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

IMF News, March 17, 2023

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Canonical URL: 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

Applies in situations of "exceptionally high uncertainty" involving exogenous shocks beyond the control of country authorities and the reach of their economic policies, and which generate larger than usual tail risks.
Two policy modifications (applying only to cases of exceptionally high uncertainty) to enable Upper Credit Tranche (UCT) arrangements:
- Allow 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 (paragraph 25 of the paper).
- Extend the use of a capacity-to-repay assurance from official bilateral creditors/donors from emergency financing to a UCT arrangement context to help establish adequate safeguards for repayment (paragraph 26 of the paper).

A case of "exceptionally high uncertainty" is characterized by all of the factors set out in paragraph 13 of the paper.
Fund-supported UCT arrangements in such cases require demonstrating that medium-term external viability is being restored and that the program can resolve the member’s Balance of Payments (BoP) problem.
Program design approach in such cases:
- Set out two fully elaborated scenarios covering both a baseline and a downside scenario.
- Demonstrate that a Fund-supported program could work in both scenarios.
- Scenarios must be sufficiently separated to generate confidence the program could succeed and restore medium-term external viability despite ongoing shock uncertainty.
Members need:
- Capacity and commitment to implement a UCT arrangement in such circumstances.
- To provide the necessary data for Fund monitoring.
- In some cases, a Staff Monitored Program or Program Monitoring with Board involvement might be necessary first to establish a track record.

The Board 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.
Directors endorsed the use of the procedural safeguard set out in paragraph 18 of the paper for an initial engagement with Executive Directors.
Some Directors called for broader engagement than set out in the paper; a few called for a formal Board meeting.

Emergency financing through the Rapid Financing Instrument and/or Rapid Credit Facility would generally be the appropriate modality for urgent BoP needs in the context of exceptionally high uncertainty.
Stronger Fund engagement in a UCT context may be appropriate and consistent with Fund policies in certain cases.
Directors stressed careful judgment about feasibility and credibility of a Fund-supported program given likely risk characteristics and consistency with legal and policy requirements for Fund lending.
Directors expected that, to the extent the exceptionally high uncertainty dissipates, program design would revert to the standard Fund approach built around the baseline.
If circumstances deteriorate and confidence becomes too low to clearly and credibly establish a program design to resolve the member’s BoP problem and/or restore debt sustainability, Directors would need to determine whether further financing under the arrangement would become infeasible.

Directors noted the proposed policy changes involve considerable enterprise risks to the Fund, including reputational and spillover risks, and recognized the mitigants identified in the paper.
Overall view: the benefit of having the option of supporting members facing exceptionally high uncertainty outweighs the additional risk of the proposed policy change, when considering these risks.

Press Release No. 23/78
Date: March 17, 2023
Press officer: Nicolas Mombrial; Phone: +1 202 623-7100; Email: MEDIA@IMF.org; @IMFSpokesperson

Source: Press Release No. 23/78, March 17, 2023.