Annex 1. Fund Facilities Serving Liquidity Needs for Members with Strong Policies
The Fund first considered facilities for helping members with strong policies deal with financial market volatility in the early 1990s, although the proposal for a Short-Term Financing Facility (STFF) was never adopted. Its successor, the Contingent Credit Line (CCL), was established in 1999 against the backdrop of financial contagion during the Asian crisis. The CCL was never used, however, in part due to stigma concerns and because it was perceived to be insufficiently automatic and predictable. The Short-term Liquidity Facility (SLF), established at the outset of the global crisis, was quickly replaced by the Flexible Credit Line (FCL) which aimed to address such concerns more forcefully. The Precautionary Credit Line (PCL) and its successor, the Precautionary and Liquidity Line (PLL), were introduced to spread some of the FCL’s benefits to a wider range of members. However, both facilities have seen only limited use thus far.
Contingent Credit Line (CCL)
The CCL was established in May 1999, following the Asian financial crisis, to provide members with strong economic policies with a precautionary line of defense against contagion. The CCL was to provide higher and more frontloaded access (with shorter maturities) than conventional precautionary SBAs/ EFFs. Key design features included a formal request that encapsulated prescreening (ex-ante conditionality) as well as an activation review required to make an initial purchase of a substantial portion of access. Importantly, Board approval was conditional on determining that contagion was indeed the source of the member’s problems.
The CCL expired in November 2003 without having ever been used. One reason for the lack of interest was stigma concerns related to the signal potentially conveyed by a CCL request; relatedly, members anticipated uncertainty in case a country with a CCL was no longer deemed eligible at a future point in time. Moreover, the instrument was seen as insufficiently automatic and predictable, both due to a lack of clarity of eligibility criteria and as a result of the complexity of procedures for activation. The need to establish that a member’s balance of payments needs were indeed driven by contagion was seen to further complicate activation.
Short-term Liquidity Facility (SLF)
The SLF was established in October 2008 amid the liquidity squeeze in global financial markets. It aimed to help members with very strong policies and fundamentals deal with self-correcting and quick-reversing BOP needs, subject to pre-qualification and absent ex-post conditionality. As such, the facility addressed the concerns that weakened the CCL in part. Following an expression of interest, members facing temporary liquidity problems would be permitted purchases up to a cumulative limit of 500 percent of quota subject to a Board decision that eligibility criteria are met. Repurchases would have to be made three months from the relevant purchase.
While the SLF was terminated in 2009, and thus too early to establish conclusively lack of member interest, several design issues kept members away from the instrument. These included (i) the outright purchase nature of financing, which prevented use on a precautionary basis; (ii) the capped access and short repurchase period; and (iii) high borrowing service charges when purchases are made.
Flexible Credit Line (FCL), Precautionary Credit Line (PCL) and Precautionary and Liquidity Line (PLL)
The FCL was established in March 2009 to provide large, upfront precautionary financing to members with very strong fundamentals and policies. In line with the SLF, the FCL aims to reduce stigma and increase predictability by entailing no ex-post conditionality. It further includes an ex-ante qualification framework and is established as a window in the credit tranches. As such, it can be used to address (potential or actual) financing needs stemming from any type of balance of payments problem. In the same spirit of increasing flexibility and predictability, there are no restrictions on requesting a successor arrangements and, in August 2010, the initial cap on access was lifted.
The Fund created the PCL in August 2010 to spread some of the benefits of the FCL to a larger subset of the membership. Both access and the qualification bar are correspondingly lower than in the FCL, although PCL eligible members were required to have sound fundamentals and policies. In light of potentially remaining vulnerabilities, the PCL combined ex ante conditionality (qualification criteria) with focused ex-post conditionality. The PCL was renamed PLL in November 2011 to reflect the decision to make it more flexible through broadening eligibility to members with actual balance of payments needs and creating a six-month liquidity window under the facility.
Usage of the FCL and PLL remains modest despite the recent period of elevated market volatility, reflecting a number of reasons. First, the high qualification bar may have limited the number of potential qualifiers, some of which see no need for additional insurance given existing external buffers. Second, qualification criteria may not have been clear enough, especially for the PLL, as the minimum standard for eligible members is difficult to identify. Third, stigma concerns related to the need to approach the Fund remain, in part, due to the lack of pre-qualification. Indeed, members may have been reluctant to request Fund financing individually for fear of negative public perception in the event that none of their peers would end up doing so (first mover problem). Finally, the introduction of multiple instruments has created a system of tiering that was partly intentional but may have made the PLL less attractive.
Six-Month PLL Liquidity Window
The creation of the PLL allowed for arrangements with shorter duration as a platform to address the needs of crisis bystanders during periods of heightened stress and contagion. The 6-month PLL can be approved based on an actual or potential balance of payments need, although such need would have to be of a short-term nature such that it can generally be expected to make credible progress in addressing its vulnerabilities during such six-month period. All other qualification criteria would be the same as in a PLL with longer duration. Repeat approval of 6-month PLL arrangements is limited to prevent usage to meet balance of payments needs that are not of a short-term nature. Similar to an FCL, the 6-month PLL would, in turn, not be subject to a review or to other forms of ex-post conditionality beyond the standard performance criteria.
There has thus far been no sign of interest in the 6-month PLL. While the almost non-existent ex-post conditionality1 may have attenuated stigma concerns compared to a PLL of longer duration, the 6-month PLL is likely subject to the same concerns regarding the high bar and limited predictability of qualification. Similarly, the tiering between FCL and PLL may have limited the use of PLL arrangements of both short and longer duration. Due to the requirement to identify balance of payments needs of a short-term nature, the qualification process for the 6-month PLL may be perceived to be especially complicated. Finally, limiting repeat use of the instrument may have further reduced its attractiveness.
See Strengthening the International Monetary System, IMF Policy Paper, February 2016 and Adequacy of the Global Financial Safety Net, IMF Policy Paper, March 2016.
See IMFC Communique, Washington D.C., April 2016 and G20 Leaders Communique September 2016.
The change in financial regulations may have also contributed to the failure of covered interest parity. However, the timing of reforms does not appear to explain all deviations, especially in the immediate aftermath of the GFC.
See Strengthening the International Monetary System—A Stocktaking, IMF Policy Paper, March 2016.
When there is a need for foreign currency liquidity, which a domestic central bank cannot print, government’s ability to provide liquidity to markets (through foreign exchange intervention) or directly to market participants (as in an emergency loan to a bank) is constrained by its access to the GFSN.
See Adequacy of Fund resources—Preliminary Considerations, March 2016.
Throughout the text and in figures, the sample of included countries does not provide any indication of potential qualifiers or users of a liquidity instrument. The broad focus is on advanced economies without a reserve currency, while the set of large emerging markets is limited by data availability.
Generally, EPFR flows represent around one-fifth to one-quarter of BOP-reported portfolio flows.
Disorderly Market Conditions are defined as stress situations in financial markets triggered by global and/or idiosyncratic shocks. The effects are usually amplified by excessively large or rapid FX movements and are compounded or mitigated by country-specific characteristics, such as macro imbalances, balance sheet FX exposures, financial market depth and structure, and policy framework.
For a discussion of currency mismatches in EM corporates see, for example, Chui, Kuruc and Turner, 2016, A new dimension to currency mismatches in the emerging markets: non-financial companies, BIS Working Paper 550.
It should be noted that this reduction of public buffers by EMs with sound fundamentals (e.g., sharp increase of public debt-to-GDP at the 25th percentile) usefully contributed to boosting global demand in the wake of the GFC.
For the definition, objectives, and a detailed discussion of the evolution and shortcomings of the current GFSN, see Adequacy of the Global Financial Safety Net, IMF Policy Paper, March 2016.
Future reactivation of these BSAs would depend on the domestic policy considerations of the liquidity-providing central banks, as well as their non-transparent screening of potential users to mitigate credit risks.
Gatekeeper countries are economies that belong to multiple trade and financial clusters and can act as transmitters of shocks between clusters. Systemic countries are economies with significant contributions to the global trade and financial networks. For a list of gatekeeper and systemic countries see Adequacy of the Global Financial Safety Net, IMF Policy Paper, March 2016.
See Crisis Program Review, IMF Policy Paper, November 2015.
See Obstfeld, M., 2011, The International Monetary System: Living with Asymmetry, NBER Working Paper No. 17641, December 2011.
This policy paper focuses on the GRA toolkit. A separate forthcoming policy paper, “Financing for Development: Enhancing the Financial Safety Net for Developing Countries—Further Considerations” assesses and clarifies some aspects of the concessional lending toolkit, including the precautionary toolkit for LICs.
Unless there is an augmentation of access during the life of the arrangement.
The juxtaposition of “very strong” policies and fundamentals required for FCL qualification and “sound” in the case of PLL reinforces the perception of tiering of the two instruments. The PLL factsheet also positions the instrument for “member countries with sound economic fundamentals but with some limited remaining vulnerabilities which preclude them from using the FCL.” For survey results on facility tiering, see the 2014 FCL/PLL/RFI Review.
See IMFC Communique, April 2016 (https://www.imf.org/en/News/Articles/2015/09/28/04/51/cm041616a).
IMF (2014) “Review of the Flexible Credit Line, The Precautionary and Liquidity Line, and The Rapid Financing Instrument”.
Calculated for each EM as the 5th percentile of net quarterly portfolio outflows from 2006 to 2016–see Figure 8.
Of course resource needs for tail events, of the sort discussed in the Adequacy of Fund Resources paper, would be many times larger and call for alternative forms of financing under the exceptional access criteria.
Nevertheless, the backstop would have an impact on the Fund’s liquidity position. A liquidity backstop would imply a direct, semi-permanent call on Fund resources and there could also be important second-round effects on Fund liquidity, by removing members from the Fund’s Financial Transactions Plan (FTP) in the event they draw under the facility to meet emerging actual BOP needs. Accordingly, the potential magnitude of second round effects would need to be kept under review and, if necessary, consideration could be given to increasing the size of the prudential balance. A backstop could also have implications for members of the FTP, as potential drawings would tie up part of reserves (at least for non-reserve currency issuers), resulting in lower returns.
See Crisis Program Review, IMF Policy Paper, November 2015.
The standard of UCT aims at ensuring that: (i) policies will allow the member to solve its balance of payments difficulties in a manner consistent with the Articles of Agreement; (ii) the likelihood the Fund gets repaid is high, allowing it to meet its fiduciary responsibilities; and (iii) the Fund gets repaid reasonably quickly, consistent with the revolving nature of its resources. In the context of a monitoring and signaling instrument, this standard can be interpreted as signifying policies that are sufficient to correct any external imbalances within the program period.
See Signaling by the Fund—A Historical Review, IMF 2004.
See Decision on Article IV Consultation Cycles (Decision No. 14747–(10/96)).
Specifically, an assessment letter would be called for if either (i) the most recent assessment is more than six months old, or (ii) if Fund staff considers that there have been material changes in the country’s circumstances that call for an updated assessment.
As with the PSI, Fund engagement via the proposed new monitoring instrument would be a form of technical assistance (TA) (Article V, Section 2(b)). Fund TA to non-members is permitted with approval of the Executive Board.
As part of the 2008–09 lending reforms, structural performance criteria were discontinued and monitoring of structural reforms became review-based, though quantitative performance criteria were maintained. Evidence suggests that this did not lead to a weakening in the implementation of the structural reform agenda (see the 2015 Crisis Program Review, IMF 2015).
A comprehensive review of LIC facilities, including a review of the PSI, is planned for 2018. The experience with the new policy monitoring instrument (if adopted in due course) could inform that review.
6 month PLL arrangements still require standard continuous performance criteria. Prior actions are also possible when needed.