Annex I. Access Reduction and Market Impact
Potential negative market reaction upon exiting from FCL/PLL arrangements could deter exit. Hence, this annex examines market reactions to past reductions in access. The analysis does not find evidence of negative market impact from reducing access under FCL or PLL arrangements.
1. Since the inception of the FCL and the PLL, six cases of access reduction have taken place. Morocco reduced access at the time of its second (July 2014) and third (July 2016) arrangements (Figure AI.1). Poland reduced access during its fifth arrangement, both at the time of the approval (January 2015) and the review (January 2016), and at the time of the sixth arrangement (January 2017). Colombia reduced access under the FCL at the time of the second arrangement (May 2010), but has since reversed this.
2. Lower access, which signals gradual exit, was discussed positively in staff reports. With Colombia’s first arrangement approved at the height of the global financial crisis, reduced access under the 2010 arrangement reflected the fact that global risks had subsided. In the case of Morocco, lower access reflected stronger fundamentals and an improved balance of external risks relative to previous arrangements. The reductions in access under Poland’s FCL arrangements reflected improved fundamentals and increased policy buffers, and was communicated as a clear signal of the authorities’ intention to fully exit from the FCL once external risks recede. At the same time, the authorities highlighted their commitment to maintaining very strong policies and fundamentals. The authorities were keen on communicating their plans of gradual exit through outreach to investors and the general public, including by top Ministry of Finance officials. In turn, the market reaction at the time of access reduction was muted.
3. High-frequency data point to generally muted market reaction to access reductions, with no negative impact on spreads and exchange rates. Daily data confirm the absence of sudden changes to EMBI spreads and nominal bilateral exchange rates on the day immediately following the announcement. In the case of Poland, financial variables appeared to improve at the time of the January 2015 announcement, with observed exchange rate appreciation and reduction in spreads. Similar patterns were observed when looking at yields and the volatility of spreads and exchange rates (Figure AI.2).
4. Regression analysis supports the finding of no adverse market reaction. Regressions of EMBI spreads adjusted for global factors on an access reduction dummy show no evidence of negative market reactions to access reductions.1 The coefficient on the access reduction dummy is consistently negative and statistically significant in some specifications. This suggests a potentially favorable market reaction to access reduction, which, in turn, underscores the importance of effective communication surrounding exit decisions.
Annex II. Recent FCL and PLL Arrangements
Access levels under recent FCL and PLL arrangements have diverged. This annex provides an overview of the recent FCL and PLL arrangements.
1. Among FCL users, Colombia and Mexico have recently increased access, while Poland has reduced access under the arrangement.
Colombia has recently increased access. A sixth arrangement under the FCL in an amount equivalent to SDR 8.18 billion (400 percent of quota) was approved in June 2016. This corresponded to more than a doubling in access from the previous arrangement of SDR 3.870 billion, though it was only moderately above the level of access under the first arrangement in May 2009 in light of a significant access reduction at the time of the second review.
Mexico has recently increased access. A sixth arrangement under the FCL in an amount equivalent to SDR 62.389 billion (700 percent of quota) was approved in May 2016, thereby allowing for a more than 30 percent increase in access from the previous arrangement. This is also considerably larger than the SDR 31.5 billion approved under the first arrangement in April 2009.
Poland has continued a gradual exit from the FCL. After an initial arrangement in May 2009 and increased access in terms of SDR in the context of the third and fourth arrangements, Poland requested a close-to-30 percent reduction in access at the time of the fifth request in January 2015, an additional 16 percent reduction at the time of the review of the fifth arrangement one year later, and a further 50 percent reduction in access at the request of the sixth arrangement. This resulted in a reduction in access to 159 percent of quota from a peak of 537 percent of current quota.
2. Access has gradually declined for Morocco, the only current PLL user.
Morocco has continuously lowered access. Morocco is currently the only user of the Precautionary and Liquidity Line (PLL). After the approval of the initial arrangement in August 2012 in an amount equivalent to SDR 4.1 billion, Morocco has demonstrated its gradual exit strategy by requesting lower access in both the second and third arrangements, reflecting the evolution of external risks and the strengthened resilience of the economy. In turn, access under the third (2016) PLL arrangement is close to 40 percent lower than that under the first arrangement.
Annex III. Evaluation of the External Economic Stress Index
The External Economic Stress Index (ESI) was developed to guide access discussions under FCL and PLL arrangements. This annex reviews the performance of the ESI since its implementation. Overall, the analysis suggests that ESI downside scenarios have developed in line with access levels, but that some strengthening of guidance pertaining to the use of the ESI would help support cross-country comparability.
1. The 2014 FCL/PLL review introduced an External Economic Stress Index (ESI) to guide access discussions and help inform exit strategies in program documents. Subsequently, the 2015 FCL guidance note fleshed out modalities of the ESI and asked country teams to develop and maintain an ESI that indicated the evolution of the external economic environment for the given country. The guidance note proposed to compute the ESI as a weighted sum of standardized deviations from means of external variables. When the index points to more elevated risks, the adverse scenarios that help determine access levels in FCL and PLL arrangements would normally be expected to include assumptions that are more extreme, and vice versa. As such, the ESI provides information about the external environment, whether a successor arrangement is warranted, and in which direction potential access is expected to change.
2. To support consistency over time, guidance on the chosen ESI and the adverse scenario was provided. Specifically, once risks, variables, and weights in the ESI were decided, these were expected to remain unchanged during an arrangement, unless a compelling economic reason for changes could be provided. Furthermore, downside scenarios should draw, as appropriate, on corresponding World Economic Outlook (WEO) downside scenarios, the Global Financial Stability Report (GFSR), or the Global Risk Assessment Matrix (G-RAM).
3. Staff implemented ESIs with data-based weights. The first implementations of ESIs among FCL and PLL users were in 2014 (Mexico) and 2015 (Colombia, Morocco, and Poland). While weights related to the various external factors in the ESI could be either data- or model-based, all four country teams opted for data-based weights. Under this method, weights are determined by the economic size of the respective trade and financial exposures relative to the overall size of the economy, thus differing across countries. None of the teams implemented model-based weights, where econometric methods are used to estimate the importance of each of the external risks for observed balance of payment pressures.
4. The projected downside ESI scenarios have helped justify access levels in successor arrangements. Overall, downside ESI scenarios have generally been closely aligned with potential financing needs in adverse scenarios. This consistency between ESIs and financing needs tables was evident also across time. Notably, in Colombia’s and Mexico’s 2016 requests for higher access under the FCL arrangements, projected downside ESI values worsened relative to their respective 2015 and 2014 arrangements (Figure AIII.1). In 2016, Morocco’s (PLL request) and Poland’s (FCL review) requests for lower access were associated with marginal improvements in the adverse scenarios of the ESIs relative to earlier program documents. That said, despite deteriorated external conditions at the time of Poland’s 2017 request, Poland was able to reduce access on the back of improved fundamentals and buffers.
5. However, guidance could be strengthened to improve comparability of the ESI adverse scenarios across countries, including related to the size of underlying shocks.
Comparability of adverse scenarios across countries. While downside ESI scenarios have generally been computed based on values of external variables in adverse scenarios in the WEO, GFSR, and spillover reports, not all reports have based their downside scenarios on the most recently available scenarios. Hence, relevant guidance could be strengthened by specifying that ESI downside scenarios should be based on scenarios developed in Fund documents no older than six months, to the extent that relevant scenarios are available. Alternatively, specific common scenarios as they pertain to the G-RAM would help ensure consistency.
Comparability of the size of shocks across countries. Adverse scenarios in program requests that fall close in time should be comparable in terms of the size of assumed underlying shocks, given similar supporting information available. However, some shock scenarios in recent program requests have not been fully comparable. For example, while the May 2016 staff report for Mexico incorporated a U.S. growth shock of 1.5 percentage points (referencing the April 2016 GFSR), the June 2016 staff report for Colombia involved a smaller U.S. growth shock. Hence, while downside scenarios for the two reports were similar, the quantification of the shocks differed. That said, even if underlying shocks would be similar, the impact of the shock would likely differ across countries given their different exposures to external risks, as reflected in the ESI weights.
6. In sum, the ESI has been helpful in supporting discussions related to the need for successor arrangements, but could be improved. As external risks have remained elevated as assessed by the ESI, there is no evidence of unjustified successor FCL and PLL arrangements. Adverse scenarios, computed using the ESI, have generally developed in line with the direction of access levels. Nonetheless, comparability across countries could be improved. Hence, to ensure consistency going forward, it will be important that Fund country teams rely on the most recently published flagship reports (i.e. WEO, GFSR, spillover reports) or specific scenarios related to the G-RAM, as appropriate. In a similar vein, global shocks should be treated equally across reports that fall close in time. To the extent that differences are warranted, these could be clarified by specifying the context surrounding the given shock.
Annex IV. Use of Reserves in Adverse Scenarios
Reserve use has been increasingly prevalent in recent FCL and PLL arrangement access scenarios. However, to the extent that reserves have been assumed to remain adequate in adverse shock scenarios, additional reserve drawdown could be warranted. This annex examines to what extent there is room for additional reserve drawdown in adverse scenarios.
1. The FCL and PLL allow for an enlarged backstop against downside risks without the need to accumulate excess international reserves. As such, they complement adequate reserve levels. However, as central banks accumulate adequate reserves for use in the event that downside risks materialize, some reserve drawdown should be expected in a tail risk event. Therefore, reserve drawdown should be assumed to occur in adverse scenarios when determining the appropriate access level under FCL and PLL arrangements. To the extent that reserve drawdowns in past access scenarios have been modest, more severe shock assumptions could be partially met through a larger drawdown of reserves, rather than an increase in access levels.
2. Fund staff’s guidance has pointed to the need for increased use of reserves in downside scenarios. The 2015 FCL guidance note highlighted that “for countries for which reserve levels are plentiful, and well above adequate, the adverse scenario should include the use of international reserves to cover part of the financing gap, implying that not all the potential financing need is met through Fund resources. In such an adverse scenario, reserves could go below the relevant adequacy thresholds (since this is an extreme stress event).” In this respect, the 2014 Review of the FCL, the PLL, and the RFI pointed to a lower threshold of 80 percent of the Fund’s ARA metric. Using a large sample of EMs over a 22-year period, the reserve threshold was derived so as to minimize Exchange-Market-Pressure crisis prediction errors.1 Hence, with an 80 percent threshold separating crisis from non-crisis signals, countries may be able to draw down reserves to that limit in severe stress events without igniting crisis risks.
3. In turn, the use of reserves in adverse scenarios has become more prevalent. Requests for FCL arrangements in 2012 (Mexico) and 2013 (Colombia and Poland) were characterized by the absence of a drawdown of reserves in the adverse scenarios, with Poland assuming reserve accumulation corresponding to half of that projected under the baseline scenario. However, since then, all adverse scenarios in FCL arrangements have been accompanied by reserve drawdown, with the drawdown playing an increasing role in reducing the financing gap across most arrangements (Figures AIV.1 and AIV.2).
4. However, room may remain for additional reserve drawdown in a tail risk scenario. While reserve drawdown has been increasingly prevalent, the level of reserves has generally remained above 100 percent of the ARA metric in the adverse scenario. For example, while the Colombia 2016 FCL arrangement request incorporated a reserve drawdown of more than USD 6 billion, reserves remained well within the adequacy range, in part reflecting concerns about adverse market reactions to a large and rapid reserve drawdown. For Morocco, while the financing gap was defined to maintain reserves at 90 percent of the standard ARA metric, reserves remained adequate in the adverse scenario after adjusting for capital controls. Hence, with reserve drawdown a key element in determining access levels, limited reserve drawdown should be clearly justified in light of the guidance provided by the 2014 review. Specifically, it would generally be expected that assumed levels of gross reserves are allowed to fall below 100 percent of the ARA in the adverse scenario, while reserve adequacy ratios well into the adequacy range in the adverse scenario should be avoided. The pace of the reserve drawdown should also be considered to avoid adverse market reactions.
Annex V. Commitment Fee Reform Options
The Annex provides a summary of the purpose and application of the current commitment fee policy and a more detailed discussion on the two reform options discussed under “Proposed Changes to the Existing Toolkit:” (i) steepening the current commitment fee schedule by increasing the rate for access above the highest fee threshold and (ii) introducing a time-based commitment fee. The Annex also presents numerical illustrations for possible calibrations of the two options, including implications to current FCL/PLL users.
Annex VI. Cost Comparison of Commitment Fees
The Annex compares costs of the Fund’s current commitment fees to staff estimates for members’ costs of accumulating reserves as well as costs of contingent credit from other multinational and regional institutions.
Annex VII. Illustrative Written Communication from the Central Bank
[member capital city], [date]
Ms. Christine Lagarde
Managing Director, International Monetary Fund
700 19th Street NW
Washington, DC 20431
Dear Ms. Lagarde,
I would like to thank you for your conditional approval of a 12-month Short-term Liquidity Swap arrangement with access in the amount equivalent to SDR [X].
I hereby confirm the intention of [member] to avail itself of the arrangement, and can confirm that the Central Bank of [member] will take any actions necessary to respond appropriately to shocks that may arise and is committed to maintaining its very strong economic policies during the course of the arrangement.
Separately, I have been requested to convey on behalf of the government of [member] its commitment to maintain during the arrangement its current very strong policies.
We consent to the IMF’s publication of this letter and the related staff report.
Governor of Central Bank of [member]
Annex VIII. Scoring of Precautionary Arrangements in the FCC
This annex briefly reviews the background to the Fund’s current practice of counting (or “scoring”) precautionary arrangements at full value for the purpose of measuring Fund liquidity, elaborates on the relevant key considerations, and presents numerical scenarios illustrating the constraints to partial scoring.
“Adequacy of the Global Financial Safety Net—Considerations for Fund Toolkit Reform,” IMF Policy Paper, December 2017.
“Adequacy of the Global Financial Safety Net,” IMF Policy Paper, March 2016.
“Review of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument,” IMF Policy Paper, January 2014.
Contingent on a decline in external risks, the Moroccan “authorities remain committed to continue with their gradual exit to allow full exit from PLL support at an early stage.” IMF Country Report No. 16/265, Statement by Mr. Daïri. The three FCL users have also signaled their intention to reduce access should risks subside, with a view to exiting the instrument.
“Adequacy of the Global Financial Safety Net—Considerations for Fund Toolkit Reform,” December 2017, and “The Chairman’s Summing Up––Adequacy of the Global Financial Safety Net––Considerations for Fund Toolkit Reform”.
The Precautionary Credit Line (PCL), the predecessor to the PLL, also had only one user (the FYR Macedonia), with only one arrangement.
The FYR Macedonia fully exited from the PCL/PLL after one arrangement. However, the country experienced an actual BOP need only two months after the PCL approval. Also, it did not exit from a position of economic strength, and, as such, it is excluded from the analysis in the paper.
Decision No. 14283-(09/29), adopted March 24, 2009, as amended.
The proposed set of core indicators will be included in a revised draft of the FCL guidance note.
See “Reform of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument— Specific Proposals–Revised Annex I,” IMF Policy Paper, May 2014, and “Flexible Credit Line—Operational Guidance Note,” IMF Policy Paper, June 2015.
The only exception is the “Sound public finances, including a sustainable public debt position” criterion as the underlying assessment of debt sustainability with high probability is forward-looking in nature.
As in the case of the bottom-line assessment on the nine qualification criteria, very strong performance against all qualification criteria is not required.
See Press Release No. 14/84, March 5, 2014.
While high-access drawing arrangements which go off-track for extended periods would similarly end-up tying up Fund resources and potentially entailing costs to creditor members, in staff’s view, it would be more appropriate and effective to rely on policy discussions to facilitate progress with policy implementation, rather than imposing additional fees that would add to members’ external imbalances.
As this option builds on the existing fee structure, it is envisaged to apply to all GRA arrangements. The impact on drawing arrangements would be mitigated by the fact that commitment fees are refunded upon purchases.
While this drawback could be mitigated by not steepening the current commitment fee schedule for extended arrangements, which are not generally provided on a precautionary basis, it would add complexity to the Fund’s overall fee structure. See footnote 14 above and footnote 21 below.
For the purposes of commitment fees, the level of undrawn credit means the amount that could be purchased during the relevant period (12 months or the period left under the arrangement, if shorter) as per Rule I-8.
This is analogous to the application of time-based surcharges, which are levied for the period that members’ credit outstanding remains above a threshold, currently set at 187.5 percent of quota.
The clock toward meeting the TBCF trigger would pause once undrawn balances fall below the threshold, and would reset once undrawn balances remain below the threshold for a defined continuous period of time (“cooling off” period). See Annex V for details.
To date, based on quotas in effect after completion of the 14th General Review of Quotas, only one FCL arrangement has had access above 575 percent of quota (Mexico’s FCL arrangement approved May 2016; see text figure).
In the context of the 2000 Review of Fund Facilities, “the Board confirmed that it saw a need to ensure that arrangements under the EFF be granted only in cases that met fully the terms and spirit of the EFF Decision. These would be cases where there is a reasonable expectation that the member’s balance of payments difficulties will be relatively long-term, including because it has limited access to private capital, and where there is an appropriately strong structure reform program to deal with the embedded institutional or economic weaknesses. The Board agreed that extended arrangements should generally not be formulated on a precautionary basis, as circumstances where potential balance of payments difficulties were likely to turn out to be longer-term are probably very rare.” See “Summing Up by the Acting Chairman at Review of Fund Facilities––Proposed Decisions and Implementation Guidelines.”.
See footnote 14 above.
Past commitments would be remeasured in percent of 14th Review of Quotas and compared against the time-based fee threshold.
The FYR Macedonia’s January 2011 PCL was converted into a PLL arrangement by the time of the second review discussions. Morocco’s first PLL arrangement was in 2012.
This staff proposal was revised in the subsequent paper “Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform—Revised Proposals,” IMF Policy Paper, December 2017.
See “Review of Fund Facilities—Analytical Basis for Fund Lending and Reform Options,” 02/06/09 and “GRA Lending Toolkit and Conditionality: Reform Proposals,” 03/13/09.
See footnote 1.
For updated information with respect to this proposal, see the subsequent paper “Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform— Revised Proposals,” IMF Policy Paper, December 2017.
There will be no ex-post conditionality, including no standard continuous Performance Criteria (PCs), and no reviews during an arrangement.
Qualification criterion 4 will be amended slightly from that in the FCL arrangement to eliminate the language “When the arrangement is requested on a precautionary basis” to reflect that an SLS arrangement can only be requested when the member faces a potential but not an actual BOP need.
Pursuant to Article V, Section 7(d), the Fund, by an eighty-five percent majority of the total voting power, may adopt repurchase periods other than that which applies within the credit tranches.
Liquidity episodes in advanced economies also tend to be short-lived, as revealed by episodes of FX market dysfunction, when the covered interest parity breaks. The bulk (about 80 percent) of these episodes lasted for no more than two weeks, with the GFC being the sole exception. For details, see Box 1 in “Assessing Reserve Adequacy—Further Considerations” IMF Policy Paper, 2013.
Purchases would be subject to a one-year repurchase obligation without installments. As such, each purchase would have to be repurchased within a year of the purchase.
Even in the case of the GFC, the BOP pressures only lasted for about one year.
In addition, as the SLS, like other special facilities, is proposed to “float” against the reserve tranche (i.e., members would be able to maintain a reserve tranche position in the Fund despite making purchases under the facility), an 85 percent majority of the total voting power would be required to establish this feature (Article XXX(c)(iii)).
See “Adequacy of the Global Financial Safety Net—Considerations for Fund Toolkit Reform,” IMF Policy Paper, December 2017.
Revolving access within an arrangement is not a new design element in the Fund’s toolkit. For example, prior to the effectiveness of the Second Amendment in 1978, members were allowed to reconstitute drawing rights through early repurchases before the expiration of a stand-by or extended arrangement. Reconstitution of access was also a feature of the Currency Stabilization Fund (CSF), which was a window established in 1995 to provide Fund financial support in the context of Fund arrangements. Purchases were subject to the member’s compliance with the arrangement, including supplementary conditions set out at the establishment of the CSF. For details see “The Acting Chairman’s Summing Up at the conclusion of the Discussion on Fund Support for Currency Stabilization Funds,” Executive Board Meeting 95/86, September 13, 1995; Box 8 in “Review of Fund Facilities––Preliminary Considerations,” Executive Board Specials 00/37, March 2, 2000.
Accordingly, in line with normal practice, SLS arrangements would be scored against the Fund’s Forward Commitment Capacity (FCC). However, repurchase obligations resulting from purchases under an SLS arrangement would not be added to the FCC, unless the SLS arrangement expires or is cancelled and no approved successor SLS arrangement is in place.
The process of re-qualification will be the same as if there had been no prior arrangement (see subsection D). For members with credit outstanding when the successor arrangement is approved, rights to make purchases would build pro tanto as outstanding credit is repurchased (see subsection C).
As a legal matter, charges and fees must be uniform (Article V, Section 8 (d)). Uniformity, however, does not mean that all Fund charges and fees need to be the same across Fund arrangements; rather differentiation would be permitted based on criteria that are relevant to the use of Fund resources. Specifically, the differentiation could be made in light of the nature of the Fund arrangements and the purpose of the fees and charges. In the Fund’s practice, “[d]ifferentiation of charges has been limited to relevant differences in members’ use of the Fund’s resources (e.g., having a different balance of payments need as addressed by a special facility)”, and such differentiation needs to be consistent with the purposes of the fees and charges. See, e.g., “The Fund’s Mandate—Future Financing Role,” IMF Policy Paper, March 26, 2010, at p. 24.
Once credit is drawn under the SLS, the rate of charge would apply as it does for any credit outstanding under the GRA.
A similar idea was discussed, but not adopted, in 1995 in the context of the establishment of the Currency Stabilization Funds (CSF), which was also intended to have revolving nature. Specifically, staff had considered charging the commitment fee on the “net amount of resources” committed by the Fund under the CSF during a relevant period, so that reconstituted access from repurchases would not increase that net amount. However, staff noted that this approach may not be of much relevance because the commitment fee is refundable at the time purchase.
Eliminating the need to pay commitment fees when access is reconstituted, but keeping the commitment fee refundable upon purchases could leave the Fund with outstanding commitments to members for which no (net) commitment fee had been paid.
For example, if at the time of approval of a successor SLS of 145 percent of quota, a member has drawings outstanding under its previous SLS of 100 percent of quota, the proposed 8 bps non-refundable commitment fee would be applied to the entire access of 145 percent of quotas, notwithstanding that at the time of approval access of only 45 percent of quota would be available for drawings.
Under the credit tranches, if no actual BOP needs arise during a 12-month precautionary SBA or FCL, the commitment fee paid upfront, 18 bps for 145 percent of quota, is retained by the Fund as income at the end of the arrangement. If the member experiences an actual BOP need and purchases the commitment in full, it would pay 50 bps in service charge, and receive a full refund of its commitment fee. If the member makes a partial drawing, it pays 50 bps for the drawn amount and receives a commitment fee refund pro-rated by the drawn amount. The remaining commitment fee is retained as income at the end of the arrangement.
Under the credit tranches, there is no revolving feature. The cost of a single purchase, with refundable commitments fees, is the 50 bps service charge. The cost of using the SLS’s revolving feature once, i.e., making two drawings, is also 50 bps under the proposed pricing structure of a 8 bps nonrefundable commitment fee and a 21 bps service charge for each of the drawings.
The expression of interest in being assessed is informal (e.g., could be verbal or written) and serves the purpose of eliminating the members that do not want to be assessed.
Staff will make clear to the member that the Executive Board takes the final decisions on qualification and access.
Given the SLS’s low access limit and the fact that the member accepts an SLS arrangement after the Executive Board conditionally approves the arrangement, it is envisaged that an informal Board meeting will not be required. In contrast, an informal meeting prior to Board approval is a requirement for the FCL and PLL, given the potential for much higher access levels.
The normal periods would apply to document circulation, but circulation could be expedited under special circumstances, similar to the FCL.
Staff does not see the need to discourage members from making public disclosures of the offer; since countries need to initiate the qualification process, as under the FCL, the likelihood of a country qualifying but not opting for the instrument is considerably reduced.
A further Board meeting would not be required as the Board had already approved the extension of an offer. Restricting the time between the extension of an offer to a member and the opt-in by the member to two weeks protects the Fund against a significant change in members’ conditions.
As is standard under Fund facilities, while the Fund would not challenge a representation of need by a member for a purchase requested under the SLS, the member’s drawings would have to be commensurate with its actual BOP need at the time of the purchase, notwithstanding the available amount of approved access.
Staff will generally rely on the member’s representation regarding its domestic legal authority.
Moreover, the central bank would need to be the designated fiscal agent for the Fund to be able to communicate the member’s request for purchase under the facility.
Irrespective of who the signatory of the written communication is, the counterpart obliged to make repurchases and pay any applicable charges vis-à-vis the Fund is the member country, not the specific agency or authority signing the written communication.
The Fund has extensive experience in dealing with avoiding a negative signaling impact. Moreover, the SLS largely follows the FCL and PLL in terms of process, and as such, any signaling effects created by the SLS would already exist under the FCL/PLL. While all members have continued to qualify and no member has yet exited from the FCL or PLL arrangements, the six cases of access reductions to date have not been associated with marked changes in yields, spreads, or yield volatility (see Annex I).
See paragraph 6(b) of Decision No. 14283-(09/29), adopted March 24, 2009, as amended.
Qualification is assessed against the nine criteria as well as the strength of the member’s policy track record, its institutional policy framework, and the overall assessment of policies in the most recent Article IV staff report. The assessment was done for the full membership, except reserve currency issuers (or countries with access to a reserve currency-issuing central bank, in the case of the Euro area). Any final assessment would require further in-depth consultation with area departments and would also be subject to Board approval.
Under the policies and procedures adopted by the Executive Board, the assessment of the strength of members’ external positions for the purpose of selecting their currencies for transfers during an FTP period is conducted in consultation with members and, while anchored in a number of indicators, is ultimately a matter of judgment.
The second-round effects on Fund liquidity of purchases made by members that are included in the FTP comprise two elements: (i) the reduction in the Fund’s holdings of currencies that are available to finance purchases and (ii) conversely, the reduction in the Fund’s need to set aside quota resources as a prudential balance. The second-round effects depend on the level of members’ Reserve Tranche Positions and Fund holdings of currencies and fluctuate over time. On average, second-round effects are estimated to be about 70 percent of a member’s quota.
If a member repurchases the credit outstanding under the SLS in full and continues to have an SLS arrangement, consideration can be given to automatically add the member back to the FTP so that transfers of its currency may be made for the remainder of the plan period, subject to the strength of the member’s external position and in consultation with the member. These procedures would be laid out in a future paper for the Executive Board’s consideration.
In line with past practices, these thresholds are based on committed resources and therefore exclude any potential second-round effects.
Ceteris paribus, i.e., assuming no change in the current commitment under the FCL (SDR 77 billion), the threshold would be reached with SLS commitments of SDR 73 billion. This would reduce the FCC to SDR 136 billion.
Specifically, the FCC is defined as the IMF’s stock of usable GRA resources minus undrawn balances under existing commitments, plus scheduled repurchases less repayments of borrowing, both measured over the coming 12 months, minus a prudential balance.
As noted at the time of the FCC’s introduction, the prior approach of making adjustments to precautionary commitments under the Fund’s liquidity ratio was not transparent, could lead to dramatic changes as the precautionary status of arrangements changed and could result in the Fund implicitly recommitting already committed resources.
See “Review of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument,” IMF Policy Paper, January 28, 2014, and the Press Release No. 14/84, March 5, 2014.
There have been no drawings to date under the FCL. However, staffs analysis for assessing potential drawings shows that these would likely take place in a correlated manner in event of a severe downturn scenario (see Annex V in “Review of the Adequacy of the Fund’s Precautionary Balances.” Also, the proposed new liquidity instrument is designed to handle shocks of more frequent nature, suggesting increased probability of potential drawings.
Bilateral borrowing agreements would also be potentially available, but only as a third line of defense after quotas and the NAB have been largely exhausted. As with the NAB, these cannot be used to finance drawings under commitments made prior to their activation, and would therefore not be available under partial scoring to finance drawings under existing commitments.
Beyond this practical constraint, the current NAB decision allows the Managing Director to propose activation when there is a need for supplemental resources to forestall or cope with an impairment of the international monetary system. The decision specifies that such proposals would only be made if the Fund’s capacity to make commitments from quota-based resources has been or is expected shortly to be substantially depleted, but does not specify any threshold for the FCC that must be met before an activation can be proposed.
All these documents reference the FCC as defined in Decision No. 14906 (11/38), adopted April 20, 2011.
Regressions control for global factors by using as the left-hand-side variable the residuals from a regression of EMBI spreads on the VIX. The “access dummy” takes the value of 1 on the day when lower access was approved by the Fund’s Executive Board, and 0 otherwise.
The “optimal” threshold minimizes the sum of type I and type II crisis prediction/misclassification errors to avoid missing crises (threshold too high) and predicting false crises (threshold too low).
PRGT borrowers under the SCF pay 15 bps in availability fees on undrawn balances at the end of each 6-month period.
The marginal increase was not assessed to have a meaningful impact on liquidity risks facing the Fund. For details, see “Review of Access Limits and Surcharge Policies.”
The level of undrawn credit means the amount that could be purchased during the relevant period as provided by Rule I-8.
Due to the legal requirement of uniformity of charges, application of the TBCF cannot be ring-fenced to specific arrangements within the credit tranches. Furthermore, the application cannot legally be restricted only to arrangements that are treated as precautionary.
See, for example, Dias, D. A. and Richmond, C. “Duration of Capital Market Exclusion: An Empirical Investigation,” July 2009; Mecagni, M., Atoyan, R, Hofman, D., and Tzanninis D., “The Duration of Capital Account Crises—An Empirical Analysis,” IMF Working Paper 07/258, November 2007; and Hatchondo, J.C. and Martinez, L, “Sudden stops, time inconsistency, and the duration of sovereign debt,” IMF Working Paper 13/174, July 2013. The duration could in principle also be based on a typical length of heightened global stress, but this would require more subjective assessment.
The Fund’s reserve adequacy literature also identifies alternative metrics that may be relevant in specific circumstances, including cost of borrowing or sterilizing the intervention for acquiring reserves when their level is low. However, the opportunity cost of reserves is a more suitable measure for comparisons to Fund commitment fees, as the costs of the latter are more relevant under precautionary arrangements where the member does not face an immediate balance of payments need and has broadly adequate reserve holdings.
Conceptually, such measure should be further adjusted for the fact that higher reserves may reduce the local yield of reserves as they reduce risks. However, as noted in “Assessing Reserve Adequacy––Specific Proposals,” IMF Policy Paper, December 19, 2014, the feedback from higher reserves to lower yields appears to diminish with the level of reserve holdings. The impact is not found significant for advanced economies and while relevant for EMs in the past, the rise in reserve holdings in recent years have essentially eliminated this effect.
In principle, high access may also apply to SBAs treated as precautionary, but there have been no instances of such arrangements in recent history. Also, the more gradual accumulation of access rights under SBAs imply that these are less likely to lead to commitments subject to higher commitment fees for extended time periods.
Specifically, the FCC is defined as the IMF’s stock of usable GRA resources minus undrawn balances under existing commitments, plus scheduled repurchases less repayments of borrowing, both measured over the coming 12 months, minus a prudential balance.
“Review of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument,” IMF Policy Paper, January 28, 2014.
Press Release No. 14/84, March 5, 2014.
For the purposes of this annex “precautionary arrangements” or “precautionary commitments” refers to arrangements or to commitments under arrangements which the authorities expressed an intention to treat as precautionary and under which no purchases have been made. “Drawing arrangements” in this annex refer to arrangements with no expressed intent of precautionary use by the authorities.
Only 3 countries have so far made use of the FCL, with the largest individual commitment currently representing three-quarters of the total (one member has made use of the PLL).
There have been no drawings to date under the FCL. However, the new liquidity instrument is designed to handle shocks of a more frequent nature, suggesting that the probability of drawings could be expected to increase.
The decision specifies that such proposals would only be made if the Fund’s capacity to make commitments from quota-based resources has been or is expected shortly to be substantially depleted.
All these documents reference the FCC as defined in Decision No. 14906 (11/38), adopted April 20, 2011.
The last constraint could be addressed if the current NAB Decision were amended to allow it to be used for existing commitments. However, it is not clear whether such a change would be feasible, given that the NAB decision was only just renewed. An alternative would be to explore new credit lines with central banks that could only be drawn upon in specific circumstances involving a widespread drawdown of precautionary arrangements.
Such judgment should also be informed by the precautionary commitments’ potential second round liquidity implications as discussed in section III.
The Fund could enter into new precautionary commitments of up to SDR 208 billion without over-committing its available quota resources. In this event, the remaining FCC would be about SDR 143 billion whereas the Fund’s actual ability to commit new resources would be fully exhausted.
While the Fund could potentially seek to reduce the risk of over-committing its existing resources by capping commitments under the new liquidity instrument (e.g., at SDR 100 billion), it would still be reporting a FCC (e.g., SDR 199 billion in the third column) significantly larger than its actual ability to make new commitments over the next 12 months, which is what the FCC explicitly purports to measure.