A. Legal Basis

7. An overarching role of the Fund is to help members address balance of payments issues through policy support and the provision of financial resources. Under the Articles, there are three types of financial resources the Fund can draw upon to assist members, each of which has its own legal constraints. The first is GRA resources, which constitute the bulk of these resources. The Articles contain specific provisions mandating that adequate safeguards be established for the temporary use of GRA resources (Article V, Section 3), and require that a member must be experiencing an actual balance of payments need at the time it purchases these resources. The second type of financial resources are resources held in the Special Disbursement Account (SDA). These are resources which can be used to provide balance of payments assistance on special terms to developing countries (Article V, Section 12(f)(ii)).² SDA resources have been used (along with donor contributions) in the PRGT, CCRT and PRG-HIPC Trust, including to address “protracted” balance of payments problems under the PRGT even where the member does not have an actual balance of payments need. Third, Article V, Section 2(b) provides for the Fund’s administration of resources contributed by others, through which financing can also be provided to Fund members, subject to specific conditions.

8. Article V, Section 2(b) authorizes the Fund if requested, to provide financial and technical services to its members. This includes the establishment of administered accounts or trusts.³ Financial services under Article V, Section 2(b) (i) must be consistent with the purposes of the Fund; (ii) must not be “on the account of the Fund”, meaning the GRA cannot bear any risk of loss in respect of the provision of these services; and (iii) cannot impose obligations on members without their consent.⁴ Beyond these limitations, the Fund has broad flexibility in providing financing under Article V, Section 2(b), including as regards the purposes of the financing (which can be broader than the purposes of GRA financing specified in Article 1(v), for example), and its terms (e.g., flexibility for conditions and maturities that are different than those applicable to GRA financing, which has included grant financing and a 20-year repayment option under the PRG-HIPC trust).⁵

9. The proposed RST meets the conditions applicable under Article V, Section 2(b):

• The RST would be consistent with the Fund’s balance of payments financing focus but also the specific purpose under Article l(iii) to promote exchange stability. The latter has informed, in the surveillance context, the concept of “balance of payments stability”, which is defined as a member’s balance of payments position that does not, and is not likely to, give rise to disruptive exchange rate movements.⁶ In this context, under the Integrated Surveillance Decision, the Fund, in carrying out its surveillance mandate, should focus on those policies of members that can significantly influence present or prospective balance of payments and domestic stability, recognizing that systemic stability (a stable system of exchange rates) is best served by each member promoting its own balance of payments and domestic stability.⁷ The RST would complement the existing policy advice provided by the Fund under Article IV on members’ policies that influence their balance of payments stability by providing financial assistance to eligible members to help them implement policies designed to strengthen prospective balance of payments stability. Such financial assistance would also assist eligible members in addressing the balance of payments impact of such reforms as they are implemented.

• The financial risk from operations conducted through the RST—as envisaged in its proposed financial architecture—would be borne entirely by the contributors to the Trust and would not expose the GRA to any risk of loss.⁸

• Finally, financial contributions to the RST, and requests by eligible members for financing under the RST, would be completely voluntary. Financing would be provided following such a request and Board approval of the request.

B. Conceptual and Lending Toolkit Considerations

C. Other Considerations

20. Multilateral context: Creating the RST requires broad participation of creditors and borrowers. A supportive multilateral context, a strong lender base, a diversified borrower base, the expected de facto preferred creditor status (PCS), and adequate credit risk mitigation, including important policy safeguards and financial buffers, are essential underpinnings to successfully operationalizing the RST.

21. Add it tonality: The design of the RST prevents facility shopping. The RST’s purpose—to improve prospective BoP stability—is distinct from the focus of GRA and PRGT financing. Thus, by construction, the RST provides additional financing and does not serve as a substitute to the GRA and PRGT. The RST’s proposed safeguards further mitigate the risk of substitution, including through access caps and concurrence of RST financing with an on-track UCT program.

22. Governance and financial architecture: As with other trusts established by the Fund under Article V, Section 2(b), the proposed decisions and the instrument establishing the RST will set out the purposes of the RST, the modalities of lending, the financial structure and clear rules for the Fund’s governance and decision-making in the administration of the RST, including regarding requests for financing from the RST, as further elaborated in Section IV.A The proposed RST’s financial structure is similar to that of the PRGT, with some necessary modifications to build up a large new trust from the ground up with appropriate safeguards (Section V).

23. Coordination with multilateral agencies: Given the massive scale of longer-term structural challenges, RST support should be seen as part of a broader concerted effort by the international community. It would complement policy and financing support from other international financial institutions and development banks to address these challenges. The financing needs of members to address these challenges are so large that RST financing is bound to be modest relative to the needs. Close coordination with the World Bank (as explained in Section IV.B) and other IFIs would be essential to provide coherent policy advice and to catalyze additional official and private financing where feasible. For instance, RST support for the development and implementation of overarching policy frameworks such as green public financial management would improve the integration of climate in policy formulation and enhance governance, thereby giving more comfort to other public and private lenders and donors to provide project financing and technical assistance. Moreover, potential lenders, including regional development banks and bilateral partners would benefit from the RST’s fiscal and debt sustainability framework that incorporates economic trade-offs. The underlying diagnostics—which would include those developed by the member country and/or by other international financial institutions, such as the World Bank—would be key inputs to help identify the main policy priorities that could be supported by different stakeholders, including the private sector.

24. Integration with Fund Capacity Development: Leveraging the synergies between the Fund’s surveillance, lending, and capacity development (CD) will help in the design and implementation of the RST reform measures. Fund CD with a medium-term programmatic approach can play an important role in supporting RST reforms. For example, diagnostic tools such as the Climate Public Investment Management Assessment (C-PIMA) and the Climate Macroeconomic Assessment Program (CMAP) help identify and assess capacity and policy gaps in areas that are likely to be prominent in RST operations.

A. Uses of Resilience and Sustainability Facility Support

B. Eligibility and Qualification Eligibility

33. Scarce RST resources should be targeted at DCs, vulnerable MICs, and small states. As discussed, these members face higher risks to prospective BoP stability from longer-term structural challenges, and lack reliable access to affordable longer-term financing more suited to tackle them.

34. Staff propose to base initial RST eligibility on per capita income and population thresholds. Having analyzed a range of alternative methodologies for defining RST eligibility, staff consider that a simple income-based cutoff—with higher thresholds for small states—strikes an appropriate balance between targeting scarce resources, meeting countries’ needs, and ensuring predictability and evenhanded treatment. Using a combination of per capita income and population is an established and transparent method that also is used for determining PRGT eligibility. Specifically, it is proposed that for the initial list of eligible members, a member is assessed as RST-eligible if, based on qualifying data available as of October 2021:¹⁶

• a. its per capita gross national income¹⁷ (GNI) in 2020 (or 2019, if 2020 data is not available) does not exceed ten times the 2021 International Development Association (IDA) operational cutoff ($1,205) or

• b. it has a population below 1.5 million as of 2020, as reported by the World Bank, and its per capita GNI in 2020 (or 2019, if 2020 data is not available) does not exceed twenty-five times the 2021 IDA operational cutoff.

The per capita income cutoff for small states is set higher than for other countries given that most small islands with relatively high incomes face significant longer-term risks related to climate change but still lack steady access to affordable long -term market financing. Moreover, in order to not exclude low-income countries, in the few instances where the relevant GNI or population data are not available to assess the above criteria but the countries are PRGT-eligible, it is proposed that the countries be added to the RST eligibility list at the time of the establishment of the RST.¹⁸

35. Based on the proposed criteria, 143 countries will be RST-eligible at the time the RST is established (Annex I). Countries that do not plan to request RST financing (e.g., potential RST contributors) will have the option to opt-out of the RST eligibility list at any time by notifying the Fund in writing.

36. RST eligibility will be reviewed regularly. For the purpose of future eligibility reviews, a member will be added to the RST eligibility list if, based on the latest available qualifying data¹⁹, its annual per capita GNI is (a) less than ten times the IDA operational cutoff; or (b) less than twenty-five times the IDA operational cutoff if it has a population below 1.5 million, as reported by the World Bank. The first eligibility review will take place as part of the first review of the Trust. Subsequent eligibility reviews would be synchronized and combined with PRGT eligibility reviews, which are undertaken on a biannual schedule.²⁰ Notwithstanding the regular review cycle, decisions on entry onto the RST eligibility list could also be adopted in the interim period between eligibility reviews. It would be expected that entry decisions would be adopted on a stand -alone basis where a member that is not on the list meets the entry criteria in the period between reviews, and where a delay until the next scheduled review of the RST eligibility list would disadvantage the member (in particular, if the member wishes to request support under the RSF). Specifically, future entrants to the PRGT would typically be added to the RST eligibility list at the same time, subject to an ad -hoc Executive Board decision. Re-entry on the list in the interim period between reviews would also be possible for any country that had previously opted out or been removed in the context of sanctions imposed for overdue obligations to the Fund (assuming the graduation criteria discussed below were not met).

37. Graduation rules will feature a buffer period. It is proposed that a country would graduate from the RST eligibility list if all of the following conditions are met: (a) its GNI has been above the applicable eligibility threshold (specified above) for at least the last five years (for which qualifying data are available), (b) its GNI has not been on a declining trend in the same period (comparing the first and the last relevant annual data) and (c) based on the latest qualifying data, its GNI is at least 10 percent above the applicable eligibility threshold (i.e., 27.5 times the IDA operational cutoff for small states and 11 times IDA operational cutoff for other countries).

38. It is proposed that changes in the RST eligibility list should not interfere with an existing RSF arrangement or ongoing discussions on new requests for an RSF arrangement. A member that has an existing RSF arrangement in place at the time of the Board decision approving its graduation from the RST would be permitted to continue its RSF arrangement, including any extensions or augmentations that may be possible thereunder. The graduation decision in respect of such a member would specify that its removal from RST eligibility would become effective only upon termination, expiry or cancellation of its ongoing RSF arrangement. Further, it is proposed that if a member is no longer RST eligible under a decision adopted by the Executive Board, there would be a transitional period of 5 months before such change would become effective. During the transitional period, a new RSF arrangement based on past or ongoing discussions with the member may be approved by the Executive Board. Members who become RST eligible would be able to access RST financing with immediate effect.

C. Lending Terms

40. RSF lending terms are proposed to combine low interest rates with significantly longer maturities than in the GRA and the PRGT. RSF loans are meant to provide longer-term financing on terms that are considerably more affordable than available market financing. Under the terms proposed below, the cost of RST loans would be cheaper than GRA credit, and, at current interest rates, also more concessional than GRA-PRGT blend and regular PRGT terms (see Table 2 in Annex II). The relatively favorable lending terms are consistent with (i) the RST’s purpose to support reforms that tackle long-term structural issues that impact prospective BoP stability, (ii) reforms having a public goods nature with potential positive externalities, and (iii) the intended borrower group of LICs, vulnerable MICs, and small states.

41. Consistent with the RST’s purpose to contribute to longer-term prospective BoP stability, RSF loans are proposed to have a maximum maturity of 20 years. Given that RST resources are solely contributor resources, administered under Article V, Section 2(b), the requirements of temporary use of GRA resources under the Articles do not ap ply, and the proposed loan maturity is not unprecedented for Fund financing under Article V, Section 2(b), both as discussed above. It is proposed that principal repayments be made in 20 equal semi-annual instalments that begin 10!/2 years after the RSF disbursement. Together with the interest rate structure, the proposed maturity ensures that RST concessionality for the poorest and most vulnerable countries remains close to that in the PRGT (see below).

42. An RSF borrower would pay an interest rate with a modest margin over the 3-month SDR interest rate (SDRi). The margin above the RST’s funding cost (i.e., the SDRi paid on RST borrowing) contributes to the build-up of RST reserves and, together with the service charge on RSF disbursements for some country groups, covers the RST’s administrative costs, thus helping ensure the financial soundness and viability of the RST (Section V). RSF borrowing would not be subject to surcharges, and outstanding RST credit would not count towards the level-based threshold for GRA surcharges. A commitment fee is not currently contemplated.

43. Staff proposes a tiered interest rate structure that differentiates financing terms across groups of countries. The proposed margin structure has been calibrated to support adequate accumulation of the RST’s Reserve Account (Section V) while covering operational costs. The proposed margins would provide more favorable terms to lower-income countries and most small states (see Section VI and Annex V), with an expectation that future reviews would consider an increased degree of cross-subsidization of the poorest if the SDRi rises, as expected, to higher levels (see below). Three country groups would broadly mirror the differentiated financing terms across the GRA and the PRGT (See Annex V Table 2 for a list of countries under each group). The grouping of countries would be reviewed at each RST eligibility review; once allocated, a member would remain in that group until the next eligibility review. Irrespective of changes in a member’s blending status, income, or country grouping following an eligibility review during the lifetime of an RSF arrangement, the member would continue servicing credit outstanding arising from disbursements under that arrangement at the interest rate that corresponds to the group it belonged to when the arrangement was approved.

• Group A countries are all PRGT-eligible countries that are not presumed blenders.^{21 22} This group currently comprises 51 countries and members in this group are proposed to pay a margin of 55 basis points above the SDRi and would be exempt from any service charges on RSF loan disbursements.

• Group B countries are all presumed blenders under the Fund’s framework for blended access to GRA and PRGT resources and all non-PRGT eligible small states with per capita GNI below ten times the IDA operational income cutoff. This group is currently composed of 27 countries and is proposed to pay a margin of 75 basis points above SDRi and would be subject to an upfront one-time service charge of 25 basis points on each RSF loan disbursement.

• Group C countries are all other RST-eligible countries. This group is currently composed of 65 countries and would pay a margin of 95 basis points above SDRi (just below the current GRA margin for the basic rate of charge) and would be subject to an upfront one-time service charge of 50 basis points for each RSF disbursement.

44. To protect the lowest income borrowers from rising market rates, an interest rate cap for Group A countries could be considered at future reviews (see below). Such an interest rate cap would imply that the margin paid by the poorest countries (Group A) would decline as interest rates rise above a certain level, and eventually would become negative once the SDRi rises above the specified level. The foregone interest income implied by such a cap would be financed through increased cross-subsidization of interest rates between borrowers, with the use of resources in the RST’s Reserve Account only possible if consistent with reserve-adequacy including reserve build-up (see Section V). A cap of 2¼ percent, including the margin, as assumed by staff for modeling purposes in this paper, would ensure that, together with the 10½-year grace period and 20-year maturity, the concessionality of PRGT and RSF loans would be at roughly the same level when SDRi rises above 2 percent (a grant element of around 30 percent at a 5-percent discount rate, see Annex II, Table 2). In the initial proposal for the level of margins, no interest rate cross-subsidization is envisaged at the start of the RST.

45. The margin structure and service charges will be subject to reviews, with adjustments as the Executive Board considers appropriate. The funding costs for RST loans is a given as the interest rates on these loans up to the SDRi will be hard-wired in the RST instrument and reflected in the borrowing agreements. Given the uncertainty about future demand, world interest rates, and RST finances, staff proposes that the Executive Board retain flexibility in setting the margin structure for RST loans, that balances the need to ensure the financial sustainability of the Trust and the need to protect the poorest members. At each interest rate review, the Board would consider a range of relevant factors to maintain or adjust the margins (as well as service charge structure), including the financial position of the RST (e.g., the projected pace of reserve buildup, demand across country groups, and the appropriateness of financing terms for borrowers). The review would also decide on any adjustments to the specification of country groupings.²³ An interest rate review would take place during each regular RST policy review, and earlier as needed. Staff, for example, would expect that it would be triggered if the average SDRi were to rise above 1!/2 percent in any 12 -month period and if financial market indicators (i.e., SDRi projections) signal that this interest rate is not expected to decline below 1.5 percent within the coming quarters, which would give the Board the opportunity to discuss possible interest rate protection for the poorest borrowers through a reduced margin or an interest rate cap. An interest rate review could also be triggered by other unexpected events that have a bearing on the financial sustainability of the RST.

D. Access

46. The overall cumulative access cap for eligible members under the RSF is proposed to be set at the lower of 150 percent of quota or SDR 1 billion. Access considerations reconcile demand estimates (Section VI) with the anticipated size of the Trust and are an important tool to manage scarce Trust resources. Access caps may need to be revisited should there be excess or shortfall in contributions relative to existing fundraising targets (Section V). The RSF would have no annual access limits to facilitate flexibility in the timing of RSF disbursement but would limit the size of disbursements (see U58).

47. Access under RSF arrangements would be guided by norms and other criteria. The starting point of access determination would be an access norm of 75 percent of quota. The proposed use of norms reflects resource constraints associated with the limited size of the Trust and the difficulty of precisely assessing the BoP implications (both medium-term costs and long-term benefits) of RSF-supported reforms. However, the norm is neither a ceiling nor a floor on the level of access. It should help inform the assessment of appropriate access levels but should not be misconstrued as an access limit or entitlement. Deviations from the access norm may be considered depending on: (i) any direct short- to medium-term BoP needs associated with the implementation of corresponding RSF-supported reforms, (ii) strength and ambition of the package of RST-supported reforms; and (iii) capacity to repay the Fund, taking into account the member’s debt sustainability, debt carrying capacity, and composition of debt (in particular the prevalence of de facto senior obligations, especially in cases of elevated debt vulnerabilities).²⁴

48. Policy Safeguards for High Combined Credit Exposure from the PRGT and GRA (the “PS-HCC Policy”), introduced in 2020, would not apply to financing under RSF arrangements. Features distinguishing the RST from other Fund financing—e.g., focus on prospective stability (as opposed to filling residual BoP gaps), longer maturities—underpin the rationale for treating RSF access separately from that extended under the GRA and the PRGT. The PS-HCC Policy, which applies the policy safeguards for HCC exposure under the GRA and the PRGT, would not be amended to include RST financing (which is for longer-term needs), or to take into account credit outstanding under an RSF arrangement in assessing access under PS-HCC. Likewise, the GRA and PRGT Exceptional Access Frameworks apply to respective GRA and PRGT credit and would not apply to RST financing. This approach also mitigates the risk that countries might seek to substitute GRA access with RSF access in light of the more favorable financing terms. Instead, the RSF design incorporates several alternative safeguards, which are more consistent with the terms of lending of the new facility:

• Built-in safeguards: Policy safeguards for high access under the PS-HCC are designed to provide enhanced safeguards to GRA and PRGT resources, respectively. Under the RSF, a number of enhanced safeguards are built in directly through (i) debt sustainability requirements for RST qualification (1139) (ii) modest access caps (1146), (iii) access determination rules that explicitly account for debt vulnerabilities (1147), and (iv) enhanced analysis of debt structure, debt sustainability, and of capacity to repay (Section III.F).

• Modest debt service schedule: The RSF’s much longer grace and repayment periods—resulting in modest effects on annual gross financing needs (up to 15 percent of quota per year)— positively distinguishes the impact of RST financing on the country’s debt risk profile from that of GRA/PGRT financing.

E. Lending Modalities

49. Request and Approval. An RSF arrangement requested by an RST-eligible member may only be approved by the Executive Board if that member either has an “on-track” UCT program with at least 18 months remaining until its expiration (12 months for RSF arrangements approved within the first six months of the RST’s operationalization), or is receiving approval for such a program concurrently with the consideration of the request for an RSF arrangement (see Section III. B on qualification). Approval of an RSF arrangement would normally take place either at the time of approval of the request for the UCT program or at a review under the UCT program. The authorities would need to make a request for an RSF arrangement in writing (normally as part of the LOI for the UCT program documentation). The Memorandum of Economic and Financial Policies (MEFP) — normally a single document covering both the UCT Program and the RSF arrangement—would then describe broad policy intentions in RST-relevant areas and specific structural reforms (“reform measures”, see 1151) that would be supported under the RSF arrangement.

50. Duration. The duration of the RSF arrangement would generally be expected to coincide with the duration of a new UCT program (when the two are requested together) or the remaining duration of an existing UCT program (when the RSF request occurs at a review of the UCT program). The minimum duration would be 18 months (12 months for RSF arrangements approved within the first six months of the RST’s operationalization), to allow adequate time for implementation of RSF reforms measures, including any necessary technical assistance (see ll(b) under 1139). The RSF arrangement would expire when all amounts available under the arrangement have been disbursed. Given the important safeguards provided by the accompanying UCT program, the RSF arrangement would also automatically terminate upon the termination, cancellation or expiry of the accompanying UCT program. The RSF arrangement could be extended at the time of a request of an extension of the qualifying UCT program if additional time is required to complete Board-approved reform measures (see discussion of conditionality below) or if new reform measures are identified for inclusion.

Disbursements, Phasing and Reviews

56. Disbursements: A member’s total RSF access would be partitioned into several disbursements that are linked to the implementation of RSF reform measures. Each disbursement, defined as a percentage of quota, will be associated with the implementation of one reform measure. Recognizing the difficulty of “pricing” longer-term reforms, the presumption would be for equal access across disbursements; exceptions could be made for reform measures that are demonstrably more consequential to prospective BoP stability and/or create larger actual BoP needs.

57. Phasing will be specified at the time of the RSF request. Each disbursement will have an availability date linked to the expected time of completion of the associated reform measure, which will generally mirror the availability date of a particular purchase/disbursement under the UCT program;²⁶ this “links” RSF disbursements to reviews under the accompanying UCT program.²⁷ Multiple reform measures can be linked to the same availability date. Phasing should ensure that the cumulative access of all disbursements subject to the completion of a review under the RSF arrangement does not exceed 50 percent of quota. That said, if there are delays in the implementation of reform measures, disbursements exceeding 50 percent of quota that become available following the completion of a review are not precluded. Box 2 illustrates a range of scenarios. No disbursement would be available immediately at the time of approval of the request for an RSF arrangement. This ensures that an RSF arrangement only finances reforms that are additional to efforts the member has already undertaken.

58. Reviews: RSF disbursements would occur following the completion of a review by the Executive Board. RSF reviews will be used to monitor Implementation of reform measures, modify them, or establish new reform measures as part of an augmentation. Several features are of note:

• Monitoring conditionality. RST loan disbursements are subject to the completion of an RSF review by the Executive Board. Completion of an RSF review²⁸ will require a Board assessment, based on staffs recommendation included in the UCT program documentation, that the relevant reform measure was met. The Board may also, in rare cases, decide to complete the review and approve the associated RSF disbursement available where the reform measure was implemented with a minor deviation relative to its Board-approved design. In making an assessment of whether the deviation is minor, the Board will consider whether the member has substantially implemented the reform measure such that the objective of the reform measure has been met. The RST review will only make available the RST disbursement amounts corresponding to the reform measures that were assessed as implemented or implemented with minor deviation.

• Modification and establishment of conditionality. In cases where the reform measure is assessed as not met, and the Board does not assess the deviation as minor, the review would provide an opportunity to adjust (or replace) the reform measure on a forward -looking basis if needed. Reviews can also be used to augment an RSF arrangement by increasing access of disbursements associated with existing reform measures with availability dates in the future or establishing new reform measures and associated disbursements.

• Timing of reviews. Since the target dates for reform measures are indicative in nature (see 1154), regular reviews under an RSF arrangement are not warranted. Instead, reviews under an RSF arrangement will take place concurrently with reviews under the UCT program, once the expected date of completion of a reform measure has passed and management (i) recommends completion of a review based on staffs assessment that the reform measure was successfully implemented, or that any deviation was minor or (ii) a modification of reform measure(s) based on the authorities’ request for the same.²⁹ To ensure that RST disbursements only occur when the UCT program is on track, delays in completing reviews under the UCT arrangement would also delay RSF reviews, and therefore delay the attendant disbursements, even when reform measures are implemented on time (Box 2, Scenario D).

• Disbursement request. In keeping with the drawing nature of RSF arrangements (1130), members would be expected to request disbursement promptly upon completion of an RSF review. Reflecting the scarce nature of RST resources, the member would have 30 calendar days following completion of the review by the Executive Board to make a request (but no later than the end of the arrangement). If a member fails to make a request for disbursement within this period, the member may only request the disbursement in the 30-day period following the completion of a subsequent review under the RSF arrangement. This will also help minimize the risk that RSF disbursements occur when the UCT program is off-track.

59. Undisbursed amounts, cancellation, and expiration. As with all Fund arrangements, an RSF arrangement expires when all amounts under the RSF arrangement have been disbursed. An RSF arrangement may also be cancelled at any time by a member by notifying the Fund. The RSF arrangement would automatically terminate when the accompanying UCT program expires, is cancelled, or terminates (Box 2, Scenario E). Undisbursed financing after the expiration of an RSF arrangement—which may arise because reform measures were not implemented or the UCT program went off-track, expired or was cancelled—would not be available thereafter. However, the member may request financing under a successor RSF arrangement—with access up to the overall cumulative access caps for the RSF (in quota and SDR terms)—and an appropriate successor UCT arrangement.

^{Box 2.}

Phasing and Disbursements Under Various Illustrative Scenarios

1. Phasing scenarios for a simple example

A hypothetical RSF arrangement approved together with an EFF has two reform measures phased for implementation ahead of the 2^nd and 4^th reviews. If both reform measures are implemented on schedule, ex-ante and ex-post RSF phasings are identical (Scenario A). If, however, implementation of the second reform measure is only completed ahead of the 5^th review under the EFF, the corresponding review under the RSF arrangement and the associated disbursement would take place concurrently with the 5^th EFF review (Scenario B). All reform measures must be implemented ahead of the last completed review under the EFF for the full amount under the RSF arrangement to be disbursed (Scenario C).

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Note: Scenarios assume simultaneous requests for the RSF and the UCT arrangement. RSF requests at the time of a scheduled review under the UCT arrangement would not substantively affect the scenarios.

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2. Schedules of disbursement for a more complex example The following example presents disbursement tables for a hypothetical RSF arrangement accompanied by a three-year ECF, both approved on October 31, 2022. This example is separate from the phasing diagrams above, as it assumes more reform measures (four in total), with reform measures 2 and 3 expected to be completed by the time of the second ECF review (since all share the same availability date—April 1 5, 2024). A separate table would specify the content of reform measures 1 through 4.

Country: Proposed Schedule of Disbursements and Timing of Reviews Under ECF Arrangement

Country: Proposed Schedule of Disbursements and Timing of Reviews Under ECF Arrangement

Date of Availability	Conditions necessary for disbursement	Amount
		SDR million	Percent of quota
Board Approval	Executive Board approval of three-year arrangement under ECF	100.0	40
April 15, 2023	Observance of PCs for December 31, 2022, continuous PCs and completion of first review	100.0	40
October 15, 2023	Observance of PCs for June 30, 2023, continuous PCs and completion of second review	100.0	40
April 15, 2024	Observance of PCs for December 31, 2023,continuous PCs and completion of third review	50.0	20
October 15, 2024	Observance of PCs for June 30, 2024, continuous PCs and completion of fourth review	50.0	20
April 15, 2025	Observance of PCs for December 31, 2024,continuous PCs and completion of fifth review	50.0	20
October 15, 2025	Observance of PCs for June 30, 2025, continuous PCs and completion of sixth review	50.0	20
Total		500.0	200
Memo item: Quota		250.0

View Table

Country: Proposed Schedule of Disbursements and Timing of Reviews Under ECF Arrangement

Date of Availability	Conditions necessary for disbursement	Amount
		SDR million	Percent of quota
Board Approval	Executive Board approval of three-year arrangement under ECF	100.0	40
April 15, 2023	Observance of PCs for December 31, 2022, continuous PCs and completion of first review	100.0	40
October 15, 2023	Observance of PCs for June 30, 2023, continuous PCs and completion of second review	100.0	40
April 15, 2024	Observance of PCs for December 31, 2023,continuous PCs and completion of third review	50.0	20
October 15, 2024	Observance of PCs for June 30, 2024, continuous PCs and completion of fourth review	50.0	20
April 15, 2025	Observance of PCs for December 31, 2024,continuous PCs and completion of fifth review	50.0	20
October 15, 2025	Observance of PCs for June 30, 2025, continuous PCs and completion of sixth review	50.0	20
Total		500.0	200
Memo item: Quota		250.0

Country: Proposed Schedule of Disbursements and Timing of Reviews Under RSF Arrangement

Country: Proposed Schedule of Disbursements and Timing of Reviews Under RSF Arrangement

Date of Availability	Conditions necessary for disbursement	Amount
		SDR million	Percent of quota
October 15, 2023	Completion of RSF review of reform measure 1 implementation	50.0	20
April 15, 2024	Completion of RSF review of reform measure 2 implementation	62.5	25
April 15, 2024	Completion of RSF review of reform measure 3 implementation	62.5	25
October 15, 2024	Completion of RSF review of reform measure 4 implementation	75.0	20
Total		250.0	100

View Table

Country: Proposed Schedule of Disbursements and Timing of Reviews Under RSF Arrangement

Date of Availability	Conditions necessary for disbursement	Amount
		SDR million	Percent of quota
October 15, 2023	Completion of RSF review of reform measure 1 implementation	50.0	20
April 15, 2024	Completion of RSF review of reform measure 2 implementation	62.5	25
April 15, 2024	Completion of RSF review of reform measure 3 implementation	62.5	25
October 15, 2024	Completion of RSF review of reform measure 4 implementation	75.0	20
Total		250.0	100

F. Debt and Capacity to Repay Considerations

60. Additional debt and capacity to repay (CtR) safeguards are proposed for lending under the RST to account for the nature and terms of the lending, borrower’s debt profiles, and to mitigate excessive accumulation of de facto senior debt. Medium-term debt sustainability is a key qualification for accessing the RST (Section III.B). In addition, all Board documents for RST financing requests and augmentations will need to include analysis and discussion of (i) the composition of public debt, including the share of de facto senior debt, (ii) debt risk analysis over a longer time horizon (up to 20 years), and (iii) an extended CtR analysis that covers the RSF repayment period, taking into account all Fund borrowing by the member. These safeguards are warranted in part by the RSF’s longer repayment period and because RSF access does not fall under the PS-HCC Policy. Such additional safeguards are also intended to ensure that RST lending does not aggravate a borrower’s debt vulnerabilities, notwithstanding the additional exposure to de facto senior/non-restructurable debt (see discussion of the RST’s envisaged de facto Preferred Creditor Status, Section IV.B).

61. Debt composition. All relevant Board documents will need to discuss the structure of total public debt and its projected evolution overtime. In particular, analysis of external debt structures should take into account the amount and shares of debt owed to the Fund and other senior creditors, informed by tables showing two distinct breakdowns of public external debt: (i) de facto senior or difficult to restructure debt (debt to the IMF; debt to the World Bank and other international financial institutions; known collateralized debt) and other debt and (ii) multilateral versus official bilateral versus private debt.³⁰

62. Long-term debt risk analysis. The LIC Debt Sustainability Framework (DSF) already requires a macroeconomic framework for a 20-year projection period, providing debt and debt service projections for the full repayment horizon of RST financing.³¹ The new Sovereign Risk and Debt Sustainability Framework for Market Access Countries (MAC SRDSF) will provide a 10-year horizon for debt and GFN projections. Both of these frameworks also have tailored stress tests for natural disasters to capture risks associated with one-off climate events over the medium term and the MAC SRDSF has a set of modules to analyze key longer-term risks: climate change, large amortizations, demographics, and natural resource scale-up or depletion.³² While these modules are optional for UCT lending in market access countries, they will be required for program documents with a concurrent RSF arrangement to inform on key long-term risk to debt, with only the natural resource scale-up/depletion module as optional. In particular, for the climate change module, countries will be expected to discuss the impact of climate change on key macro-fiscal variables (such as potential growth and spending) and, where feasible, draw out long-term implications for the debt, leveraging relevant analysis from the IMF’s Climate Macroeconomic Assessment Program (CMAP) documents, World Bank’s Country Climate and Development Reports (CCDR) or other country-specific work.

63. Capacity to repay. All relevant Board documents will need to present the evolution of the total IMF (i.e., PRGT+GRA+RST) projected debt and debt service to the Fund relative to key economic metrics over the course of the RST’s repayment period.

• These long-term (20 years) projections, based on data provided by country teams, will be compared with available data from prior Fund lending, supported by a set of standardized charts.

• In cases where the CtR indicators signal relatively high risks, the program documents underpinning the RSF request will discuss the severity of the implied risks and explain how the design of the RSF and concurrent UCT program—including access, phasing, and conditionality— seek to mitigate these risks.

• The assessment will normally be based on the baseline macroeconomic framework of the RSF request, but may also need to reflect information on downside scenarios if these are also included in program documents (e.g., if the concurrent UCT arrangement is treated as precautionary).

G. Overdue Obligations

64. The Managing Director will not recommend an RSF arrangement for approval by the Executive Board if the member has overdue financial obligations to the Fund. This applies to overdue financial obligations in the General Resources Account, the Special Disbursement Account, the SDR Department, or to the Fund as Trustee (under the RST or under the PRGT). Similarly, if a member under an RSF arrangement incurs overdue financial obligations as described above, no further disbursements may be made under the RSF arrangement until such time as the overdue financial obligations are settled in full. Moreover, should a member incur overdue financial obligations to the RST, that member’s access to the GRA and PRGT would also be suspended.

65. The RST would follow the Fund’s strategy to prevent and remediate overdue financial obligations.³³ This strategy consists of three elements: prevention, intensified collaboration, and remedial measures. As in the GRA and PRGT, in the RST, preventative measures provide a critical first line of defense to avoid the emergence of new arrears and would employ the Fund’s engagement with the member, including through surveillance, policy advice and safeguards, and technical assistance with the aim to proactively safeguard Fund resources. For members that cooperate with the Fund in resolving their arrears the strategy provides for intensified collaboration to assist the member in establishing a track record of policy and payments performance, mobilizing resources from other creditors and donors, and normalizing relations with the Fund. Once arrears have arisen, the strategy provides for the application of remedial measures of increasing intensity in order to encourage members to cooperate with the Fund in seeking a solution to their arrears.

66. The proposed cooperative strategy for resolving arrears under the RST would set remedial measures in cases of overdue financial obligations, broadly similar to those for the PRGT.³⁴ The remedial measures would apply to member countries with overdue obligations (repayments of principal and interest) that do not actively cooperate with the Fund to resolve their arrears problems. An escalating timetable would guide the Executive Board in considering remedial measures of increasing intensity, although the application of each measure would take into account the specific circumstances of the member.³⁵ Whenever a member would fail to settle a financial obligation to the RST on time, communication urging prompt payment would be sent to the member and the Executive Director concerned, and the member’s access to the GRA, PRGT, and RST will have been suspended. In all cases, overdue obligations (i.e., repayments of principal or payment of interest) to the RST would accrue interest at an interest rate equal to the applicable interest rate under the tier structure to compensate the Trust for the opportunity cost of arrears, subject to a minimum interest rate charge of the SDRi.³⁶ In addition, in cases of protracted overdue obligations, remedial measures would also include the Executive Board’s consideration of removing the member from the list of RST eligible countries (6 months after emergence of arrears) and declaration of noncooperation with the Trust (12 months after emergence of arrears). Upon a declaration of noncooperation, the Fund could decide to suspend the provision of technical assistance. Nonetheless, as for the PRGT, these remedial measures would not extend as far as those for the GRA given that overdue obligations in the GRA are breaches under the Articles of Agreement whereas overdue obligations in respect of Trust loans are not.

67. The RST’s framework for overdue financial obligations would allow for and encourage the prioritization of GRA repurchases and PRGT repayments. The IMF’s lending under the GRA and PRGT has a unique “lender-of-last resort” function that is essential for the stable functioning of the international monetary system. Consistent with this role, and while recognizing borrowers’ freedom to attribute any payment to specific obligations, members would be encouraged to prioritize payments (arrears clearance or as appropriate periodic partial/”token” payments) to the GRA and PRGT in cases where a borrower has (or risks having) such overdue financial obligations. This approach, which would be built into the design of the RST, would be in line with the role that GRA and PRGT lending play in the Global Financial Safety Net and would help avoid any weakening in the Fund’s ability to perform its broader responsibilities in the International Monetary System.

H. Post-Financing Assessment and Ongoing Monitoring

68. Following the end of an RSF arrangement, monitoring could take place under the current Post-Financing Assessment policy. It is proposed that outstanding credit to the RST would count towards the quota threshold established under the Post Financing Assessment (PFA) policy, where PFA is expected for members that are not in a Fund arrangement and where combined GRA/PRGT/RST credit outstanding exceeds 200 percent of quota. In these cases, the evolution and impacts of reform measures and monitoring the member’s capacity to make repayments to the RST would be covered as part of the PFA Although in practice PFA is primarily triggered by credit levels relative to quota, the PFA policy also provides for absolute trigger of SDR 1.5 billion and SDR 0.38 billion for credit outstanding to the GRA and PRGT, respectively, which were calibrated relative to the loss-absorption capacity of the GRA and PRGT. Based on experience and the evolution of the RST’s Reserve Account, the calibration of an absolute level of outstanding RST credit as a trigger for PFA could be considered at the time of the first review of the RST policy. In the interim, the initial trigger for PFA in absolute terms is proposed to be set at the same level as the PRGT (i.e., SDR 0.38 billion). In addition, the PFA policy provides the Managing Director with the discretion to recommend the institution of PFA if there are developments that suggest the need for closer monitoring of the member’s capacity to repay, and particularly, where developments call into question the member’s progress toward external viability³⁷ In the case of the RST, ongoing monitoring in the context of Fund surveillance would provide the opportunity to recommend PFA as needed over the longer period for which this credit remains outstanding.

69. Further monitoring will be covered as part of surveillance and lending. Following the end of an RSF arrangement, Article IV consultations will be the main vehicle to cover issues related to longer-term structural challenges addressed by the RST and follow up on the implementation of past IMF policy advice as long as they remain macro-critical. If residual BoP needs persist or a new BoP gap emerges, any follow-up UCT program would be expected to account for RSF repayments in debt sustainability and capacity to repay considerations.

I. Misreporting Framework and Other Lending Policies

70. Misreporting framework. A framework to address misreporting under the RST is proposed to be established. In particular, misreporting under the RST would occur either:

• (i) when the member has received a non-complying disbursement as a result of inaccurate information being provided to the Fund on the implementation of a reform measure which leads to an incorrect assessment that (a) such measure has been fully implemented when it has in fact not been fully implemented or (b) that the deviation in implementation of the reform measure was minor when in fact it was not; or

• (ii) there has been an Executive Board finding of misreporting under the accompanying UCT program, which was not assessed as “de minimis” or waived by the Executive Board. As the UCT program provides the short-term policy anchor and safeguards for disbursements under the RSF arrangement, a noncomplying disbursement under the accompanying UCT program, other than a “de minimis” misreporting or a misreporting that was waived, would also taint disbursements made at the same time under the RSF arrangement as noncompliant.

In cases of misreporting under (i) above, members are expected to make an early repayment of the non-complying disbursement(s), unless the Executive Board makes a determination that, based on the fact that the deviation in policy implementation is minor, the objectives of the reform measure have been achieved, notwithstanding the misreporting. With respect to cases of misreporting under (ii) above, the misreporting framework applicable to the UCT program would apply with no separate or additional steps required under the RST misreporting framework. Members would be expected to make an early repayment of the non-complying disbursement(s) under the RSF arrangement unless, pursuant to the misreporting framework applicable to the UCT program, the misreporting under the UCT program is de minimis or a waiver of non-observance is granted by the Executive Board. With the above exceptions, the misreporting framework of the RST is proposed to be procedurally analogous to that of the PRGT.

71. Other Fund policies. Given the close operational link between RSFs and UCT programs, key Fund policies applicable to UCT programs (e.g., lapse of time (LOT) procedures, side letter policy) will be applicable to RSF arrangements mutatis mutandis. Under the LOT procedures, a review under an RSF arrangement would be eligible for completion on a LOT basis where the review under the underlying UCT-quality arrangement or instrument meet the criteria for LOT completion of program reviews and the relevant reform measures have been met. In countries where governance issues are assessed to be critical to the resolution of the member’s BoP problem, these would be expected to be addressed under the UCT program in line with the 2018 Governance Policy. Staff would expect this aspect to be taken up based on experience at the proposed review of the RST. Other lending policies would be expected to guide RST policies as they apply to the accompanying UCT program as well. Any standalone RSF arrangement documents would be considered country papers within the scope of the Transparency Policy, with the same publication regime as applicable to documents on use of Fund resources. Similarly, any standalone RSF arrangement documents would be considered as documents discussing a member’s use of the Fund’s resources under the Open Archives Policy.

A. Governance

72. Similar to the PRGT, the Fund would act as Trustee of the RST, and the Executive Board would have the authority to take decisions on issues pertaining to the RST as well as to approve individual RSF arrangements. This includes decisions related to eligibility, qualification, access, adjustments to certain financial parameters of the Trust (such as the interest rates), and the assessment of RSF conditionality. Decisions regarding the RST establishment, amendments and implementing decisions would be taken by a majority of the votes cast, as is the case with most decisions in the PRGT. The Executive Board would also have the power to terminate the RST.

73. Creditor consent would be required for changes to fundamental terms of the RST that affect creditor interests, including the purposes clause, lending facilities, and key financial terms and structure. As discussed in greater detail in the supplement to this paper, the RST Instrument specifies the provisions that could only be amended with creditor consent (“protected provisions”). These protections would assure contributors that no fundamental change would be made to the clause governing use of RST resources or in the key financial parameters for creditors without their consent or an opportunity to suspend their financial support for future trust operations in the absence of consent.³⁸ If a Loan Account contributor does not consent to an amendment, further drawings under its borrowing agreement to fund Trust loans would be suspended. The contributor may further request the partial return of its Deposit Account and Reserve Account contributions, in an amount proportional to the remaining uncommitted portion of its commitments under its Loan Account borrowing agreement. The borrowing agreement, though, would remain open for encashment calls related to claims outstanding or committed prior to the effectiveness of the amendment, and outstanding claims under such borrowing agreement would remain outstanding and subject to repayment in accordance with the repayment schedule of the RST loans funded with drawings under the borrowing agreement. Where the consent of a stand-alone contributor to an amendment of the Reserve Account or the Deposit Account is required, the non-consenting contributor under such stand-alone contributions may request the repayment of its principal contribution, net of any losses or retained investment earnings.

74. In terms of the consent process for protected provisions, staff proposes that the consent of a creditor would be assumed if the contributor was given adequate notice and appropriate time to respond to a request for consent and no response is received. Specifically, the RST Instrument would authorize the Board to set a first deadline for explicit consent. This would be followed by a second deadline to those contributors that did not respond within the first deadline. The second formal notifications would indicate that if no response is received from the contributor on the proposed amendment, the contributor would be presumed to have consented to the amendment. It is proposed that after the amendment has become effective, any contributor that did not respond within the second deadline would have six months to notify the Fund of its objection to the amendment. If such notification is received, the contributor would have the same rights regarding suspension of future drawings and partial return of its share in the deposit and reserve accounts discussed in paragraph 73 above. The underlying rationale for this proposed consent process is that the purpose of the protected provisions is to give contributors enough time to consider whether they support an amendment and to take actions to protect their contributions if necessary, but not to provide them with a veto (including, e.g., through non-response). The proposal aims at balancing two competing interests, namely the need of giving contributors adequate time to consider an amendment and the ability to move forward with an amendment if a contributor does not respond. Staff is proposing a similar approach for the PRGT (1196).

75. Staff propose that the RST would be reviewed three years after it becomes operational, or sooner if warranted.³⁹ This review could take stock of the experience with the RST, and consider if any modifications may be needed, including in respect to qualifying longer-term challenges, eligibility, margin and service charge structure, country groupings, and reserve coverage. The Board could also assess at that time whether RST financing should extend beyond the current drawdown period (November 30, 2030) or be sunset at a future date, in line with the goal of the SDR channeling to support more resilient and sustainable growth following the pandemic. The review would also decide the frequency at which RST policy reviews would be conducted going forward with the expectation that such reviews would generally cover the policy areas included in the first review. As set out above, depending on developments in the SDRi or unexpected events that have a bearing on the financial sustainability of the RST, an earlier review of the RST interest rate structure may be necessary. Such reviews would always also trigger a review of the country groupings.

B. Coordination with the World Bank

76. RST lending operations would greatly benefit from close coordination with the World Bank and other relevant agencies, including regional MDBs. IMF and World Bank staff have worked closely to develop broad principles for coordination on RST operations (see Annex III). At this stage, the Fund staff note concentrates on climate-related issues; they would need to be customized for other long-term challenges under the RSF to the specific features of those purposes. In line with the 1989 IMF-World Bank Concordat (SM/89/54, Rev. 1), coordination will be guided by principles that reflect each institutions’ respective mandate and expertise.

77. The five key areas for coordination are (i) diagnostics; (ii) policy priorities; (iii) conditionality; (iv) implementation supervision; and (v) program documentation (i.e., a vehicle to document the coordinated approach for RST lending).

• RSF reform measures would be informed by country diagnostics developed in both institutions relevant to the RST’s purposes, as well as—where applicable—national authorities’ strategies. For example, on climate change, the Bank’s Country Climate and Development Reports (CCDR), if available, will be a critical input, complemented by other products such as the Fund’s Climate Change Policy Assessments (CCPAs) and its potential successor instrument, Climate Macroeconomic Assessments Programs (CMAPs), Climate Public Investment Management Assessment (C-PIMA), and Disaster Resilience Strategies (DRS). This would strengthen policy consistency and complementarity on policy recommendations, while leveraging the comparative expertise of both institutions for the best policy advice to the country. If neither a CCDR nor a CMAP are available, RSF policy design would be based on other available information and discussions with other IFIs/regional MDBs and the authorities.

• Based on the diagnostics, Fund staff will identify policies that the member country would need to prioritize under the RST, in coordination with the WB. The idea is to promote complementarity with any active or planned WB development policy operation or climate program, while delineating areas of responsibility according to each institution’s mandate and role.

• The IMF’s Executive Board will establish RSF conditionality and assess whether an RSF condition is met or not (consistent with the policy on not having cross-conditionality), drawing to the fullest extent deemed useful on the advice of WB staff in areas of the WB expertise. RST conditionality would be designed taking into account the principles underpinning the conditionality guidelines, including capacity to implement.

• It is envisaged that Bank staff would provide an assessment letter on the authorities’ climate policies for information at the time of an RSF approval and for reviews where implementation of RSF reform measures is assessed. In addition, the staff report and MEFP will also document the coordination with the Bank, including a brief description of the Bank’s engagement in the sector and/or any Bank technical assistance related to RST-supported reforms. The staff report would also acknowledge Bank staff’s inputs into the RST in the cover note.

• Broad expectations on modalities for engagement for both Fund and WB staff have also been agreed, with appropriate caveats for confidentiality of discussions with the authorities and information sharing.

78. A coordination framework will also be developed for pandemic preparedness by the start of RST operations. Based on a similar blueprint developed for coordination with the World Bank on climate change, staff are engaging with relevant stakeholders, including the World Bank and the World Health Organization, to develop broad principles for coordination with other institutions on RST lending for pandemic preparedness.

C. Preferred Creditor Status

79. The proposed lending framework presumes de facto PCS of RST loans, as is the case for Fund lending under the GRA and PRGT. The Fund’s de facto PCS is accepted by Fund members and the international creditor community (official and private)—by practice, not law—recognizing the public good nature of IMF financing, including the benefits to both the country and its creditors from Fund financial support under a Fund-supported program. Under this practice, creditors have excluded the Fund’s claims from sovereign debt restructuring by exercising voluntary forbearance in enforcing their claims.

80. To clarify intentions regarding the de facto PCS status for RST claims, the IMFC could call on all Fund members to recognize such status for RST claims, as it did for the Fund’s PCS in 1988. Major official bilateral creditors could recognize the de facto PCS of RST claims via the Paris Club or the G20, such as in creditor committees under the Common Framework of the G20 or Paris Club.

81. De facto PCS for the RST claims would be accompanied by additional safeguards. Appropriate access policies, and the debt sustainability and CtR safeguards discussed above would help minimize the risk that RST obligations could aggravate a member’s debt vulnerabilities as a result of the added exposure to de facto senior debt. In addition, to protect the unique lender-of-last resort function of the GRA and PRGT financing, the RST’s policy would encourage prioritizing payments to the GRA and PRGT over RST obligations when a borrower has overdue obligations to the Fund (see Section III.I—I) with no implication for the de facto PCS of the RST claims.

A. General Framework

82. The RST is proposed to be a loan-based trust administered by the IMF, with a governance and financial structure broadly similar to that of the PRGT. The roles of the Executive Board, management, and staff for RST lending and other decisions regarding the RST would be broadly the same as for PRGT and GRA lending. Similar to PRGT, RST resources would be mobilized based on voluntary contributions from members, including those wishing to channel SDRs for the benefit of LIC and more vulnerable middle-income members. The RST would in turn on-lend these resources to eligible borrowers. It is expected that the bulk of the contributions to the RST would be made in SDRs, although the provision of RST resources in freely usable currencies would also be possible. Contributions to the Reserve Account (RA) and Deposit Account (DA) could also be made in other currencies. All claims of contributors on the RST would be denominated in SDRs.

83. Establishing a large loan-based trust, and making it operational in a relatively short period of time poses challenges for the financial design of the RST relative to the PRGT, which had a funded Reserve Account from its establishment and has expanded incrementally since 1987. From the outset, the RST would require sufficient loan resources to meet potential demand from borrowers, as well as adequate financial buffers to help manage credit and liquidity risks. While lending and investment income can help build reserves overtime, there is a need for adequate upfront funding—this presents a major challenge since members’ budgets are constrained by the impact of the pandemic and parallel fundraising campaigns for other initiatives (e.g., PRGT, CCRT, IDA). This is the main difference over the PRGT which from its establishment had a reserve account funded with Special Disbursement Account (SDA) resources derived from gold sales profits.

84. The proposed financial architecture is designed to ensure the safety and liquidity of contributors’ claims on the Trust while minimizing the need for budgetary contributions. This is done through a combination of: (i) strong policy safeguards, including the link of RST lending to a UCT-quality program; (ii) a supportive multilateral context, including the expected de facto PCS for the RST; (iii) an adequate reserve buffer that is expected to grow over time through lending and investment income, with significantly higher reserves by the time RST loan repayments come due; (iv) a funding mechanism that combines modest upfront reserve account contributions with a much larger pool of loan resources and long-term deposits by contributors that create claims on the RST and retain their reserve asset character (through early repayment in case of balance of payments or reserve position need (“encashability”) and high asset quality); (v) a split of each contributor’s claims on the RST into resources for lending operations (drawn over time based on demand) and an upfront long-term contributions to bolster reserves (contributing to investment income and risk mitigation).

85. To operationalize these design features, the RST is proposed to have three financial pillars: a Loan Account, a Reserve Account, and a Deposit Account (see Figure 1 below and Annex IV for details).

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RST Financial Framework

Citation: Policy Papers 2022, 013; 10.5089/9798400207730.007.A001

* Contributors and beneficiaries can provide/receive both SDRs and currency, facilitated through the VTA market when needed

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• Loan Account (LA). The LA is the RST’s conduit for lending operations, funded by voluntary loan commitments from contributors. As in the PRGT, RST loans would be made on a pass-through basis: the Trust extends loans to borrowers (in response to demand) by drawing on available LA resources committed by contributors (i.e., loan or note purchase agreements). Borrowing Agreements with contributors would be subject to uniform key substantive terms. In particular, all LA contributors are remunerated at interest rates up to the SDRi. Borrowers of RST loans will pay the SDRi plus a modest margin to cover administrative expenses and reserve build up, as well as a service charge in some cases (see H43). Repayments to LA contributors are on the same maturity schedule as the amortization of borrowers’ RST credit outstanding. LA contributors’ commitments will include an encashment buffer available for drawings in the event that another contributor requests early repayment of its LA claims by representing that its balance of payments or reserve position justify it (see Section V.B below).

• Reserve Account (RA). The RA is the RST’s principal financial buffer to manage credit and liquidity risk, and also to cover administrative costs. It is funded through upfront contributions by contributors in proportion to their respective LA commitments. To limit the budgetary impact of the upfront RA principal contributions by LA contributors, the proposed structure starts off with a relatively modest RA balance that grows over time from lending margins, service charges, and investment income, net of administrative costs. The RA principal contributions are not remunerated but entitle each contributor to a share of the Trust’s net assets at the termination of the Trust. RST lending income from the margin is transferred to the RA quarterly, and any service charges by RST borrowers go directly into the RA. RA resources can be used to cover the administrative expenses of the Trust, and the margin and service charge income are expected to fully cover these costs. RA resources are distributed to contributors based on their share in the account at the time of the liquidation of the RAAn early partial distribution of RA resources may also take place based on an assessment of the adequacy of net reserves. Pending use, RA resources are invested in liquid, high-quality instruments in accordance with guidelines established by the Executive Board (see Section V.C below).

• Deposit Account (DA). The DA, which adds to the RST’s gross reserves, would be funded upfront by long-term deposits from LA contributors in proportion to their LA commitments, remunerated at interest rates up to the SDRi. The purpose of the DA is to generate additional net investment income for the Trust that would contribute to building the RST’s net reserves, thereby minimizing any residual risks to contributors’ claims on the RST. Resources will be invested in liquid, high-quality assets, in accordance with investment guidelines adopted by the Executive Board (see Section V.C below), that would permit liquidation at short notice to allow for payment of a possible encashment in the event of a BoP/reserve need by a contributor.

86. Contributors’ claims on the LA and DA of the RST will have all the characteristics of reserve assets, supported by a multilayered risk management framework and the possibility to encash such claims in case of balance of payments or reserve position need. The quality and liquidity of claims on the RST is backed by:

• Policy safeguards. RST lending would be approved alongside an arrangement supporting a UCT program allowing the RSF arrangement to leverage the UCT program’s financing, safeguards and monitoring framework (e.g., program design, debt sustainability analysis, capacity to repay assessment, PFA arrears policy). In addition, RST financing would have its own conditionality and additional policy requirements, such as an overall access cap, phasing rules, debt sustainability and CtR requirements, and charges and repayment structures (see Section III).

• Multilateral context and de facto PCS. As with the PRGT, the RST would benefit from a supportive multilateral context. For instance, risk pooling and mitigation would be facilitated by broad member participation on the lending and borrowing side. The purpose and public good nature of the RST would motivate contributions to the Trust, and RSF-supported policies would possibly catalyze broader donor support on terms that moderate borrowers’ credit risk and promote sustained implementation of sound polices. Collaboration on the prevention and clearing of arrears and the agreement on remedial measures for overdue obligations would provide credit risk protection for the RST and, in turn, its contributors. Consensus by members that RST claims would have de facto PCS through an IMFC communique as discussed above will be an important factor in facilitating a wide pool of contributors to the RST.

• Financial buffers. The proposed financial architecture is designed to provide strong buffers to safeguard against financial risk and to ensure the high quality and liquidity of contributors’ claims on the RST (i.e., LA and DA) from its establishment to underpin its readiness to meet potential demand.

87. The proposed financial structure envisages adequate financial buffers up-front, with significantly higher reserve levels expected by the time RST loan repayments begin. Gross reserves are initially funded through upfront contributions to the RA and long-term deposits (principal claims) in the DA Net reserves, defined as gross reserves net of contributors’ claims on the DA, are initially modest but are expected to grow steadily funded by lending margins and service charges income, excess investment income in the DA (net of SDRi paid to contributors), and investment income of the RA, net of administrative costs (see Section VI). The adequacy of reserves would be reviewed periodically together with the interest and charges’structure, with a view to ensuring an adequate, but not excessive, degree of reserve coverage.

88. Each LA contributor would sign a Contribution Package with three parts—the loan account contribution (borrowing agreement); an RA contribution; and a DA contribution.^{40 41} Contributions to the RAand DA would be 2 percent and 20 percent, respectively, of a contributor’s commitment to the LA at a minimum. The DA contributions would have a uniform pre-specified maturity date, i.e., 20 years after the end of the agreed loan drawdown period when all LA claims are scheduled to have been repaid, irrespective of when final repayments under individual borrowing agreements take place. At the time of maturity of the DA, the principal value of a DA contribution is returned to the respective contributor. Any excess investment returns attributed to the DA contribution would be transferred to the RA and counted as a contribution of the contributor to that account. The RA contribution and DA net investment income would remain in the RST pending distribution to contributors. At liquidation of the RST, following repayment of all LA claims under borrowing agreements, and the repayment of the DA principal contributions and the associated transfer of excess investment income to the RA, each contributor would receive its calculated share in the total assets of the RA. Annex IV sets out in greater detail the principles and methodologies for DA and RA distributions. In the event of successive RST mobilization rounds, any additional RA and DA contributions would need to be determined at the time such extension of the RST is decided, taking into account the reserve adequacy of the Trust. As with the PRGT, staff would expect that contributions would be received from members or their institutions (packages or ad hoc contributions), and the framework is designed this way (in particular regarding use of SDR or encashment rights). If interest for contributions were received from other parties, the Managing Director would assess whether such requests could be accommodated under the RST framework (for example by excluding SDR transactions if the contributor is not a prescribed holder or limiting encashment rights), but would submit any such request for Executive Board consideration.

89. The Trust may also receive “standalone” contributions to the RA and/or the DA unrelated to LA contributions. Such contributions could come from contributors that are not able to make LA contributions but would want to contribute to the RA and/or the DA. Such standalone contributions to either or both accounts would be in the interest of the Trust, as they would bolster reserves at the outset and raise Trust income from investments. In contrast, standalone contributions to the LA (without RA and DA contributions) would increase the risk exposure of reserves and deposits from other contributors. Standalone contributions to the RA and DA would have a fixed maturity, guided by an investment duration consistent with reliably strengthening RST reserve accumulation. Staff considers that such contributions should normally have a maturity of 10 years. Standalone RA and DA contributions bear the same risks within the RST as RA/DA contributions from a Contribution Package.

B. Reserve Asset Character of Contributor Claims on the Loan and Deposit Accounts

90. Many potential contributors prefer (or require) that their claims on the Loan and Deposit Account of the RST qualify as international reserves.⁴² A key requirement for a reserve asset is that it must be readily available for use in case of a BoP or reserve need (i.e., be liquid) and be of generally high quality (i.e., with low credit risk). Preserving the reserve asset nature of lenders’ claims thus entails ensuring both the quality and liquidity of the underlying assets of the Trust, i.e., the quality of RST loans and investments. Under the proposed architecture, LA and DA claims would have all the necessary characteristics of reserves assets, while RA contributions would not.

91. LA claims. Contributors could count outstanding loan claims on the LA as international reserves, in view of the quality and liquidity of the underlying assets under the proposed credit risk management framework and encashment regime.

• Asset quality of outstanding loan claims on the LA would be ensured by a multilayered credit risk management framework involving three pillars: (i) policy safeguards (including requiring an accompanying UCT-program, conditionality, and RST access policies) to ensure that borrowers have the capacity to service their debt; (ii) financial buffers in the RA and DA as described above, to protect contributors’ claims on the LA against potential arrears or credit losses; and (iii) a supportive multilateral context (e.g., a cooperative arrears framework, a diversified borrower base, and envisaged de facto PCS).

• Liquidity of contributors’ claims on the LA related to outstanding RST loans would be ensured by an encashment regime stipulated in the RST instrument and incorporated into the loan agreements (all LA contributors would have to allow for encashment drawings), where contributors commit to provide access to their borrowing agreements for drawings in the event another contributor experiences a BoP need and requests early repayment its loan claim. Staff would seek to manage the level of undrawn commitments under borrowing agreements in a manner that preserves a buffer for possible encashment requests, parallel to the practice in the PRGT. A lender encashing its RST loan resources would commit to again finance calls for drawings under its loan agreement once it no longer has a BoP need. The encashment regime would require a sufficiently large pool of economically strong lenders.

92. DA claims. Lenders could count their claims on the DA as international reserve assets, on the basis of the proposed investment strategy and credit risk management framework.

• Asset quality would rely on an appropriate investment strategy, with financial assets held in the DA invested in high-quality investment grade fixed-income instruments with limited risks to the principal value and in line with general practices for investing reserves. In general, the goal of generating investment returns above the SDRi will entail a certain degree of investment risk, especially over the short-term. While the strategy would aim to limit the probability and extent of investment losses over the medium-term, short-term transient losses stemming from mark-to-market volatility could arise but can be tolerated as the strategy would be expected to remain resilient over time and also because a risk exposure of this nature is commonly accepted for reserve assets. In addition, the RST’s comprehensive policy safeguards, an adequately funded RA (which would increase overtime based on lending margins and investment returns), and a supportive multilateral context, including de facto PCS of RST loans, would mitigate the risks to the value of claims on the DA. The value of contributors’ claims on the DA (i.e., deposit principal and attributed cumulative investment earnings net of SDRi remuneration) would be assessed and reported at regular intervals.⁴³⁴⁴

• Liquidity of contributors’ claims on the DA would be ensured by investing DA deposit resources in high quality instruments, with sufficient liquidity of the asset pool to allow for encashment of individual contributors’ claims when they experience a BoP/reserve need. A contributor encashing their claim on the DA would commit to reconstituting its deposit once it no longer has a BoP need.

C. Investment Strategy

93. The investment strategy for the RST should support the purposes of the investment assets. Assets in both the DA and RA have a dual role of generating income for RST operations and providing security for RST loans. Maintaining high-quality investments and sufficient liquidity to meet potential withdrawal requirements would be important to support these purposes, including in counting DA claims as international reserves. Minimizing the risk of investment losses over a medium-term horizon would also be prudent in the event of unexpected needs (e.g., encashment or credit losses). To this end, the main component of RST investment assets should be invested in a short duration fixed-income (SDFI) strategy. In addition, a liquidity component which is expected to be relatively small, would be set aside in deposits to cover short-term operational cash requirements. ⁴⁵ The proposed investment strategy described below is envisaged for Executive Board approval following the establishment of the RST. Similar to the PRGT, the RST Instrument would authorize the Executive Board to adopt guidelines for investment of RST assets in line with the proposed investment strategy described below.

94. An investment strategy similar to the one for the IMF’s own reserves in the Fixed-Income Subaccount (Fl) is envisaged for the SDFI component of RST investment assets.⁴⁶ This strategy has recently been adopted for a portion of the PRGT portfolio and is well suited to meet the purposes described above. The strategy balances income generation with maintaining reserve asset like properties and is in line with general practices for investing reserves at peer institutions (e.g., central banks and multilateral development banks). The objective of the investment strategy for the SDFI component is to produce returns in excess of the three-month SDR interest rate (SDRi) by an average of around 50 basis points, while minimizing the frequency and extent of negative returns and underperformance over an investment horizon of three to four years. Eligible investments include a range of high-quality investment grade fixed-income instruments such as government and government agency obligations as well as credit instruments such as corporate bonds and asset backed securities. Under this strategy, the majority of the Fl portfolio has been actively managed in short duration diversified fixed-income instruments in which external asset managers can adjust risk exposure to duration and credit assets according to market conditions. Staff envisages that RST investments in the SDFI component would be similarly managed. The strategy for investing its reserves in the Fl has served the IMF well. It has a proven track record for generating consistent and meaningful returns in excess of the SDRi. The resilience of the strategy has been supported by the diversification of risk premia.

95. The proposed investment strategy for the SDFI component is well positioned to achieve a moderate margin above the SDRi over a three-to-four-year investment horizon. As with other investments of reserve assets, there will be fluctuations in the market value of the portfolio. The proposed strategy is appropriately conservative to limit excessive volatility and provide sufficient liquidity to meet withdrawal needs. The proposed strategy also has a relatively high probability of achieving a positive margin above the SDRi over a three-to-four-year horizon with an average expected margin of around 50 basis points over time. While the strategy has a relatively high probability of achieving a positive margin above the SDRi over shorter periods, this probability would be reduced under certain stress scenarios, for example, if interest rates rise faster than currently anticipated.⁴⁷ However, under such a scenario, higher yield levels and an upward sloping curve would benefit returns over time allowing mark-to-market losses to be recovered.

96. Pooling of RST investment assets (RA and DA in one pool) with those of other trusts, in particular the PRGT, would facilitate timely implementation of the investment strategy and limit investment costs. Pooling of investment assets of accounts within a trust is already current practice. In addition, pooling of RST investment assets with the PRGT would allow the RST to benefit from the existing investment arrangements in place for the PRGT—limiting setup time and costs. Pooling of trust assets for investment purposes is a common practice followed by several multilateral development banks.⁴⁸ If pooling was not possible, setting up separate investment arrangements for the RST could significantly delay implementation of the investment strategy. Pooled investments would also incur significantly lower investment costs over time than for separately managed accounts due to economies of scale. Pooling of assets would not be expected to have any material implications for PRGT contributors or PRGT investment operations. Under the current record keeping arrangements, detailed attribution is made of the share of each account in the investments, and this could be expanded for pooled investment across trusts.⁴⁹

97. To enable pooling of RST assets with PRGT assets, an amendment to the PRGT Instrument is proposed, requiring the consent of subsidy account contributors. With respect to the PRGT, the provision on separation of trust assets under current PRGT Trust Instrument precludes pooling of investments across trusts. PRGT Instrument, Section VII, Paragraph 2 is among the so-called protected provisions of the PRGT Instrument. Protected provision can be amended but require the consent of affected contributors.⁵⁰ Amending the PRGT to allow for the pooling of PRGT assets with other trusts for investment affects all current contributors to the subsidy accounts of the Fund whose contributions would be invested together with RST resources and possibly those of other trusts under such pooling arrangements. There is a total of 154 current PRGT subsidy account contributors whose consent would be required to make the proposed amendment effective.

98. Staff propose to seek consent from contributors to the PRGT subsidy accounts for the proposed amendment under a process that would allow for lapse of time consent for contributors that do not respond within the prescribed deadlines for consent (or an opportunity to be bought out). First, following approval of the proposed amendment by the Executive Board, a communication from the Fund would be sent to contributors to seek their explicit consent to the amendment within six weeks. Countries that do not wish to consent to the proposed amendment should notify the Fund in writing within the response windows. The objection by a contributor does not mean that the amendment could not become effective; rather, and as described in the MDRI context in 2005, the dissenting contributor could request back its subsidy contribution.^{51 52} After the expiration of the first deadline, staff would send a second formal communication to the contributor requesting a response within a further period of four weeks. The second communication would indicate that if no response is received by the second deadline, the contributor is assumed to have consented to the amendment. Fund staff would follow up bilaterally with authorities to ensure that a response is received within the second deadline. If no response is received within the second deadline, the consent is assumed for purposes of the amendment process. It is proposed that the contributor would be given six months after the amendment becomes effective to request the remaining share of its contribution to the PRGT subsidy accounts back if during this period it sent a communication to the Fund objecting to the amendment. Contributors would be given clear communications about this additional six-month period and its implications. In the event of any unexpected difficulties in securing the expected high level of contributor consents, management could return to the Executive Board prior to the expiration of the second deadline regarding the proposed amendments, including to extend the consent period for a further limited time to allow for engagement with PRGT subsidy contributors that have not yet responded, which is independent from the RST related decisions.

99. The proposed approach, while new in the context of PRGT amendments, is legally permissible as it appropriately protects the interests of affected PRGT contributors to have an opportunity to reject a proposed amendment while also taking into account the interests of other contributors and PRGT beneficiaries to have operations continue under an amended instrument. The PRGT Instrument is silent on the modalities for consent. While affirmative consent has been sought in the past, and will continue to be followed as the first step for the proposed amendment, adding a lapse of time element along with strong notice provisions and a significant period within which to request a buyout for creditors that do not respond provides appropriate safeguards to protect creditors’ interests. The underlying rationale of the amendment process for protected provisions is that a contributor can request its resources back if it does not consent to an amendment; the creditor does not have a veto over the amendment process. The lapse of time element for contributors that do not respond allows the Trustee to bring closure to the amendment process and avoids giving individual contributors a veto by not responding. Giving a contributor that does not respond within the deadlines an additional six months after the amendment has become effective to request its contribution back, offers a final opportunity for the contributor to express its objection and in this case request its contribution back.⁵³

D. Making the RST Operational

100. To commence lending operations and therefore become operational, the RST would need a critical mass of resources from a sufficiently broad base of contributors with strong external positions. Once the RST is formally established, there will be an interim period before lending operations can start, with time needed to negotiate and make effective contribution agreements, set up new financial systems, and engage with members on UCT-quality and RST-supported policies. In this interim period, the Trust will be in a position to accept and hold RA and DA contributions and enter into loan agreements prior to the start of RST lending operations. Two general conditions would be particularly important for RST lending operations to commence: (i) sufficient loan resources in nominal terms to meet initial demand for RST resources in line with the envisaged access policy, and (ii) a sufficiently broad pool of participating RST contributors to ensure encashability of LA claims. It is proposed that lending operations commence once the Managing Director has notified the Executive Board that these two conditions are met and that sufficiently robust financial systems and processes are in place.

101. Fundraising would be initiated immediately after the establishment of the RST. The overall fundraising strategy would seek broad contributor participation and aim to secure the necessary resources for the operationalization of the Trust. As the bulk of contributions would likely be in SDRs, the initial fundraising will focus on a group of countries that have historically participated in other Fund financing initiatives (i.e., PRGT, NAB, BBAs) and participate in the VTA market (a total of 26 countries). Voluntary contributions from other VTA participants are also encouraged to help strengthen the RST financial capacity given the tight implementation timetable.

102. In addition, staff will implement in the interim period the necessary adjustments to the Fund’s financial systems and processes to ensure smooth RST operations, including appropriate internal controls and reporting. Staff will leverage existing Fund systems and expertise to implement the financial infrastructure for the RST as soon as possible. The implementation of changes needed to support a new Trust is, however, a significant and resource-intensive undertaking. Careful consideration will be given to ensure that system configurations will adequately safeguard the financial resources of the RST and its contributors. An assessment of system readiness will precede the commencement of RST lending operations.