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IMF POLICY PAPER

CHANGES TO THE FUND’S FINANCING ASSURANCES POLICY IN THE CONTEXT OF FUND UPPER CREDIT TRANCHE FINANCING UNDER EXCEPTIONALLY HIGH UNCERTAINTY

MARCH 2023

IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following documents have been released and are included in this package:

• A Press Release summarizing the views of the Executive Board as expressed during its March 15, 2023 consideration of the staff report.

• The Staff Report, prepared by IMF staff and completed on March 2, 2023 for the Executive Board’s consideration on March 15, 2023.

[The documents listed below have been or will be separately released.]

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Electronic copies of IMF Policy Papers are available to the public from

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International Monetary Fund

Washington, D.C.

© 2023 International Monetary Fund

Press Release

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PR23/78

IMF Executive Board Concludes Changes to the Fund’s Financing Assurances Policy in the Context of Fund Upper Credit Tranche Financing Under Exceptionally High Uncertainty

FOR IMMEDIATE RELEASE

Washington, DC – March 17, 2023: The Executive Board of the International Monetary Fund (IMF) approved changes to the Fund’s financing assurances policy. The changes apply in situations of exceptionally high uncertainty, involving exogenous shocks that are beyond the control of country authorities and the reach of their economic policies, and which generate larger than usual tail risks.

In situations of exceptionally high uncertainty, the Fund can provide emergency financing to meet urgent Balance of Payments (BoP) needs of members, provided certain safeguards are met. It is more challenging to provide support through an Upper Credit Tranche (UCT) arrangement, which requires a Fund-supported program that resolves BoP problems, restores external viability over the medium term, and provides adequate safeguards.

The changes adopted would address key barriers to designing a Fund UCT program in situations of exceptionally high uncertainty, in particular by modifying the Fund’s financing assurances policies in two ways. The first change allows official bilateral creditors to provide an upfront credible assurance about delivering debt relief and/or financing with the delivery of a contingent second-stage element of debt relief and/or financing once the exceptionally high uncertainty has been resolved. This would help establish that medium-term viability is being restored. The second change extends the use of a capacity-to-repay assurances from official bilateral creditors/donors from emergency financing to a UCT arrangement context. This would help establish adequate safeguards.

These changes and their application to any specific country case in a situation of exceptionally high uncertainty would require the Fund to weigh enterprise risks. Therefore, along with these changes, the Board also established a procedural safeguard for early consultation with Executive Directors about engagement under exceptionally high uncertainty to determine whether these circumstances are present and whether the Fund is prepared to accept the risks that a UCT arrangement would entail.

Executive Board Assessment:

Executive Directors welcomed the opportunity to consider reforms to the Fund’s Financing Assurances Policy that would enable the approval of upper credit tranche Fund arrangements (UCT arrangements) in cases of exceptionally high uncertainty. Directors stressed that emergency financing through the Rapid Financing Instrument and/or Rapid Credit Facility would generally be the appropriate modality for the Fund to support members with urgent balance of payments (BOP) needs in the context of exceptionally high uncertainty. However, stronger Fund engagement in a UCT context with a member facing exceptionally high uncertainty might be deemed appropriate and consistent with Fund policies in certain cases.

Directors agreed that a case of “exceptionally high uncertainty” is characterized by all of the factors set out in paragraph 13 of the paper. Directors stressed that the assessment of whether a case is one of “exceptionally high uncertainty” must be made in a manner that ensures uniformity of treatment and evenhandedness across the membership.

Directors recognized that it is extremely difficult to design a UCT-quality arrangement in cases of exceptionally high uncertainty. They supported the approach detailed in the paper of setting out two fully elaborated scenarios in such cases, covering both a baseline and a downside scenario, noting the need to demonstrate that a Fund-supported program could work in both scenarios, and that these scenarios would need to be sufficiently separated to generate confidence that the program could succeed and solve the member’s BOP problem and restore the member to medium-term external viability, notwithstanding the exceptionally high uncertainty about the ongoing shock. Directors stressed that a member would need to have the capacity and commitment to implement a UCT arrangement in such circumstances and to provide the necessary data for the Fund to be able to monitor the program, and that a Staff Monitored Program or Program Monitoring with Board involvement might first be necessary to establish a track record on this.

Directors stressed that proceeding with a Fund-supported program in cases of exceptionally high uncertainty would require careful judgment about whether such a program would be feasible and credible given its likely risk characteristics, and be consistent with legal and policy requirements for Fund lending. These requirements include providing adequate confidence about the ability of the program to solve the member’s BOP problem and restore the member to medium-term external viability, while providing adequate safeguards for the repayment of the Fund’s financing. The Board would need to make this judgement, based on a recommendation from Management and staff, at the time of approval of the arrangement as well as at subsequent reviews.

Directors expected that, to the extent the exceptionally high uncertainty dissipates, the program design would revert to the standard Fund approach to lending built just around the baseline. In the event that the circumstances of exceptionally high uncertainty were to deteriorate and questions arose about whether the level of confidence had become too low to clearly and credibly establish a program design to resolve the member’s BOP problem and/or restore debt sustainability, then Directors would need to determine whether further financing under the arrangement would become infeasible.

To support the Fund’s ability to approve UCT arrangements in cases of exceptionally high uncertainty, Directors endorsed the use of a procedural safeguard set out in paragraph 18 of the paper for an initial engagement with Executive Directors. Some Directors called for a broader engagement than set out in the paper, with a few Directors calling for a formal Board meeting.

Directors also supported two policy modifications, applying only to cases of exceptionally high uncertainty, to allow UCT arrangements. First, Directors supported the modified approach in cases of exceptionally high uncertainty set out in paragraph 25 of the paper for official bilateral creditors to deliver credible upfront assurances covering their commitments to help restore debt sustainability where contributions from official bilateral creditors are needed to restore debt sustainability. Directors also endorsed the proposal set out in paragraph 26 of the paper, for situations of exceptionally high uncertainty, to extend the existing use of a capacity-to-repay assurance from official bilateral creditors/donors to ensure adequate safeguards for the repayment of the Fund’s financing from an emergency financing context to a UCT program context.

Directors welcomed the paper’s discussion of risks and noted that the proposed policy changes involve considerable enterprise risks to the Fund while also noting the mitigants to address these risks identified in the paper. However, they generally agreed that when considering these risks—including reputational and spillover risks—the benefit of having the option of supporting members facing exceptionally high uncertainty outweighs the additional risk of the proposed policy change.

Title page

CHANGES TO THE FUND’S FINANCING ASSURANCES POLICY IN THE CONTEXT OF FUND UPPER CREDIT TRANCHE (UCT) FINANCING UNDER EXCEPTIONALLY HIGH UNCERTAINTY

EXECUTIVE SUMMARY

March 2, 2023

The Fund may on occasion confront cases of member countries requesting Fund financing which face exceptionally high uncertainty. Such situations are complex, but generally involve exogenous shocks beyond the authorities’ control and the reach of their economic policies, at least in the near term. Fund engagement in situations either meeting this description or sharing some features of it has been rare, with three past examples of Fund engagement post-2000, all addressed through emergency financing.

An RFI/RCF would be the appropriate instrument for the Fund to support members with urgent BOP needs in the context of exceptionally high uncertainty. Providing Fund Upper Credit Tranche (UCT) financing would implicate two conditions under the Fund’s legal and policy frameworks. First, a program would need to be designed to solve the member’s balance of payments (BoP) problem and achieve medium-term external viability; and second, adequate safeguards would need to be in place for the Fund’s lending, including capacity to repay the Fund. Debt must thus be sustainable on a forward-looking basis. Usually, the UCT program is designed with sufficient confidence that the program will succeed and will also in itself provide adequate safeguards, but the tails risks associated with such exceptionally high uncertainty means that confidence is lower than normal that the program can in itself deliver this.

Stronger Fund engagement in a UCT context with a member facing exceptionally high uncertainty could nonetheless be appropriate. This paper proposes: (i) a procedural safeguard on early Board consultation about engagement, given elevated risks to the Fund; and (ii) two reforms to the Fund’s financing assurances policy to enable the Fund to proceed with UCT financing despite such exceptionally high uncertainty. The first would be to allow upfront commitment to debt relief with a contingent second-stage element. The second would be to extend the use of a capacity-to-repay assurance from official bilateral creditors/donors from emergency financing to a UCT context. The changes would together facilitate adequate safeguards in situations involving exceptionally high uncertainty, in line with the Fund’s legal and policy frameworks.

These proposed policy changes and their application to any specific country case involving exceptionally high uncertainty would result in the Fund taking on material additional enterprise risks. These need to be carefully weighed, as identified mitigating factors would only partially reduce them.

Approved By

Ceyla Pazarbasioglu, Rhoda Weeks-Brown, and Bernard Lauwers

Contents

• CONTENTS

• INTRODUCTION

• WHAT IS THE FUND’S CURRENT FINANCING ASSURANCES POLICY?

• WHAT IS EXCEPTIONALLY HIGH UNCERTAINTY AND WHAT WOULD MOTIVATE FUND UCT PROGRAM INVOLVEMENT?

• CAN A UCT PROGRAM BE SPECIFIED IN SITUATIONS OF EXCEPTIONALLY HIGH UNCERTAINTY?

• CAN SUCH A PROGRAM DESIGN BE ACCOMMODATED UNDER FUND DEBT POLICIES?

• ENTERPRISE RISK ASSESSMENT

• ISSUES FOR DISCUSSION