Questions and Answers

Reforms of Lending and Conditionality Frameworks

Last Updated: March 20, 2019

Q. You have announced a major overhaul of the IMF's lending framework. What's the purpose?

A. We are injecting new flexibility into the Fund’s lending framework by establishing a new instrument and new guidelines for providing large, upfront financing on a precautionary basis and better tailoring conditionality to countries’ varying strengths and circumstances. Together with increased lending access limits and simplified terms for borrowing, these reforms will help us better respond to the various needs of all our member countries. In turn, this will help them in their efforts to weather the global crisis and return to sustainable growth.

These steps, which will be soon followed by reforms of concessional lending instruments for low-income countries, complement our ongoing effort to increase significantly our overall lending resources and will pave the way for countries to work with the IMF on crisis prevention and crisis resolution.

Q. What's the rationale for precautionary lending?

A. Our reforms leverage our empirical finding that IMF precautionary lending can help reduce the probability of crisis especially when it is large in relation to certain vulnerabilities (such as a country’s short-term external debt) and is combined with strong policies.

So, our reforms aim to enhance the effectiveness of contingent financing by the IMF. The Flexible Credit Line (FCL) achieves this for very strong performing members. For those that do not qualify or apply for the FCL, we are facilitating the use of High-Access Precautionary Stand-By Arrangements (HAPAs) as a regular lending instrument to provide large and frontloaded access to countries.

Q. Why are you pushing precautionary lending when other countries have real financing needs?

A. Many emerging market countries are not in crisis, in the sense of having actual financing needs, but could be at risk if the global deleveraging process and global recession is protracted.

They may well be countries that would eventually need IMF support anyway. By coming to the Fund earlier and using finance in a precautionary manner, it is likely that they can stave off pressures on their reserves, avoid more serious problems, and so ultimately reduce the economic and social costs of crises.

Q. Why are you placing emphasis only on relatively strong countries?

A. Our reforms help all countries. Those that are interested in precautionary lending will have either access to the Flexible Credit Line (FCL), High-Access Precautionary Stand-By Arrangements (HAPAs) or the traditional SBA (for normal access levels). Those that come to the Fund with real financing needs can also benefit from the FCL if they qualify and apply; or they will benefit from the doubling of normal access lending limits, which will give countries assurances that resources would be accessible to them under SBAs commensurate with their financing needs. Also, all countries, including those that borrow from the Fund’s concessional facilities, such as the Poverty Reduction and Growth Facility (PRGF), will benefit from our efforts to streamline and destigmatize conditionality.

Q. Who do you expect will use the Flexible Credit Line (FCL)?

A. We cannot give specific country names. The FCL was designed in a flexible way to accommodate the needs of countries that have very strong fundamentals and policies (a set of rigorous qualification criteria governs access to the FCL—see next question), but which already have financing needs resulting from the crisis, or could become vulnerable if the global downturn and deleveraging is prolonged. Its design reflects fully suggestions provided by potential users.

Countries that tap this new instrument would further buttress their economic strength and mitigate the costs of this crisis, but it is up to them to confidentially request use of the FCL.

Q. What are the qualification requirements for the FCL?

A. The qualification criteria are the core of the FCL and serve to signal the Fund’s confidence in the qualifying member’s policies and ability to take corrective measures when needed. At the heart of the qualification process is an assessment that the member (a) has very strong economic fundamentals and institutional policy frameworks; (b) is implementing—and has a sustained track record of implementing—very strong policies, and (c) remains committed to maintaining such policies in the future.

The relevant criteria for the purposes of assessing qualification for an FCL arrangement are (i) a sustainable external position; (ii) a capital account position dominated by private flows; (iii) a track record of steady sovereign access to international capital markets at favorable terms; (iv) a reserve position that is relatively comfortable when the FCL is requested on a precautionary basis; (v) sound public finances, including a sustainable public debt position; (vi) low and stable inflation, in the context of a sound monetary and exchange rate policy framework; (vii) the absence of bank solvency problems that pose an immediate threat of a systemic banking crisis; (viii) effective financial sector supervision; and (ix) data transparency and integrity.

Any assessment of qualification involves a degree of judgment. The assessment of the qualification criteria will need to take into account the great variety of the member’s circumstances and the uncertainties that attend economic projections. Strong performance against all relevant criteria noted above would not be necessary to secure qualification under the FCL. However, significant shortcomings on one or more of these criteria—unless there are compensating factors, including corrective policy measures under way—could generally signal that the member is not among the strong performers for whom the FCL is intended.

Q. What's the cost to the country of borrowing through the FCL? What are the fees and charges?

A. The cost of borrowing under the FCL is the same as that under the Fund’s traditional Stand-By Arrangement (SBA). If borrowing on a precautionary basis, countries pay only a commitment fee that is refunded if they opt later to draw on the loan. Commitment fees range with the scale of lending and are around 24–27 basis points for lending between 500 and 1000 percent of quota.

The cost of drawing under the FCL varies with the scale and duration of lending. Considering the currently low world interest rates, the effective cost of borrowing under the FCL (or an SBA) for access between 500 and 1000 percent of quota currently ranges between 2.3–2.9 percent before duration-based surcharges apply (these surcharges would raise the cost of borrowing up to 2.7–3.6 percent whenever the country’s outstanding credits has been above 300 percent of its Fund quota for more than 3 years). These interest rates exclude a flat 50 bps service charge, which is applied to all Fund disbursements.

Q. Why a new instrument? Does its creation mean that the earlier Short-Term Liquidity Facility (SLF) was a failure?

A. The SLF was designed fairly early on in this crisis—before last fall’s collapse of financial markets. And, several of its design features turned out to be not well suited to the deepening global crisis—including its capped access and short repayment period, and the inability to use it on a precautionary basis. Hence, a more flexible instrument that can adapt to the evolving global environment was needed.

The FCL has evolved from the SLF. It retains many of the features of the SLF (catering to strong performers and ex ante conditionality), while fixing these shortcoming, with longer repayment terms, scope for precautionary use, and flexibility in the nature of the balance of payments problem faced by the member.

Q. Why do you think there will be demand for the FCL when similar earlier schemes, like the SLF, were not used?

A. We have very enthusiastic support for the FCL from our emerging markets membership, who became aware of SLF shortcomings and sought the reforms that led to the FCL. This gives us confidence that the FCL will be an attractive option for eligible members.

Also, the demand for swap lines from central banks, and similar but smaller lending vehicles from the multilateral development banks, suggests there is demand for crisis prevention lending.

Q. What are the main changes that will make traditional SBAs more flexible?

A. The new SBA framework will facilitate high access on a precautionary basis and provide increased flexibility by allowing frontloading of access and reducing the frequency of reviews and purchases where warranted by the strength of the country’s policies and the nature of its financing needs.

Q. Will the FCL cause stigma for users of other facilities?

A. A key objective of the lending reform is to reduce the perceived stigma of borrowing from the IMF by ensuring that its lending instruments meet the varied needs of all member countries. Together with the establishment of the FCL, the IMF has introduced a number of changes to make its traditional Stand-by Arrangement more attractive to countries who are interested in a crisis prevention instrument but have not yet established the very strong track record of policy implementation that is at the core of the FCL qualification.

For example, the Stand-by Arrangement can now be used as a credit line without hard caps on the size of the loan and with frontloaded disbursements. More generally, conditions attached to IMF loans are being focused on the core problems, and structural policies will now be assessed in a more holistic and forward-looking manner. These changes are beneficial to all countries, not just users of the FCL, and go in the direction of reducing the perceived stigma of borrowing from the IMF. These changes should encourage all members to approach the Fund early on for precautionary financing. Such financing will help reduce adjustment costs and, ultimately, avert costly crises.

Q. Are low-income countries eligible for the FCL, and if not, why not?

A. The FCL—like all of the Fund’s general resources account facilities—does not disqualify countries on the basis of income levels. That said, the FCL targets members who have capital market access and are reasonably well-integrated into financial markets, with a capital account position dominated by private flows. Low-income countries typically do not meet such circumstances.

The Fund is considering separate reforms to its concessional lending facilities to better meet low-income countries’ needs (see next question).

Q. What reforms are being planned to overhaul lending to low-income countries?

A. The IMF is working on a redesign of its concessional lending facilities to strengthen the IMF’s capacity to provide short-term and emergency financing to low-income countries. This would include efforts to at least double the Fund's concessional lending capacity for low-income countries. Low-income countries will also benefit from the already adopted reform of structural conditionality, as that reform covers Fund arrangements under all facilities, including those available only to LICs.

Q. Why have you decided to eliminate structural performance criteria in IMF financing?

A. The elimination of structural performance criteria and the reliance on review-based conditionality for structural reforms aims to reduce the stigma of Fund lending. (One of the advantages of the reform is that with the elimination of structural performance criteria, a member does not have to request a waiver for a criterion that was not met, which often is viewed as particularly problematic by members).This approach should also give members a greater sense of ownership and ultimately improve reform prospects.

Q. Does it mean the IMF is going to place less emphasis on the implementation of structural measures?

A. No. Progress in implementing structural measures may still be critical to keeping the program on track. And these will continue to be monitored in the form of benchmarks and assessed in the context of program reviews.

Q. Why have you increased normal access limits?

A. Access limits had become outdated in light of the increase in private capital flows and trade since the last general quota increase in 1998. The doubling of access limits to 200 percent of quota per year and 600 percent cumulatively helps to restore them to 1998 levels in terms of global trade and capital flows.

Q. Will the amount of IMF support to program countries rise as a result of the increased limits?

A. The level of IMF support is decided on a case by case basis and access is guided by the member’s need for financing, its capacity to repay the Fund, outstanding use of IMF resources, and track record. This has not changed. However, during the global financial crisis we have already seen a significant increase in the demand for IMF resources. And the doubling of access limits will provide members with confidence that adequate financing from the IMF is available should they request it.

The increase in access limits together with availability of the FCL and high access precautionary arrangements may also mean that countries are prepared to come to the Fund for support earlier than has been the case in the past—in particular to seek contingent financing. If that happens then IMF financing could increase.

Q. Will limits be adjusted regularly now to keep up with growth of the world economy?

A. Access limits are required to be reviewed at least every five years in the context of a regular policy review. But the Fund monitors the use of its resources closely and there is flexibility to conduct such a review at an earlier point if appropriate. Indeed, the decision to double access limits now was taken well in advance of the next scheduled review date (2013).

There is no mechanical link between access limits and the size of the world economy or private capital flows but these are obviously factors that are taken into account when reviewing the access limits as they capture, respectively, countries’ ability to repay and their potential needs.

Q. Access limits are being raised to keep pace with trade and capital flows, but these flows are collapsing. With lower flows in the future, should limits be reduced?

A. Not necessarily; indeed, it is precisely when flows drop from previous high levels that access to IMF financing at higher levels may be most needed. Financing conditions globally have tightened drastically. This means more, not less, financing from the Fund might be needed.

• IMF implements major lending policy improvements
• Press Release: IMF Overhauls Lending Framework, March 24, 2009
• Webcast of a Press Briefing on IMF Facilities Reform
• To Help Countries Face Crisis, IMF Revamps its Lending
• Key Issues: Lending