The Chairman’s Summing Up—Review of Facilities for Low-Income Countries, Executive Board Meeting 12/85, September 6, 2012

Executive Directors welcomed the opportunity to review the Fund’s facilities for low-income countries (LICs). They considered that the 2009 reforms have been broadly successful in closing gaps and creating a streamlined architecture of facilities better tailored to the needs of LICs. Directors welcomed the staff’s findings that the Fund was able to respond effectively to LICs’ needs during the global financial crisis, and that Fund-supported programs have played a positive role over the longer term in helping countries raise economic growth, reduce poverty, and build macroeconomic buffers and institutional capacity.

Concessional financing framework

Directors noted that the central challenge ahead will be to preserve the Fund’s ability to provide financial support to LICs in the face of a sharp prospective drop in the Fund’s concessional lending capacity after 2014. With demand projected to exceed by a considerable margin the Fund’s existing financing capacity even under a low-case scenario, identifying substantial additional resources for the PRGT becomes a priority to secure the PRGT’s longer-term sustainability.

Most Directors supported, or were open to, using resources linked to the remaining windfall profits from gold sales as part of a strategy to make the PRGT sustainable, possibly supplemented by contingent measures, including suspension of the reimbursement to the GRA for the PRGT’s administrative costs and/or bilateral fundraising. Many Directors supported, or were open to, establishing a regular fundraising mechanism. A number of Directors saw the two main options—use of the remaining gold windfall profits and regular fundraising—as complementary, while a few encouraged exploring additional options. Some Directors proposed that consideration be given to eliminating PRGT reimbursement to the GRA for administrative costs. A few others considered that, in the current circumstances of elevated credit risks facing the Fund, the remaining windfall profits should be counted toward the Fund’s precautionary balances.

Tailoring access and financing terms

Directors underscored that it is important to make the most effective use of the Fund’s scarce concessional resources. Noting that current access levels appear broadly appropriate on average, most Directors saw merit in keeping access unchanged in SDR terms when the 14th General Review of Quotas becomes effective, which implies a corresponding decrease in access in percent of quota. A number of other Directors were not in favor of reducing access norms and limits as quotas are doubled, or could support only a less than commensurate reduction, while strengthening efforts to address the long-term resource gap. A few of these Directors expressed concern about a perceived lack of evenhandedness in the proposal and a potential negative effect on the Fund’s credibility that could arise in the context of the 14th General Review of Quotas. Directors recognized that access will need to be raised in the future as financing needs increase, based on a careful assessment of projected financing needs and available resources. Some Directors underlined the importance of applying robust and evenhanded PRGT graduation criteria and looked forward to the upcoming review of PRGT eligibility.

Directors saw scope for aligning financing more closely with countries’ balance of payments needs. In this context, there was broad support for further work on a cost-neutral approach for allowing contingent tranches that can be activated when unforeseen urgent balance of payments needs arise during an on-track ECF or SCF arrangement. While the financing terms of PRGT loans appear on average to strike the right balance between concessionality and lending capacity, most Directors saw merit in greater differentiation of financing terms, particularly through greater use of blending. While many could consider interest rate surcharges, a few Directors held the view that interest rate differentiation should not go against the principle of uniformity of treatment.

Contingent financing

Directors generally saw merit in exploring refinements to increase the flexibility of existing instruments to provide contingent financing and policy support to LICs, rather than creating a new instrument. These could include relaxing timing restrictions on access under the SCF; giving ECF users the option to forego disbursements when the member’s balance of payments position improves; and making the design of the PSI more flexible while preserving its signaling function. Directors noted that any modifications should be designed in a manner that limits the need for additional resources and avoids adding undue complexity. A few Directors favored exploring a new precautionary instrument for LICs.

Design of PRGT arrangements

Directors also generally saw room for improvements to certain design aspects of the facilities—including the proposed refinements aimed at refocusing PRS linkages on substance rather than process, in consultation with the World Bank. Most Directors would support, or were open to, the proposals to provide options for ECF arrangements with longer initial durations and increased flexibility in the phasing of disbursements. Most also supported considering the proposal to allow defunct arrangements to lapse in order to free up scarce resources. Some others held the view that the treatment of defunct arrangements should be aligned across GRA and PRGT facilities.

Directors looked forward to the second stage of the review, which will draw on their views expressed today, and allow them to take decisions on specific refinements. The Board will return in the near future to the issue of the use of resources linked to the remaining windfall profits from gold sales as part of a strategy to ensure PRGT sustainability.

BUFF/12/104

September 10, 2012