Public Information Notice: IMF Board Agrees on Changes to Fund Financial Facilities
September 18, 2000

Review of Fund Facilities — Follow Up
Supplementary Information

Prepared by the Policy Development and Review and Treasurer’s Departments
September 13, 2000

1.   The Executive Board had a useful exchange of views on the review of Fund facilities on September 7, 2000, and this was followed by additional discussion in the International Monetary and Financial Committee preparatory meeting of Deputies in London on September 11. This short supplement lays out elements of a possible package of changes, providing further information in a few areas.

2.   There appears to be an emerging consensus that the problem of long use of Fund resources following the resolution of a balance of payments problem should be addressed through the introduction of time-based repurchase expectations. According to the proposal in the main staff paper (Box 3), in stand-by arrangements (SBAs), members would be expected to begin repurchases after 2¼ years, as compared with the timing of the first repurchase obligations at 3¼ years. Under the Extended Fund Facility (EFF), members would begin repurchases after 4½; years, as at present, but the amounts of each repurchase expectation would be double the amounts of the obligations, so that the expected repurchases would be completed in 7 years, rather than 10 years under the obligation schedule. The member would be expected to meet these expectations, but the Fund could extend them on request by the member, if the Board agreed that the member’s external position had not improved sufficiently for repurchases to be made. The member could make such a request at any time when expected repurchases remained to be made, and the Board could either agree to the request by extending any or all remaining expected repurchases or deny the request. Fund-supported programs would normally continue to be formulated on the assumption that the member would meet the repurchase obligations (rather than the expectations), and the member’s ability to meet expectations would be intended to signal a stronger-than-expected improvement in its external position, rather than a failure to achieve the targeted improvement. The construct would need to be explained carefully to the public, and in this context, following suggestions by Executive Directors, it is proposed that the word “waiver” be avoided, and that reference be made instead to “extensions” of repurchase expectations.

3.   In the case of SBAs, the period before repurchase expectations begin could be shortened further, but there are arguments against this. The evidence presented in the staff paper “Review of Fund Facilities—Further Considerations” (EBS/00/131, July 10, 2000) that actual balance of payments needs are often significantly shorter than projected needs (and indeed are in many cases of less than one year’s duration) would appear to support a further shortening. However, there are some reasons why a more modest shortening for SBAs might be preferable:

• The average actual length of SBAs approved in recent years has been 18 months, so that if repurchase expectations began earlier than proposed in the main paper, some members with still-ongoing arrangements would face repurchase expectations while purchases were still being made.¹

• As emphasized in EBS/00/131, the staff’s calculations of the duration of balance of payments needs cannot easily serve as a basis for determining exact appropriate maturities. In the staff’s analysis, the balance of payments need is defined to last until the time when the member can meet program reserve targets without recourse to exceptional financing, which does not necessarily mean that the member would be in a position to repay.

• Related to both these points, it should be noted that an earlier starting point for repurchase expectations could lead to a sharp increase in the incidence of requests for, and approval of, extensions. In such a situation, extensions could become routine, which would threaten the effective functioning of repurchase expectations.

• Conversely, cases of an exceptionally rapid improvement in a member’s balance of payments position will be dealt with under the early repurchase policy (to which the Board will return).

4.   Time-based repurchase expectations would not apply to credit outstanding at the time the policy change was introduced, but would apply to all purchases made after the policy change, including those under arrangements in existence at the time of that change. It is not legally possible to differentiate between purchases made under arrangements in existence at the time of the policy change, and arrangements granted thereafter, and to introduce repurchase expectations only into the latter. This is because the same policies must apply to all purchases made at the same time under the same facilities by different members (whether these members have preexisting or new arrangements).

5.   Could Directors accept a solution to the problem of long use following the resolution of a member’s balance of payments problem that would consist of time-based repurchase expectations, within a timeframe of 2¼ - 4 years under a SBA and 4½ - 7 years under the EFF?

6.   As a supplement to repurchase expectations, the Board has discussed the introduction of surcharges on credit outstanding above a certain level under the credit tranches and the EFF. The surcharge might begin at a level between 100 percent of quota and 300 percent of quota. The former level is comparable to the member’s entitlement under Article V, Section 3 (b)(iii);² the latter is equivalent to the current cumulative limit on access under the credit tranches and the EFF. Intermediate levels could also be chosen, and if a relatively low initial level was chosen the surcharge could be graduated at higher levels of credit outstanding. Figure 1 (reproduced for ease of reference from the main paper) and Figure 2 present a number of possible options in this regard—including different thresholds for the surcharge (100-300 percent of quota), initial rates of surcharge (ranging from 25 basis points to 300 basis points in the option involving the highest threshold), maximum rates of surcharge (200-300 basis points), and numbers of steps (1-4) to reach the maximum surcharge.

7.   Key features of level-based surcharges would include the following:

• The level of outstanding credit would determine the applicable surcharge. The surcharge would apply only to the additional amount of credit above the threshold at which it enters into force, not to the total amount of outstanding credit.

• Credit drawn under the SRF and CCL would continue to be subject to special surcharges and would not be subject to the suggested level-based surcharge, and would not be taken into account in determining the applicable surcharge on other Fund credit.

• Other types of purchases could be excluded, if it were so desired. In particular, purchases under the policies on emergency assistance for natural disasters or post-conflict cases could be excluded (by converting these policies in the credit tranches into special facilities, requiring decisions adopted by a 70-85 percent majority of the total voting power).³

8.   Graduated charges would not apply to credit outstanding at the time the policy changes were introduced, but there would be various options for the transitional treatment of purchases made after the introduction of the policy changes. A surcharge related to the level of credit outstanding would apply only to new purchases, and as with time-based repurchase expectations it would have to apply equally to purchases under both preexisting and new arrangements. As regards the treatment of new purchases, there are essentially two options:

• The Board could decide to ignore the amount of credit outstanding at the time of introduction of the policy change, so that surcharges would not begin to apply until new purchases cumulate to the threshold for the initial rate of surcharge—which would take some time for most members.

• Alternatively, the Board could decide to take the level of credit accumulated prior to the introduction of the policy change into account, either immediately or following a transitional period, in determining whether a surcharge is payable on new purchases.

9.   Could Directors accept graduation with the level of credit outstanding? What parameters (from among those presented in Figures 1-2, or others) would be acceptable? By way of transitional arrangements, it is clear that existing credit outstanding would not be subject to surcharges, but would Directors wish to ignore or take into account existing credit in the determination of the surcharge payable on new purchases?

10.   As regards the Contingent Credit Lines (CCL), there appears to be broad agreement in several areas, although some issues in the area of monitoring and exit remain a subject for discussion. Table 1 summarizes the current structure of the CCL, and changes proposed by the staff.

11.   There is broad agreement that the following changes should be made to the CCL:

• The rate of charge should be reduced. The staff had suggested an initial surcharge of 150 basis points, rising with time on the same schedule as the surcharge under the Supplemental Reserve Facility (SRF), to a ceiling of 350 basis points. Figure 3 illustrates. Under this scheme, using weights corresponding to the period repurchases are outstanding up to the date of the repurchase expectations, the average surcharge would be of the order of 170 basis points.

• The commitment fee should be reduced. As noted in the main paper, the only way to effect such a reduction, since commitment fees must be uniform on all arrangements, would be to amend Rule I-(8) of the Fund’s Rules and Regulations to change the basis on which the commitment fee is charged from the amount committed for the next twelve months to the amount scheduled to be purchased in the next twelve months. The commitment fee would then be charged, on approval of the commitment of CCL resources, only on the small purchase (5-25 percent of quota) made available upon approval of the arrangement. (If and when activation takes place, the commitment fee would then be charged on the amount phased at that time.)

• The Fund’s discretion to require policy changes in the activation review should be reduced. The activation review could be divided into an “activation” and a “post-activation” (or phasing) review. The former would release a predetermined, large amount of resources, and the member would be given the strong benefit of the doubt as to any required policy adjustments. In the post-activation review, the Fund and the member would reach understandings on policies to be pursued from that point onward, and phasing and conditionality would be specified for access to the remaining resources. The activation review would be completed expeditiously, while the post-activation review might take a little more time to complete. Nonetheless, it would be reasonable to keep open the possibility of combining both reviews, should the member request it as a means of accelerating the process, and should the Board agree that the member’s situation and the Board’s familiarity with and assessment of its policies warrant it.

12.   An issue that remains the subject of debate is monitoring arrangements under the CCL. It is agreed that the Fund must have the means to make a member exit from the CCL—that is, to interrupt the member’s (conditional) right to make any purchases associated with the activation review. These means take the form of the limited (one-year) commitment period under the current CCL and, importantly, the midterm review. At the same time, however, some Directors are concerned that monitoring under the CCL may be unduly intrusive, in a manner that is not reflective of the situation of a country that has successfully prequalified for the CCL. These Directors point, in particular, to the requirement in the CCL decision that the member submit to the Fund, as part of its request for a commitment of CCL resources, “a satisfactory economic and financial program, including a quantified framework” —which could be interpreted to mean a program specified in the same way as it would be for a stand-by or extended arrangement.⁴

13.   Several options could be considered to make monitoring under the CCL less intrusive:

• It would be possible to complete the midterm review on a lapse-of-time basis. While Board discussion might be useful in certain cases, it may be the case that the circumstances of a member that has successfully prequalified for the CCL would develop in such a way that no Board discussion was required.

• It could be clarified that, upon approval of a commitment of CCL resources, the member would not need to specify its program in a manner as detailed as expected under other arrangements. The member’s program—both the quantified framework that will guide its macroeconomic policies, and the structural policies it plans to implement—is to be presented to the Board in a statement of policies. However, as regards the quantified framework, the CCL summing up specifies only that it “should be specified in such a way that the staff and the Board would be able to form a rapid assessment of the member’s compliance with it and thereby facilitate the rapid release of resources upon the request for activation of the CCL.”⁵ Such a framework would not need to be as elaborate as the ones that underpin typical arrangements, and could instead be closer to the forward-looking framework discussed by authorities and staff on the occasion of a typical Article IV consultation. The summing up does not explicitly state that the framework would involve benchmarks, although it seems to imply it when it states that the framework “would not necessarily involve monthly benchmarks.” On reflection, the staff would suggest that the word “benchmark” be avoided: its connotations, carried over from its use under other arrangements, seem to imply that any small deviations would have to be explained and justified, whereas members that have successfully prequalified for the CCL should have room for small deviations from their programs without adverse effects. The request for a commitment of CCL resources would still include a quarterly scenario that would constitute a baseline for monitoring. There would be no need for a Technical Memorandum of Understanding or similarly detailed definitions of program targets. It may also not be necessary for the structural program of a member that has prequalified for the CCL to be prespecified to the degree of detail that would be entailed by structural benchmarks (including, say, exact dates), and thus the staff would propose not to include structural benchmarks in programs underlying requests for CCL resources. The initial consideration of the member’s eligibility would nevertheless assess the member’s structural program and the progress expected under that program during the period of commitment of CCL resources.

14.   Could Directors accept the changes to the CCL summarized in Table 1?

15.   There appears to be fairly wide agreement that enhanced post-program monitoring (PPM), with more formal involvement of the Board, can be useful in certain cases. It may be possible to establish a presumption that members that meet certain criteria would engage in post-program monitoring by the Fund of their circumstances and policies after the expiration of their arrangements. The implementation of such a presumption could take place along the following lines:

• As regards the criteria for a presumption of PPM, a key criterion would be when a member’s credit outstanding at the end of the arrangement exceeds a threshold of 100 percent of quota. Agreement by the Board to an extension of the period for early repurchase expectations could be another criterion for a presumption of PPM.

• A presumption of PPM would not imply that members that met the criteria would automatically be subject to PPM. Rather, the Managing Director would be expected to recommend PPM to the Board at the time of the last review of the member’s arrangement or of a request for an extension of an early repurchase expectation, unless there were circumstances that militated against this. Similarly, the Managing Director could recommend that a member be subject to PPM (either at the time of the final review or at a later time when Fund resources were still outstanding) even though that member did not meet the criteria. In all cases, it could be agreed that the decision would rest with the Board.

• The Board’s discussions of PPM papers could be reflected in either a Chairman’s Statement or a Public Information Notice (PIN). The latter would seem to be preferable, as it would be a natural vehicle for a discussion that might reflect divergent policy views. The publication of PINs would follow the normal PIN procedure, including the requirement for the member’s consent.

In other respects (e.g., focus of discussions and content of reports, frequency of Board discussion, and possible recourse to consideration on a lapse-of-time basis) provisions for PPM would be as proposed in the main paper. Experience with PPM could be reviewed in about 18 months.

16.   Could Directors accept procedures for post-program monitoring along the lines set out in the previous paragraph?

- Fund verifies member’s willingness to adjust policies as needed

- Post-activation review sets phasing and includes understandings on policy adjustments

- Structural benchmarks

- No structural benchmarks

The proposal in the main paper could result in this happening in the case of SBAs lasting for more than two years, but most such SBAs are expected to turn precautionary before the first repurchase expectation would fall due at 23 years.

² “A member shall be entitled to purchase the currencies of other members from the Fund in exchange for an equivalent amount of its own currency subject to the following conditions: (iii) the proposed purchase would not cause the Fund’s holdings of the purchasing member’s currency to exceed two hundred percent of its quota.” (However, this provision is formulated in terms of Fund holdings of the member’s currency, and thus—unlike the graduation of charges under consideration—captures all purchases in the General Resources Account (including under the Supplemental Reserve Facility and Contingent Credit Lines).)

³ The policy on purchases in the first credit tranche would not be affected unless the surcharge were to start below 25 percent of quota.

⁴ Decision No. 11942-(99/48) SRF/CCL, April 23, 1999.

⁵ “The Chairman’s Summing Up on Contingent Credit Lines,” EBM/99/48, April 23, 1999.