On July 23, 2009, the IMF’s Executive Board approved far-reaching reforms of the concessional lending facilities for low-income countries (LICs), creating a new architecture of facilities that is more flexible and tailored to the increasing diversity of LICs and their needs. As part of the reform package, the Executive Board approved a new concessional financing framework under which a new Poverty Reduction and Growth Trust (PRGT) would replace the PRGF-ESF Trust. Separate loan and subsidy accounts will be established under the PRGT to receive and provide resources to finance new LIC lending facilities under the new Trust. These reforms will become effective and operational when all current lenders and subsidy contributors to the PRGF-ESF Trust provide their consent and commitments of additional loan and subsidy resources are secured from the membership.

To meet projected demand for concessional financing through 2014, it is estimated that loan resources of SDR 11.3 billion (US$17 billion) and subsidy resources of SDR 2.5 billion in end-2008 net present value terms (or about US$4.7 billion in cash terms) would be needed. Given the available resources, additional loan resources of SDR 9 billion (US$14 billion) and new subsidy resources of SDR 1.5 billion (US$2.8 billion) will need to be mobilized. It is envisaged that, as in the past, the required additional loan resources will be mobilized through bilateral contributions. Most of the needed subsidy resources, however, will come from the IMF’s internal resources—including the use of resources linked to the limited sales of gold approved by the Executive Board on September 18—with additional bilateral contributions of SDR 0.2–0.4 billion being sought to complete the financing package. It is expected that these reforms will boost the resources available to LICs to SDR11.3 billion (US$17 billion) through 2014, including about US$8 billion over the next two years. This exceeds the call by G-20 leaders in April for additional lending of US$6 billion over the next 2-3 years. The reform will also provide exceptional interest relief (i.e., zero interest payments on concessional loans through end-2011) and permanently higher concessionality.

High demand projections

The global financial crisis is having a severe impact on LICs, with many facing a significant deterioration in their external positions. Loan demand so far in 2009 has been stronger than expected—new lending reached SDR 2.1 billion (US$3.1 billion) as of mid-September 2009, compared to SDR 0.8 billion (US$1.2 billion) for 2008 as a whole. It is expected that demand for IMF concessional financing is likely to remain high beyond 2009, as many LICs will continue to face a difficult environment even as global demand begins to recover. Accordingly, the IMF needs to be prepared for the possibility that lending could be sustained at recent levels of about SDR 2.7 billion (US$4 billion) a year at least through 2010 (Table 1). Over the medium term, it is anticipated that demand could be about SDR 1.5 billion a year, double the long-term historical average. On this basis, total concessional lending is estimated at SDR 11.3 billion (about US$17 billion) through 2014 (Table 1). These projections take into account the doubling of access limits approved by the Executive Board in April 2009, and the implications of the new facilities architecture.

Table 1. Demand Projections

Annual commitments	Actual 2000-08 1	2009	2010	2011	2012	2013	2014	Total
In billions of SDR	0.7	2.7	2.7	1.5	1.5	1.5	1.5	11.3
In billions of US$	1.0	4.0	4.0	2.3	2.3	2.3	2.3	17.0
1/ Excluding the very high level of lending committed to Pakistan in the aftermath of 9/11, and to Liberia in 2008 following arrears clearance. 2/ Assuming exchange rate of US$1.5 per SDR.

More resources needed

Additional loan resources of about SDR 9 billion (US$14 billion) will need to be mobilized to meet projected demand over the medium term. Reflecting the strong demand by LICs, available loan resources declined sharply, to SDR 0.5 billion (US$0.8 billion) as of end-August. Given the current demand projections, available loan resources could be fully depleted in the next two to three months in the absence of new contributions (Table 2). It is, therefore, urgent that additional loan resources be secured expeditiously.

Table 2. PRGF-ESF Trust—Loan Resources
(In billions of SDRs; end-August 2009)

Available uncommitted resources	0.5
Total available	16.4
Cumulative commitments to LICs	16.0
Projected demand	9.3
Sept 2009 - 2010	3.3
2011 - 14	6.0
Additional resources required	8.8

Resources needed to fully subsidize the projected concessional lending are estimated at SDR 2.5 billion in end-2008 NPV terms, or US$4.7 billion in cash terms (Table 3). This would cover the projected lending of SDR 11.3 billion over the medium term, as well as the estimated cost of temporary interest relief being provided through end-2011, and reducing the concessional interest rates charged thereafter according to the new structure of interest rates. Taking into account the resources available in the PRGF ESF Trust, additional subsidy resources of about SDR 1.5 billion (US$2.8 billion in cash terms) will need to be mobilized.

Table 3. Subsidy Needs and Availability

	In billions of SDRs (end-2008 NPV terms)	In billions of US$ (cash terms) 1
Estimated subsidy needs	2.5	4.7
Minus: available resources	1.0	1.9
Remaining needs	1.5	2.8
1/ Assuming an exchange rate of US$1.5 per SDR.

New financing package approved

On July 23, 2009, the Executive Board endorsed a financing package to ensure the necessary financing of the new LIC facilities architecture, involving the following elements (Table 4):

Table 4. Subsidy Needs and Possible Sources of Financing
(In billions of SDRs; end-2008 NPV terms)

Subsidy requirements	2.5
Minus: available resources	1.0
Remaining needs	1.5
Possible sources
Transfer from PRGF-ESF Reserve Account	0.62
New bilateral contributions	0.2-0.4
Delaying PRGF-ESF reimbursement (for 3 years)	0.15-0.2
Gold sales resources 1	0.5-0.6
1/ After assumed leakage of 10 percent of the distribution of gold sales.

New Bilateral Contributions. In light of the critical role that bilateral subsidy contributions have played in past fund-raising exercises, the Executive Board agreed that such contributions should remain an important part of the new financing package. Recognizing the budget constraints facing many countries, the Board agreed to target additional bilateral subsidy contributions of SDR 0.2–0.4 billion (end-2008 NPV terms).

Delaying PRGF-ESF Reimbursement to the GRA. To help meet the projected subsidy needs, it was agreed that for a period of three years starting in FY 2010, an amount equivalent to the expenses of operating the PRGF-ESF Trust would be transferred from the PRGF-ESF Trust Reserve Account to the new General Subsidy Account under the PRGT (see below). Based on current projections, this could generate subsidy resources of about SDR 0.15–0.2 billion.

Use of PRGF-ESF Reserve Account Resources. There was broad support for using resources from the PRGF-ESF Reserve Account as part of the financing package. Staff’s analysis indicated that it is feasible to make an allocation of Reserve Account resources of about SDR 0.62 billion (in end-2008 NPV terms) to help meet LIC subsidy needs and still leave sufficient resources in the Reserve Account to ensure its annual self-sustained subsidization capacity of about SDR 0.7 billion after 2014–15.

Use of Resources Linked to Envisaged Gold Sales. The Executive Board agreed that resources of SDR 0.5-0.6 billion (end-2008 NPV terms) linked to gold sales would be used for LIC subsidy financing. In this context, it was also agreed that the strategy would involve the use of windfall profits arising from gold sales at an average price in excess of US$850 per ounce in the first instance. To the extent that the realized windfall profits fall short of the required contribution, the difference will be generated through investment income from the gold endowment. This strategy would provide some flexibility on how the subsidy resources would be generated, and allow the corpus of the gold sales proceeds, and thus the Fund’s ability to implement the new income model.

The Board noted that the strategy regarding the use of the resources linked to gold sales for financing subsidy needs will guide future Board decisions to be taken after the completion of the gold sales. These decisions will provide for the transfer of such resources from the Investment Account to the General Resources Account, to be followed by the distribution of an equivalent amount to members in proportion to quotas. Members would then be expected to allocate this distribution, or broadly equivalent amounts, as subsidy contributions to the PRGT.

Increased flexibility

The new financing framework that is consistent with the new architecture for LIC facilities was also approved. The framework increases flexibility of use of loan and subsidy resources, while preserving the scope for donors to earmark contributions for specific facilities. The key elements of the framework include: (i) consolidating all concessional financing instruments in the PRGT; (ii) establishing a General Loan Account (GLA) for all PRGT facilities, three Special Loan Accounts for specific facilities, and a single Reserve Account to provide security to lenders for all outstanding loans of the Trust; and (iii) establishing a General Subsidy Account (GSA) within the Trust to receive and provide resources for the subsidization of loans under all facilities of the PRGT, and four special subsidy accounts for specific facilities. To achieve its purposes, the PRGT will provide loans under the new facilities as well as under any new lending facilities that may be established under the PRGT in the future. The new lending facilities are:

• the Extended Credit Facility (ECF) succeeds the Poverty Reduction and Growth Facility (PRGF) as the Fund’s main tool for providing flexible medium-term support to low-income members with protracted balance of payments problems;
• the Standby Credit Facility (SCF) addresses short-term and precautionary balance of payments needs, similar to the Stand-By Arrangement (SBA); and
• the Rapid Credit Facility (RCF) provides rapid low-access with limited conditionality to meet urgent balance of payments needs.

The Trust will comprise four Loan Accounts, a Reserve Account, and five Subsidy Accounts (Figure 1):

General Loan Account (GLA): The purposes of the account will be to cover all facilities of the PRGT. The Loan Account will continue to borrow resources from central banks, governments, and official institutions, as under the current PRGF-ESF Trust, largely at market-related rates. The proceeds of these loans will be used to finance lending to eligible LICs under all facilities of the PRGT.

Special Loan Accounts (SLAs): These accounts will accommodate donors’ preferences for earmarking their contributions for specific facilities. The three separate loan accounts will be created for the ECF, SCF, and RCF, respectively. Loan resources in the Special Loan Accounts will be exhausted first before the Fund draws on the General Loan Account.

Reserve Account: The coverage of the Reserve Account will be expanded to provide security for loans under all facilities of the PRGT. The role of the Reserve Account remains the same, however—that is, to provide payment to the lenders to the Loan Accounts of the PRGT in the event of a payment delay or non-payment by borrowers. It also serves to bridge temporary mismatches between repayments from borrowers and repayments to lenders. The Reserve Account is, and will continue to be, replenished upon the settlement by borrowers of the payment arrears or mismatches that resulted in disbursements from the Reserve Account.

General Subsidy Account (GSA): This account will receive and provide subsidies for existing and new loans under all facilities of the PRGT. Resources in a special subsidy account will be used first for the subsidization of loans under the facility to which it is linked before resources in the General Subsidy Account are drawn. New donor contributions provided to this account will provide maximum flexibility in the use of resources. While current estimates indicate that resources in the ENDA/EPCA administered account are sufficient to subsidize all outstanding ENDA/EPCA purchases, the PRGT Instrument will authorize limited transfers from the GSA to the ENDA/EPCA administered account to subsidize the purchases that are outstanding on the effective date of the PRGT reform, in case there would be an unexpected shortfall in subsidy resources in the ENDA/EPCA administered account.

Special Subsidy Accounts (SSAs): These will be established to accommodate donors’ preferences for earmarking their contributions for specific facilities. Four separate subsidy accounts will be created for the ECF, SCF, RCF, and ESF, respectively:

• The ECF Subsidy Account will receive and provide resources for the subsidization of new ECF loans, outstanding PRGF loans, and loans disbursed under the ESF. The ECF Subsidy Account will be the “default” new subsidy account for the receipt of existing subsidy resources to be transferred from the current PRGF-only and PRGF-ESF Subsidy Accounts of the PRGF-ESF Trust, and will also be able to receive new bilateral contributions.¹ The current PRGF and PRGF-ESF Subsidy Accounts will be terminated upon the effectiveness of the PRGT reforms.
• The SCF Subsidy Account and RCF Subsidy Account will receive and provide resources for subsidizing SCF and RCF loans, respectively.
• The current ESF Subsidy Account will be maintained on a temporary basis for subsidizing existing ESF credit. Given the limited resources available in this account, it is expected that these resources will be exhausted shortly. The account will be closed once such resources are depleted.

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¹ The ECF Subsidy Account could also receive resources from the PRGF-HIPC Trust not earmarked for HIPC subsidy purposes, if additional resources were to be needed for ECF subsidy purposes. Under current arrangements, resources are transferable from the PRGF-HIPC Trust to the PRGF Subsidy Account, if resources in both the PRGF and the PRGF-ESF Subsidy Accounts are insufficient for interim PRGF subsidy purposes, and the amount of such transfers are limited to the amounts needed for such PRGF subsidy payments (see PRGF-HIPC Trust Instrument, Section III bis). It is proposed that amounts would, similarly, be transferable from the PRGF-HIPC Trust to the ECF Subsidy Account, if resources in both the ECF Subsidy Account and the GSA were to be insufficient.