Lending
IMF loans are meant to help member countries tackle balance of payments problems, stabilize their economies, and restore sustainable economic growth. This crisis resolution role is at the core of IMF lending. At the same time, the global financial crisis has highlighted the need for effective global financial safety nets to help countries cope with adverse shocks. A key objective of recent lending reforms has therefore been to complement the traditional crisis resolution role of the IMF with additional tools for crisis prevention. Unlike development banks, the IMF does not lend for specific projects, but to countries that may experience a shortage of foreign exchange, to give them time to rectify economic policies and restore growth without having to resort to actions damaging to their own or other members’ economies. In broad terms, the IMF has two types of lending—loans provided at nonconcessional interest rates and loans provided to poorer countries on concessional terms, with interest rates that are low or in some cases zero.
Nonconcessional Financing Activity
In FY2017, the Executive Board approved 15 arrangements under the IMF’s nonconcessional financing facilities, totaling SDR 98.2 billion ($134.7 billion at the SDR/dollar exchange rate on April 28, 2017, of 0.729382). Precautionary arrangements under the Flexible Credit Line with three members—Mexico (SDR 62.4 billion), Colombia (SDR 8.2 billion), and Poland (SDR 6.5 billion)—accounted for 78 percent of these commitments. All three arrangements under the Flexible Credit Line were successors to previous arrangements that expired or were canceled.
Of the remainder, 14 percent were accounted for by arrangements under the Extended Fund Facility with Egypt (SDR 8.6 billion), Tunisia (SDR 2.1 billion), Sri Lanka (SDR 1.1 billion), Jordan (SDR 0.5 billion), Bosnia and Herzegovina (SDR 0.4 billion), Côte d’Ivoire (SDR 0.3 billion), Georgia (SDR 0.2 billion), and Moldova (SDR 0.1 billion). Stand-By Arrangements—with Iraq (SDR 3.8 billion), Jamaica (SDR 1.2 billion), and Suriname (SDR 0.3 billion)—accounted for 5 percent of the new arrangements.
A successor Precautionary and Liquidity Line arrangement with Morocco for SDR 2.5 billion accounted for the remaining 3 percent. Table 2.1 details the arrangements approved during the financial year, and Figure 2.2 shows the arrangements approved over the past 10 financial years.
During FY2017, disbursements under financing arrangements from the GRA, referred to as “purchases,” totaled SDR 5.8 billion ($8 billion). Of these purchases, 90 percent were made by Egypt, Iraq, Pakistan, Sri Lanka, Tunisia, and Ukraine. In addition, in July 2016, the Executive Board approved an SDR 261.6 million (about $358.7 million) purchase for Ecuador under the Rapid Financing Instrument.
Total repayments, termed “repurchases,” for the financial year amounted to SDR 5.55 billion ($7.6 billion), including advance repurchases from Portugal of SDR 3.31 billion ($4.6 billion). Reflecting the slightly larger purchases relative to repurchases, the stock of GRA credit outstanding increased to SDR 48.3 billion ($66.2 billion) from SDR 47.8 billion ($65.4 billion) a year earlier. Figure 2.3 shows the stock of nonconcessional loans outstanding over the past 10 financial years.
GRA borrowing
The IMF is a quota-based institution, and its quota resources were doubled through the implementation of the quota increases under the Fourteenth General Review. However, borrowed resources continue to play a key role in supplementing quota resources. The New Arrangements to Borrow (NAB), a set of credit arrangements with 38 participants totaling about SDR 180 billion, serves as a second line of defense after quotas, and bilateral borrowing provides a third line of defense after quotas and the NAB.
In August 2016, in light of the ongoing uncertainty and structural shifts in the global economy, the IMF’s Executive Board approved a new framework for bilateral borrowing that allows the IMF to maintain access on a temporary basis to bilateral borrowing from the membership and thereby avoid a sharp fall in lending capacity. Borrowing agreements under the new framework have a common maximum term of December 31, 2020, with an initial term to December 31, 2019, extendable for an additional year with the consent of the creditors. As of April 30, 2017, 35 member countries had committed a total of about SDR 300 billion, or $400 billion, in bilateral borrowing.
In November 2016, the IMF’s Executive Board approved renewal of the NAB for another five years, from November 2017 through 2022.
Table 2.2
Financial terms under IMF General Resources Account credit
This table shows major nonconcessional lending facilities. Stand-By Arrangements have long been the core lending instrument of the institution. In the wake of the 2007–09 global financial crisis, the IMF strengthened its lending toolkit. A major aim was to enhance crisis prevention instruments through the creation of the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL). In addition, the Rapid Financing Instrument (RFI), which can be used in a wide range of circumstances, was created to replace the IMF’s emergency assistance policy.
Table 2.3
Concessional lending facilities
Three concessional lending facilities for low-income developing countries are available.
Concessional Financing Activity
In FY2017, the IMF committed loans amounting to SDR 1.1 billion ($1.5 billion) to its low-income developing member countries under programs supported by the Poverty Reduction and Growth Trust. Total concessional loans outstanding to 52 members amounted to SDR 6.3 billion at the end of April 2017. Table 2.4 provides detailed information on new arrangements and augmentations of access under the IMF’s concessional financing facilities. Figure 2.4 illustrates amounts outstanding on concessional loans over the past decade.
The IMF’s framework for concessional financing is regularly reviewed to take account of changing needs. In 2015, the financial safety net for low-income developing countries was enhanced as part of the international community’s wider effort to support countries in pursuing the post-2015 UN SDGs. Key changes included the following: (1) a 50 percent increase in PRGT access norms and limits; (2) rebalancing the funding mix of concessional and nonconcessional resources provided to countries that receive IMF support in the form of a blend of PRGT and GRA resources from a 1:1 ratio to 1:2 ratio; and (3) setting the interest rate permanently at zero on fast-disbursing support under the Rapid Credit Facility to assist countries in fragile situations, hit by conflict, or affected by natural disaster.
A subsequent Board discussion in November 2016 clarified various aspects of the application of this financial safety net, including PRGT-eligible members’ access to the GRA, policies on blending, and the role of norms in determining access. In addition:
- In October 2016, it was decided to set interest rates on all concessional loans to zero until December 31, 2018. The interest-rate-setting mechanism was also modified such that interest rates will remain at zero as long as and whenever global interest rates are low.
- In May 2017, the IMF also explored options to better assist countries, including PRGT-eligible members, faced with sudden balance of payments pressures due to major natural disasters.
A new fundraising round is underway to raise up to SDR 11 billion in new PRGT loan resources, which are needed to support continued concessional lending by the IMF for its poorest and most vulnerable members. Of the 28 potential lenders approached―including 14 new lenders from both emerging market and advanced economies—16 had confirmed their intention to participate as of April 30, 2017. Within this group, 10 new loan contributions have been finalized, amounting to SDR 7.7 billion. This includes a new lender, Sweden.
Regarding debt relief, the Heavily Indebted Poor Countries (HIPC) Initiative has been largely completed. A total of 36 out of 39 eligible or potentially eligible countries benefited from HIPC Initiative relief, including Chad—the latest beneficiary—which received debt relief in the amount of SDR 17 million in April 2015. The IMF can also provide grants for debt relief to eligible countries through the Catastrophe Containment and Relief Trust (CCRT), established in February 2015. The CCRT provides exceptional support to countries confronting major natural disasters, including life-threatening, fast-spreading epidemics with the potential to affect other countries, and other types of catastrophes such as massive earthquakes. To date, three countries (Guinea, Liberia, Sierra Leone) have benefited from debt relief under the CCRT. In addition, in 2010, Haiti received SDR 178 million in debt stock relief under the former Post-Catastrophe Debt Relief Trust.
Design
Strengthening the Framework for Post-Program Monitoring
IMF lending has expanded sharply since the global financial crisis. For member countries no longer in a program relationship, but with substantial outstanding IMF credit, post-program monitoring (PPM) provides a framework for close IMF engagement. It is an important part of the IMF safeguards architecture, focusing on members’ capacity to repay the Fund and providing an early warning of policies that could jeopardize IMF resources.
In July 2016, the Executive Board discussed a staff report titled “Strengthening the Framework for Post-Program Monitoring.” The report addressed the need to strengthen the design and implementation of the current policy, highlighting alternatives to adapt the content of PPM reports to improve risk assessment. It also discussed the realignment of PPM thresholds with risks to the balance sheet of the Fund and the PRGT in light of the sizable expansion of Fund credit in recent years.
The IMF staff proposed moving toward a more risk-based and focused PPM framework that would provide a detailed analysis of risks to repayment capacity. The paper presented a composite PPM threshold based on two indicators—one that captures the absolute size of credit outstanding and a second, quota-based indicator that assesses the scale of country risk.
Executive Directors supported moving toward the more risk-based and focused PPM framework, welcoming the innovative techniques and indicators in the analysis and monitoring of risks. Directors saw merit in establishing thresholds to help ensure adequate monitoring of large exposures to the IMF’s resources and found it reasonable to calibrate such thresholds to the Fund’s loss-absorption capacity.
Directors agreed that a quota-based threshold should be retained as a backstop. There was support for raising the threshold to 200 percent of quota, close to the point at which level-based surcharges apply for exposures under the Fund’s General Resources Account.
Policy Support Instrument
The Policy Support Instrument (PSI) offers low-income developing countries that do not want or need an IMF loan a flexible tool that enables them to secure IMF advice and support without a borrowing arrangement. This nonfinancial instrument is a valuable complement to the IMF’s lending facilities under the PRGT. The PSI helps countries design effective economic programs that deliver clear signals to donors, multilateral development banks, and markets of the IMF’s endorsement of the strength of a member’s policies.
The PSI is designed to promote a close policy dialogue between the IMF and a member country, usually through semiannual Fund assessments of the member’s economic and financial policies. It is available to PRGT-eligible countries with a poverty reduction strategy in place that have a policy framework focused on consolidating macroeconomic stability and debt substantiality, while deepening structural reforms in key areas in which growth and poverty reduction are constrained. Such reforms would support strong and durable poverty reduction and growth for countries whose institutions are capable of supporting continued good performance.
In general, policies under the PSI aim to consolidate macroeconomic stability and push ahead with structural measures to boost growth and jobs. These include measures to improve public sector management, strengthen the financial sector, or build up social safety nets. Program reviews by the IMF’s Executive Board play a critical role in assessing performance under the program and allowing it to adapt to economic developments.
In June 2016, the Board approved a one-year extension of the PSI for Uganda. To date, the Executive Board has approved 18 PSIs for seven members: Cabo Verde, Mozambique, Nigeria, Rwanda, Senegal, Tanzania, and Uganda.
Staff-Monitored Program for Somalia
Somalia is recovering slowly from nearly 25 years of civil war. Weak institutional capacity, complex clan politics, and a challenging security situation have complicated the country’s economic reconstruction. As a result, social and economic conditions remain dire. With continued support from the international community and key donors, the federal government of Somalia has initiated important reforms to lay the foundation for the country’s economic reconstruction.
Somalia’s external debt is high and virtually all in arrears, thus limiting access to external borrowing and precluding access to IMF resources because of the country’s continued arrears to the Fund. To address the high debt overhang, the country needs to establish a strong track record of macroeconomic performance, implementation of reforms, and a comprehensive strategy of arrears clearance and debt relief supported by Somalia’s development partners.
The IMF has been working closely with Somalia since resuming its relationship with the country in 2013. The Executive Board concluded the first economic health check (Article IV consultation) for Somalia in more than 26 years in July 2015, followed by another one in February 2017. In addition, the IMF has delivered 76 technical assistance and training missions since 2013.
To help Somalia’s economic reconstruction efforts and establish a track record on policy and reform implementation, the authorities requested an IMF staff-monitored program (SMP). An SMP is an informal agreement between country authorities and the IMF staff to monitor the implementation of the authorities’ economic program. SMPs do not entail financial assistance or endorsement by the IMF Executive Board. In May 2016, the Managing Director approved the SMP for Somalia, which covered the period May 2016–April 2017. Performance under the SMP has been broadly satisfactory. As the SMP was expiring in April 2017, the authorities requested a follow-up 12-month SMP, on which IMF staff and the authorities reached agreement in May 2017.
The program is geared toward reestablishing macroeconomic stability, building capacity to strengthen macroeconomic management, rebuilding institutions, and improving governance and economic statistics. It includes fiscal, monetary, and financial policy setting and reforms. Given Somalia’s weak administrative capacity, technical assistance is an integral part of the SMP, and training will be intensified. Successful completion of this program and subsequent SMPs could help pave the way toward future financial assistance from the IMF.