The Poverty Reduction and Growth Facility (PRGF) -- A Factsheet

How the IMF Helps Poor Countries -- A Factsheet

The Role of the Fund in Low-Income Member Countries
August 13, 2004

1. The Executive Board discussion of The Role of the Fund in Low-Income Member Countries: Considerations on Instruments and Financing on March 31, 2004 adopted or amended policies for the use of Fund financial instruments for low-income member countries.¹ This note summarizes Poverty Reduction and Growth Facility (PRGF) access policies, including those aspects of the Board's March 31 discussion with immediate effect on the PRGF. These are: access norms for successive PRGF arrangements; criteria for blending financing from PRGF arrangements with arrangements under the Extended Fund Facility (EFF); guidelines for use of low-access PRGF arrangements; and principles for PRGF augmentation. Other issues that do not directly affect PRGF arrangements, including changes in emergency assistance for natural disasters, emergency post-conflict assistance, and post-program monitoring, will be reflected in separate guidance notes.

Access Norms

2. The Executive Board established norms for access to PRGF resources in third and successive arrangements for members with continuing balance of payments needs. Previous norms covered only the first and second Enhanced Structural Adjustment Facility (ESAF) or PRGF arrangements. In line with the current practice, PRGF access norms for the third and subsequent arrangements are tapered (Box 1). These represent neither an entitlement nor a maximum, but are intended to provide general guidance for access decisions.²

3. While the access norms are expected to provide guidance, the access level under PRGF arrangements will continue to be determined on the basis of a set of general criteria. These include: a member's balance of payments need, the strength of its adjustment effort under the proposed PRGF-supported program, its outstanding use of Fund credit and the record of such use in the past, and ability to repay the Fund. In most cases, where there are clear balance of payments need and a sufficiently strong adjustment effort, the access level is expected to be around the norms. However, access can be above the norm, including under arrangements immediately following arrears clearance, severe natural disasters, replacement of emergency post-conflict assistance, or other special considerations. Access could be below the norm, for example, for countries that have access to highly concessional resources and have little need for Fund's balance of payments support. These countries should more appropriately have a low-access PRGF arrangement, as is discussed below.

PRGF/EFF Blend Arrangements

4. Blended arrangements-combining financing from the PRGF Trust and the non-concessional General Resources Account (GRA) for low-income member countries with higher income levels or non-concessional financing alternatives-help conserve scarce PRGF resources for those members that have limited access to non-concessional financing or for which only such financing is appropriate. Some PRGF-eligible member countries already have access to substantial amounts of non-concessional credit or are close to, or above, the indicative per capita income limits for IDA lending. While these members often have substantial balance of payments needs, they are able to meet part of their needs through borrowing from external private capital markets or the "hard" windows of multilateral development banks or bilateral creditor agencies and have the capacity to service such assistance.³ Because of similarities in program length, maturity and other aspects of financial and program architecture, PRGF/GRA blends are typically in the form of a single three-year program supported by a combination of a PRGF and an EFF arrangement. A more systematic approach to PRGF/EFF blending should make the transition from concessional to non-concessional borrowing from the Fund less abrupt for those countries successfully moving toward middle-income, emerging market status or with access to private capital markets.

5. Accordingly, the Executive Board agreed that guidelines on blended use of PRGF/General Resources Account (GRA) resources should be clarified and strengthened, taking into account the need for some degree of flexibility and consistency with the World Bank and the framework for debt sustainability. In particular:

• There is a presumption that PRGF resources will be provided in the context of a PRGF/EFF blend if either (i) the member's per capita income exceeded 75 percent of the prevailing IDA operational cutoff (currently US$895) or (ii) the member had significant recent or prospective nonconcessional borrowing from private capital markets or the "hard" windows of official bilateral and multilateral lenders.⁴



• If neither condition is met, there is a presumption of PRGF financing only.

Box 2 presents the current country coverage for blended arrangement under these criteria.

6. Assessing whether nonconcessional borrowing is significant requires an element of judgment. Recent borrowing should be assessed on the basis of IDA/IBRD blend status, amounts contracted in the preceding few years, or amounts provided for in the debt limits of recent Fund arrangements. Prospective borrowing would be assessed on the basis of the member's debt-service capacity or other announced plans for non-concessional external borrowing, including in proposed debt limits.

7. Access to the PRGF resources in a blended arrangement is expected to be one half of the PRGF norms in percent of quota for successive arrangements. Access to GRA resources will be guided by EFF access policies (the member's balance of payments need, capacity to repay including strength of the program, and outstanding use of Fund credit and the record of such use), taking into account the borrowing of the PRGF resources.

8. Blended arrangements are not expected for countries with limited BOP need that have low-access PRGF arrangements (see below). Given the low level of overall access in these arrangements, there is no need for blending to further conserve PRGF resources.

Low-Access PRGF Arrangements

9. Some low-income members have limited balance of payments needs for Fund resources, either as a result of sustained adjustment to a point where the members have little need for balance of payments financing, or because of their access to large concessional resources. However, for many of these members, Fund engagement continues to be desirable to provide guidance for policy implementation, address potential vulnerabilities, or provide signals to donors and creditors about the macroeconomic stabilization and sustainability and the implementation of structural policies within the Fund's areas of expertise.

10. Low-access PRGF arrangements are suitable for many of these members. Low access is appropriate in light of the limited balance of payments need and the scarcity of PRGF resources. Where macroeconomic stability is not yet well established and the economy is vulnerable to exogenous shocks, a low-access PRGF arrangement provides a framework for quick augmentation should a balance of payment need develop. Moreover, some of these members, bilateral donors, and MDBs may find the discipline of a formal Fund arrangement useful to provide clear and timely signals to donors and concessional lenders on whether the macroeconomic policies are on track.

11. The Executive Board agreed that standardization of current practice with low-access PRGF arrangements should clarify the signals being sent to creditors, donors, and possibly markets. The standardized access level in such circumstances is 10 percent of quota, spread evenly over the three years of the arrangement. Staff reports and other documents should explicitly state that these arrangements are a standard Fund response to limited balance of payments needs and should not justify access further in terms of the strength of the program or precise BOP need calculations. The clarity of the assessment is bolstered by the inclusion of standard language in press releases for such arrangements explicitly noting the limited balance of payments need, rather than considerations of program strength, as the reason for the low access level. In particular, the press release should note along the following line: "The Executive Board of the International Monetary Fund (IMF) has given its final approval of a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for [country] in an amount of SDR [xx] million (about US$[xx] million) to support the government's economic program. This amount is equivalent to 10 percent of the country's quota, corresponding to the standard access under the PRGF facility for countries with limited balance of payments needs."

Principles for PRGF Augmentation

12. The Executive Board agreed that augmentation of existing PRGF arrangements is the most appropriate form of Fund financing for low-income members facing increased balance of payments needs as a result of exogenous shocks.⁵ An existing PRGF arrangement provides a framework around which the policy response to the shock can be structured, including measures to ensure adequate expenditures to protect those most vulnerable to the adverse impacts of shocks. The additional financing necessitated by the shock can be incorporated into the existing PRGF arrangement in a rapid and straightforward manner with appropriate terms and conditionality. Augmentation of PRGF arrangements normally takes place in the context of PRGF reviews, and an augmentation may increase the amount of financing for one or more reviews. In exceptional circumstances, augmentations can also be approved outside of the context of a PRGF review.

13. Directors agreed that current approach of addressing shocks through PRGF augmentation where PRGF arrangements are in place is broadly satisfactory but would benefit from greater clarity and systematization. For countries with a PRGF arrangement in place, the following general principles should guide augmentation:

• Fund staff should work with authorities and other institutions to assess the nature of the shock and estimate likely direct and indirect impacts of a shock on the balance of payments, growth and, to the extent possible, poverty. The mix of economic adjustment and financing (including from a member's international reserves) should reflect these assessments. Where the shock is likely to be self-reversing, more financing and less adjustment could be appropriate. Where shocks are likely to be persistent, relatively more adjustment effort may be advisable, as additional financing might delay needed adjustment. However, financing may still be desirable to smooth the path of adjustment, particularly when sharp adjustment is likely to create strong indirect effects on growth and poverty. The financing-adjustment mix and the composition of financing will need to take into account debt sustainability considerations.⁶



• Fund staff should encourage low-income members to seek (and donors to provide) more concessional resources than are available from Fund financing, as highly concessional resources, including grants, are more appropriate for the poorest members experiencing shocks. However, should such resources not be sufficient to cover all financing needs, Fund staff should be prepared to recommend approval of PRGF augmentations to avoid overly disruptive adjustment, excessive drawdown of reserves, or external financing on terms less concessional than the PRGF (e.g., foreign commercial bank loans). This lending would, of course, be subject to an assessment of the member's capacity to repay.
  
  
• For members with on-track PRGF-supported programs (with the partial exception of PRGF/EFF blends), PRGF augmentation is preferred to Fund financing from the GRA (e.g., emergency assistance or CFF purchases). Augmentations for PRGF/EFF blends should normally increase access under the EFF arrangement, except to the extent that an augmentation of the PRGF arrangement would not raise total PRGF access above one half of the applicable norm shown in Box 1. Augmentation of low-access PRGF arrangements for countries that would otherwise have a presumption of blended access would normally be from the PRGF Trust resources so long as the total access did not exceed one half of the applicable PRGF access norm. In the event that an augmentation was proposed that would increase total financing to an amount above the applicable norm, a possible GRA component to the augmentation could take the form of financing under emergency assistance for natural disasters, the Compensatory Financing Facility, a stand-by or extended arrangement, or other facilities. A decision would be guided by prevailing eligibility and access policies for those facilities, the point in the PRGF arrangement at which the augmentation is being proposed, and the size and nature of the shock.