A. Exit and Access

9. In response to some Directors’ concerns about prolonged use of the FCL, staff reports for successive FCL arrangements have been more explicit about the expectation for exit. The revised 2015 FCL guidance note highlights specific expectations for exit discussions in staff reports, which subsequent staff reports have followed. For example, the recent staff report for Colombia’s FCL request highlighted that “the authorities consider access to the FCL to be temporary and dependent on external conditions.” Reports have also listed specific external risks and the expectation of exit as these risks recede, and the authorities’ own letters have included language on exit expectations (Box 1). The Polish authorities, in particular, highlighted their efforts to communicate to market participants and the broader public their intention to continue with a smooth and gradual exit strategy, and noted the muted market reaction to date.

10. Staff analysis shows that reductions in access do not appear to be associated with adverse market reaction. The six cases of access reductions to date—four under the FCL and two under the PLL—have not been, on average, associated with marked changes in yields, spreads, or yield volatility (Annex I). Furthermore, Poland’s case highlights the benefits of outreach to financial markets, as it has reduced access on three occasions—most recently to 159 percent of quota in January 2017 (Annex II)—without adverse market reaction.

11. Still, no member has recently exited from FCL or PLL arrangements, and two members have recently increased access. Colombia and Mexico requested increased access levels in 2016, reflecting a rise in external risks. Access under Colombia’s FCL arrangement doubled to 400 percent of quota (about USD 11.5 billion) and access under Mexico’s FCL arrangement increased by more than 30 percent to 700 percent of quota (about USD 88 billion).⁷

12. In light of elevated external risks, there is no evidence that either prolonged use on a precautionary basis or high access levels have been unjustified. Access discussions in successor arrangements were generally consistent with developments in the ESI, and the ESI helped point to specific economic risks (including from global growth, commodity prices, and turbulence in global financial markets) that were elevated. Mexico’s and Colombia’s requests for higher access levels in 2016 were consistent with ESIs that pointed to heightened risks. In addition, the assumed shocks (used to establish the access level) were chosen further into the tail of the distributions (see the red areas in Figure 1). Poland’s 2016 request for a lower access level coincided with an ESI that pointed to reduced risks, though assumed shocks were broadly unchanged.

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Evolution in the Severity of Shocks Relative to Previous Arrangement^1/

Citation: Policy Papers 2017, 069; 10.5089/9781498346139.007.A001

Sources: IMF staff reports.1/ Colors denote the severity of the shock in the kernel distribution and level of access relative to the previous arrangement (or review in the case of Poland in 2017). Red: more severe; yellow: unchanged; green: less severe; gray: not available. Table considers only the shocks as they pertain to the kernel distributions. Other shocks, such as “other capital outflows” are not considered.2/ Mexico: red color in the 2012 request is relative to the 2010 request as the 2011 request assumed MEX to become a net oil importer in 2011–12.3/ Morocco: yellow color is relative to the shock in the 2012 request.

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13. The implementation of the ESI has, nevertheless, been somewhat uneven and could be improved. While ESI adverse scenarios were constructed drawing on Fund flagship reports, such as the WEO and the GFSR, shocks were not always based on the most recent scenarios (see Annex III). Moreover, the size of assumed global shocks varied across shock scenarios in recent program requests. That said, staff reports have recently become more transparent regarding the assumptions underpinning the access scenario; both the Mexico and Colombia requests have listed all relevant assumptions for not only the current arrangement but also the previous two arrangements.

14. While the assumed use of reserves in adverse scenarios has become more prevalent, there may be scope for an even greater reliance on reserve drawdown in adverse scenarios, which would in turn support the case for lower access levels. While external risks have pushed in the direction of higher access levels, developments in fundamentals and the use of buffers have had an important role in reducing access levels (Annex IV). Improved economic fundamentals and buffers, for example, reduced financing needs in the 2017 Poland FCL request. Assumed use of reserves in adverse scenarios has also become more prevalent. Nonetheless, reserve levels in extreme stress scenarios have generally remained within the adequacy range (see text chart), in part reflecting concerns about adverse market reactions to a large and rapid reserve drawdown. The 2014 review and the 2015 FCL guidance note suggest considering 80 percent of the Fund’s ARA metric as a lower threshold in an extreme stress event (see Annex IV). This would imply that additional room for reserve drawdown may be available.

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Reserve Adequacy in Current Arrangements

(Percent of reserve adequcy metric; based on gross international reserves)

Citation: Policy Papers 2017, 069; 10.5089/9781498346139.007.A001

Sources: IMF staff reports; and IMF staff calculations.1/ Augmented by buffer for commodity exports.2/ Net international reserves declined to 89 percent of the ARA metric in the adverse scenario.3/ Financing gap defined to maintain reserves at 90 percent of the standard ARA metric (before adjusting for capital controls). After adjusting for capital controls, baseline reserves amounted to 136 percent of the ARA metric and reserves in the adverse scenario remained adequate.

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15. In addition, the discussion of exchange rate assumptions and the implied impact on financing needs in adverse scenarios could be strengthened. As noted in the FCL guidance note, “the adverse scenario should also take into account whether there is a case for an orderly exchange rate adjustment.” Furthermore, temporary exchange rate depreciation could impact the current account. However, while adverse scenarios have often implicitly built in exchange rate depreciation, which has led to import compression (e.g., Poland’s most recent FCL request), this has generally not been clearly communicated. Hence, the assumed impact of the exchange rate depreciation could be clarified in the description of the adverse scenario.

B. Qualification

16. The 2014 review modified the qualification criteria for the FCL and the PLL to improve the transparency and predictability of qualification and added new indicators to strengthen the assessment. The changes included (i) a clarification of the PLL qualification areas by introducing a direct mapping between the five PLL qualification areas and the nine FCL qualification criteria, strengthening comparability; and (ii) the introduction of indicators to inform the assessment of institutional strength. However, the review also pointed to ambiguity over what constitutes underperformance relative to the qualification requirements, especially with respect to the PLL.

17. The FCL criteria are currently assessed without clearly specified benchmarks. The examination of recent FCL and PLL staff reports highlights the lack of specific tools and benchmarks (i.e., specific indicators with thresholds) that can guide judgment in several of the nine qualification criteria (see Box 2). The absence of benchmarks against which the assessment is made reduces predictability in qualification. The assessment of a sustained track record of implementing very strong policies has also been based entirely on judgment, since neither the benchmarks nor the period over which they are assessed are defined. The next section puts forward proposals for refining the assessment of the nine qualification criteria and a member’s track record. No changes are proposed to the assessment of institutional quality, which warrants a holistic approach.

A. Qualification for the FCL

Making the qualification criteria more transparent would help ensure evenhanded treatment and give members a clearer sense, ex ante, as to whether they would meet (or continue to meet) the qualification criteria. As noted above, while judgment is essential in making the FCL qualification assessments, the role of indicators and thresholds in guiding judgment can be more clearly specified. Accordingly, the paper proposes to use a set of core indicators, based on existing analytical tools, to guide judgment in FCL qualification.

18. The paper proposes to maintain the existing high FCL qualification standard. To approve an FCL arrangement, the Fund must assess that the member (i) has very strong economic fundamentals and institutional policy frameworks; (ii) is implementing—and has a sustained track record of implementing—very strong policies; and (iii) remains committed to maintain such policies in the future.⁸ In addition to a very positive assessment of the member’s policies by the Executive Board in the context of the most recent Article IV consultation, qualification is assessed against nine criteria.

19. The proposed changes to the qualification framework retain all existing qualification criteria but specify more clearly the role of indicators in guiding judgment. To provide a more transparent and predictable basis for assessing whether a member meets the qualification criteria, the framework would be anchored in a set of core indicators with thresholds that are based on established analytical frameworks (e.g., metrics such as the ARA and bottom-line assessments of a member’s external position).⁹ These core indicators are drawn from the indicators endorsed by the Executive Board in 2014.¹⁰

20. The bottom-line assessments on each criterion will remain a judgment, but will be clearly guided by the proposed set of core indicators. The set of core indicators and their thresholds will constitute a key element in determining whether the FCL criteria are met, but do not obviate the need to consult other sources of information—including the broader set of Board-approved indicators—deemed relevant for the bottom-line assessment of any given criterion in a specific country context. This approach would help address the issue of ambiguity over what constitutes underperformance relative to the qualification requirements identified in the 2014 review. Moreover, as under the current framework, very strong performance against all qualification criteria will not be necessary to secure qualification. However, significant shortcomings on one or more of these criteria—unless there are compensating factors underway—would generally signal that the member is not among the very strong performers for whom the FCL is intended. The specific proposal is set out in Box 3, and has been designed to ensure that the overall strength of the FCL qualification standard remains unchanged.

21. The assessment of policy track record will be anchored in the same set of core indicators. Determination of whether a member meets the track record requirement would be guided by an assessment of the qualification criteria in each of the five most recent years.¹¹ The bottom-line assessments on each criterion would follow the same approach as for the current year, including by drawing on additional information, e.g., the appropriateness of a member’s policy response to past bouts of capital flow volatility, and the extent to which individual indicator outcomes reflect favorable external conditions.¹²

B. Other Operational Considerations for the FCL

C. Commitment Fees

This section discusses considerations for raising commitment fees on high access commitments. Although the review has not found any evidence of undue use of the FCL, higher fees could nonetheless promote a more balanced use of Fund resources, including between the FCL and the proposed new liquidity instrument.

24. Over recent years, a number of Directors have called for strengthening exit incentives from prolonged precautionary use of Fund facilities at high access levels. When this issue was last discussed, in the context of the 2014 Review of the FCL and PLL, views were divided. Many Directors saw merit in further work on stronger incentives to encourage timely exit, such as time based commitment fees, with a few suggesting also a time limit on the use of the FCL and PLL. Many other Directors saw no compelling evidence of problems with exit, noting that exit should depend on the state of the external environment facing the member.¹³

25. While the current review reaffirms staff’s earlier view that the FCL has been used as intended, maintaining large commitments on a precautionary basis for extended periods entails costs to the membership. Specifically, prolonged use of large arrangements on a precautionary basis ties up a significant share of the Fund’s finite resources. It also potentially entails costs to creditor members, particularly to non-reserve-currency-issuing members in the Financial Transactions Plan (FTP) that maintain liquid assets to meet potential calls under such arrangements.¹⁴

26. Against this background, two commitment fee reform options could be considered to promote a more balanced use of Fund resources (see Annex V for details). Both are intended to strengthen price-based incentives to discourage large-scale use of precautionary arrangements. Such use typically arises in the context of the FCL, but as commitment fees apply to all GRA arrangements whether they are treated as precautionary or non-precautionary by the member, the fees would also apply to arrangements that are expected to be drawn. Ramifications for arrangements other than FCL would therefore need to be taken into account in the design of the specific policy.

27. A first option would be to steepen the current commitment fee schedule. The current upward-sloping fee structure was introduced as part of the broader reforms in 2009, including the creation of the FCL, to discourage unnecessarily high precautionary access and contain risks to the Fund’s liquidity. Building on the existing commitment fee structure, the current 60 bps rate applied at access above the highest fee threshold of 575 percent of quota could be increased by, say, 10–20 bps. This would be an operationally simple and transparent means to strengthen price-based incentives to discourage prolonged commitments under arrangements with very high access, which are typically precautionary FCLs, while not excessively penalizing high access where such use is warranted.¹⁵ A drawback would be that the structure would apply uniformly to all GRA arrangements irrespective of whether these are treated as precautionary, and could therefore also have implications for large drawing arrangements that go off-track.¹⁶

28. An alternative option would be to introduce a time-based commitment fee, which would be intended to discourage large-scale prolonged precautionary commitments. An arrangement could become subject to an additional fee once the level of undrawn credit has remained above a specified threshold for a defined period (“duration trigger”), say 4 years (see Annex V for details).¹⁷ For arrangements currently in effect, the clock toward meeting the duration trigger would thus start, at the earliest, in mid-2013 (see ¶33 on grandfathering). The arrangements would remain subject to the fee until the level of undrawn credit falls below this threshold, through purchases or upon expiration.^18,19 The drawback of a time-based fee is that it would not be state-dependent, but rather come into effect on a pre-determined schedule, irrespective of underlying external conditions, and could become payable when risks remain elevated. Thus, it could penalize members that experience prolonged periods of adverse external circumstances, including those facing new risks. For this reason, it would be important that any time-based commitment fee be set at a modest level, e.g., 10–20 bps.

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Access under Successive FCL/PLL Arrangements

(Percent of post-14th review quota)

Citation: Policy Papers 2017, 069; 10.5089/9781498346139.007.A001

Sources: IMF staff reports; and IMF staff calculations.

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29. If adopted, the threshold for the time-based commitment fee should be set at a sufficiently high level to appropriately target large precautionary commitments and mitigate the risks of unintended consequences. The threshold could be set, for example, at the higher level-based commitment fee threshold of 575 percent of quota. Such a high threshold could address Directors’ concerns regarding particularly large and prolonged commitments, in practice applying only to prolonged use of high access FCL arrangements.²⁰ A lower threshold would increase the risk of having unintended consequences for other high access arrangements that are expected to be drawn.

30. While consideration could be given to applying the proposed time-based commitment fee to all GRA arrangements, given the purpose of this fee to discourage large-scale prolonged precautionary commitments, it would be appropriate not to apply it to the extended arrangements and the new liquidity facility. If the fee were applied to all GRA arrangements, extended arrangements, which are generally not provided on a precautionary basis²¹ could be subject to the fee in instances that are not aligned with the fee’s purpose, such as when large arrangements go off-track on a protracted basis.²² Arrangements under the new liquidity facility are envisaged to have no exit expectations, and should therefore not be subject to the time-based commitment fee either.

31. Under either of the options above, members could still request new arrangements or renewals if warranted by external risks. Under the current commitment fee structure, costs to users of the Fund’s precautionary facilities are materially lower than staff’s estimates for the cost of accumulating reserves and the fees for comparable arrangements charged by other IFIs (Annex VI). Increasing the fees through either of the above options would bring the costs closer to these comparators (see Annex V for numerical examples).

32. However, in staff’s view, both options have significant drawbacks. As argued above, steepening the slope of the current fee structure would be administratively straightforward to implement, but would not be specifically targeted to prolonged precautionary use of Fund resources. A time-based fee would be more targeted on prolonged use but is a rather blunt tool, as it would be triggered irrespective of the state of external risks faced by members. It would also significantly increase the complexity of the Fund’s fee structure and be operationally burdensome, requiring careful calibration of several design elements (see Annex V).

33. Should the Board decide to implement one of the above options, staff would propose that current arrangements be grandfathered. Increased fees would not be payable under existing arrangements, but the new policy would apply to all new requests for use of Fund resources (e.g., augmentation or new arrangements) approved after the new fee structure comes into effect. In the case of a time-based commitment fee, past repeat use could be taken into account when determining whether a time-based fee is triggered.²³ As such, any augmentation or successor arrangements to the current FCL arrangements could become subject to a time-based fee to the extent that the trigger condition for the fee has been met and the level of undrawn credit under the augmented or new arrangement continues to exceed the chosen threshold. Alternatively, the duration trigger could be applied from the date of effectiveness of the decision or the approval date of a new arrangement.

34. Alternative approaches such as charging an additional fee at times of lower external risks or imposing time limits on use of FCLs were also considered, but would be subject to significant legal and policy constraints. In the 2014 Review, some Directors proposed that an additional fee could be levied on the basis of the state of risks faced by a member or that a time-based commitment fee could be waived in certain circumstances. Such options were noted to be impermissible under the Articles of Agreement, as any difference in fees paid by members must be related to the use of Fund resources and cannot be based on members’ specific circumstances. A legally possible alternative would be to uniformly waive some portion of commitment fees, e.g., the time-based fee if introduced, for all members, on the basis of some global stress indicator. However, such an approach would make the current fee structure much more complex to administer and unpredictable for users, while still leaving the possibility that a member could face higher fees when it was subject to idiosyncratic risks. A few Directors have also raised the idea of imposing a time limit on members’ use of the FCL. Staff does not support such a limit, as it could come into play while external risks remain elevated, and would thereby limit the Fund’s ability to provide support to members that would otherwise be eligible.

D. Elimination of the PLL

Eliminating the PLL would help maintain a streamlined and coherent toolkit.

35. The PLL has had two users. The facility was introduced in 2011 as a replacement for the PCL. Despite offering more flexibility than its predecessor, including use for actual as well as potential BOP needs, and a new 6-month term “liquidity window” for short-term BOP needs, Morocco is the only member that has opted to use the PLL.²⁴ This likely reflects the issue of tiering vis-à-vis the FCL, as well as the difficulty of identifying members that have strong fundamentals and remaining vulnerabilities, as per the 2014 review.

36. Staff proposes to eliminate the PLL.^* Given the low use and general Board concerns about instrument proliferation, the paper proposes to eliminate the PLL. This might open a gap in the toolkit, but the gap should be small, reflecting the low use. Members not qualifying for the new liquidity facility/FCL could continue to have access to the precautionary SBA. Moreover, removing the PLL would eliminate the tiering vis-a-vis the FCL and avoid instrument proliferation. Staff assesses that, on balance, the benefits from eliminating the PLL would outweigh the costs. The existing PLL arrangement would be grandfathered (i.e., it will remain under pre-existing policies until it expires).

A. Objective and BOP Need

37. The 2008–09 review of the Fund’s lending toolkit marked a shift toward more flexible instruments that could address all types of BOP problems. The review recognized that, in practice, it is difficult to predict ex ante the nature, magnitude, or duration of a crisis, and to distinguish between different types of BOP problems, especially potential BOP needs, underscoring the importance of flexible access levels and the possibility of longer repurchase periods.²⁵ Even in circumstances where the sources of a shock were exogenous, one could not assume that policy adjustment would not be necessary. It was therefore agreed to place greater reliance on the credit tranches as the vehicle for the delivery of GRA financing and to eliminate special facilities that were designed to address special, and narrower BOP needs, many of which had been seldom or never used.

38. Since that time, however, the global economy has changed. As noted in previous papers, the global economy is experiencing a period of protracted uncertainty, marked by frequent episodes of volatility.²⁶ Global financial cycles have increased in amplitude and duration, capital flows have become more volatile, and nonbank finance channels have expanded. Demand for a liquidity backstop has intensified, particularly from EMs, which are increasingly exposed to liquidity events triggered by external events and channeled through the capital account (see Box 4).

39. Staff proposes to establish the SLS as a special facility to provide “swap-like” liquidity support for potential short-term BOP needs resulting from exposure to volatile capital flows.^** The SLS will be anchored in a special BOP need, namely “potential short-term BOP difficulties reflected in pressure on the capital account and the member’s reserves resulting from volatility in international capital markets.” Such difficulties are expected to be limited in scale, and to require, at most, a fine-tuning of central bank policies (e.g., exchange rate adjustments, foreign exchange market intervention, and/or interest rate changes).

B. Qualification

40. SLS qualification will be based on the same standard and criteria as the FCL. The high qualification bar for the FCL aims to ensure that a member, when faced with an actual BOP problem of any kind, will undertake the necessary adjustment to correct the problem, and therefore, ex post conditionality is not needed, regardless of the size or nature of the shock. The high qualification standard for the SLS will provide similar confidence that the member will take the necessary policy actions to resolve its BOP problem under moderate shocks and repay the Fund, without the necessity for ex-post conditionality.^{27 28} It would also provide assurance that the member is inherently less susceptible to deeper or more protracted BOP problems. Discussions of subsequent SLS arrangements would also consider the member’s use of Fund resources under previous SLS arrangements in accordance with the special nature of the facility.

C. Terms

12-Month repurchase obligation

41. In light of the short-term nature of the special BOP need, staff proposes the establishment of a 12-month repurchase obligation.²⁹ The proposed one-year repurchase period is consistent with the observed duration of the liquidity shocks that the SLS aims to cover. The acute phase of the recent liquidity events—including the 2013 Taper Talk, which was the most severe post-GFC liquidity event for the EMs—typically lasted a few months, while the impact of the shock dissipated within about a year (Box 4).^{30 31} Assuming a member draws on the SLS at the onset of the shock, a three-month repurchase period (in line with the central bank swap lines) would likely fall within, or very close to, the acute period of the crisis, putting undue additional strain on the BOP and reserves. A three to five-year repurchase period (in line with the instruments in the credit tranches), in contrast, appears unnecessarily long for a short-term liquidity shock.³² Establishing the liquidity backstop as a special facility with a repurchase period shorter than under the credit tranches will require an Executive Board decision adopted by an 85 percent majority of the total voting power.³³

Box 4.

Recent Liquidity Episodes in Emerging Markets: Stylized Facts¹

The introduction of the SLS is at least in part motivated by the major liquidity events that have affected emerging markets (EMs) since the Global Financial Crisis (GFC). This box summarizes stylized facts on the evolution of key variables and policy responses during these episodes, which inform the design of the facility.

The analysis is based on four major exogenous events that have generated financial stress in at least half of the 22 major EMs. These events are the GFC, the 2011 Euro Debt crisis, the 2013 Taper Talk, and the 2015 China market correction. The GFC is included primarily as the reference for a large global shock.

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Financial Pressures in Emerging Markets

(Percent of large EMs; VIX level)

Citation: Policy Papers 2017, 069; 10.5089/9781498346139.007.A001

Source: IMF staff calculationsNote: Daily data aggregated at weekly level. Sample includes 22 large EMs: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Hungary, India, Indonesia, Kazakhstan, Malaysia, Mexico, Peru, Philippines, Poland, Romania, Russia, South Africa, Thailand, Turkey, Ukraine, and Venezuela

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The liquidity events follow the same pattern: a short acute phase followed by a gradual normalization within about a year. The charts on the next page show the evolution of portfolio flows (as measured by Emerging Portfolio Fund Research, EPFR²), the exchange market pressure index (EMP, which combines exchange rate movements and use of reserves), and reserves. The first month of the crisis is the most severe one (as measured by the EMP), and the acute phase lasts around one quarter. During this period, even better-performing EMs (75th percentile) experience portfolio outflows. The outflows reverse within two to three quarters, and by the first anniversary of the crisis, portfolio investments either surpass their original level, or at least stabilize at a new equilibrium level (Taper Talk). Some major liquidity episodes are followed closely by smaller market-moving events (oil price collapse, Brexit, the US elections). Finally, while the GFC had a profound impact on growth outcomes, EM capital inflows rebounded as quickly in the GFC as in the more modest episodes that followed. Only the GFC had a profound impact on EM reserves, while in subsequent episodes reserves of possible SLS qualifiers showed little downward movement and remained at or above 100 percent of the ARA metric, suggesting a reliance on exchange rate flexibility.

The response is generally limited to central bank’s policies. The 2013 Taper Talk was the most severe post-GFC liquidity event for EMs, prompting a multi-prong policy response in several countries (see table below). But even in this extreme event, the response relied almost exclusively on FX interventions, liquidity measures, and monetary tightening, while fiscal and structural measures were deployed only in a few cases.

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Portfolio Flows and Exchange Market Pressure During Recent Liquidity Episodes

Citation: Policy Papers 2017, 069; 10.5089/9781498346139.007.A001

Sources: EPFR, IFS and IMF staff calculations.Note: Sample comprises Argentina, Brazil, Bulgaria, Chile, China, Colombia, Hungary, India, Indonesia, Kazakhstan, Malaysia, Mexico, Peru, Philippines, Poland, Romania, Russia, South Africa, Thailand, Turkey, and Ukraine. The solid blue line is the sample median and the shaded areas the sample interquartile range. The dotted line is the median for potential SLS qualifying EMs.

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Policy Response Following the 2013 Taper Talk

Sources: IMF desk economists; IMF FSAPs; and IMF staff reports. Adapted from Sahay et al., 2014, “Emerging Market Volatility: Lessons from The Taper Tantrum ,” IMF Staff Discussion Note. ^3/ At least ten bank days of disorderly market conditions, as measured by the IMF DMC index.

Policy Response Following the 2013 Taper Talk

	Argentina	Brazil	Bulgaria	Chile	China	Colombia	Hungary	India	Indonesia	Kazakhstan	Malaysia	Mexico	Peru	Philippines	Poland	Romania	Russia	South Africa	Thailand	Turkey
Financial Pressure 3/	✓			✓		✓		✓	✓		✓		✓	✓	✓	✓		✓		✓
Monetary tightening	✓	✓						✓							✓	✓	✓	✓		✓
Monetary loosening																			✓
FX intervention	✓	✓				✓		✓	✓				✓	✓	✓	✓	✓		✓	✓
Liquidity provision		✓						✓	✓				✓							✓
Macropru tightening								✓	✓											✓
CFM easing		✓						✓	✓
Fiscal tightening								✓			✓
Structural policies								✓			✓		✓

Sources: IMF desk economists; IMF FSAPs; and IMF staff reports. Adapted from Sahay et al., 2014, “Emerging Market Volatility: Lessons from The Taper Tantrum ,” IMF Staff Discussion Note. ^3/ At least ten bank days of disorderly market conditions, as measured by the IMF DMC index.

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Policy Response Following the 2013 Taper Talk

	Argentina	Brazil	Bulgaria	Chile	China	Colombia	Hungary	India	Indonesia	Kazakhstan	Malaysia	Mexico	Peru	Philippines	Poland	Romania	Russia	South Africa	Thailand	Turkey
Financial Pressure 3/	✓			✓		✓		✓	✓		✓		✓	✓	✓	✓		✓		✓
Monetary tightening	✓	✓						✓							✓	✓	✓	✓		✓
Monetary loosening																			✓
FX intervention	✓	✓				✓		✓	✓				✓	✓	✓	✓	✓		✓	✓
Liquidity provision		✓						✓	✓				✓							✓
Macropru tightening								✓	✓											✓
CFM easing		✓						✓	✓
Fiscal tightening								✓			✓
Structural policies								✓			✓		✓

Sources: IMF desk economists; IMF FSAPs; and IMF staff reports. Adapted from Sahay et al., 2014, “Emerging Market Volatility: Lessons from The Taper Tantrum ,” IMF Staff Discussion Note. ^3/ At least ten bank days of disorderly market conditions, as measured by the IMF DMC index.

1 The box focuses on EMs, as previous GFSN papers have identified them as the main beneficiaries of a new liquidity instrument given gaps in the current GFSN. 2 EPFR flows cover only a fraction of BOP-recorded flows. However, EPFR’s monthly data allows for a more granular analysis. BOP and EPFR trends look similar when compared on a quarterly basis.

Charges and fees

46. Staff proposes a commitment fee and service charge structure for the SLS that takes into account the short-term BOP need addressed by, and the revolving access under, the SLS policy. Specifically, staff proposes a non-refundable commitment fee of 8 bps and a service charge of 21 bps. While these fees differ from the commitment fee and service charge applicable to other Fund arrangements, the differentiation can be justified in view of the special, short-term nature of the BOP need to be addressed by the SLS and the proposed revolving feature.³⁸ The proposed structure and level of the fees are intended to ensure that both the commitment fee and the service fee can fulfill their respective purposes in the context of the SLS and that the overall pricing for the SLS is comparable to other Fund credit.³⁹

47. The commitment fee and the service charge serve different yet related purposes. Commitment fees are intended to cover the cost of establishing and monitoring arrangements and for setting aside resources, and to discourage unnecessarily high precautionary access and thereby help contain risks to the Fund’s liquidity. The purpose of the service charge is to generate income to cover administrative costs and discourage unnecessary purchases (Table 2). Taken together, these charges provide the incentives for a member to request only the amount of access it needs, without imposing prohibitive cost barriers that discourage members with potential BOP problems from requesting Fund resources and, if an actual BOP need arises, to purchase only the amount it needs. These incentives are reflected in the commitment fee being generally lower than the service charge, so that even after taking account of the commitment fee refunds, there is often a net cost to drawing under an arrangement.

Table 2.

Income from GRA Charges and Fees, FY2012–16

(Millions of SDR unless stated otherwise)

Source: IMF Finance Department.

^1/Excluding burden sharing adjustment for charges.

^2/At end-April 2016, there was a further SDR 415 million of commitment fees collected (including SDR 396 million from FCL/PLL arrangements) which may be refunded (if drawn or cancelled before expiration) or recognized as income (if amounts remain undrawn upon cancellation or expiration).

^3/Average USD/SDR exchange rates for FY2012–16 are from the annual income outturn papers. Average exchange rate for the 9 months in FY2017 is the daily average of USD/SDR exchange rate published by the IMF.

Table 2.

Income from GRA Charges and Fees, FY2012–16

(Millions of SDR unless stated otherwise)

			2012	2013	2014	2015	2016	Total (FY’12-’16)	2017 (9 mo.)
	Basic charges 1/		1,040	996	932	788	542	4,299	413
	Surcharges		907	1,241	1,398	1,463	787	5,796	456
	Commitment fees 2/		25	473	29	505	96	1,128	333
		Of which: FCLs/PLLs	5	433	19	494	18	968	332
	Service charges		161	53	58	60	23	356	26
Total charges and fees			2,133	2,763	2,418	2,817	1,448	11,578	1,227
Total charges and fees (mill. USD) 3/			3,306	4,171	3,676	4,140	2,013	17,307	1,694
	Commitment fees (mill. USD)		38	714	45	742	134	1,673	459
	Service charges (mill. USD)		250	80	89	88	33	539	36

Source: IMF Finance Department.

^1/Excluding burden sharing adjustment for charges.

^2/At end-April 2016, there was a further SDR 415 million of commitment fees collected (including SDR 396 million from FCL/PLL arrangements) which may be refunded (if drawn or cancelled before expiration) or recognized as income (if amounts remain undrawn upon cancellation or expiration).

^3/Average USD/SDR exchange rates for FY2012–16 are from the annual income outturn papers. Average exchange rate for the 9 months in FY2017 is the daily average of USD/SDR exchange rate published by the IMF.

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Table 2.

Income from GRA Charges and Fees, FY2012–16

(Millions of SDR unless stated otherwise)

			2012	2013	2014	2015	2016	Total (FY’12-’16)	2017 (9 mo.)
	Basic charges 1/		1,040	996	932	788	542	4,299	413
	Surcharges		907	1,241	1,398	1,463	787	5,796	456
	Commitment fees 2/		25	473	29	505	96	1,128	333
		Of which: FCLs/PLLs	5	433	19	494	18	968	332
	Service charges		161	53	58	60	23	356	26
Total charges and fees			2,133	2,763	2,418	2,817	1,448	11,578	1,227
Total charges and fees (mill. USD) 3/			3,306	4,171	3,676	4,140	2,013	17,307	1,694
	Commitment fees (mill. USD)		38	714	45	742	134	1,673	459
	Service charges (mill. USD)		250	80	89	88	33	539	36

Source: IMF Finance Department.

^1/Excluding burden sharing adjustment for charges.

^2/At end-April 2016, there was a further SDR 415 million of commitment fees collected (including SDR 396 million from FCL/PLL arrangements) which may be refunded (if drawn or cancelled before expiration) or recognized as income (if amounts remain undrawn upon cancellation or expiration).

^3/Average USD/SDR exchange rates for FY2012–16 are from the annual income outturn papers. Average exchange rate for the 9 months in FY2017 is the daily average of USD/SDR exchange rate published by the IMF.

48. When the SLS is used as envisaged, i.e., on a short-term and revolving basis, the Fund’s current standard commitment fee and service charge structure could undermine the key features of the new facility. If the current rules were applied to the SLS, a member would pay a refundable commitment fee upfront for the approved amount, receive a refund if it makes purchases, and pay a pro-rated commitment fee if it reconstitutes access by repurchasing within the arrangement period. Requiring members to pay (pro-rated) commitment fees each time they reconstitute access under the SLS, however, would provide financial disincentives to early repurchases and could undermine the SLS’s unique revolving feature.⁴⁰ Similarly, if the current 50 bps service charge is levied on each purchase under the SLS, it could be prohibitively expensive for members to make repeated purchases/repurchases within the arrangement as their short-term BOP needs subside and reemerge, which would also discourage the use of the revolving feature. For example, if a member with an SLS were to fully draw, repay, and draw again under an SLS arrangement with access of 145 percent of quota during a 12-month period, total fees from the combination of the current refundable 18 bps average commitment fee and the 50 bps service charge would amount to 100 bps. In the view of staff, this pricing is out of line with the pricing of other Fund facilities, and would not provide adequate incentives for members to make use of the SLS.

49. Against this background, and to support the use of revolving credit, staff proposes applying a nonrefundable commitment fee for the SLS. As discussed above, requiring members to pay pro-rated commitment fees when they reconstitute access could discourage early repurchases. Therefore, staff proposes that the commitment fee for the SLS be paid on a nonrefundable basis.⁴¹ This would also apply in the context of successor arrangements where drawing under a previous SLS remains outstanding at the time a successor SLS is approved.⁴² If purchases are made under the SLS, members would not receive refunds, and if they make early repurchases and thereby reconstitute their right to make further purchases, they would not incur further commitment fees. Consideration could be given to billing the commitment fee at the end of the arrangement rather than upfront to simplify operations.

50. To be comparable with the refundable commitment fee under the credit tranches, staff propose that the nonrefundable fee be 8 bps. The expected commitment fee paid by member and received as income by the Fund for use of other GRA facilities of the same size and duration, i.e., 145 percent of quota for 12-months on a precautionary basis, would be between 0–18 bps.⁴³ A nonrefundable commitment fee of 8 bps for the SLS would make the expected costs and related income to the Fund broadly comparable with credit tranche facilities under a combination of drawing and non-drawing scenarios.

51. Staff also proposes to establish a lower service charge of 21 bps for purchases under the SLS. This would support the SLS’s revolving feature and, together with the proposed 8 bps non-refundable commitment fee, would allow for the expected cost of the facility to be broadly comparable to that of other GRA facilities as its revolving feature is used. The service charge should be established at a level where it provides an additional net cost to the user of Fund credit above the commitment fee, but lower than the standard service charge of 50 bps, which would add significantly to the overall cost of using the SLS’s revolving feature and thus discourage the use of the revolving feature. Applying a non-refundable commitment fee of 8 bps while setting the service charge for all purchases under an SLS arrangement at 21 bps would result in a cost of the SLS that is comparable to other Fund credit if the facility is drawn on a revolving basis.⁴⁴

52. It is expected that the special commitment fee and service charge structure for the SLS would be reviewed within two years in the context of a broader review of the SLS. The review will take into consideration whether the experience with the use of the facility is consistent with the assumptions that underpin the proposed pricing structure.

D. Process

53. The proposed process for the approval and use of the SLS largely follows the process for the FCL There are three notable differences: the extension of an “offer” by the Fund to those members that qualify, the absence of a prior informal Board meeting, and an option for sole central bank signatory. The main steps are:

• Initial confidential consultation. Staff discusses with the authorities their interest in pursuing an SLS arrangement and the likelihood of meeting the qualification criteria. Discussions are confidential and could happen at any point during the year, similar to the FCL process.

• Assessment of qualification. Staff begins the assessment process once the authorities have indicated their wish to be assessed.⁴⁵ Staff carries out an assessment of qualification and the level of access that might be warranted based on the latest information. If further consultation with the authorities is required, it could take place via a staff visit or video teleconferencing. Once the assessment is complete, management will assess if access to Fund resources is appropriate.^{46 47}

• Preparation of the Board paper. If a member confirms its intention to proceed, staff prepares the staff report setting out the basis for the Board to support an arrangement. The report includes: (i) the assessment of qualification; and (ii) the assessment of the potential BOP need, appropriateness of the proposed level of access, and repayment capacity.⁴⁸

• Formal Board meeting to consider the case for an offer and conditional approval of an arrangement. In contrast to other Fund instruments where the Executive Board may approve a request for the use of Fund resources, the Board instead approves the “extension of an offer” to the member. The offer is contingent on the authorities’ acceptance within a specified period (see below) and their commitment to maintaining very strong economic policies and responding appropriately to shocks that may arise. If, after the Board meeting, there are concerns about market-sensitive leaks or misinformation regarding the offer, the member could request that the Fund issue a press release indicating the Board’s conditional approval of an arrangement. The press release would take special care not to prejudge the authorities’ decision on whether to avail themselves of the arrangement⁴⁹

• Extension of an “offer.” The Board’s conditional approval of the arrangement, with a specified access level, is communicated to the authorities within 24 hours of the Board meeting. The authorities are required to respond within two weeks from the date of the conditional approval.

• Effectiveness of the arrangement. The arrangement becomes effective upon the Fund confirming receipt of the signed written communication from the member, including the acceptance of the “offer” and policy commitments (see Annex VII for an illustrative letter). Staff will subsequently issue the communication to the Board for information.⁵⁰

• Press release and publication. A press release is published on the date the arrangement enters into effect, while the staff report, including the authorities’ written communication, is published shortly afterwards.

• Purchases. A member could make one or multiple purchases during the period of the SLS arrangement subject to the approved access level. In the event of a purchase, staff would inform the Board promptly.⁵¹

• Transition between the FCL and the SLS. A member could cancel an existing arrangement (FCL or SLS) and request a new arrangement (SLS or FCL, respectively). As the proposed qualification criteria for the SLS and the FCL are fully aligned, and the member is already qualified for the existing arrangement, it is expected that the member will also qualify for the new arrangement (in the case of the SLS, if the member has the potential BOP need which the SLS is aimed to address), and the process for the new arrangement will be expeditious.

54. The central bank could be the sole signatory of the written communication, if the member so chooses, subject to certain requirements being met. First, the central bank must have the domestic legal authority to commit the member to the financial obligations to the Fund.⁵² Second, it must be the exclusive responsible authority for any necessary adjustment. As the SLS is designed to address a special BOP need that by nature requires only adjustment of a monetary and exchange rate nature (e.g., interest rate changes, exchange rate policies), any needed adjustment would likely be confined to measures implemented by the central bank.⁵³, ⁵⁴ Lastly, the written communication would need to convey, on behalf of the member’s authorities, the member’s commitment to maintain its current very strong policies that form the basis for the qualification assessment. As these policies will necessarily include fiscal policies, staff will confirm with the Ministry of Finance that they are indeed committed to maintaining their current fiscal stance during the course of the arrangement.

55. The process for the SLS is strictly confidential and designed to both minimize the risk and mitigate the impact of potential leaks. The information would be handled the same way as for the FCL, with great care taken to maintain the confidentiality of the process. The qualification assessment is made public only for countries that meet the criteria and ultimately enter into an arrangement. The risk of a damaging leak is therefore mitigated by the fact that reports are only produced for countries that have passed staff’s qualification assessment. The negative signal that might be sent if a previous user does not renew its arrangement is thus muted, since it would be unclear whether this was the member’s choice or the member no longer qualified.⁵⁵

56. A group of qualifying countries could simultaneously opt in. Synchronized extension of offers to, and opt-in, by qualifying members can help kick-start the use of the SLS by minimizing first-mover problems, and strengthen the effectiveness of the response to a common shock. The process is similar to that for the synchronized approval of FCLs, as per FCL guidelines. Confidentiality is preserved in discussing with members the potential interest and qualification for the backstop; staff only reveal that other members have expressed interest in the backstop if those members have agreed that such information can be shared. While each member’s qualification is assessed individually, and is subject to all the requirements for the backstop, the Executive Board considers the extension of offers to multiple countries at a single meeting. External communication could be coordinated, e.g., in the form of a single Fund press release announcing the multiple new arrangements, subject to agreement by the members in question.

E. Relationship with the FCL

57. The SLS and the FCL are designed to address different types of BOP needs, but in practice may be complementary. The SLS aims to provide support against medium-sized BOP shocks of a special nature, while the FCL is for any type and size of BOP needs. For those members looking to access a Fund arrangement on a precautionary basis, staff envisages that the SLS would provide support against medium-sized liquidity shocks, while the FCL could be the exceptional-access counterpart, for use as a temporary backstop against extreme shocks/tail events that may require comprehensive policy adjustments, with an exit expectation (see Figure 2). The maximum access level under the SLS should provide sufficient coverage for the type of volatility that the SLS is envisaged to address. If, however, the financing need of a member with an active SLS ends up exceeding 145 percent of quota (or the remaining credit available under the SLS), the member would need to transition to a different instrument, e.g., the FCL, which would provide access to more resources and a longer repayment period. The transition from the FCL to the SLS (and vice-versa) would be facilitated by the identical qualification criteria.

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Envisaged Configuration of the Fund Precautionary Toolkit

Citation: Policy Papers 2017, 069; 10.5089/9781498346139.007.A001

Source:IMF staff estimates.1/ Showing historical precautionary arrangements in percent of 2016 quota.

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F. Other Modalities

58. Review clause. To ensure that the Fund has sufficient resources for crisis lending, staff propose that the SLS be reviewed two years after its creation, or earlier if total combined commitments under the SLS and the FCL exceed SDR 150 billion (see resource section below). The Board could also consider incorporating a sunset clause providing for the expiration of the facility in eight years after its establishment. A decision to extend the SLS beyond the initial sunset date would, like the original decision establishing the facility, require a Board decision adopted by an 85 percent majority of the total voting power.

59. No safeguards assessment. The SLS would be subject to the same requirements as the FCL regarding safeguards assessments. FCL arrangements are not subject to the Fund’s policy on safeguards assessments and a modified safeguards approach applies.⁵⁶ Under the FCL, the very strong institutional quality criterion justifies a streamlined approach and since the SLS has the same qualification criteria, the same limited safeguards procedures are proposed for the SLS.

60. No concurrent use. Members that have other GRA arrangements (e.g., FCL or SBA) would not use the liquidity backstop to “double up.” As a general matter, members do not access financing under concurrent GRA arrangements. If a member has an existing precautionary arrangement under another facility, this would provide support in the event of short-term liquidity shocks, even if that were not the main objective of the arrangement.

61. Post-program monitoring (PPM). Like the FCL, it is proposed that credit outstanding under SLS arrangements will be taken into account for the purpose of the PPM policy.

62. Consequential policy changes. Establishing the SLS with its proposed features will require changes to a number of Fund policies. These include changes to the decision on overall access to the Fund’s resources in the GRA, which will need to be amended to reflect the specific access provision of the SLS. Changes to the transparency policy will also be made to clarify that the Board’s approval of an SLS arrangement will be conditional upon the member’s commitment to publication in its written communication accepting the offer, and to link the publication timelines for the SLS to the activation of the arrangement (instead of the Board approval). Further changes will need to be made to the decision on Article IV consultation cycles to provide that, upon approval of an SLS arrangement, a member will remain on a 12-month Article IV consultation cycle.

A. Commitments and Second-Round Effects

63. Staff’s preliminary estimates indicate that potential commitments under the SLS would likely not exceed SDR 90 billion, and would probably be much lower. Staff has established a tentative list of potential qualifiers, based on a preliminary assessment of the qualification framework described in Box 3.⁵⁷ The resulting list was used to construct different scenarios for possible resource implications (Table 3). All scenarios assume that members that opt in receive the maximum access under the facility of 145 percent of quota. • Scenario A assumes that all potentially eligible members, except those with current active FCL arrangements, decide to avail themselves of SLS arrangements. This could be considered an upper-bound estimate under current circumstances and would result in commitments of about SDR 88 billion.

• Scenario B assumes that only the potentially eligible members that have so far expressed a clear interest opt in. Under this more plausible scenario, commitments would be about SDR 32 billion.

• Scenario C builds on Scenario B, further assuming that, once their current arrangements expire, the three current FCL users would qualify and opt in for an SLS arrangement. In this case, commitments under the SLS would rise to around SDR 54 billion, but aggregate commitments under the SLS and FCL arrangements would fall considerably relative to Scenario B, by about SDR 55 billion, raising the Fund’s forward commitment capacity (FCC) by SDR 23 billion.

Table 3.

Potential Resource Implications

(Billions of SDR)

^1/Potential SLS commitments assuming maximum commitment of 145 percent.

^2/Current FCL commitments (Mexico, Poland, Colombia). They are already reflected in the current FCC.

^3/Assumes all members with an SLS or an FCL draw simultaneously.

Table 3.

Potential Resource Implications

(Billions of SDR)

	Commitments				Second round effects 3/
	SLS 1/	FCL 2/	Total	Net impact on FCC	SLS	FCL
Scenario A	88	77	165	-88	38	11
Scenario B	32	77	109	-32	12	11
Scenario C	54	-	54	23	23	-

^1/Potential SLS commitments assuming maximum commitment of 145 percent.

^2/Current FCL commitments (Mexico, Poland, Colombia). They are already reflected in the current FCC.

^3/Assumes all members with an SLS or an FCL draw simultaneously.

View Table

Table 3.

Potential Resource Implications

(Billions of SDR)

	Commitments				Second round effects 3/
	SLS 1/	FCL 2/	Total	Net impact on FCC	SLS	FCL
Scenario A	88	77	165	-88	38	11
Scenario B	32	77	109	-32	12	11
Scenario C	54	-	54	23	23	-

^1/Potential SLS commitments assuming maximum commitment of 145 percent.

^2/Current FCL commitments (Mexico, Poland, Colombia). They are already reflected in the current FCC.

^3/Assumes all members with an SLS or an FCL draw simultaneously.

64. This analysis suggests that potential commitments under the SLS could be accommodated comfortably within the Fund’s current resource envelope. Under all scenarios, commitments under the SLS would be well below the current FCC of SDR 210 billion, which as of April 11, 2017, comprises only quota resources.

65. The liquidity impact of SLS commitments could become temporarily higher if some members were to draw on the arrangements. Members meeting the SLS qualification criteria would generally be expected to also have sufficiently strong external positions to be included in the Financial Transactions Plan (FTP).⁵⁸ Members included the plan would be removed temporarily from the FTP if they draw on their arrangements, since they would not be in a position to provide resources to other members when they have BOP needs themselves. This, in turn, would reduce the FCC, giving rise to a second-round effect on the Fund’s liquidity.⁵⁹ Such second-round effects of SLS commitments could be significant, albeit temporary given the anticipated short-term nature of the special BOP need.⁶⁰ For instance, in Scenario B, the maximum temporary second -round effects (for as long as Fund credit remained outstanding) would reach SDR 12 billion in the extreme event where all members with SLS arrangements in that scenario made purchases.

66. Staff proposes to review the SLS if total combined commitments under the SLS and the FCL exceed SDR 150 billion.^{61 62} This is the same threshold as the current review trigger of SDR 150 billion of combined commitments under the FCL and the PLL. Maintaining a trigger based on combined commitments under the FCL and SLS is also consistent with the proposed replacement of the PLL with the SLS and positioning the SLS as complementary to the FCL. If the Fund has concerns in the future regarding the burden the SLS places on Fund resources, it could decide to modify or terminate the facility, with transitional arrangements for those arrangements in effect.

B. Scoring of Precautionary Commitments in the FCC

67. The Fund’s forward commitment capacity currently counts (“scores”) all Fund commitments at their full value. The one year FCC, which was adopted in 2002, is the primary measure of the Fund’s liquidity position, providing a transparent measure (derived from published data) of the resources available for making new financial commitments over the next 12 months.⁶³ Its calculation treats all commitments as equivalent, including under arrangements treated as precautionary (“precautionary arrangements”) by country authorities that are historically less likely to be drawn.⁶⁴

68. Directors last reviewed the above approach in the context of the 2014 FCL/PLL/RFI Review. The staff paper noted several drawbacks with partial scoring, and proposed that the current approach be maintained. Directors generally supported this conclusion, though a few were open to consider some flexibility in their treatment.⁶⁵ Some Directors have since asked staff to revisit the practice again in the context of the current review.

69. Partial scoring would not increase the Fund’s overall resource envelope. Nor would it change the size of total commitments the Fund is obliged to meet on demand. Rather, a shift to partial scoring would signal that the Fund is willing to commit more resources than it has available when part of these commitments are precautionary in nature. To avoid raising doubts about the Fund’s ability to honor its commitments, staff believes it is important that the Fund retain a low tolerance for liquidity risk.

70. Against this background, two conditions can be identified that could justify partial scoring: (i) that the Fund’s exposures under precautionary arrangements are sufficiently well diversified to assure, with a high degree of confidence, that only a fraction of its total commitments will be drawn upon within a short period of time; and/or (ii) that the Fund has a credible mechanism in place to mobilize the necessary resources quickly should large-scale drawings materialize.

71. However, in staff’s view, neither of these conditions is currently in place:

• It is difficult to conclude, with high degree of confidence, that only a fraction of the Fund’s precautionary commitments will be drawn within a short period of time. Given the high degree of inter-connectedness in today’s global economy, the number of Fund’s individual precautionary exposures is unlikely to be large enough to meaningfully diversify liquidity risks, even assuming greater demand for the new liquidity instrument that has emerged to date for the FCL/PLL. Moreover, the Fund’s precautionary arrangements, including the proposed new liquidity instrument, are designed to address external shocks that are likely to impact a number of countries simultaneously. Even if the probability of such shocks were to remain relatively low, the potential concurrent drawings in such a low probability event could be very high.⁶⁶

• As currently designed, the Fund’s primary liquidity backstop, the NAB, could not be used to meet commitments made when the NAB was not activated. While the NAB can be activated at short notice with a Board decision and 85 percent support from the NAB participants, NAB resources can only be used to finance commitments made after its activation.⁶⁷ This implies that such commitments could only be financed with quota resources and the Fund would need to ensure that it has sufficient quota resources available at all times to meet the full amount of potential drawings under existing arrangements. Relatedly, under recent legislation, the U.S. can only support an activation proposal during the next NAB renewal period if the FCC is expected to fall below SDR 100 billion, which effectively sets a quantitative threshold to meet the required 85 percent majority for activation.⁶⁸ Therefore, under partial scoring, the Fund could be in a position where available quota resources are fully committed but the FCC remains above SDR 100 billion, such that it would be unable to activate the NAB to finance new commitments (see Annex VIII for illustrative calculations).

72. Under partial scoring, the FCC would also become an increasingly misleading indicator of the Fund’s ability to enter into new commitments as the level of precautionary commitments expands. It should also be noted that full scoring of precautionary commitments is embedded in the Fund’s Borrowing Guidelines as well as in each individual bilateral borrowing agreement, which would need to be amended if partial scoring were adopted.⁶⁹

73. Based on these considerations, staff believes that full scoring of precautionary arrangements in the FCC remains appropriate. The main reasons are (i) the importance of avoiding any doubts over the Fund’s ability to meet its financial commitments under precautionary arrangements and thus ensuring their effectiveness as part of the GFSN; (ii) the potential for drawings to be highly correlated in response to external shocks that affect several members at the same time; and (iii) the absence under the current framework of an alternative source of liquidity that could be tapped in the event of such correlated drawings. If such an alternative source of liquidity were identified in the future, this treatment could be revisited.

74. That said, it would seem reasonable for the Board to take account of the level of precautionary commitments when assessing the adequacy of the Fund’s liquidity. In particular, the same level of the FCC could be considered more or less comfortable depending on the relative size of drawing versus precautionary commitments. In circumstances where precautionary commitments are a relatively large share of the total, the Fund could be willing to tolerate a lower FCC before activating the NAB, and the Managing Director could take such considerations into account in making a proposal on activation. To facilitate such judgments on when a need exists to supplement quota resources, staff proposes that the FCC calculation in future provides a breakdown of total commitments between arrangements expected to be drawn and those treated as precautionary by the authorities.