Public Information Notice No. 10/16

Public Information Notice: IMF Reviews Eligibility for Using Concessional Financing Resources

February 1, 2010

On January 11, 2010, the Executive Board of the International Monetary Fund (IMF) approved a new framework for determining which member countries are eligible for using its concessional financial resources under the Poverty Reduction and Growth Trust (PRGT). The new eligibility framework, which completes the IMF’s recent overhaul of its concessional financing facilities for low-income countries (LICs), preserves access to the IMF’s concessional financing for members with a low level of income and related economic and financial vulnerabilities.

Background

The new framework establishes transparent criteria for IMF Executive Board decisions regarding entry onto and graduation from the list of countries that are eligible to use the IMF’s concessional resources. It enhances the uniformity of treatment across the membership and further aligns access to concessional resources with the objectives of the PRGT.

The framework comprises differentiated sets of criteria for entry and for graduation. Countries would become eligible if their annual per-capita income falls below a certain threshold and they have not had substantial access to international financial markets for an extended period of time. For this assessment, the IMF will use the same per-capita income threshold as used by the World Bank Group to determine eligibility for International Development Association (IDA) resources, which is revised on an annual basis. Countries that are on the PRGT eligibility list would be expected to graduate from the list if they:

• (a) either have a persistently high level of income, exceeding twice the IDA per capita income threshold, or capacity to access international financial markets on a durable and substantial basis; and

  (b) do not face serious near-term risks of a sharp decline in per-capita income, loss of market access, and/or debt vulnerabilities.

The new framework also extends to all small countries the existing exceptional treatment of small islands in determining PRGT eligibility. This approach aims to ensure uniformity of treatment for members with similar vulnerabilities. For small countries, the criteria for entry and graduation from PRGT eligibility largely mirror the general rules but they are less stringent as regards per-capita income, to reflect these countries’ higher vulnerabilities.

Graduation from PRGT eligibility would become effective three months after the adoption of the Executive Board decision, and will not affect existing concessional Fund support or ongoing discussions on new financing requests. Moreover, countries that have arrangements in place would remain PRGT-eligible for the full duration of the arrangement, and their graduation upon completion of the Fund-supported program would not affect the terms of outstanding concessional or subsidized credit. Countries’ PRGT eligibility will be reviewed every two years.

Executive Board Assessment

Executive Directors welcomed today’s discussion on eligibility to use the Fund’s facilities for concessional financing, which complements the new architecture of lending facilities and financing for low-income countries. They noted that Fund concessional resources have helped many LICs weather the impact of the global economic crisis. It will be important that access to these scarce resources be preserved for members most in need, and that eligibility be reviewed in a timely manner to ensure its alignment with recent developments and with the objectives of the Poverty Reduction and Growth Trust.

Directors supported the proposed framework for updating, on a regular basis, the list of countries eligible for concessional financing under the PRGT (the PRGT-eligibility list). The framework is based on transparent criteria for entry and graduation, thereby enhancing uniform treatment of LICs in line with the objectives of the PRGT. A more demanding set of criteria for graduation, compared with those for entry, seeks to minimize untimely graduation decisions, and hence the risk of a need for their reversal.

Directors expressed a range of views on the thresholds proposed for entry and graduation; at the same time, they recognized the tradeoffs involved and the need to strike the appropriate balance. On the one hand, less stringent graduation criteria would allow members to graduate earlier from relying on scarce concessional resources. On the other hand, premature graduation could pose undue risks to the member’s financial sustainability. Noting the judgmental element inherent in the market access criterion and vulnerability assessments, Directors underscored the importance of applying the framework consistently and objectively, though recognizing that some degree of flexibility is appropriate. They welcomed the fact that the determination of eligibility would remain closely aligned with IDA practices, and the large majority of IDA-eligible countries would remain PRGT-eligible.

Directors also supported the extension to all small countries—those with a population below one million—of the existing exceptional treatment of small islands in determining PRGT eligibility, in order to ensure uniformity of treatment for all members with similar vulnerabilities. A number of Directors considered that the population threshold, which is lower than that used by IDA, is relatively restrictive.

Applying the proposed framework, Directors endorsed the proposed graduation from the PRGT-eligibility list of Albania, Angola, Azerbaijan, India, Pakistan, and Sri Lanka. They considered that these graduations would likely have a limited impact on the demand for the Fund’s concessional resources. While Armenia, Dominica, Georgia, Grenada, Maldives, St. Lucia, and St. Vincent and the Grenadines met the applicable income criterion for graduation, these countries would maintain their PRGT-eligibility, in view of their short-term vulnerabilities.

To ensure consistency between the new eligibility framework and the policy for blending concessional and GRA financing, Directors supported the proposed modification to the blending rules. The existing criteria used to establish a presumption of blending for members with market access, as defined under the current blending rules, will apply only if per capita gross national income exceeds 80 percent of the IDA operational cutoff. Directors looked forward to greater, more consistent use of blended arrangements, thereby protecting finite concessional resources and encouraging appropriate borrowing behavior as members progress toward middle-income status.