Review of Facilities for Low-Income Countries
Author: International Monetary Fund
Publication Date:
26 Jul 2012
eISBN:
9781498340120
ISBN:
9781498340120
Language:
English
Keywords:
PP; ECF arrangement; financial support; balance of payments; ECF user; program implementation; low-access ECF; debt relief; debt service
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The 2009 reforms have broadly achieved their objective of closing gaps and creating a streamlined architecture of facilities that is better tailored to the diverse needs of LICs. Supported by the financing package to boost the PRGT’s lending capacity for 2009–14 and the accompanying doubling of access, the Fund was able to mount an effective response to LICs’ needs during the global financial crisis.

Abstract

The 2009 reforms have broadly achieved their objective of closing gaps and creating a streamlined architecture of facilities that is better tailored to the diverse needs of LICs. Supported by the financing package to boost the PRGT’s lending capacity for 2009–14 and the accompanying doubling of access, the Fund was able to mount an effective response to LICs’ needs during the global financial crisis.

Review of Facilities for Low-Income Countries

1. This review examines the experience with the Fund’s facilities for low-income countries (LICs), and considers some possible options for refinements.1 The Fund’s facilities for LICs were overhauled in 2009, with a view to increasing their flexibility and better tailoring them to the increasingly diverse needs of LIC members. With almost three years having elapsed, this paper is an early opportunity to review to what extent the reforms have met these objectives and explore areas where further enhancements to the toolkit could be considered. A key objective is to ensure that the Fund retains the capacity to provide effective policy and financial support as LICs will remain exposed to global risks and volatility. Trade-offs among the options for possible enhancements will need to be considered to ensure that the Fund’s limited concessional lending capacity, which is likely to decline after 2014–15, is used most effectively in support of LIC members. This paper represents the first stage of the review, and will be followed by a second paper with specific proposals based on the feedback of Executive Directors. A separate Board paper on the review of PRGT eligibility is planned for early 2013.

I. Recent Reforms to LIC Facilities

The 2009 reform closed gaps and created a streamlined architecture of facilities tailored to the diverse needs of LICs. Access was doubled; access policies revised; blending rules strengthened; concessionality increased, including through temporary interest relief; and a financing package was approved to boost the Fund’s lending capacity during 2009–14.

2. The Fund’s support to LICs has evolved over time as countries’ needs changed. For the two decades following the introduction of the Enhanced Structural Adjustment Facility (ESAF) in 1987, the Fund’s program and financial support to LICs was delivered almost entirely through medium-term financial arrangements aimed at addressing protracted balance of payments problems, and in rare cases through Emergency Natural Disaster Assistance (ENDA) or Emergency Post-Conflict Assistance (EPCA). This basic facilities structure remained largely intact following the introduction of the Poverty Reduction and Growth Facility (PRGF) in 1999, albeit with a greater emphasis on poverty reduction and growth. With improved policies and supported by debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI), many LICs progressively reduced their dependence on continuous IMF balance of payments support. This led to the introduction of the Policy Support Instrument (PSI) in 2005, which allowed the most advanced countries to continue close policy engagement without Fund financial support, and to the introduction of the Exogenous Shocks Facility (ESF) in 2006, which was specifically designed to assist LICs dealing with exogenous shocks. The ESF was enhanced in 2008 with the creation of the Rapid Access Component (ESF-RAC) and High Access Component (ESF-HAC), which could thereafter be used alongside the PSI.

3. These gradual enhancements had left some gaps in the toolkit, and also created a number of overlaps. The changes to the Fund’s LIC facilities preceding the 2009 reforms were introduced in a piecemeal fashion and left three notable gaps in the Fund’s concessional financing toolkit: (i) flexible short-term financing; (ii) a precautionary instrument; and (iii) flexible emergency financing. Use of the ESF-HAC was limited to exogenous shocks, and could not address short-term financing and adjustment needs when these were primarily caused by domestic factors. The lack of a concessional precautionary instrument constrained the Fund’s capacity to support LICs that may face no immediate financing needs but are exposed to global volatility due to their increased integration in international goods and capital markets. Emergency assistance was available under three different instruments for LICs hit by natural disasters (ENDA), affected by exogenous shocks (ESF-RAC), or emerging from conflict (EPCA), but the Fund lacked a streamlined tool to provide rapid emergency assistance for urgent balance of payments needs, irrespective of their cause. Moreover, access levels had severely eroded over the past decade, and access policies were not consistent across instruments. These factors contributed to an increasing number of LICs seeing the need to turn to (nonconcessional) Stand-By Arrangements (SBAs).

4. The 2009 reform created a new architecture of concessional facilities aimed at providing more flexible and tailored support to LICs’ diverse needs.2 The Extended Credit Facility (ECF) replaced the PRGF as the main tool for addressing protracted balance of payments problems. The Standby Credit Facility (SCF) was created to provide support to LICs with short-term balance of payments needs, akin to that provided under the SBA, with the possibility of using it on a precautionary basis. The Rapid Credit Facility (RCF) was created to provide rapid low-access financing with limited conditionality to meet urgent balance of payments needs, widening the scope of emergency assistance to cover needs arising from domestic factors and streamlining existing emergency instruments as used by LICs (ENDA, EPCA, and ESF-RAC) under one facility. The PSI was kept largely unchanged. See Appendix I for details.

5. Access policies were also revised, blending rules strengthened, and concessionality increased through a new interest rate mechanism. Access levels were doubled, and new access limits and norms were designed to ensure consistency across the three facilities. Blending rules were strengthened to ensure a more consistent use of blending, with a view to preserving concessional resources while allowing higher access when needed (see Appendix II). A new interest rate mechanism was introduced to increase concessionality and limit fluctuations of the grant element in the context of global interest rate volatility (see Appendix III). In addition, temporary interest relief on all concessional credit was approved, and recently extended through end-2012, to help LICs cope with the crisis. Some other modalities were made more flexible, including by allowing more time to meet Poverty Reduction Strategy (PRS) documentation requirements. Around the same time, the Fund also made its debt limits policy and structural conditionality more flexible and tailored to country circumstances.

LIC Facilities Architecture

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Instruments or facilities that support upper-credit tranche (UCT) quality programs.

6. In July 2009, the Board endorsed a LIC financing package to more than double the Fund’s concessional lending capacity to SDR 11.3 billion (US$17 billion) for the period 2009–14. Most of the additional subsidy resources are being mobilized from the Fund’s internal resources, including those linked to gold sales, but they also include new bilateral contributions (see Appendix IV). In addition, the general and special SDR allocations agreed during the height of the crisis provided more than SDR 8 billion to bolster LICs’ foreign exchange reserves and help alleviate financing constraints during the global financial crisis.3

II. Experience With the New LIC Facilities

7. A preliminary assessment of experience since the 2009 facilities reform suggests that the Fund has largely been able to provide flexible and tailored support to LICs, which helped them navigate the global financial crisis. The analysis is based on the observed usage of facilities, program design features, country characteristics, and economic outcomes associated with program usage. It was informed by staff consultations with member country authorities, civil society organizations, and Fund mission chiefs (Appendix V).

A. Tailoring to Country Needs

Demand for Fund support through its LIC facilities has been high, and shifted to a more diverse range of tools, with greater use of short-term and emergency financing facilities, blending, and augmentations. Use of facilities remains greatest among the poorer and HIPC-eligible LICs, and has increased strongly for small and fragile economies.

More diverse use of LIC facilities

8. Demand for Fund policy and financial support has remained very high, with currently almost 50 PRGT-eligible countries in program or near-program mode. New concessional financing commitments peaked at nearly SDR 2.5 billion (US$3.8 billion) at the height of the crisis in 2009, almost four times the historical average. In 2010 and 2011, annual commitments averaged SDR1.2 billion, well above both the historical average and the Fund’s longer-term concessional lending capacity (see Section III.A). By contrast, official development assistance from other sources has remained relatively stable.

9. The nature of Fund support to LICs has become more differentiated (Figure below and Tables 1 and 2). Since the reform, around three-quarters of PRGT-eligible countries have had a Fund-supported program or instrument in place, a somewhat higher share than prior to the onset of the crisis. At the same time, consistent with the reform objective of tailoring facilities to the diverse needs of LICs, the nature of Fund support has shifted from near exclusive reliance on the ECF and its predecessors to a more diverse range of tools, with a somewhat greater focus on policy support and episodic short-term and emergency financing, and several countries have sought precautionary financing.

Table 1

IMF Facilities and Instruments in Place; 2000-12 1/2/

(As of end-June, 2012)

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Indicates facility or instrument in place in a given year. Use of multiple facilities and/or instruments in a single year is shown with a period separator. Blends are hyphenated. ENDA, EPCA, RAC, and RCF support is shown for a period of six months after their approval.

ECF: Extended Credit Facility (prior to 2010: Poverty Reduction and Growth Facility); SCF: Standby Credit Facility; RCF: Rapid Credit Facility; PSI: Policy Support Instrument; SMP: Staff-Monitored Program; ESF: Exogenous Shocks Facility (High Access Component); RAC: Exogenous Shocks Facility (Rapid Access Component); EPCA: Emergency Post Conflict Assistance; ENDA: Emergency Natural Disaster Assistance; SBA: Stand-By Arrangement; EFF: Extended Fund Facility.

In 2010, six countries graduated from the PRGT-eligible group: Albania, Angola, Azerbaijan, India, Pakistan, and Sri Lanka.

Table 2

Facilities and Instruments in Place for Current PRGT-Eligible Countries; 2000-12

(As of end-June 2012)

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Shows one facility/instrument per country, based on the length of use in the year.

Previously PRGF. Includes ECF-EFF blends.

Includes ESF-HAC (ESF), ESF-SBA, and SCF-SBA blends.

Includes RCF, ESF-RAC, EPCA, ENDA, and blends.

In 2010 six countries graduated from the PRGT-eligible group: Albania, Angola, Azerbaijan, India, Pakistan, and Sri Lanka.

Count of facilities under broader categories (same type within a year counts as one).

uA01fig01
1/ Shows one instrument per country and year for currently PRGT-eligible (71) countries. See Table 2 for details.2/ For countries with concurrent PSI and short-term financing, only the latter is counted (Senegal (2008-10); Mozambique (2009-10); and Tanzania (2009-10)).3/ New concessional commitments (including emergency assistance) cover all LICs that were PRGT-eligible at the time.

10. The ECF has remained central to the architecture of facilities as the majority of LICs still face protracted balance of payments problems. Usage has remained overall broadly stable, with around 30 ECF arrangements in place in any given year. However, there has been some change in the composition of ECF users as some (often post-HIPC) countries graduate, while other countries move from emergency to medium-term support. Interviews with country authorities indicated that the new name of the facility helped reduce perceived stigma in some cases, by avoiding attachment of an implicit label to countries. No low-access ECF arrangements have been requested since the onset of the crisis (see Sections III.B and III.C).

11. The SCF, and previously the ESF-HAC, has helped LICs deal with turbulence in the global economy, and demand for precautionary support is growing. Seven countries requested support under the ESF-HAC during 2008–09 to address the short-term balance of payments needs stemming from higher commodity prices and the global financial crisis. Since 2010, four SCF-supported programs have been requested (Solomon Islands in 2010 and 2011, Honduras, and Georgia), of which three were on a precautionary basis. Faced with an increasingly uncertain global outlook, interviews with country authorities and mission chiefs indicate a greater interest in precautionary support from the Fund (see Section III.C).

12. The RCF has provided rapid low-access financing in a wide range of emergency situations since it became effective in early 2010. Since 2008, 14 countries have requested support under the RCF and previous emergency facilities (ESF-RAC, ENDA, and EPCA), including five that used such emergency financing more than once. The strongest increase in demand came from small economies hit by natural disasters. Some countries affected by the global crisis also requested support under the RCF. A few countries requested the RCF to address urgent balance of payments needs arising before domestic political conditions were appropriate to move to ECF support, a type of assistance that was not available prior to the facilities reforms except in post-conflict cases.

13. The PSI facilitated access to short-term financing during the crisis. Since 2008, six LICs that had achieved broadly stable and sustainable macroeconomic positions sought support under the PSI, which provides policy support through program engagement and helps catalyze donor support. The PSI has also facilitated rapid access to short-term financing during the crisis (Senegal in 2008, Mozambique and Tanzania in 2009). At the same time, the group of PSI users has remained relatively small and confined to Sub-saharan Africa.

14. As intended by the 2009 reform, the use of stand-alone SBAs among LICs has faded in recent years, while use of blending has increased. Some of the LICs that had previously relied on stand-alone SBAs graduated from PRGT eligibility in 2010 (Angola, Pakistan, and Sri Lanka), while others moved to arrangements with blended PRGT-GRA financing (Armenia and Georgia). No stand-alone GRA financing has been requested by any PRGT-eligible country since the effectiveness of the reforms.

Use across country groups

15. Reliance on LIC facilities has varied significantly across regions, and has increased in all regions except Asia (see chart below and Table 3).4

Table 3

Use of IMF Facilities and Instruments for PRGT-Eligible Countries, by Country Group

(As of end-June, 2012; Percentage of Years with Facility or Instrument in Place)1/

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Sum of country years with facility in place as a share of total country years for each country group.

Number of countries in the group in parentheses. Country group definitions use 2010 data unless otherwise indicated. AFR (African), APD (Asia and Pacific), EUR/MCD (European, Middle East and Central Asia), and WHD (Western Hemisphere) refer to Fund Area Departments. Small economy: below 1.5 million population in World Bank World Development Indicators; Fragile refers to World Bank definition of countries in fragile situations; Net oil exporter defined by IMF World Economic Outlook; Exchange rate regime defined by IMF defacto exchange rate regime classification; Monetary union defined as membership of WAEMU, CEMAC and ECCU; IDA cutoff refers to countries with per capita gross national income less than US$1,175; Market access is defined as countries with cumulative public external borrowing in 2005-2009 exceeding 50 percent of quota; status under the Highly Indebted Poor Countries Initiative (HIPC) at end-2009: post-CP means post completion point, DP and pre-DP means reached decision point or pre-decision point.

Previously called PRGF. Includes ECF-EFF blends.

Includes ESF-HAC (ESF), ESF-SBA, and SCF-SBA blends.

Includes RCF, ESF-RAC, EPCA, ENDA, and blends.

In 2010 six countries graduated from the PRGT-eligible group: Albania, Angola, Azerbaijan, India, Pakistan, and Sri Lanka.

  • LICs in Sub-saharan Africa—representing roughly half of PRGT-eligible countries and two-thirds of LICs with per capita income below the International Development Association (IDA) threshold—have traditionally been the heaviest users of IMF facilities, and have further increased their engagement after the facilities reform. This reflected to some extent the needs arising from the global financial crisis, but also growing demand for new facilities.

  • At the other end of the spectrum, LICs in the Asia Pacific region (accounting for one-quarter of PRGT-eligible countries) have been the least frequent users of LIC facilities, with currently only one ECF and one SCF arrangement in place. This may partly reflect the comparatively strong macroeconomic positions of many Asian LICs (including the near-absence of HIPC cases), the availability of alternative financing sources in the region and, according to mission chiefs, lingering stigma associated with Fund engagement post Asian crisis.

  • LICs in the Western Hemisphere (representing one-eighth of PRGT-eligible countries) have increasingly relied on LIC facilities, in particular the RCF and previous emergency assistance tools, as a response to the global crisis and natural disasters.

  • The sharpest increase in usage of LIC facilities occurred among LICs in the Middle East, Central Asia, and Europe (accounting for one-sixth of PRGT-eligible countries), driven primarily by new demand arising from the severe impact of the global crisis.

16. Poorer LICs have relied more extensively on Fund support through its facilities than those with relatively higher per capita income. Over two-thirds of countries with per capita income below the IDA operational cutoff have made use of a LIC facility or instrument in a given year since 2009, well above the rate of usage among PRGT-eligible countries with higher per capita income (see chart below, and Table 3 for details and methodology). At the same time, use of LIC facilities increased for both sets of country groups relative to the pre-crisis period, driven by higher demand for SCF, RCF, and PSI support. This trend toward new facilities and instruments has been particularly pronounced for LICs with higher income and some market access.5 In this group, five out of the six countries that requested Fund financial or policy support relied on an instrument other than the ECF.

uA01fig02
1/ Sum of country years with facility or instrument in place as a share of total country years for each country group. Number of countries in each group shown in parentheses. See Table 3 for details on data and methodology.2/ In any given year, more than one facility per year would be counted if more than one facility was in place.

17. The strongest increase in demand for IMF facilities has come from small economies (see chart above and Table 3).6 Prior to the reform, only around one-quarter of small PRGT-eligible countries used Fund facilities in a given year, mainly the PRGF, followed by ENDA. Since 2009, more than half have sought support under a Fund facility, driven by requests for short-term financing under the RCF and SCF, and their predecessors. The use of the RCF is even more pronounced for small island economies, partly reflecting their exposure to natural disasters.

18. LICs in fragile situations also increased their engagement with the Fund (see chart above and Table 3).7 Prior to the 2009 reforms, just over a third of LICs in fragile situations used the Fund’s facilities in a given year, with many relying on Staff-Monitored Programs (SMPs) and the EPCA. Since 2009, almost two-thirds of fragile LICs have engaged with the Fund, mainly through the ECF and to a lesser extent the RCF, as windows of opportunity for reforms and debt relief opened up in several countries. However, in some of these cases, ECF-supported program implementation has proved difficult, in part reflecting institutional capacity constraints.8

B. Access, Blending, and Financing Terms

Access increased across all facilities post reform, in particular through augmentations and shock-related facilities. Blending PRGT with GRA resources has become more common, while a zero-interest rate has provided exceptional relief during the crisis period.

Access

19. The 2009 reforms doubled access levels and overhauled access policies. Total annual access as a share of total quota of all LICs increased from an average of about 6 percent during 2000–08 to 13 percent in 2009–12 (Table 4). As a result, average concessional credit outstanding of PRGT users increased from 47 to 76 percent of quota between end-2008 and June 2012 (Table 5). Average access in percent of quota for new financing requests increased across all facilities, in particular for shock-related financing through ECF augmentations and short-term/emergency financing tools (see chart). Concessional commitments in 2010 and 2011 were three times higher than in the five years before the reform of the facilities. While the higher level of financing was primarily driven by demand stemming from the global financial crisis, the reforms to access ensured that the Fund was able to provide the support necessary to meet the higher level of financing needs.

Table 4

Access (New PRGT Commitments) by Country Group1/

(As of end-June 2012; Period average)

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Originally approved amounts under the ECF (and previously PRGF), SCF, RCF, ESF-HAC, ESF-RAC, EPCA and ENDA.

Country groups are defined in Table 3, Footnote 2.

Period average of total annual PRGT commitments at the time of approval as a share of total group quota.

Period average of access (in percent of quota) of new PRGT commitments within a year and country group.

Table 5

PRGT Credit Outstanding

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Zimbabwe is not PRGT-eligible due to its removal from the PRGT-eligibility list by an Executive Board decision in connection with its overdue obligations to the PRGT. It does not meet the graduation criteria for PRGT eligibility and, accordingly, would be expected to become PRGT-eligible if the remedial measure were lifted.

Excludes Kyrgyz Republic, which became non HIPC-eligible in November 2011 based on end-2010 indebtedness criterion.

Since 2010, six countries have graduated from the PRGT-eligible group: Albania, Angola, Azerbaijan, India, Pakistan, and Sri Lanka.