1. This supplement sets forth an illustrative set of decisions that would be needed to adopt the reforms outlined in Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform, IMF Policy Paper, December 2017 (the “Paper”). A number of Directors have requested illustrative decisions to better understand the details of the policy changes discussed in the Paper. In this light, attached are an illustrative set of decisions that would: (i) complete the review of the Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL) and set the deadline for the subsequent review of the FCL; (ii) eliminate the PLL; and (iii) establish the Short-term Liquidity Swap (SLS), and make the necessary changes to ancillary Fund policies to implement the proposed features of the SLS. Additionally, while staff does not propose such reforms, the set includes—at the request of some Directors—an illustrative decision that includes options to either steepen the current commitment fee schedule or introduce a time-based commitment fee. Based on the understandings reached at the Executive Board meeting scheduled for June 30, 2017, staff would subsequently circulate proposed decisions for adoption either at a follow-up Board meeting or on a lapse-of-time basis.
2. Completion of the FCL/PLL Review and Timing of Future FCL Review (Illustrative Decision I): Illustrative Decision I, which would be subject to adoption by a majority of the votes cast, would complete the FCL and PLL Review called for in Decision No. 15596-(14/46), adopted May 21, 2014 (paragraph 1). While the decision on streamlining of policy reviews (Decision No. 15764-(15/39), adopted April 23, 2015) currently contemplates that the next FCL review take place in five years or more, on an as needed basis, Illustrative Decision I would propose that the next FCL review take place within two years, at the same time as the review of the SLS, or earlier if aggregate outstanding credit and commitments under the FCL and the SLS exceed SDR 150 billion (paragraph 2). Subsequent reviews would then take place in five years or more, or on an as needed basis, in accordance with the streamlining policy. Consistent with the elimination of the PLL discussed below, the FCL would no longer be reviewed in conjunction with the PLL, and outstanding credit and commitments under the PLL would no longer count towards the SDR 150 billion review trigger (paragraph 3).
3. Elimination of the PLL (Illustrative Decision II): Illustrative Decision II, which would be subject to adoption by a majority of votes cast, would repeal the PLL, effective upon the expiration or cancellation of the PLL arrangement currently in effect (paragraph 1), and no new PLL arrangements would be approved (paragraph 2).
4. Establishment of the SLS and Related Decisions (Illustrative Decision III): Illustrative Decision III would establish the SLS as a special facility in the GRA (i.e., outside the credit tranches) and make the necessary changes to Fund policies to implement the proposed features of the SLS. Because all policy changes in Illustrative Decision III are necessary to establish the proposed features of the SLS, they are included in a single Decision. Adoption of Illustrative Decision III would require a majority carried by 85 percent of the total voting power because: (i) it establishes a special repurchase period for the SLS (12 months); and (ii) the SLS is proposed to “float” against the reserve tranche (i.e., members will maintain a reserve tranche position in the Fund despite making purchases under the SLS), both of which require an 85 percent majority under the Articles (Article V, Section 7(d) and Article XXX(c)(iii), respectively). While Illustrative Decision III would also include elements that independently would require adoption by either a majority of the votes cast (e.g., access policy) or 70 percent of total voting power (e.g., changes to charges and fees), when one decision makes changes that require different voting majorities, the highest voting majority applies. A detailed description of each section of Illustrative Decision III follows:
Establishment of the SLS (Section A of Illustrative Decision III): Section A would establish the SLS for members with the special balance of payments need outlined in paragraph 39 of the Paper (paragraph 1). While not proposed by staff, some Directors have expressed interest in approving the SLS for a limited period of time (e.g., eight years), with extension of the SLS after that time requiring approval by 85 percent of the total voting power. Members that informally express interest would be conditionally approved for an SLS arrangement if they meet the qualification criteria, which are the same as those for the FCL (paragraph 2), and would not be subject to any form of ex-post conditionality or reviews (paragraph 3). Access under an SLS arrangement would be approved for a qualifying member up to 145 percent of its quota, on a revolving basis both within and across SLS arrangements (paragraph 4), for a period of 12 months, unless cancelled before expiry by the member (paragraph 5). The process for approval, including the authorization to access audited financial information, is outlined in paragraph 6. Purchases under the SLS would not count against a member’s reserve tranche position (paragraph 7). The SLS would have a repurchase obligation of 12 months (paragraph 8). Finally, the SLS would be proposed to be reviewed within two years from the date of adoption, or whenever aggregate outstanding credit and commitments under the SLS and the FCL exceed SDR 150 billion (paragraph 11).
Access Policy (Section B of Illustrative Decision III): Section B would carve out access under the SLS from the access limits set forth in the policy on overall access to the Fund’s resources in the General Resources Account. This is because unlike other Fund arrangements, which define access on a flow basis, access under the SLS would be defined as a limit on the stock of Fund credit committed or outstanding, up to a maximum of 145 percent of quota. A member would be able to purchase at any given time up to the amount of approved access under the SLS, minus outstanding purchases. Repurchases would reconstitute access up to the approved access amount for the SLS arrangement in effect at the time of the repurchase (paragraph 4 of Section A). However, outstanding amounts under the SLS would count towards the access limits if a member subsequently requests access to Fund resources under another Fund facility.
Article IV Consultation Cycle (Section C of Illustrative Decision III): Section C would amend the Decision on Article IV Consultation Cycles to clarify that members with an SLS arrangement must remain or be placed on the 12-month Article IV consultation cycle.
Transparency Policy (Section D of Illustrative Decision III): Section D would amend the Decision on Publication of Reports to account for the SLS arrangement’s approval process, which differs from other Fund arrangements in that the Executive Board would “offer” an SLS arrangement to a member and the SLS arrangement would become effective upon confirmed receipt of a member’s acceptance of the offer. In this regard, changes would be made so that: (a) the publication deadline of the press release and staff report starts from the effective date of a member’s SLS arrangement, rather than the date the underlying staff report is discussed; and (b) the effectiveness of a member’s SLS arrangement is conditioned on the member’s consent to publish when it accepts the Fund’s offer of an SLS arrangement, unlike other requests for Fund arrangements, which require that the member consent to publication for management to recommend approval of an arrangement by the Executive Board.
Allocation of Repurchases (Section E of Illustrative Decision III): Section E would amend the Decision on Attribution of Reductions in the Fund’s Holdings of Currencies, for administrative purposes, to clarify that a member’s repurchases under the SLS will be applied first to the longest outstanding purchase under the SLS (i.e., a “first out, first in” rule will apply) as outlined in Box 5 of the Paper.
Surcharges (Section F of Illustrative Decision III): Section F would amend the level-based surcharge policy to include outstanding purchases under the SLS. Fund holdings of a member’s currency over 187.5 percent of quota resulting from purchases in the credit tranches, under the SLS and the Extended Fund Facility would be subject to a surcharge of 200 basis points per annum above the basic rate of charge. The illustrative decision reflects staff’s view that the purchases under the SLS should not be subject to the time-based surcharge because of their short-term repurchase obligation.
Service Charge and Commitment Fee (Section G of Illustrative Decision III): Section G would amend Rules I-1 and I-8 to set the service charge for purchases under the SLS at 21 bps (Rule I-1) and the commitment fee for the SLS at 8 basis points on a non-refundable basis (Rule I-8). The draft envisages that the commitment fee would be charged at the beginning of each SLS arrangement, and would not be refunded if the member makes purchases under the arrangement. A pro-rata portion of the commitment fee would be refunded, however, if the member cancels its arrangement before expiry. Consideration could be given to charging the commitment fee at the end of the arrangement, as an operational simplification with no impact on the amount the member would be charged.
5. Steepening the Commitment Fee Schedule or Establishing the Time-based Commitment Fee (Illustrative Decision IV, Option A and Option B): As noted in the Paper, staff does not propose either Option A or Option B, as its findings in the Paper reaffirm its view that the FCL has been used as intended. However, as some Directors have called for strengthening exit incentives from prolonged precautionary use of Fund facilities at high access levels, staff has included Illustrative Decision IV in this Supplement to inform the Board discussion. Adoption of Illustrative Decision IV would require a majority carried by 70 percent of total voting power, and would either make amendments to Rule I-8 of the Fund’s Rules and Regulations to steepen the commitment fee schedule (Option A, outlined in paragraph 27 of the Paper) or adopt new Rule I-8A to introduce a time-based commitment fee (Option B, described in paragraphs 28 through 30 and Annex V of the Paper). The illustrative Rule I-8A presents three possible options as to how the time calculation for the time-based commitment fee could operate. One option would be to include periods before the adoption of a decision to introduce a time-based commitment fee in the time calculation. A second option would be to “start the clock” only after the adoption of such decision. A final option would be to “start the clock” only upon the approval of a new arrangement, or augmentation of an existing arrangement, for a member. In each of these cases and notwithstanding how the time period is calculated, the time-based commitment fee would not be payable under current arrangements.
Annex I. Illustrative Example of Decisions to Complete the FCL/PLL Review, Eliminate the PLL, Establish the SLS (and related policy changes), and either Steepen the Commitment Fee Schedule or Introduce a Time-based Commitment Fee
If an approach that SLS arrangements would only be approved for a limited period of time were to garner sufficient support by Directors, paragraph 1 of Section A could include the following introductory phrase: “For a period of  years from the date of this Decision, …”
If consideration is given to charging the commitment fee for SLS arrangements at the end of the arrangement, the proposed Rule I-8(g) could be redrafted as follows: “(g) With respect to SLS arrangements, a non-refundable charge of [8/100] of 1 percent per annum on the total amount of access approved by the Fund for a member under an SLS arrangement shall be payable upon expiry of such arrangement, or the date on which the member notifies the Fund that it wishes to cancel such SLS arrangement. Where the member notifies the Fund that it wishes to cancel an SLS arrangement, the charge will be applied only to the period during which the arrangement was effective.”