Press Release No. 17/310

IMF Executive Board Discusses Collaboration between Regional Financing Arrangements and the IMF

July 31, 2017

On July 26, 2017, the Executive Board of the International Monetary Fund (IMF) discussed the Fund’s ongoing work on enhancing collaboration between regional financing arrangements (RFAs) and the Fund. The work is part of a broader discussion with Executive Directors over proposals to strengthen the Global Financial Safety Net (GFSN), which has included the creation of a new Policy Coordination Instrument on July 14, 2017. [1]

As the GFSN expanded and became more multi-layered, stronger collaboration between its various elements has become increasingly important to ensure timely and effective crisis mitigation. After establishing the mutually reinforcing benefits derived from stronger collaboration, the paper proposes modalities for collaboration—across capacity development, surveillance, and lending. Building on past co-lending experience, it outlines operational principles to help guide future co-lending between the Fund and the various RFAs. Recent experience with co-lending highlights the importance of early and evolving engagement between the RFA and the Fund; the benefits of exploiting complementarities; the criticality of a single program framework; and the need to mutually respect the institutional independence and capacity of the partners.

Executive Board Assessment [2]

Executive Directors welcomed the proposed framework for collaboration between regional financing arrangements (RFAs) and the Fund, which is part of a broader effort to enhance the global financial safety net (GFSN). They agreed that stronger Fund-RFA collaboration would bring substantial mutually-reinforcing benefits. These include promoting early engagement, exploiting complementarities, increasing the firepower, and mitigating contagion. Directors also concurred that a more structured approach would help enhance transparency, predictability, and effectiveness of collaboration in an increasingly multi-layered GFSN, with the Fund at its center. From the Fund’s perspective, improved collaboration with RFAs would help increase its catalytic role and reduce stigma associated with the use of its resources. For some countries that do not have access to RFA resources, the Fund’s role at the center of the GFSN, and its readiness to assist these countries, is even more critical.

Directors endorsed the six operational principles to guide future Fund-RFA collaboration, as laid out in the staff paper. They welcomed the fact that these principles were grounded in actual Fund-RFA co-financing experience and, at the same time, are generally in line with the existing high-level G20 principles. Directors underscored the importance of the Fund and the RFA respecting each other’s mandate and independence; aiming at consistency and evenhandedness, and encouraging early cooperation. Directors also emphasized that the Fund’s preferred creditor status must be fully respected. A number of Directors observed that operationalizing some of these principles may be challenging given the inherent tensions between them.

Directors broadly supported the proposed operational modalities for collaboration based on activities in the areas of capacity development, surveillance, non-financial support, and lending. This framework would allow the Fund to tailor its engagement with RFAs depending on the form of operations and the capacity of each RFA. At the same time, it would provide clear rules of engagement ranging from formal agreement for surveillance and capacity development, to more flexible modalities suitable where the situation may change rapidly, including for lending activities. Directors noted that the different modalities were necessary given the diversity and heterogeneity of RFAs. Directors generally saw mutual benefits from a regular exchange of views, and possible attendance of RFA staff in selected Article IV mission meetings with the consent of both the member country concerned and Fund mission chief.

In the context of lending arrangements, Directors emphasized that the roles of the Fund and the RFA in program design and monitoring need to reflect their respective mandates and policies, as well as the capacity of the RFA. Where the RFA has limited capacity or its areas of responsibilities do not overlap with the Fund, the Fund should take a leading role in establishing the macroeconomic framework, policies, and conditionality. Where the RFA has expertise and room for a division of labor is limited, collaboration could in principle be based on a single coherent and consistent program framework and the independence of the parties involved. Directors observed that this second model calls for careful implementation to strike the right balance between flexibility and evenhandedness while preserving independence, with a few suggesting that it could be helpful to develop clear criteria for determining RFA capacity. Directors stressed that, regardless of the modality used, it would be important to adhere to the six operational principles and for each institution to comply with its own governance structure. They highlighted, in particular, the need to preserve the Fund’s high-quality lending standards and independence of assessments in its core areas of responsibility, including debt sustainability analysis, and to adhere to the Fund’s policies.

Directors acknowledged the potential for difficulties in resolving fundamental differences of views over program design and conditionality in certain situations, which may have implications for public communication. They agreed that formal mechanisms for resolving difficulties may be counterproductive, although some saw merit in developing broad parameters ex ante. Directors noted that co-financing by the Fund would proceed only when the member’s program, including the macroeconomic framework and conditionality, is consistent with the Fund’s lending policies, and that the Fund’s role in program design and monitoring would be independent of the share of overall financing it provides. In this context, efforts by the RFA to extend the maturity of its financing to better align with that of the Fund would help address financing assurances concerns. Some Directors emphasized that, in protecting its independence, the Fund must be prepared to withhold its participation whenever areas core to its mandate would be compromised, and noted in this regard that the recent IEO report on euro area programs provides insightful lessons.

Directors underlined the importance of sharing technical information between the Fund and RFAs, conditional on reciprocity and confidentiality assurances. They recognized that a clearly-defined legal identity and governance structure of the RFA could help facilitate collaboration in this area. A number of Directors also noted that consideration should be given to sharing country staff reports, especially in a lending context, with relevant RFAs at the time they are issued to the Fund’s Executive Board for consideration. A few Directors noted that information sharing, and technical assistance more broadly, would particularly help smaller RFAs strengthen their capacity over time.

Directors regarded the proposals discussed today as an important first step toward stronger and more structured collaboration between the Fund and RFAs. They welcomed the proposed next steps, including continued dialogue between the Fund and RFAs, both individually and collectively, and joint test-runs. These efforts would help improve the operational preparedness of both sides, identify any impediments to co-financing operations and, as warranted, develop more concrete guidance. Directors encouraged staff to continue to draw on new experiences and ex post program evaluations, and provide an update to the Board once experience with the framework established here has been accumulated or as significant issues arise.