IMF Executive Board Modifies PRGT Interest Rate Mechanism and Approves Zero Rates on All Low-Income Country Lending Facilities Through end-2018

IMF News, October 6, 2016

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Published: October 6, 2016

Key decision and operative changes

Press Release No. 16/448; October 6, 2016; IMF Communications Department; MEDIA RELATIONS; PRESS OFFICER: Andrew Kanyegirire; Phone: +1 202 623-7100; Email: MEDIA@IMF.org.
On October 3, 2016, the Executive Board approved:
- A modification of the mechanism governing interest rate setting of PRGT facilities.
- Setting the interest rates to zero on all Fund concessional loans under the PRGT for the next two years through end-December 2018.
Modification specifics:
- Introduces an additional threshold for the SDR reference rate of 0.75 percent.
- Sets the interest rates on the Standby Credit Facility (SCF) and the Extended Credit Facility (ECF) to zero if the SDR reference rate is lower than or equal to 0.75 percent.
- Rates will continue to be set at zero for as long as and whenever global interest rates are low.
- Waives interest rate charges on outstanding balances under the Exogenous Shocks Facility (ESF) until the next review of the interest rate mechanism in 2018.

Executive Board assessment and rationale

Directors welcomed the review of the interest rate structure for PRGT and the mechanism established in 2009.
Observations about recent interest rate environment:
- Since the PRGT mechanism was adopted, the SDR interest rate has remained well below the 2 percent threshold.
- Application of the 2009 mechanism would imply ECF interest rate be set at zero percent for 2017–18, and the SCF rate at 0.25 percent.
- Remaining credit under the ESF, which is not part of the interest rate mechanism, would be charged 0.25 percent upon expiration of the interest rate waiver at end December 2016.
Directors noted prior exceptional measures:
- The Executive Board had previously endorsed temporary relief of interest payments on all outstanding concessional loans for PRGT-eligible members in 2009, waiving all interest payments on PRGT loans through December 2011.
- The exceptional interest rate waiver was extended successively: first to end‑December 2012, next to end-2014, and then again to end-2016.
Rationale for modification:
- A strong case remains for maintaining zero rates on the Fund’s concessional credit given lack of improvement in the global economic outlook for low income countries and significant downside risks from lower commodity prices, weak external demand, and tighter financial conditions.
- Market expectations of timing and pace of interest rate normalization have been substantially revised down, possibly prolonging very low interest rates.
- Under a very low interest rate environment, applying the old mechanism could result in some PRGT borrowers paying a rate on outstanding concessional credit exceeding the PRGT’s cost of funding, contrary to the concessional nature of the PRGT.
Directors’ views on duration and review:
- A few Directors stated there should be an explicit agreement now on a zero interest rate for the ECF and SCF through 2020.
- Directors shared the view that, given current market expectations, the modified mechanism will likely keep all PRGT interest rates at zero through at least 2020, and agreed that, if the mechanism were to generate a different outcome, it would be reassessed in 2018.
- Most Directors expressed the view that the merits and implications of unifying the interest rate structure for the SCF and ECF should be examined on a comprehensive basis and as one element of the planned review of PRGT facilities in 2018; a number proposed consultations in 2017; a few felt unification should happen now.

Numerical and timeline specifics

Zero interest rates set on all PRGT concessional loans through end-December 2018.
Additional SDR reference rate threshold: 0.75 percent.
Previous SDR threshold referenced in mechanism: 2 percent.
Under application of 2009 mechanism (as noted by Directors):
- ECF rate for 2017–18: zero percent.
- SCF rate for 2017–18: 0.25 percent.
ESF outstanding balances would have been charged 0.25 percent upon expiration of waiver at end December 2016, but interest charges are waived until the next review in 2018.
Next review of the PRGT interest rate mechanism scheduled by December 31, 2018.

Policy implications and operational effects

The modification makes zero rates an integral part of the interest rate mechanism in periods of very low global interest rates, reducing the need for continual interest rate waivers.
Preserves the concessional nature of PRGT financing when global interest rates are very low.
Directors emphasized preserving the self‑sustaining PRGT framework as future proposals for revising PRGT-related policies are considered.
Directors supported staff’s proposal to extend zero interest rates charged on outstanding balances under the ESF for the period 2017–18.

IMF Executive Board Modifies PRGT Interest Rate Mechanism and Approves Zero Rates on All Low-Income Country Lending Facilities Through end-2018 — Press Release No. 16/448, October 6, 2016.