Press Release No. 18/325

IMF Executive Board Discusses 2018 Review of Facilities for Low-Income Countries

August 1, 2018

On July 20, 2018, the Executive Board of the International Monetary Fund (IMF) discussed a staff evaluation of the Fund’s facilities for low-income countries (LICs).

The current toolkit of Fund facilities for LICs, introduced in 2009, comprises:

• the Extended Credit Facility (ECF), aimed at helping countries tackle protracted balance of payments problems;
• the Standby Credit Facility (SCF), aimed at helping countries tackle short-term balance of payments problems or to put in place precautionary financing to respond to unexpected shocks;
• the Rapid Credit Facility (RCF), which provides emergency finance to countries hit by adverse exogenous shocks (including natural disasters) and financing to countries not yet in a position to enter into a Fund-supported arrangement (such as the ECF);
• the Policy Support Instrument (PSI), which provides countries with a means of signaling strong economic policies along with a framework for provision of IMF policy advice and technical assistance.

Financial support under these facilities is provided on concessional terms, with interest rates currently at zero percent. Resources to provide concessional loans are secured through lending agreements at market interest rates between member countries and the Poverty Reduction and Growth Trust (PRGT) that are subsequently on-lent to eligible LICs under the various concessional windows; the subsidies needed to provide low (zero) interest rates come from the PRGT, which is administered by the IMF and operates on a self-sustaining basis.

Given the limited amount of subsidy resources, access to concessional lending is subject to annual and cumulative limits. These limits were doubled (in SDR terms) as part of the overhaul of facilities in 2009; they were increased by a further 50 percent in 2015. The limits constrain LICs’ access to resources on concessional terms; LICs can also borrow on non-concessional terms from the Fund’s General Resources Account (GRA), subject to the same conditions as all other Fund member countries.

The macroeconomic challenges of LICs have evolved since the last review of the LIC facilities was completed in 2013. Adverse commodity price shocks and overly loose fiscal policies have contributed to rising debt levels and financing needs in many countries, while many countries, especially smaller ones, are increasingly vulnerable to large natural disasters. At the same time, many LICs less dependent on commodity exports have enjoyed robust growth in recent years, with contained vulnerabilities and only episodic need for Fund financing.

This review examines whether the basic structure of LIC facilities remains broadly appropriate to meet members’ evolving needs; looks at the case for increasing access limits and modifying financing terms; and evaluates the case for specific adjustments to the facilities to ensure they appropriately address the financing needs of LICs.

This review is taking a two-step approach. The first step, completed with the Board’s discussion on July 20^th, includes both an evaluation of the experience with use of the concessional facilities and an examination of options for modifying the existing facilities. Based on today’s assessment by the Executive Board, staff will prepare specific proposals for Board discussion and approval in early-2019. Work on the LIC facilities review is aligned with the ongoing Review of Conditionality and Design of Fund-Supported Programs.

Executive Board Assessment [1]

Executive Directors welcomed the opportunity to discuss the Fund’s facilities for supporting Low Income Countries (LICs) and provide preliminary views. They agreed that the basic architecture of Low‑Income Country (LIC) facilities has generally enabled Fund support to the diverse needs of LICs and that it remains broadly appropriate. Directors saw merit in reassessing selected features of the existing facilities to make IMF engagement with low‑income countries more effective. At the same time, a number of Directors noted that this reassessment should take into account rising debt vulnerabilities and financial risks to the PRGT. Directors also emphasized that the Fund can play a valuable role in LICs through policy advice, capacity development, and by helping to catalyze further financial support from development partners.

Directors noted that the Extended Credit Facility (ECF) and the Standby Credit Facility (SCF) have been valuable components of the LIC facilities toolkit. The Rapid Credit Facility (RCF), which has been widely used to respond to emergency financing needs, and the Policy Support Instrument (PSI), which has served to support policies and as a signaling device are also important features of this toolkit.

While Directors welcomed the analysis in the papers, many Directors looked forward to a deeper examination of the effectiveness of the LIC Facilities in meeting their objectives; the Fund’s role in catalyzing resources from development partners; and the specific quantitative impact of individual reform proposals on the self‑sustained lending capacity of the PRGT as inputs for the next Board Meeting on this topic.

Many Directors underscored that longer programs are needed for LICs to make significant progress towards a sustainable position. A number of Directors also noted the positive role holistic, medium‑term country strategies could play to anchor successive programs and aid the integration with technical assistance and policy advice.

Most Directors were open to an appropriately calibrated generalized increase in limits on, and norms for, access to concessional financing. The size of the proposed increase should take account of rising external financing needs of LICs (distinguishing temporary balance of payments needs from broader development finance requirements), while maintaining the self‑sustaining nature of PRGT finances. A number of Directors considered a sizeable increase to be important for leveraging deeper and more meaningful policy engagement, while a few other Directors were unconvinced that a general increase in access levels would improve the quality of Fund engagement. Most Directors saw merit in revisiting the exceptional access policy to ensure that countries with strong programs and high financing needs can receive the necessary financial support, subject to higher safeguards. A few Directors expressed concern about loosening the exceptional access criteria, particularly for countries at high risk of or in debt distress, at a time when debt sustainability risks are rising. As part of a wider increase in access limits and norms, a number of Directors saw merit in keeping the normal cumulative access limit unchanged, as a tool to contain credit risk to the PRGT, with requests for higher access levels being subject to the exceptional access policy, while other Directors saw merit in raising this limit. Given the limited PRGT resources, most Directors saw merit in achieving a greater focus of subsidy resources on poorer LICs by eliminating or modifying the current blanket exemption from the presumption to blend concessional and GRA resources for countries classified at high risk of debt distress.

With the more advanced LICs increasingly integrated into global markets, and thus more exposed to potentially larger shocks, in general Directors saw merit in relaxing the constraints on providing episodic financial support, including on a precautionary basis, under the SCF. Many Directors supported aligning the maximum length of the SCF with that of the SBA at three years; eliminating the sub‑limits on access for precautionary arrangements; and aligning the interest rate on credit extended under the SCF with the ECF interest rate. Directors generally were open to considering the proposal to align the Economic Development Document (EDD) requirements for Fund‑supported programs under the SCF, ECF, and PSI in excess of two years.

Directors underscored that the PSI has been a useful tool for LICs that have achieved broadly stable and sustainable external positions. They saw merit in retaining the PSI, alongside the newly established PCI, as a policy support instrument specific to LICs, while assessing the experience with the PCI. A few Directors also saw merit in modifying the features of the PSI by introducing a more flexible review schedule and review‑based conditionality, as in the PCI, although most were of the view that more experience with the PCI is needed before taking decisions on possible modifications to the PSI.

Given the likely increase in the impact and frequency of natural disasters, most Directors saw merit in raising RCF access limits in line with other access limits and norms to help address urgent financing needs after natural disasters. Directors also saw merit in intensifying efforts to help vulnerable countries build ex‑ante resilience, with a number of Directors calling for linking this Fund work stream more explicitly to the review of LIC facilities. A few Directors proposed increasing the cumulative access limit for natural disaster financing under the RCF more than proportionally to any across‑the‑board increase. Directors noted that the Catastrophe Containment and Relief Trust is not adequately funded and that expanding the scope of support provided would first require an additional injection of donor funds. A few Directors saw merit in exploring a mechanism to provide countries hit by large natural disasters with financing from a trust fund or administered account to meet debt service falling due to the Fund in the wake of the shock.

Directors underlined the importance of program engagement with fragile states and urged staff to continue collaborating with the World Bank in providing support to these countries. A number of Directors underscored the value of the Fund’s current approach of relying on repeated RCFs , together with Staff Monitored Programs (SMPs), to assist countries, including fragile states, that are not yet able to implement Upper Credit Tranche policies. Most Directors saw merit in increasing the annual access limit of the regular window of the RCF by proportionally more than the increase in other access limits, noting that this would provide greater flexibility to support fragile states that require time to build institutions needed to implement upper credit tranche programs. Many Directors expressed openness to a soundly‑designed and ring‑fenced shorter term ECF arrangement that could facilitate engagement with fragile states in situations of elevated uncertainty, although others expressed reservations about such a move. Separately, most Directors were open to extending the initial maximum duration of ECF arrangements from currently four to five years, to provide more flexibility for supporting country reform programs.

Directors looked forward to the second stage of the review, which would provide additional analysis and further flesh out changes to the LIC facilities, including options for a reform package, based on a deep and careful analysis of PRGT self‑sustainability. A few Directors called for a review of the three‑pillar strategy for maintaining a self‑sustaining PRGT, while most Directors opposed such a move at this juncture. Directors also looked forward to the Review of Conditionality and Design of Fund‑Supported Programs and welcomed that this review is being discussed in parallel to improve the design of PRGT programs and to ensure appropriate safeguards.