reforms for achieving the program’s objectives and country capacity; SCF arrangements would typically contain less than 5 structural benchmarks per semiannual review. The use of structural PCs was discontinued in 2009.

147. Any structural benchmark that is significantly delayed can be re-dated and re-linked to the next program review, if the benchmark remains macro-critical to the program. If it seems that implementing a structural benchmark is no longer possible as defined under the program (say, due to a change in the authorities’ reform plans or other changes in circumstances), a new benchmark or a modified version of the original one may be appropriate as long as it is critical to achieve program goals.

Waivers and modifications

148. A waiver for non-observance of a PC may be granted if the Fund is satisfied that the program will nevertheless be successfully implemented—i.e., that it will achieve its goals— either because of the minor or temporary nature of the nonobservance or because of remedial actions taken by the authorities to preserve program objectives. Upon verification that a PC was not met, a request for a waiver of its nonobservance can be made by the member in the LOI. If staff supports the granting of the waiver, relevant justification would be provided in the staff report, which will also include a proposed decision on the waiver. Waivers for nonobservance are only required for quantitative PCs that are tied to the specific disbursement and to the review that is being completed (and for any standard continuous PC that has been missed). Waivers for PCs that are tied to subsequent disbursements and reviews are not required even if information on nonobservance already exists. In these cases, however, the staff report and LOI/MEFP would need to provide assurances that understandings on appropriate policies have been reached to complete the subsequent review, even though relevant PCs will need to be waived when that review is concluded.

149. Waivers of applicability could in principle be granted if the Fund is satisfied that, notwithstanding the unavailability of the information necessary to assess observance of a PC, the program will be successfully implemented and there is no clear evidence that the PC has not been met. However, in the case of the SCF, waivers of applicability would be highly unusual. Unlike purchases under the SBA, each SCF disbursement is linked to specific PC test dates and to a specific review, and thus the disbursement is not blocked—and there is consequently no need for a waiver of applicability—when a new test date passes and information on performance under it is unavailable, because such test date is linked to a future disbursement and review. While in theory a waiver of applicability could be granted for a PC at a test date linked to the current review, this would raise serious questions about the country’s capacity to provide timely data as reviews under the SCF should generally be scheduled with sufficient time to monitor the data relevant for the applicable test dates. In arrangements with blended financing, waivers of applicability will be required for the GRA-financed arrangement if the review is being conducted after the most recent test date has passed and data are not yet available. Additionally, with respect to the GRA financial arrangement, the member may purchase any amount available based on earlier completed reviews if the purchase is requested within 45 days of the most recent test date and all the conditions specified in paragraph 2 of the Reduction of Blackout Periods in GRA arrangements decision (Decision No. 14407-(09/105) have been met.

150. Modifications to program conditionality that has already been set by the Board may be appropriate when departures from PCs are expected to occur, for instance when basic program assumptions have not been realized or significant developments have occurred that had not been anticipated when the PCs were set, provided that the targets remain macro-critical. Requests for such modifications must be submitted to the Board before the relevant test date has been passed, and must be approved by the Board before information on the observance of the PC is available, normally in the context of a program review. In exceptional cases, modifications of conditionality can be approved by the Board outside the context of a program review, provided the authorities and staff have common understandings on appropriate policies through the next review, as documented in a revised or new LOI with an updated PC table and, where relevant, TMU. This could be appropriate if the original targets are no longer appropriate due to developments beyond the authorities’ control (including staff errors). Board approval would require a staff report that discusses the reasons for the modification, including why it is proposed outside the review context, the status of the program, and relevant policy understandings.

Misreporting⁹⁹

151. Misreporting occurs when members with a Fund-supported program obtain resources on the basis of inaccurate information regarding observance of quantitative or continuous PCs or prior actions (a “noncomplying disbursement”). Under the SCF arrangement, a noncomplying disbursement occurs when (i) the Fund makes a disbursement on the basis of a finding that applicable conditions established for that disbursement (which include the accuracy of the information on PCs for which waivers have been requested) have been observed and (ii) that finding later proves to be incorrect. Upon evidence that a member may have received a noncomplying disbursement, the Managing Director shall inform the member promptly. After consultation with the member, if the Managing Director determines that the member did receive a noncomplying disbursement, the Managing Director shall promptly notify the member and submit a report to the Executive Board with recommendations. The Board may decide either (a) that the member shall be expected to repurchase/repay the disbursed amount, or (b) that the nonobservance will be waived. Waivers will normally be granted only when the deviation from the relevant PC or other condition was minor or temporary, or if the member had adopted additional measures appropriate to achieve the objectives supported by the relevant decision on the disbursement.

152. Whenever the Executive Board finds that the noncomplying disbursement has been made but that the nonobservance of the relevant PC or other specified condition was also de minimis misreporting; i.e., when a deviation from a PC would be so small as to be trivial with no impact on the assessment of performance under the relevant member’s program, a waiver for nonobservance shall be granted by the Executive Board.¹⁰⁰ De minimis misreporting will not be published in a staff report.

Purpose of program reviews

153. Program reviews evaluate whether the program is on track to achieve its objectives. This evaluation is based on a backward-looking assessment—taking into account performance against quantitative PCs, structural and quantitative benchmarks, and prior actions—and a forward-looking assessment of the prospects for successful program implementation, in particular whether policy capacity and commitments are adequate to achieve the program’s objectives. At the time of the consideration of the final review under an SCF arrangement, and assuming no further program support from the Fund is expected, the scope of the forward-looking assessment could be more limited than for previous reviews.

154. Reviews also update the program design, in particular by specifying forward-looking policies and conditionality, and are the main vehicle for any potential modifications to program design—such as changes in access, phasing, and conditionality—as may be necessary to achieve the program’s objectives in changing circumstances. At the time of approval and for each review, the authorities’ LOI presents or updates their policy program, and a staff report provides an overall assessment of performance and policy commitments.

Timing of reviews, test dates, and disbursements

155. The timing of all reviews, test dates, and disbursements is summarized in a staff report table at the time of approval of an SCF arrangement and updated as needed at the time of reviews. Moreover, the Arrangement text attached to the staff report for the initial SCF request specifies the test dates, reviews, availability dates, and disbursements for the first year of the arrangement. The quantitative indicator table (“PC table”) attached to the LOI/MEFP should clearly identify PCs, indicative targets, and adjustors for at least a 12-month period from the Board date of the program approval or review, as indicated above. Similarly, the structural benchmark table should cover measures over at least a 12-month period, clearly indicating the reviews that individual benchmarks are linked to. The Decision attached to the staff report should specify all PCs and review/availability dates normally over the next 12 months from the Board date of the program approval/review. The first disbursement is made available upon approval of the arrangement, and subsequent disbursements will be conditional on observance of PCs and a program review that confirms satisfactory progress in implementing the economic program and adequate safeguards continue to be in place.

156. Disbursements and reviews under an SCF arrangement can be either both semiannual, or, in cases where closer monitoring is needed, both quarterly, for instance in the context of significant volatility and/or uncertainty. When designing the schedule of test dates, careful consideration should be given to alignment with the country’s budget cycle. There is scope for some flexibility in setting the specific review dates and test dates relative to the regular cycle, as long as deviations are minor. Small deviations from a strict six-monthly schedule can be justified, for example, by the need to align monitoring with national budget/reporting cycles. In exceptional cases, it is also possible to shift between semiannual and quarterly phasing during the course of an arrangement on the basis of changes in volatility and/or uncertainty. Such shifts could also be scheduled at the time of approval of a new SCF arrangement if warranted based on the projected risk profile over time.

157. The test dates for PCs must be set such that all scheduled disbursements can take place before the end of the SCF arrangement, taking into account reporting lags and preparation and circulation periods for staff reports. Similarly, the availability dates for disbursements should be set such that all data needed to confirm observance of PCs at the related test dates would have become available. Availability dates are specified in the Arrangement text and subsequent Decisions, and are summarized in the staff report table on the schedule of disbursements. Reviews cannot be completed prior to the applicable availability date.

158. The program period supported by an SCF arrangement would typically start somewhat before the Board approves the SCF arrangement,¹⁰¹ and three to six months before the first test date under semi-annual monitoring. The program period should normally not start more than three months prior to the Board meeting, and in any case not before the authorities and staff have discussed the parameters of the program.

159. In contrast to SBAs, the design of an SCF arrangement avoids “blackout periods” by linking each disbursement to the completion of a specific review and to the observance of specific periodic performance criteria, and thus a disbursement is not blocked—and there is consequently no need for a waiver of applicability upon data unavailability—when when a new test date passes, because such new test date applies to a future disbursement subject to completion of a future scheduled review.¹⁰²

Addressing interruptions in program implementation: track records, combined reviews, and rephasing

160. The implementation of SCF-supported programs may encounter interruptions and delays. If these are caused by substantial policy slippages, it is often appropriate to establish a track record before completing the review. As discussed in more detail in Appendix III, a track record could be informal (based on informally agreed time-bound policy actions and targets) or monitored more formally under an SMP, or, in case of urgent financing needs caused by an exogenous shock, the RCF (assuming the applicable policy commitments are in place). In some cases, bringing the program back on track may also require modification to the planned timing of disbursements and reviews. Such delays and interruptions can sometimes be addressed through extensions of the arrangement (see above), combining reviews, rephasing of access, or some combination of the three.

161. Under certain circumstances, two reviews can be combined when delays in program implementation have occurred and performance can be assessed against two test dates that were linked to successive reviews. Combining three or more reviews, while theoretically possible, would be very unusual as PCs are typically not defined for more than two future test dates under semiannual monitoring and because long-lasting deviations from program objectives would often justify cancellation of the arrangement. Combining reviews is only possible if: (i) the conditionality has been fully defined, including through applicable PCs, for these reviews and approved by the Board; (ii) data are available for measuring observance of conditionality for the reviews; and (iii) the anticipated dates for conclusion of the reviews in the text of the arrangement have all passed. Typically, reviews are combined when the program is on track with respect to the most recent review and sufficient corrective action had been taken to offset any problems with observance of the conditions for earlier reviews. By contrast, where slippages relative to the objectives and conditionality for the most recent review are significant, it would not be appropriate to combine reviews. In such circumstances, the authorities could request cancellation of the arrangement and discussion of a support under a new instrument once conditions for such support are appropriate. Alternatively, in cases where performance relative to the objectives and conditionality for the earlier review was broadly satisfactory (or slippage has been addressed through sufficient corrective action) and program objectives can still be obtained through modifications of the program, this past review could be completed, while a new, future test date and conditionality should be established for the next review, typically combined with rephasing of access over the remainder of the arrangement.

162. Disbursements under an SCF arrangement may be rephased to change the amounts of financing provided under individual disbursements associated with specified reviews and/or change the number or timing of disbursements and reviews. If delays in program implementation cannot be accommodated by extensions or combining reviews alone, the total amount of access under the arrangement can be rephased into a new pattern of test dates and reviews, generally only after making full use of the maximum possible extension. Access should never be rephased in a manner that would make it impossible for the member to get the full, undisbursed amount under the arrangement. If delays in program implementation have been substantial and rephasing would involve compressing a very large amount of access into a short period of time (even with a potential extension of the arrangement period), it would normally be appropriate to let the current arrangement expire, or for the member to cancel it, and to proceed to a new SCF arrangement with more attainable goals, unless there has been a very sharp turnaround in performance.

Purpose and objective

164. The RCF provides rapid concessional financial assistance as outright disbursements to LICs facing urgent balance of payments needs. These financing needs include those caused by exogenous shocks, natural disasters, and emergence from conflict, as well as other factors such as domestic instability, emergencies, and fragility. Some of these situations were previously covered by three instruments, namely the ESF-RAC as well as the subsidized components of the ENDA and the EPCA. The RCF is designed for situations where a multi-year UCT-quality Fund-supported program is either not necessary (e.g., due to the transitory nature of the adjustment need and the financing) or not feasible (e.g., due to the member’s limited capacity, including in post-conflict, disaster, or other fragile situations or when more time is needed to design a multiyear program). In the latter case, the member country would typically be expected to make efforts to move to a UCT-quality program (typically supported under the ECF), in which case repeated use of the RCF may be warranted under certain circumstances and subject to certain limitations under the legal framework of the PRGT Instrument.

165. The purpose of RCF support is to meet urgent balance of payments needs of eligible member countries and assist them in implementing economic policies aimed at moving toward achieving or restoring a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. Such a position would be characterized by the absence of a present or prospective balance of payments need and by the domestic and external stability that is necessary to support strong and durable poverty reduction and growth. It would typically be associated with sustainable fiscal and current account balances, limited debt vulnerabilities, adequate international reserves, and sufficient policy and institutional capacity to implement appropriate macroeconomic policies. This position might still involve significant levels of donor assistance, though aid dependence would be expected to decline over time.

166. Similar to other Fund instruments, RCF financing assists countries in addressing their balance of payments difficulties by providing temporary financial support (in this case, on a concessional basis) to smooth economic adjustment and avoid excess volatility. By meeting urgent balance of payments needs, RCF support can help replenish international reserves and loosen financing constraints for both the public and private sectors as the country aims to address its balance of payments difficulties. The RCF is also expected to provide policy support and catalyze additional financing from donors.

Eligibility and qualification

167. Assistance under the RCF is available to PRGT-eligible member countries¹¹² that face urgent balance of payments needs unless (i) the balance of payments difficulties that underlie the financing need are predominantly caused by a withdrawal in financial support by donors or (ii) a UCT-quality program is both feasible and necessary. In this context:

• An urgent balance of payments need is characterized by a present balance of payments need¹¹³ that, if not addressed, would result in immediate and severe economic disruption. Non-urgent financing needs could be met by the ECF or SCF, assuming relevant qualification requirements are met, including the commitment and capacity to implement a UCT-quality program (see below).

• The RCF can only be used if it is either not feasible or not necessary to implement a Fund-supported program with a UCT-conditionality standard; i.e. a program with the commitment and capacity by the authorities to implement a set of policies that is adequate to correct external imbalances and enable repayment to the Fund within the specified maturity period. Specifically, a member would normally only qualify for the RCF if either (i) the balance of payments need is expected to be resolved within one year and no major policy adjustments are necessary to address underlying balance of payments difficulties (as may be the case with some temporary shocks, but not for a country also facing a protracted balance of payments problem¹¹⁴); or (ii) a UCT-quality Fund-supported program cannot be put in place owing to limited policy implementation capacity or when the urgency of the balance of payments need calls for financial assistance before a UCT-quality program can be put in place (or, where relevant, be brought back on track). In the latter case, the RCF can be used to build a track record for moving to a UCT-quality arrangement.

168. Qualification also requires several ex ante policy undertakings. The member would need to outline, in a LOI, the policies it plans to pursue, and set out any additional understandings to provide assurance that it will not introduce measures or policies that would compound its balance of payments difficulties. This would typically encompass, inter alia, a commitment not to introduce or intensify exchange and trade restrictions. Moreover, sufficient policy capacity and commitment to implement the policies must exist to safeguard Fund resources, and the Fund would need to assess that the member will cooperate with the Fund in an effort to find, where appropriate, solutions for its balance of payments difficulties. Other requirements for the approval, repeated use, and implementation of RCF support are discussed further below.

Concurrent use

171. A member cannot obtain RCF financing if a UCT-quality financial arrangement (e.g., under the ECF or SCF) is in place and on track. Should additional balance of payments needs arise during an ECF or SCF arrangement, an augmentation of access under this arrangement would typically be the appropriate response. RCF financing during an ECF or SCF arrangement can be provided only when (i) disbursements under the ECF or SCF arrangement are not possible, for instance due to policy slippages or delays in program discussions, (ii) qualification requirements for the RCF are met, including the existence of an urgent balance of payments need and relevant policy commitments, and (iii) the balance of payments need giving rise to the request for financing under the RCF is primarily caused by a sudden exogenous shock. When access under the RCF exceeds 25 percent of quota in these circumstances, existing and prospective policies should be sufficiently strong to address the shock. In addition, RCF-supported polices could serve as a track record to bring the ECF- or SCF-supported program back on track. The RCF can be used concurrently with GRA financing under certain circumstances (see below).

172. The RCF can be combined with programs supported under the PSI or monitored under an SMP. Satisfactory performance under a PSI or SMP for at least six months would normally satisfy the track record requirement for repeated use of the RCF, if relevant, and would facilitate rapid disbursement of RCF support. A short LOI together with a short staff paper would normally suffice for requesting an RCF loan disbursement when an urgent balance of payments need arises during an on-track PSI or SMP. In case of program slippages under a PSI, the policies supported under the RCF (similar to an SMP) could help build a track record for bringing the PSI-supported program eventually back on track.

Blending

173. Certain PRGT-eligible countries are expected to receive financial assistance through blended PRGT and GRA resources, rather than relying on fully concessional Fund financing.¹¹⁵ Blending can allow higher access levels (if justified by the balance of payments need and strength of the program) and provide a signal that the borrower is moving toward middle-income or emerging market status. PRGT-eligible countries, including members qualifying for support under the RCF, would be expected to use either fully concessional or blended resources, rather than GRA-only financing, although they are always eligible for access to the Fund’s general resources.

174. Blending of RCF and GRA resources is subject to the following presumptions and limitations:¹¹⁶

• Blending is presumed for PRGT-eligible countries with either (i) per capita income above the prevailing operational cutoff used by the IDA¹¹⁷ or (ii) sustained past and prospective market access and a per capita income that exceeds 80 percent of the IDA operational cutoff.¹¹⁸ The income presumption applies at the time of each RCF disbursement irrespective of whether or not previous financial support under any instrument was blended. The market access criterion would be met if the market access criterion for graduation from the PRGT eligibility is met, and continued access is expected. Other PRGT-eligible countries are expected to use concessional financing only.

• If there is no available GRA instrument for blending an RCF loan disbursement with GRA resources, in particular when RFI purchases cannot be used, RCF-only financing is possible irrespective of the presumption of blending.

• Blending should normally not be used for countries at a high risk of debt distress or in debt distress (as assessed by the most recent joint Bank-Fund LIC DSA, even if per capita income or market access creates a presumption for blending.

• As a consequence of the rules on access under blended financial assistance (Section D), when total access for a disbursement is 25 percent of quota or below, the resources under the RCF would not normally be blended with resources under the GRA even if the criteria that create a presumption for blending are met.

• In exceptional circumstances, when financing needs exceed the applicable access limits, blending can be used irrespective of the per capita income, market access, and debt sustainability criteria (see Section D on access under blended financial assistance).

175. When providing financial assistance with blended resources, RCF resources will normally be provided together with GRA resources under the RFI. Use of the RCF in conjunction with financing under GRA arrangements would only be expected in cases where the programs financed under the pre-existing SBA or EFF arrangements (typically in the context of blended financial support) are off track. In this case, RCF financing would normally be provided together with RFI resources.

176. The modalities (and documentation) of blended RCF-GRA financing would be broadly the same as those applicable under a stand-alone RCF disbursement. In particular, the financing would aim to meet urgent balance of payments needs for countries where a UCT program is either not needed or not feasible. The main difference is that Fund financial assistance would typically involve both RCF and GRA resources (see Section D), implying lower average concessionality of the Fund’s financial support than under stand-alone RCF support. Additionally, RFI qualification requirements must be met when applicable.¹¹⁹

Determination of access—main criteria

178. Access under the RCF is determined on a case-by-case basis based on the following standard criteria: (i) the member’s (present) balance of payments need (taking into account all balance of payments flows, including reserve accumulation and financing from other sources);¹²⁰ (ii) the strength of its policies and capacity to repay the Fund (taking into account the member’s policy plans, adjustment effort, commitment to implement the program, institutional capacity, track record of policy implementation, and country circumstances such as vulnerabilities, imbalances, and debt sustainability);¹²¹ and (iii) the amount of outstanding Fund credit and the member’s record of past use.

179. The amount of individual RCF disbursements may not exceed the member’s present balance of payments need, and would typically be less than total financing needs, keeping in mind that RCF support is expected to catalyze financing from donors and creditors. When requesting individual disbursements, the member will need to make a representation, normally in an LOI, that it is experiencing an urgent balance of payments need.

180. In case of repeated RCF disbursements, the timing and amounts of access¹²² would not be expected to mirror the projected evolution of financing needs. In particular, given the limits on the number of disbursements available in any 12-month period and the sub-ceilings on RCF access (see below), disbursements would often cover only a small part of total financing needs, with the remainder being mobilized from other development partners.

181. When urgent financing needs are projected to persist or reoccur for some time, and transition to a UCT-quality arrangement is not expected in the near term, it may be appropriate to set access such that successive disbursements, at semiannual intervals and roughly equal magnitudes, could be accommodated under the applicable RCF access sub-ceilings (see below).

Access limits

182. A member’s total access under all concessional facilities is subject to “global” annual and cumulative limits. This includes credit outstanding and disbursements under the ECF, SCF, RCF, and ESF, but does not include credit outstanding under ENDA and EPCA even if this credit is subsidized, as these resources are provided under the GRA. Specifically, total access to financing under the PRGT should normally not exceed 100 percent of quota per year across all concessional facilities. This annual access limit refers to past and future scheduled disbursements in any 12-month period, specifically (i) any actual disbursements under the RCF and past ECF and SCF arrangements at the time they became available (i.e., the date of the Board decision that makes the disbursement available), (ii) any disbursements to date that became available under the current ECF or SCF arrangement, as relevant, irrespective of whether they have been drawn or not, and (iii) any future disbursements under the current ECF or SCF arrangement, as relevant, at the scheduled availability dates. Furthermore, total access to financing under the PRGT should normally not exceed 300 percent of quota cumulatively, net of scheduled repayments. Specifically, this cumulative access limit requires that total outstanding Fund concessional credit (including disbursements that were made available but not drawn in the context of the current arrangement) cannot normally exceed 300 percent of quota at any point in time, based on projected disbursements and repayments.

183. In exceptional circumstances, access above the normal global limits can be made available to countries that (i) experience an exceptionally large balance of payments need that cannot be met within the normal limits (e.g., very large external shocks, very low levels of reserves), (ii) have a comparatively strong adjustment program and ability to repay the Fund—this criterion 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 DSA, unless expected debt relief or restructuring is projected to reduce the risk of debt distress to a moderate level or low level, and (iii) do not meet the income or market access criteria for blending (see above).¹²³ Exceptional access is subject to hard caps of 150 percent of quota annually and 450 percent of quota on a cumulative basis (as defined above) across all concessional facilities.

184. In addition to these global limits on access under all facilities under the PRGT, access to the RCF is subject to sub-ceilings, set at 25 percent of quota per year (i.e., over any 12-month period) and 75 percent of quota on a cumulative basis (i.e., total stock of RCF credit outstanding at any point in time).

185. These sub-ceilings can be exceeded under the “shocks window” of the RCF, where augmented access of up to 50 percent of quota per year and up to 100 percent on a cumulative basis could be made available provided that: (i) the primary cause of the balance of payments need is a sudden exogenous shock other than a withdrawal in financial assistance by donors, and (ii) existing and prospective policies are sufficiently strong to address the shock. The concept of a sudden and exogenous shock mirrors that used in the past for the ESF. In particular, an exogenous shock may include both economic (e.g., terms of trade) and non-economic shocks (e.g., natural disasters) that are sudden and not related to members’ policies. The amount of augmented access provided under the shocks window cannot exceed the size of the financing need created by the exogenous shock. Outstanding credit by a member under the ESF-RAC and outstanding subsidized credit under EPCA or ENDA count against the above RCF sub-ceilings.

186. There are no norms for access under the RCF, and the above sub-ceilings on RCF access should not be considered norms. Individual disbursements would in most cases be below the applicable annual sub-ceilings. For instance, a disbursement of 50 percent of quota under the shocks window would only be expected in cases where the financing need is very large and the economic policy context is relatively strong (including limited debt vulnerabilities). Similarly, in the absence of an exogenous shock, a disbursement of 25 percent of quota would be rare, and could only be appropriate in cases where the financing need is relatively large and the economic policy context strong enough (including limited debt vulnerabilities) to provide a realistic near-term prospect of a transition to a UCT-quality program.

Access under blended financial assistance

187. When RCF disbursements are blended with concurrent GRA disbursements (see Section C on the criteria that create a presumption for blending), total access to financial assistance (e.g., RCF together with RFI) is determined based on the standard criteria (see above), implying that total access should be comparable across countries with similar balance of payments needs, strength of policies, and outstanding Fund credit, irrespective of whether the Fund’s financial assistance comes in the form of blended or PRGT-only resources.

188. Analogous to financial arrangements involving blended financial assistance, access to the concessional (RCF) financing component of blended financial assistance would normally be half of total access, subject to a floor on annual average access under the RCF of 25 percent of quota, and the remainder of the total access would be met by GRA financing. As a consequence, any disbursements of 25 percent of quota or less would therefore normally be provided through the RCF only (i.e., it would not involve any GRA resources) even when a member meets the income or market access criteria that create a presumption of blending. However, if for such a member another RCF disbursement is made within 12 months, the earlier RCF disbursement would count against the applicable sub-ceilings on annual access under the RCF, and the second disbursement would therefore normally involve GRA resources even if it is in a total amount of 25 percent of quota or lower.

Procedural safeguards on high access requests—DSAs and informal Board meetings

189. Financing requests are subject to procedural safeguards that apply uniformly across all concessional facilities. These safeguards are aimed at protecting PRGT-eligible members’ debt sustainability and the Fund’s concessional resources.¹²⁴ Specifically, the staff report for any RCF disbursement should provide an up-to-date assessment of the debt vulnerabilities, with an explicit reference to the impact of new borrowing from all sources, including prospective IMF disbursements. In addition:

• A DSA or DSA update is required for any financing requests under the PRGT if it (i) involves exceptional access to concessional resources; or (ii) brings total access under all concessional facilities to more than 80 percent of quota, based on past and future scheduled disbursements in any 24-month period, specifically (a) any actual disbursements under the RCF, ESF, and past ECF and SCF arrangements at the time they became available (i.e., the date of the Board decision), (b) any disbursements to date that became available under an existing ECF or SCF arrangement, irrespective of whether they have been drawn or not, and (c) any future scheduled disbursements under an existing ECF or SCF arrangement; or (iii) involves a member country with a high risk of debt distress or in debt distress. A DSA update can be prepared unilaterally by Fund staff drawing on a prior full joint Fund-Bank DSA as long as a joint DSA was prepared recently and the analysis would not result in a change of the risk of debt distress rating.

• An early informal Board meeting is required if a financing request under the PRGT would (i) involve exceptional access to concessional financing or (ii) bring total access under all concessional facilities to more than 180 percent of quota, based on past and future scheduled disbursements in any 36-month period specifically (a) any actual disbursements under the RCF, ESF and past ECF and SCF arrangements at the time they became available (i.e., the date of the Board decision), (b) any disbursements to date that became available under an existing ECF or SCF arrangement, irrespective of whether they have been drawn or not, and (c) any future scheduled disbursements under an existing ECF or SCF arrangement. Information to the Board would typically be in a 2-3 page note that would include (i) the factors underlying the large balance of payments need, taking into account financing from donors, (ii) a brief summary of the needed main policy measures and macroeconomic framework, (iii) the expected strength of the program and capacity to repay the Fund, (iv) an analysis of debt vulnerabilities, reflecting all projected debt financing, including from the Fund, (v) a reference to the impact on the Fund’s concessional resources (drawing on the latest available paper on concessional resources), (vi) the likely timetable of discussion with the authorities, and (vii) a selected indicators table and, if possible, the standard DSA charts. The meeting should take place before staff reaches understandings, ad referendum, with the authorities.

• In addition, staff would provide early notice to the Board, for instance in an informal country matters session, of upcoming financing requests where the envisaged financing commitment, in absolute terms, would have a large impact on the Fund’s overall concessional resources.

• As an exception to these procedures, new financing requests of 10 percent or less of quota do not trigger either the need for a DSA update or a Board briefing.

Arrears

193. The Fund’s policy of non-toleration of sovereign arrears to official (multilateral and bilateral) creditors¹²⁷ remains generally applicable in the context of RCF support. Under this policy, the Fund generally calls for the resolution of existing arrears to official creditors and non-accumulation of new arrears. Existing arrears need not necessarily be settled immediately—they can be addressed in a number of ways, depending on the type of creditor. Country teams should seek guidance from LEG and SPR on the application of the policy to specific creditors. The macroeconomic assumptions underlying RCF-supported policies should be consistent with the expectations regarding the resolution of existing arrears to official creditors, implying that the authorities and staff have common understandings on the timing and modalities of arrears clearance to the extent possible. However, as was the case with EPCA and ENDA (and is the case for the RFI), flexibility can be practiced under certain circumstances, making RCF disbursements possible without understandings on clearance of sovereign arrears. This would especially be in the wake of a conflict or natural catastrophe, where concerted action by the international community is expected to lead to the normalization of relations with official creditors and a program supported by a Fund financial arrangement. In any event, staff reports for RCF requests should provide detailed information on such arrears and discuss prospects for arrears resolution.

194. There is also scope for flexibility in applying the Fund’s LIA policy, which covers sovereign arrears to private external creditors and non-sovereign arrears that arise by virtue of the imposition of exchange controls.¹²⁸ Under this policy, the Fund can lend, on a case-by-case basis, in a situation of sovereign arrears to private external creditors and only where: (i) prompt Fund support is considered essential for the successful implementation of the member’ s adjustment program; and (ii) the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors (or to facilitate a collaborative agreement between private debtors and their creditors and good prospects exist for the removal of exchange controls). For the RCF, these conditions may not be required in all cases, in particular in the wake of a conflict or natural catastrophe, although staff reports should in any event provide information on arrears to private external creditors.

195. RCF-supported economic policies should also take into account the presence of any domestic arrears. The specification of policies related to domestic arrears will depend on the country context, in particular, the fiscal framework (see Appendix II).

Overdue obligations to the Fund

196. Where a member is in arrears to the Fund in the GRA, the Special Disbursement Account, or the SDR Department, or to the Fund as Trustee (including the PRGT), a request for IMF financing, including under the RCF, will not be approved and disbursements under an existing arrangement will be suspended (PRGT Instrument, Section II, paragraph 1(e)(3) and 3(g)) until the arrears are cleared. ¹²⁹ After one month the Managing Director will notify the Executive Board that an obligation is overdue, and in the case of protracted arrears to the Fund (i.e., arrears of more than six months’ duration), semiannual reports are to be issued to the Executive Board. While a member is in arrears to the Fund, policy support can only be provided through surveillance, technical assistance and, under certain circumstances, SMPs. Remedial measures for dealing with PRGT arrears include removal from the list of PRGT-eligible countries, declaration of noncooperation and suspension of technical assistance.

Safeguards assessments policy

197. Under the RCF, a member’s request for assistance will require a commitment to undergo a safeguards assessment and to provide Fund staff access to the central banks’ most recently completed external audit reports (whether or not the audit is published); the member shall authorize its external auditors to hold discussions with staff. The commitment and authorization is to be provided at the time when the member makes a formal written request for RCF resources. The timing and modalities of the assessment will be determined on a case-by-case basis depending on the institutional and administrative capacity of the central bank. It is presumed, however, that the safeguards assessment would have been completed before Board approval of any subsequent arrangement to which the Fund’s safeguards policy applies.¹³⁰ The safeguards process involves a continuous analysis of information obtained primarily through the collection of documents, and discussions with the authorities and the central bank’s external auditors. It entails an evaluation of the central bank’s safeguards framework covering governance, auditing, financial reporting, control systems, and its legal autonomy. Close cooperation and coordination between FIN, other functional departments, and area departments is essential for the effective conduct of the safeguards process. It is important for FIN to be kept informed by area departments of safeguards issues, including logistical issues such as the timing of new arrangements.

Policy objectives

198. While the policy standard for RCF support is considerably more flexible than for UCT-quality arrangements supported under the ECF and SCF, the member’s policies should not compound existing balance of payments difficulties and should in general be aimed at making progress toward achieving or restoring a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth (see definition in Section A). This would involve steps to address, though not necessarily resolve, the country’s macroeconomic imbalances and maintain or move toward (i) strong and durable poverty reduction and growth, (ii) low or moderate inflation, (iii) sustainable fiscal and current account balances, (iv) limited debt vulnerabilities, (v) adequate international reserves, and (vi) sufficient policy and institutional capacity to implement appropriate macroeconomic policies.

199. RCF-supported policies should, to the extent possible, be aligned with the country’s own poverty reduction and growth objectives (see further below). The LOI and staff report for an RCF request should discuss the current situation, including the cause of the urgent balance of payments need, and macroeconomic prospects. Near-term RCF-supported policies should be clearly articulated in the LOI/MEFP and associated staff report, and should be consistent with the country’s medium- and longer-term policy objectives, which would typically include:¹³¹

• Fiscal policies, where (i) the fiscal stance is well anchored to help ensure macroeconomic stability and fiscal/debt sustainability, (ii) revenue and spending policies take due account of the country’s growth and social objectives, and (iii) budgets are guided by medium-term fiscal frameworks to the extent possible.

• Monetary policies that are consistent with inflation, exchange rate, and reserve objectives, while taking due account of cyclical considerations.

• Exchange rate policies that ensure a unified exchange rate and a real exchange rate level that is broadly in line with fundamentals, ensuring a stable and sustainable external position consistent with adequate growth.

• Financial sector policies geared toward financial stability and deepening with a view to fostering investment and forestalling financial crises.

• Public financial management reforms aimed at ensuring that resources are tracked, reported, and targeted appropriately (including by providing adequate resources for social and other priority spending), public debt management aimed at supporting debt sustainability, and revenue reforms aimed at broadening the revenue base, and enhancing tax efficiencies.

• Other structural reforms that are critical for achieving the member’s macroeconomic objectives.

Role of RCF financial support

200. The balance of payments support through the RCF can assist countries in smoothing the adjustment process toward a more stable and sustainable macroeconomic position. The Fund’s financial support can be used both to replenish international reserves of the member country and to provide liquidity for making external payments. By relaxing external financing constraints, the Fund’s balance of payments support in effect also loosens domestic liquidity constraints for both the public and private sector. Specifically Fund financing reduces the need for retrenchment in the public and private savings-investment balances, thus enhancing policy options (allowing less contractionary fiscal, monetary, and exchange rate policies) and cushioning private sector adjustment (e.g., investment and import declines). The appropriate mix of financing and public/private adjustment is determined on a case-by-case basis.

201. A member may use the domestic counterpart of resources received under an RCF to finance, directly or indirectly, the budget deficit of the government. Such budget financing is consistent with the Fund’s legal framework to the extent that the member has balance of payments problems and is implementing a program that will assist it in resolving such problems. Direct budget financing¹³² may be appropriate when (i) the policies are designed in a manner that envisages that the entire amount of the Fund’s financial support is used to meet a present or prospective balance of payments need, (ii) loosening fiscal financing constraints is an important macroeconomic objective under the policies, and (iii) the central bank cannot or should not (for legal or institutional reasons) lend to the government while the domestic financial sector is too shallow (or not stable enough) to provide the necessary budget financing (or the central bank plays a largely passive domestic policy role, for instance under a currency board or in a fully dollarized economy). In these cases, staff reports should justify the use of the domestic counterpart of resources obtained from RCF support for budget financing where relevant and discuss safeguards implications. ¹³³

Links to poverty reduction strategies and social spending

202. RCF-supported policies should generally be aligned with the country’s own poverty reduction and growth objectives. The following specific guidance applies to PRS linkages:¹³⁴

• Any financing request under the RCF must be accompanied by a statement, normally in the LOI or MEFP, of how the RCF-supported policies advance the country’s poverty reduction and growth objectives—given the focus of RCF support on urgent balance of payments needs, this linkage may be indirect; e.g. primarily through efforts to bolster macroeconomic stability, which is needed to underpin poverty reduction and growth.¹³⁵ In cases where a relevant PRS document exists, this description in the LOI/MEFP could cross-reference to the PRS document.

• If a PRS document exists, the RCF-supported policies should take into account—and to the extent possible, generally be consistent with—the objectives of the PRS in the context of promoting a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth.

• In cases where a relevant PRS document¹³⁶ does not exist, the RCF documentation (e.g., in an attachment to the LOI or MEFP) should outline the country’s medium-term poverty reduction and growth objectives and policies. Subsequent Board documents should refer to this documentation and update it as necessary.

• PRS documents are not required for RCF disbursements, consistent with the RCF’s focus on urgent balance of payments needs. Nonetheless, whenever a future ECF- or PSI-supported program is under consideration, staff should inform the authorities at an early stage about the relevant definitions and timelines for PRS documentation requirements (Appendix V) to ensure adequate time for the PRS process.

• More generally, PRS documents should normally be produced by the country authorities on a 12-month cycle and aligned with other domestic policy cycles. Staff are required to prepare a JSAN for PRSPs and I-PRSPs and circulate it to the Executive Board for discussion, generally within four months of the transmission of the PRSP and I-PRSP (outside the HIPC context). For APRs, it is good practice to provide feedback in the context of an AFP. In case of significant weaknesses in the PRS, including those identified in the JSAN or through the AFP, program staff reports should report how these weaknesses are being addressed.

203. Social and other priority spending should be safeguarded and, whenever appropriate, increased under RCF-supported policies. Whenever the LOI/MEFP for RCF support includes indicative targets (e.g., when the authorities seek to establish a track record, including for repeated use of the RCF), these should include a floor on social and other priority spending, whenever possible. The definition of what constitutes social or other priority spending should be consistent with the authorities’ poverty reduction and growth objectives. In cases where tracking of such expenditures is not feasible, the RCF documentation should report on which measures are envisaged to develop an adequate tracking system. Staff should monitor progress in establishing these tracking systems, and the program may include relevant structural measures, if appropriate.

Debt sustainability analysis (DSA)

204. RCF-supported policies should be underpinned by a thorough DSA to inform the elaboration of medium-term debt strategies and fiscal frameworks. Country teams should engage with the authorities in the preparation of DSAs, discuss the results, and share the final files with the relevant officials. DSAs for most LICs are usually prepared jointly with the World Bank, and country teams should also involve other relevant MDBs in the preparation of DSAs. Joint DSAs are required for PRGT-eligible IDA-only countries; for LICs that are not IDA-only, close consultation with the Bank is recommended.

205. A fully elaborated DSA is required at least once every three years, with shorter annual updates in the interim years possible in the absence of significant changes in the macroeconomic and financial environment. Full DSAs should be prepared in periods of heightened domestic, external, or global risk. The precise timing of a DSA may be driven by other IMF policy requirements. In particular, the design of possible indicative debt limits under the RCF is systematically related to the assessment of countries’ debt vulnerabilities (see Appendix II and Staff Guidance Note on Debt Limits in Fund-Supported Programs (2009)). Also, as discussed above, the determination of access to the Fund’s concessional resources needs to take account of the country’s debt vulnerabilities based on the most recent DSA, and a DSA (or DSA update) may need to be prepared for higher access financing requests. In cases where a DSA is required outside the regular joint Bank-Fund DSA cycle, a DSA update may be prepared unilaterally by Fund staff drawing on a prior full joint Fund-Bank DSA as long as a joint DSA was prepared recently and the analysis would not result in a change of the risk of debt distress rating.

206. DSAs for LICs should be presented as self-contained documents (see Appendix I). They should normally be prepared using the LIC Debt Sustainability Framework (DSF), although for countries with durable and substantial access to market financing, the template designed for middle-income countries can be used instead. The analysis includes three components: ¹³⁷

• A forward-looking analysis (20-year projection) of debt and debt-service dynamics under a baseline scenario, alternative scenarios, and standardized stress tests;

• An explicit assessment of the risk of external debt distress (low, moderate, high, or in debt distress) based on indicative country-specific debt-burden thresholds that depend on the quality of policies and institutions in the country; and

• Recommendations on a borrowing (and lending) strategy to limit the risk of debt distress, while maximizing the resource envelope to achieve the country’s development objectives.

Collaboration with the World Bank and other development partners

Fund staff should consult closely with all major development partners active in the country when designing and monitoring RCF-supported policies. In addition to this routine collaboration, the JMAP¹³⁸ approved by the Boards of the World Bank and IMF calls on Bank and Fund country teams to consult with each other at least once a year in order to identify the country’s key macroeconomic and structural reform challenges and coordinate work plans in support of addressing these challenges (see Appendix I).

Conditionality principles

207. Conditionality attached to Fund financial support is generally intended to ensure that Fund resources are provided in support of meeting the member’s policy objectives, with adequate safeguards to the Fund’s resources. Consistent with the Fund’s Guidelines on Conditionality,¹³⁹ conditions will normally consist of macroeconomic variables and structural measures that are reasonably within the member’s direct or indirect control and that are, generally, either (i) of critical importance for achieving the goals of the program (or for monitoring program implementation), or (ii) necessary for the implementation of specific provisions of the IMF Articles of Agreement or policies adopted under them. In some cases, conditions may be outside the Fund’s core area of expertise, in which case a more detailed explanation of their critical importance is required.

208. The RCF does not require a UCT-quality economic program, and does not involve ex post conditionality (i.e., quantitative or continuous performance criteria), a time-bound arrangement, or formal program reviews. Instead, the RCF provides for outright disbursements based on a number of ex-ante policy undertakings (see Section A on Eligibility and qualification).

Prior actions

209. Prior actions could be specified if necessary, but this would be expected only in exceptional circumstances, specifically when it is critical for addressing the urgent balance of payments need effectively that a measure be taken prior to the financial assistance provided under the RCF. Prior actions could be appropriate, for example, if the RCF is used (including to support building a policy track record) after severe policy slippages that could call into question the authorities’ capacity and commitment to implement policies that would not compound the balance of payments difficulties (see Section A on ex-ante policy undertakings). Prior actions should be implemented no later than five working days before the Board discussion. They should be defined in the LOI/MEFP and cross-referenced in the Board Decision approving the disbursements.

Monitoring policies

210. There is considerable flexibility on how the RCF can be used to support forward-looking economic policies. In contrast to UCT-quality arrangements, RCF disbursements do not require understandings on a program of economic policies other than general ex-ante policy undertakings by the authorities described in Section A, including the commitment to cooperate with the Fund and not to introduce measures that would compound the country’s balance of payments difficulties. However, the RCF can be used to provide general policy support, establish a track record of economic performance (similar to an SMP), and even help monitor the implementation of UCT-quality economic policies. The latter may occur, for example, when a country with a set of well-specified and sound economic policies experiences a temporary shock that creates a balance of payments need that is expected to be resolved within one year and without the need for major policy adjustments. By contrast, shocks that create more substantial or prolonged adjustment or financing needs should generally be addressed through a financial arrangement. To this end, RCF support can be provided together with staff recommendations on macroeconomic policies, monitoring of economic performance, specific policy commitments and indicative targets, or any combination of these.

211. In cases where the RCF supports a track record of policy performance, the LOI/MEFP for a disbursement request would typically set out agreed monitorable quantitative and structural indicators (which could be called indicative targets or benchmarks), based on specific test dates and deadlines. The design of monitoring could mirror that of SMPs or past practice under EPCAs, but is in general very flexible, and would not require specification of a time-bound program period. The specification of policy objectives and indicators should be aimed at supporting adequate policies to address the urgent balance of payments need and, if relevant, facilitating the member’s transition to a UCT-quality program. As the targets do not have the status of PCs, waivers are not required if they are missed. Similarly, program adjustors would not be needed.

• Quantitative periodic indicative targets could include measures of net international reserves, central bank domestic assets, domestic and fiscal balances or financing, nonconcessional external debt, social and other priority spending where possible, and any other relevant macro-critical indicators. Continuous measures could include commitments related to non-introduction of certain exchange restrictions and multiple currency practices, and non-accumulation of external arrears.

• RCF-supported policy track records could include an agenda for macro-critical structural reforms, with flexibility on the timing of the measures. Structural benchmarks could be identified, and should be critical measures that are intended to serve as clear markers in the assessment of progress in the implementation of critical structural reforms in the context of the track record. Structural benchmarks should be used as parsimoniously as possible, and their macro-criticality explicitly justified in program documents, ideally in a structural benchmark table. Structural benchmarks do not require a specific target date, but should give an indication of the envisaged time frame.

Misreporting¹⁴⁰

212. Misreporting occurs when members with a Fund-supported program obtain resources on the basis of inaccurate information regarding observance of quantitative or continuous PCs or prior actions (a “noncomplying disbursement”). As there are no PCs under the RCF, a noncomplying disbursement can only occur with respect to misreporting of prior actions (if applicable), in particular when (i) the Fund makes a disbursement on the basis of a finding that all prior actions established for that disbursement have been observed and (ii) that finding later proves to be incorrect. Upon evidence that a member may have received a noncomplying disbursement, the Managing Director shall inform the member promptly. After consultation with the member, if the Managing Director determines that the member did receive a noncomplying disbursement, the Managing Director shall promptly notify the member and submit a report to the Executive Board with recommendations. The Board may decide either (a) that the member shall be expected to repurchase/repay the disbursed amount, or (b) that the nonobservance will be waived. Waivers will normally be granted only when the deviation from the relevant condition was minor or temporary, or if, subsequent to the disbursement, the member had adopted additional measures appropriate to achieve the objectives supported by the relevant decision on the disbursement.

213. Whenever the Executive Board finds that a noncomplying disbursement has been made but that the nonobservance of the relevant specified condition was also de minimis misreporting, a waiver for nonobservance shall be granted by the Executive Board.¹⁴¹ De minimis misreporting will not be published in a staff report.

Purpose and objective

217. The PSI is a non-financial instrument for low-income member countries that is designed to promote a close policy dialogue between the Fund and a member, provide more frequent Fund assessments of a member’s economic and financial policies, and deliver clear signals through Board endorsement of those policies that could be taken into account by donors, creditors, and the general public on the strength of these policies.¹⁴⁷

218. The purpose of the PSI is to assist eligible member countries in implementing economic programs aimed at maintaining or consolidating a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. Such a position would be characterized by the absence of a present or prospective balance of payments need and by the domestic and external stability that is necessary to support strong and durable poverty reduction and growth. It would typically be associated with sustainable fiscal and current account balances, limited debt vulnerabilities, adequate international reserves, and sufficient policy and institutional capacity to implement appropriate macroeconomic policies. This position might still involve significant levels of donor assistance, though aid dependence would be expected to decline over time. The PSI is designed for countries that at the time of program approval are already in a broadly stable and sustainable macroeconomic position and therefore do not require Fund financing or significant macroeconomic policy adjustments.¹⁴⁸

Eligibility and qualification

219. The PSI is available to all member countries that are eligible for assistance from the PRGT¹⁴⁹ and have a policy framework focused on consolidating macroeconomic stability and debt sustainability while deepening structural reforms in key areas in which growth and poverty reduction are constrained. This implies that the member country is, at the time of the approval of the PSI-supported program, in a broadly stable and sustainable macroeconomic position (as defined above). Specifically, the country (i) would not have a present or prospective balance of payments need¹⁵⁰ unless such a need is expected to be met from other (exceptional) financing sources and (ii) would not require any significant macroeconomic policy adjustments (including to address a protracted balance of payments problem),¹⁵¹ although it may still benefit from structural reforms that could strengthen resilience against shocks and boost the country’s growth potential. If, by contrast, a country would require Fund financing or significant policy adjustment to achieve a stable and sustainable macroeconomic position, the PSI would normally not be approved. In particular, countries with short-term financing and adjustment needs could be supported under an SCF arrangement, whereas countries that also face a protracted balance of payments problem could be supported under an ECF arrangement.¹⁵² If a country does not have present or prospective balance of payments needs, but potential needs, a precautionary SCF arrangement may be appropriate in place of, or in addition to, a PSI-supported program. In these cases, by foregoing the Fund financing extended under a precautionary SCF arrangement and focusing on medium-term policy support and endorsement, the PSI would tend to send a stronger signal about the quality of the member’s policies and the soundness of its macroeconomic position.

220. Board approval of a PSI also requires, in particular, a finding by the Board that the member is committed to implement its policy framework in the context of a program that meets UCT-conditionality¹⁵³ standards and aims to maintain or consolidate a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. Apart from the elaboration of such a program in the LOI and MEFP, qualification would thus require assurances that the authorities have the capacity and commitment to implement their program, as evidenced by recent policy performance (including under a recent Fund-supported program), institutional capacity, and any other circumstances that may affect macroeconomic performance. Qualification also requires a Board finding that the member seeks to maintain a close policy dialogue with the Fund, through the Fund’s endorsement and assessment of its economic and financial policies under a PSI. Other requirements for the approval, extension, or implementation of a PSI are discussed further below.

221. Countries that are not currently in a position to meet the PSI qualification requirements, in particular the capacity to implement an UCT-quality program, can build a track record for moving to a PSI through an SMP or, in case of urgent financing needs, the RCF (assuming the applicable policy commitments are in place).

Financing assurances

234. PSI-supported programs require the same financing assurances as those that are required for Fund financial arrangements. This implies that PSIs can only be approved (and reviews can only be completed) when the program is fully financed. This means that donors and creditors (both official and private) have furnished assurances that they will provide the necessary support (through new loans and/or refinancing) to meet the program financing requirements on terms consistent with the member’s maintenance of a stable and sustainable macroeconomic position. Specifically, staff should confirm that there are no unfilled financing gaps over, normally, the next 12 months immediately following the approval of the PSI (and completion of each review) and that there is a clear expectation that the program will be fully financed through the remainder of the PSI period.

235. When PSI support is provided alongside financial assistance under the SCF or RCF, assurances should also be given that the country has a capacity to repay the Fund through medium-term projections of the balance of payments and the standardized table on indicators of the capacity to repay the Fund.

Arrears

236. Under the Fund’s policy of non-toleration of sovereign external arrears to official (multilateral and bilateral) creditors,¹⁵⁶ which applies analogously to the PSI, the Fund generally calls for the resolution of existing arrears to official creditors and non-accumulation of new arrears during the period of the program. It is not expected that PSI users would have any external arrears, given the qualification requirement of a broadly stable and sustainable macroeconomic position. In those rare cases where external arrears do exist, they can be addressed in a number of ways, depending on the type of creditor. Country teams should seek guidance from LEG and SPR on the application of the policy to specific creditors. The macroeconomic program assumptions under the PSI should be consistent with the expected resolution of any existing arrears to official creditors, which implies that the authorities and the staff have common understandings on the timing and modalities of arrears clearance. The assumptions on arrears clearance do not prejudge eventual agreements between the member and official creditors. Staff should have reasonable assurances that arrears clearance understandings are realistic.

237. Sovereign arrears to private external creditors and non-sovereign arrears that arise by virtue of the imposition of exchange controls are covered by the LIA policy,¹⁵⁷ which applies analogously to the PSI. Under this policy, the Fund can lend, on a case-by-case basis, in a situation of sovereign arrears to private external creditors and only where: (i) prompt Fund support is considered essential for the successful implementation of the member’s adjustment program; and (ii) the member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors (or to facilitate a collaborative agreement between private debtors and their creditors and good prospects exist for the removal of exchange controls).

238. PSI-supported programs should also address domestic arrears, if any, as part of the overall program design. The specification of policies related to domestic arrears will depend on the country context, in particular, the fiscal framework (see Appendix II).

Overdue obligations to the Fund

239. A member in arrears to the Fund in the GRA, or to the Fund as Trustee (including the PRGT), is not eligible for PSI support. Moreover, if a member were to incur arrears into GRA or PRGT, any existing approved PSI would be terminated.

Safeguards assessments policy

240. A safeguards assessment is not required for a PSI. However, members with a PSI are encouraged to undertake such an assessment on a voluntary basis as a way of enhancing the accountability, transparency, and institutional strength of their central banks. This would also facilitate quick access to Fund resources in the event of need.¹⁵⁸ The safeguards process involves an analysis of information obtained primarily through the collection of documents, and discussions with the authorities and the central bank’s external auditors. It entails an evaluation of the central bank’s safeguards framework covering governance, auditing, financial reporting, control systems, and its legal autonomy. Close cooperation and coordination between FIN, other functional departments, and area departments is essential for the effective conduct of the safeguards process. It is important for FIN to be kept informed by area departments of safeguards issues, including issues such as the timing of new arrangements and reviews.

Program objectives

241. All PSI-supported programs are aimed at maintaining or consolidating a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth (see definition in Section A of this chapter). Specifically, PSI-supported programs should aim to maintain or consolidate (i) strong and durable poverty reduction and growth, (ii) low or moderate inflation, (iii) sustainable fiscal and current account balances, (iv) limited debt vulnerabilities, (v) adequate international reserves, and (vi) sufficient policy and institutional capacity to implement appropriate macroeconomic policies.

242. The design of a PSI-supported program should be aligned with the country’s own poverty reduction and growth objectives (see further below). Specific policy objectives should be clearly articulated in the LOI/MEFP and associated staff report for a new PSI and would typically include:¹⁵⁹

• Fiscal policies, where (i) the fiscal stance is well anchored to help ensure macroeconomic stability and fiscal/debt sustainability, (ii) revenue and spending policies take due account of the country’s growth and social objectives, and (iii budgets are guided by medium-term fiscal frameworks to the extent possible.

• Monetary policies that are consistent with inflation, exchange rate, and reserve objectives, while taking due account of cyclical considerations.

• Exchange rate policies that ensure a unified exchange rate and a real exchange rate level that is broadly in line with fundamentals, ensuring a stable and sustainable external position consistent with adequate growth.

• Financial sector policies geared toward financial stability and deepening with a view to fostering investment and forestalling financial crises.

• Public financial management reforms aimed at ensuring that resources are tracked, reported, and targeted appropriately (including by providing adequate resources for social and other priority spending), public debt management aimed at supporting debt sustainability, and revenue reforms aimed at broadening the revenue base, and enhancing tax efficiencies.

• Other structural reforms that are critical for achieving the program’s macroeconomic objectives, with a focus on “second-generation reforms” aimed at enhancing the country’s growth potential and the capacity to manage volatility.

Links to poverty reduction strategies and social spending

243. PSI-supported programs should be aligned with the country’s own poverty reduction and growth objectives. The following specific guidance applies to PRS linkages:¹⁶⁰

• Analogous to the requirements for financial support under the PRGT, it is expected that new PSI requests and PSI reviews would be accompanied by a statement, normally in the LOI or MEFP, of how the PSI advances the country’s poverty reduction and growth objectives. It is expected that the description would be more detailed at the time of the initial request for a PSI or when a new PRSP (or I-PRSP) is produced. In cases where a relevant PRS document exists, this description in the LOI/MEFP could cross-reference to the PRS document.

• If a PRS document exists, the PSI-supported program should be consistent with the objectives of the PRS in the context of maintaining a broadly stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth.

• In cases where a relevant PRS document¹⁶¹ does not yet exist, the program documentation (e.g., in an attachment to the LOI or MEFP) should outline the country’s medium-term poverty reduction and growth objectives and policies. Subsequent program documents should refer to this documentation and update it as necessary.

  Appendix Box 1.

  Poverty Reduction Strategy Documents

  • Interim Poverty Reduction Strategy Paper (I-PRSP), a transitional document prepared by a member that sets out a preliminary poverty reduction strategy as a precursor to a first full PRSP (see Review of the Poverty Reduction Strategy Paper Approach—Early Experience with Interim PRSPs and Full PRSPs (2002) and Poverty Reduction Strategy Papers—Operational Issues (1999). The use of I-PRSPs will be eventually phased out as countries are expected to produce their first full PRSPs; i.e. countries cannot have I-PRSPs subsequent to full PRSPs.

  • PRSP Preparation Status Report, a document prepared by a member, reporting on the updates to the preliminary poverty reduction strategy set out in an I-PRSP in anticipation of a PRSP.

  • Poverty Reduction Strategy Paper (PRSP), a document prepared by a member in a participatory process, which assess the nature and determinants of poverty and the links between public actions and poverty outcomes. The document also presents outcome-related goals for poverty reduction and proposes a set of integrated multiyear institutional, structural, and sectoral interventions to help achieve these goals within a consistent macroeconomic framework. The poverty reduction strategy could be extended to as much as five years.

• While a PRS document is not required at the time of initial Board consideration of the PSI request, the second (and every subsequent) review under the PSI can only be completed if a PRS document has been issued to the Board, normally within the previous 18 months, and has been the subject of a staff analysis, including in the staff report on a new PSI or on a review.

• Whenever a PSI-supported program is under consideration (including cases where support is currently provided under an SMP, SCF, or RCF), staff should inform the authorities at an early stage about the relevant definitions and timelines for PRS documentation requirements (Appendix V) to ensure adequate time for the PRS process.

• While not required for PSI support, staff are required to prepare JSANs for PRSPs and I-PRSPs generally within four months of the transmission of a PRSP or an I-PRSP (outside the HIPC context).¹⁶² For APRs, it is good practice to provide feedback in the context of an annual feedback process. In cases where a JSAN has not yet been prepared, the Executive Board is not prevented from making decisions governing member’s PSIs, including the completion of reviews if the relevant preliminary staff analysis has been included in the staff report for the PSI or a supplement (and the JSAN, together with the PRSP, would be discussed at the next Board meeting). Board consideration of a JSAN cannot be on a Lapse of Time (LOT) basis.¹⁶³

• More generally, and irrespective of requirements on PRS document issuance to the Board and related staff analysis in the context of a PSI, PRS documents should normally be produced by the authorities on a 12-month cycle and aligned with other domestic policy cycles. In case of significant weaknesses in the PRS, including those identified in the JSAN or through the AFP, program staff reports should report how these weaknesses are being addressed. While it would be expected that any identified weaknesses in the member’s PRS would be addressed, this is not a requirement for support under the PSI.

244. Social and other priority spending should be safeguarded and, whenever appropriate, increased under PSI-supported programs. Analogous to programs supported through financial assistance under the PRGT, this objective could usefully be monitored through explicit program targets, for instance through an indicative floor on social and other priority spending. The definition of what constitutes social or other priority spending should be consistent with the authorities’ poverty reduction and growth objectives. In cases where such expenditures are not tracked, the program documentation could report on progress in developing a tracking system. Staff should also alert the authorities that Fund’s concessional financial support generally includes conditionality related to safeguarding social and other priority spending where feasible.

Debt sustainability analysis (DSA)

245. PSI-supported programs should be underpinned by a thorough DSA to inform the elaboration of medium-term debt strategies and fiscal frameworks. Country teams should engage with the authorities in the preparation of DSAs, discuss the results, and share the final files with the relevant officials. DSAs for most LICs are usually prepared jointly with the World Bank, and country teams should also involve other relevant MDBs in the preparation of DSAs. Joint DSAs are required for PRGT-eligible IDA-only countries; for LICs that are not IDA-only, close consultation with the Bank is recommended.

246. A fully elaborated DSA is required at least once every three years, with shorter annual updates in the interim years possible in the absence of significant changes in the macroeconomic and financial environment. Full DSAs should be prepared in periods of heightened domestic, external, or global risks. The precise timing of a DSA may be driven by program requirements. In particular, the design of debt limits in the PSI is systematically related to the assessment of countries’ debt vulnerabilities (see Appendix II). Also, in cases where PSI support is provided alongside RCF or SCF support, the determination of access to the Fund’s concessional resources needs to take account of the country’s debt vulnerabilities based on the most recent DSA, and a DSA (or DSA update) may need to be prepared for higher access financing requests (augmentation or new arrangement). In cases where a DSA is required outside the regular joint Bank-Fund DSA cycle, a DSA update may be prepared unilaterally by Fund staff drawing on a prior full joint Fund-Bank DSA as long as a joint DSA was prepared recently and the analysis would not result in a change of the risk of debt distress rating.

247. DSAs for LICs should be presented as self-contained documents (see Appendix I). They should normally be prepared using the LIC Debt Sustainability Framework (DSF), although for countries with durable and substantial access to market financing, the template designed for middle-income countries can be used instead. The analysis includes three components: ¹⁶⁴

• A forward-looking analysis (20-year projection) of debt and debt-service dynamics under a baseline scenario, alternative scenarios, and standardized stress tests;

• An explicit assessment of the risk of external debt distress (low, moderate, high, or in debt distress) based on indicative country-specific debt-burden thresholds that depend on the quality of policies and institutions in the country; and

• Recommendations on a borrowing (and lending) strategy to limit the risk of debt distress, while maximizing the resource envelope to achieve the country’s development objectives.

Collaboration with the World Bank and other development partners

248. Fund staff should consult closely with all major development partners active in the country when designing and monitoring a PSI-supported program. In addition to this routine collaboration, the JMAP¹⁶⁵ approved by the Boards of the World Bank and IMF calls on Bank and Fund country teams to consult with each other at least once a year in order to identify the country’ s key macroeconomic and structural reform challenges and coordinate work plans in support of addressing these challenges (see Appendix I).

Conditionality principles

249. Conditionality, i.e., the set of program-related conditions, under a PSI is aimed at assessing whether a member’s policies are strong enough to meet the program objectives. Consistent with the Fund’s Guidelines on Conditionality,¹⁶⁶ conditions will normally consist of macroeconomic variables and structural measures that are reasonably within the member’s direct control and that are, generally, either (i) of critical importance for achieving the goals of the program (or for monitoring program implementation, or (ii) necessary for the implementation of specific provisions of the IMF Articles of Agreement or policies adopted under them. In some cases, conditions may be outside the Fund’s core areas of expertise, in which case a more detailed explanation of their critical importance is required.

250. Analogous to ECF and SCF arrangements, PSI-supported programs must meet the UCT-conditionality standard, which requires the commitment and capacity by the authorities to implement a set of policies that is adequate to correct external imbalances, and enable repayment to the Fund within the specified maturity period in the event that the member uses Fund resources or has any credit outstanding under the GRA or PRGT.

Specification of program conditions

251. Program conditionality will include quantitative periodic and continuous ACs, and typically also indicative targets and structural benchmarks, as well as prior actions if critical (see Appendix II for detailed guidance on quantitative conditions). Conditionality is set at the time of approval of the PSI and updated at the time of program reviews. Conditionality should normally be set (or modified) by the Board before the test date. For the establishment (or modification) of post-dated ACs, the program documents would have to be signed and circulated to the Board along with the staff report before the test date, and no information on implementation of the so established conditionality would be available at the time of the Board meeting

252. Prior actions are measures that a member is expected to adopt prior to the Fund’s approval of a PSI, completion of a review, or the granting of a waiver with respect to an AC, when it is critical for the successful implementation of the program that such actions be taken to underpin the upfront implementation of important measures. Prior actions are to be applied parsimoniously and specified in clear, objective, and unambiguous terms. Prior actions should in principle be implemented at least five working days before the Board discussion. They should be defined in the LOI/MEFP and cross-referenced in the relevant Board Decision. The use of prior actions is expected to be less frequent than in Fund financial arrangements, though they may nevertheless provide a mechanism for a member to remedy policy or other slippages.

253. Quantitative ACs would normally be set on a semiannual basis and tied to semiannual program reviews, while quantitative benchmarks (also referred to as indicative targets) would normally be specified on a quarterly basis. Conditionality should cover all test dates that fall within the 12 months after the Board meeting. Specifically, at the time of initial approval and each review, ACs must be established for the shorter of (a) the next two scheduled reviews or (b) the remaining period of the PSI.

254. Quantitative ACs typically include measures of net international reserves, central bank domestic assets, domestic and fiscal balances or financing, limits on nonconcessional external debt, ¹⁶⁷ and any other macro-critical indicators. ACs are usually subject to program adjustors that reflect deviations from projected external flows. Indicative targets should include a floor on social and other priority spending where possible, and may include other indicators such as reserve money.

255. Continuous ACs always include, inter alia, commitments related to non-introduction or intensification of exchange restrictions and on non-introduction or modification of multiple currency practices. Other continuous ACs typically include the non-accumulation of external payments arrears. See Appendix II, Section G, for details.

256. PSI-supported programs normally include an agenda for macro-critical structural reforms, with a focus on “second-generation reforms” aimed at enhancing the country’s growth potential and the capacity to manage volatility. Structural benchmarks are critical measures that are intended to serve as clear markers in the assessment of progress in the implementation of critical structural reforms in the context of a program review. Structural benchmarks should be used as parsimoniously as possible, and their macro-criticality explicitly justified in program documents, ideally in the structural benchmark table. Reviews are the primary tool for monitoring performance on the structural elements of the program, by judging progress relative to the relevant objectives.¹⁶⁸ Specific objectives should be defined for periods covered by individual reviews, with related structural benchmarks that are critical for achieving the program’s objectives. The appropriate number of structural benchmarks depends on a variety of country-specific factors, including the centrality of structural reforms for achieving the program’s objectives and country capacity; PSI-supported programs would typically contain less than five structural benchmarks per semiannual review. The use of structural ACs was discontinued in 2009.

257. Any structural benchmark that is significantly delayed can be re-dated and re-linked to the next program review, if the benchmark remains macro-critical to the program. If it seems that implementing a structural benchmark is no longer possible as defined under the program (say, due to a change in the authorities’ reform plans or other changes in circumstances), a new benchmark or a modified version of the original one may be appropriate as long as it is critical to achieve program goals.

Waivers and modifications

258. A waiver for nonobservance of an AC may be granted if the Fund is satisfied that the program will nevertheless be successfully implemented—i.e., that it will achieve its goals— either because of the minor or temporary nature of the nonobservance or because of remedial actions taken by the authorities to preserve program objectives. In contrast to Fund financial arrangements, a formal request from the member to grant waivers is not required under the PSI, and the title of the staff report need not state that waivers are proposed. Waivers for nonobservance are only approved for quantitative ACs that are tied to the review that is being completed or for continuous ACs that have been missed.

259. Waivers of applicability are not possible under a PSI. Where the authorities do not provide data on performance that would allow the Fund to determine the observance of an assessment criterion or that a waiver of nonobservance is warranted, the corresponding review cannot be completed. In those circumstances where data with respect to an assessment criterion is unavailable, the review (which cannot be completed) will nevertheless assess performance against the other assessment criteria and program elements for which data were available.

260. Modifications to program conditionality that has already been set by the Board may be appropriate when departures from ACs are expected to occur, for instance when basic program assumptions have not been realized or significant developments have occurred that had not been anticipated when the ACs were set, provided that the new targets remain macro-critical. Requests for such modifications must be submitted to the Board before the relevant test date has been passed, and must be approved by the Board before information on the observance of the AC is available, normally in the context of a program review. In exceptional cases, modifications of ACs can be approved by the Board outside the context of a program review, provided the authorities and staff have common understandings on appropriate policies through the next review as documented in a revised or new LOI with an updated AC table, and, where relevant, TMU. Such modifications outside of a review could be appropriate if the original targets are no longer critical due to developments beyond the authorities’ control (including staff errors). Board approval would require a staff report that discusses the reasons for the modification, including why it is proposed outside the review context, the status of the program, and relevant policy understandings.

Misreporting

261. The framework for dealing with misreporting under the PSI is tailored specifically to the PSI modalities and the fact that the PSI does not entail the use of Fund resources (UFR).

Accordingly, the PSI misreporting framework is simplified compared to the more comprehensive framework applicable in the UFR context.¹⁶⁹

262. Board decisions approving a PSI or completing a review under a PSI are conditioned on the accuracy of information reported by the member on performance under assessment criteria (whether found to have been met or waived) and on the implementation of prior actions (if any) specified in the respective Board decision. Whenever evidence comes to the attention of the staff indicating that the member’s reporting of such information was inaccurate in relation to a PSI approved or a review completed within the preceding three years, the Managing Director shall promptly inform the member concerned. “Inaccuracy” of information should be interpreted in the same manner as in cases of misreporting under financial arrangements. For example, with respect to a quantitative AC, information would be inaccurate if the member reported that the AC was met when it turns out not to have been met. If the Managing Director finds, after consultation with the member, that the member had reported inaccurate information to the Fund, in the above-noted circumstances, the Managing Director shall promptly notify the member of this finding.

263. The Board’s consideration of the misreporting will normally take place at the same time as the next scheduled PSI review, based on a combined misreporting/review staff report, but could take place earlier if, e.g., the review is some way off and the circumstances of the misreporting warrant earlier consideration. The Executive Board shall reassess program performance in light of the revised information associated with the misreporting. Such a reassessment of past program performance in the light of a misreporting will not lead to the Board retroactively reversing its decision completing a review, which subsequently had become associated with a misreporting.

264. In all cases in which the Board has determined that misreporting has occurred (except those cases found to be de minimis),¹⁷⁰ relevant information on the Board decision, such as the finding of misreporting and any impact on past Board assessments under the member’s PSI, will be published. There are no waivers in the context of the PSI misreporting framework.

Purpose of program reviews

265. Program reviews evaluate whether the program is on track to achieve its objectives. This evaluation is based on a backward-looking assessment—taking into account performance against quantitative ACs, structural and quantitative benchmarks, and prior actions—and a forward-looking assessment of the prospects for successful program implementation, in particular whether policy capacity and commitments are adequate for implementing the UCT-quality program and achieving the program’s objectives. The second (and every subsequent) review can only be completed if a PRS document has been issued to the Board, normally within the previous 18 months. At the time of the consideration of the final review under a PSI, and assuming no further Fund program support is expected, the scope of the forward-looking assessment could be more limited than for previous reviews.

266. Completion of a review by the Board would signify the Fund’s assessment that the program is on track,¹⁷¹ whereas noncompletion of a scheduled review would provide a signal that the program is off track. Noncompletion of two consecutive scheduled reviews would automatically terminate the PSI.

267. Reviews also update the program design, in particular by specifying forward-looking policies and conditionality, and are the main vehicle for any potential modifications to program design, such as changes in conditionality, as may be necessary to achieve the program’s objectives in changing circumstances. At the time of approval and for each review, the authorities’ LOI presents or updates their policy program, and a staff report provides an overall assessment of performance and policy commitments.

“Fixed” review schedule and test dates

268. The timing of all reviews and test dates is summarized in a staff report table at the time of PSI approval, and updated as needed at the time of reviews. The quantitative indicator table (“AC table”) attached to the LOI/MEFP should clearly identify ACs and indicative targets, including adjustors, for at least a 12-month period from the Board date of the PSI approval or review, as indicated above. Similarly, the structural benchmark table should cover measures over at least a 12-month period, clearly indicating the reviews that individual benchmarks are linked to. The Decision attached to the staff should specify all ACs and review dates over the next 12 months from the Board date of the program approval/review.

269. Test dates for quantitative ACs are normally set on a semiannual basis, and are linked to reviews that will be conducted irrespective of the status of program implementation or prospects. Any proposed deviation from this six-monthly norm would need to be justified in program documentation. When designing the schedule of test dates, careful consideration should be given to alignment with the country’s budget cycle. There is (limited) scope for some flexibility in setting the specific review dates and test dates relative to the regular cycle, as long as deviations are minor and the total number of reviews and test dates over the course of the PSI remains unchanged. Small deviations from a strict six-monthly schedule can be justified, for example, by the need to align monitoring with national budget/reporting cycles.

270. The test dates for ACs must be set such that all scheduled reviews can take place before the end of the PSI period, taking into account reporting lags and preparation and circulation periods for staff reports. Similarly, the review dates that are specified in the LOI/MEFP and the Decision for approval/review should be set such that all data needed to confirm observance of ACs at the related test dates would have become available.

271. All the program documentation for a review should normally be issued to the Board within four months following the test date for the quantitative ACs linked for that review, and shall in any case be issued prior to the test date for the earliest periodic quantitative ACs linked to the next scheduled review. In line with circulation periods (Appendix I), it is expected that Board discussion of the review would normally occur two weeks after the issuance of such documentation. This “fixed” review schedule provides for regular reviews, with limited flexibility around a semiannual schedule, and is intended to ensure the strength and consistency of the Fund’s signal and provide donors and the private sector timely information to help them make independent judgments about their financing decisions.

272. The program period supported by a PSI would typically start somewhat before the Board approves the PSI, and three to six months before the first test date under semiannual monitoring. Analogous to programs supported through Fund financial arrangements, the program period should normally not start more than three months prior to the Board meeting, and in any case not before the authorities and staff have discussed the parameters of the program.

273. In the event that a member implementing a PSI-supported program also has an SCF arrangement in place, program reviews under the SCF arrangement should be scheduled at the same time as reviews of the PSI-supported program, and performance criteria under the SCF arrangement shall normally be established for the same test dates (and apply to the same variables and measures) as ACs under the PSI. A single set of documents related to PSI and SCF reviews should normally be issued to the Board. As noted in Section C, when used concurrently with the SCF, the schedule of reviews can be aligned either with the “fixed review cycle” of the PSI or on the more flexible review cycle of the SCF. With a PSI remaining on the fixed cycle, it is still required that the documentation for a review under the PSI would have to be issued to the Executive Board before the next relevant test date, irrespective of program performance and whether the review will be completed. Shifting a PSI to the SCF review schedule would require amending the approved PSI such that a PSI review can be completed at a later stage.

Noncompletion of reviews

274. In the event that performance is not sufficiently strong, or if understandings cannot be reached on the forward-looking elements of the program, a staff report must still be circulated to the Board normally within four months of the test date of the periodic ACs linked to that review and in any event prior to the test date linked to the next scheduled review. The report will provide an assessment of performance relative to program objectives and indicate clearly areas where staff’s and the authorities’ views diverge. The staff appraisal will recommend that the review not be completed at this time. To the extent possible, the staff appraisal will elaborate on the steps needed to bring the program back on track.¹⁷²

275. The normal procedure for indicating that an off-track program has been brought back on track would be through completion of the next scheduled review. To the extent that performance was not sufficiently strong to complete a particular review, bringing a PSI-supported program back on track would require corrective action. In addition, staff assessment letters can be used to fill information gaps between two scheduled reviews, and in particular to report on performance improvements following an uncompleted scheduled review.

276. While it is in principle possible to return to an uncompleted review, this would be very rare in practice as related documentation would have to be issued to the Board prior to the test linked to the review, thus allowing only a very narrow timeframe. Moreover, this option is not available if the review is the second consecutive uncompleted scheduled review.

277. The noncompletion of two consecutive scheduled reviews (or, in case of concurrent use of the PSI with the SCF, if no scheduled review is completed within 12 months of the completion of the last scheduled review) signifies the lack of Board endorsement of the member’s policies, and the PSI would automatically lapse as of the date of the Board’s second consecutive decision not to complete a scheduled review.¹⁷³ An SMP may be appropriate, in some circumstances, to reestablish a track record for a future Fund-supported program under the PSI, SCF, or (in rare cases) ECF after a PSI has terminated in this fashion. See Appendix III for a discussion of different types of track records.