Chapter

Chapter 3. Financing Temporary Balance of Payments Needs

Author(s):
Parmeshwar Ramlogan, and Bernhard Fritz-Krockow
Published Date:
April 2007
Share
  • ShareShare
Show Summary Details

According to Article I of the IMF’s Articles of Agreement, the purposes of the IMF include making the resources of the IMF temporarily available to member countries under adequate safeguards to provide an opportunity to the countries to correct balance of payments imbalances and to shorten the duration and lessen the degree of these imbalances.

Sources of IMF Financing

Quota Subscriptions

The primary source of the IMF’s loanable funds is quota subscriptions by members.35 As noted in Box 1.1, a quarter of the quota subscription is normally paid in reserve assets (SDRs or currencies of other members deemed by the IMF to be readily available and accepted for international payments), and the balance is paid in the member’s own currency. Members’ currencies are deemed usable or unusable. Usable currencies are those of member countries whose external position is strong enough for them to be called upon to finance IMF credit to other members. The IMF uses its pool of usable currencies and SDR holdings to extend credit to member countries. Since some currencies are unusable, this pool of loanable funds is less than the sum total of quota subscriptions.

Quota-based funds are held in the IMF’s General Resources Account (GRA). Any member can request a loan from the pool of quota resources at any time and such a request will be granted if certain criteria are satisfied.

Borrowing

The Articles of Agreement (Article VII, Section 1) allow the IMF to replenish its holdings of any member’s currency through borrowing, when needed in connection with its transactions. Such borrowing is undertaken on a temporary basis and is subject to continuous monitoring and a regular review of the IMF’s liquidity by the Executive Board.

Borrowing to Supplement Quota-Based Resources

The IMF currently maintains two standing borrowing arrangements with official lenders, the General Arrangements to Borrow (GAB, effective since October 1962) and the New Arrangements to Borrow (NAB, effective since November 1998). The GAB and NAB supplement the quota-based, nonconcessional lending resources in the GRA to help the IMF forestall or cope with an impairment of the international monetary system. Borrowing takes place at market-related interest rates. In the past there have been several other borrowing arrangements with official creditors under which the IMF borrowed extensively when payments imbalances were large. The IMF can borrow in private markets, if necessary, but to date has never done so.

The GAB enable the IMF to borrow specified amounts of currencies from 11 industrial countries or their central banks. The potential amount of credit available is SDR 17 billion, and an additional SDR 1.5 billion of credit is available under an associated agreement with Saudi Arabia. The NAB were set up following the Mexican financial crisis of December 1994, out of concern that substantially more resources might be needed to respond to future financial crises. They are a set of credit arrangements between the IMF and 26 member countries or institutions. The combined financing available to the IMF under the GAB and the NAB amounts to SDR 34 billion, twice that available under the GAB alone. The NAB is normally the first and principal recourse in the event of a need for supplementary financing by the IMF. Both sets of arrangements are in effect for renewable five-year terms; the GAB has been extended for five years beginning December 26, 2003, and the NAB for five years beginning November 17, 2003.

Borrowing to Finance Concessional Lending

The IMF borrows from official bilateral sources to finance concessional lending to low-income countries under the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF), which are administered by the IMF through the PRGF-ESF Trust. Borrowing for PRGF-ESF lending usually takes place at market interest rates. However, since these funds are on-lent to low-income borrowers at a concessional rate of 0.5 percent (or interest-free in the case of debt relief), the difference between the market borrowing rate and the concessional lending rate has to be subsidized. This subsidy is covered through bilateral grants (see below) or through IMF borrowing from official bilateral sources at below-market interest rates. In the latter case, the difference between the market interest rate and the below-market rate paid to the creditor is the creditor’s contribution to the interest subsidy.

Grants for Subsidized Interest Rates and Debt Relief

Bilateral grants help finance the interest subsidy on concessional loans to low-income countries, including PRGF/ESF loans and loans to low-income countries that access the IMF’s emergency assistance. While the loans are made from the IMF’s quota-based GRA resources and therefore carry nonconcessional interest rates, a concessionality element is incorporated through an interest rate subsidy. The interest subsidy is the difference between the IMF’s basic GRA rate of charge and the effective concessional lending rate of 0.5 percent. Bilateral grants also partly finance the IMF’s contribution to debt relief under the HIPC Initiative, the remainder of which was financed through gold sales (see below).

Gold Sales

The IMF acquired virtually all of its holdings of gold prior to the Second Amendment of the Articles of Agreement in 1978. Prior to this Amendment, gold played a central role in the functioning of the international monetary system: the first 25 percent of members’ quota subscriptions and quota increases was normally paid in gold, interest on outstanding IMF credit was normally paid in gold, and members could also use gold to purchase reserve currencies or repay debt to the IMF. The Second Amendment severely limited the use of gold in IMF transactions: the IMF may only sell gold at prevailing market prices and accept gold in the discharge of a member’s obligations to the IMF; no other transactions in gold are permitted. The IMF holds around 100 million ounces (3,200 metric tons) of gold at designated depositories, valued on its balance sheet at around SDR 6 billion on the basis of historical cost, while the market value, as of mid-2006, exceeds SDR 40 billion.

The IMF has sold gold on various occasions in the past to support its operations, mostly prior to 1980. Since gold is valued at historical cost in the IMF’s accounts and the market value is usually substantially higher than the book value, the sale of gold results in a profit for the IMF. These profits were placed in a Special Disbursement Account, from where they were transferred to other special-purpose accounts, in particular for financial assistance to low-income countries, including debt relief.

During 1976-80 the IMF sold gold to finance a Trust Fund that supported concessional lending by the IMF to low-income countries. When the Trust Fund ceased new lending in March 1981, its resources were used to finance concessional lending under the Structural Adjustment Facility (SAF) until 1987. Since 1987, repayments of Trust Fund and SAF loans have been accumulated to provide collateral for borrowing under the IMF’s concessional lending operations. In 1993, the IMF pledged to sell up to 3 million ounces of gold if these accumulated reserves were insufficient to repay creditors who provided loans to enable members with protracted arrears to the IMF to clear these arrears under the rights accumulation approach. This is an outstanding pledge that the IMF so far has not been called upon to honor. Also, to help finance its contribution to debt relief under the HIPC Initiative, the IMF conducted a series of off-market transactions in gold in 1999-2000 that left its gold holdings unchanged.36

The IMF’s Capacity to Lend

The IMF’s lending capacity is monitored constantly and reviewed semi-annually by the Executive Board to ensure that the IMF has adequate resources to fulfill its responsibilities. A set of indicators has been developed to gauge the IMF’s liquidity and lending capacity. Since December 2002, the primary measure of the short-term lending capacity is the one-year Forward Commitment Capacity (FCC), which indicates the amount of quota-based resources available for new lending over the coming 12 months (Table 3.1).37

Table 3.1.The IMF’s Lending Capacity(in billions of SDRs unless otherwise stated; end-of-period)
20012002200320042005
I. Total resources217.1218.1219.1220.6221.1
Members’ currencies209.0210.3211.3213.1213.4
SDR holdings1.51.21.10.81.1
Gold holdings5.95.95.95.95.9
Other assets0.70.80.90.80.8
Available under GAB/NAB activation-----
II. Less: Non-usable resources114.7117.9118.4109.275.9
Of which: Credit oustanding53.563.665.055.428.4
III. Equals: Usable resources102.5100.2100.7111.3145.2
IV. Less: Undrawn balances under GRA arrangements25.831.922.819.412.7
V. Equals: Uncommitted usable resources76.768.377.991.9132.5
VI. Plus: Repurchases one year forward15.219.09.212.98.0
VII. Less: Prudential balance30.932.632.832.834.1
VIII. Equals: One-year forward commitment capacity61.054.754.271.9106.4
Memorandum items:
Potential GAB/NAB borrowing34.034.034.034.034.0
Quotas of members that finance IMF transactions154.7163.1164.1164.1170.5
Liquid liabilities56.966.166.555.728.6
Liquidity ratio (in percent)114.983.8104.2149.5411.3
US$ per SDR1.256731.359521.485971.553011.42927
Source: Finance Department
Source: Finance Department

IMF Financing to Member Countries

Purchases and Repurchases

The IMF extends financing from GRA resources through a form of a swap. The IMF provides reserve assets to the borrower from the reserve asset subscriptions of members or by calling on countries that are considered financially strong to exchange their currency subscriptions for reserve assets. The borrower purchases these reserve assets with its own currency. This increases the IMF’s holdings of the borrower’s currency and reduces its holdings of reserve assets or the currencies of the creditor countries. Creditors (who provide reserve assets or their currencies to the IMF) now have a claim on the IMF equal to the reduction in the IMF’s holdings of their reserve assets or currencies: their reserve tranche positions increase.38 The borrower later repurchases its currency from the IMF with reserve assets. This reduces the IMF’s holdings of the debtor country’s currency, and increases its holdings of reserve assets or currencies of the creditor countries, back to their original levels. Creditors’ claims on the IMF are correspondingly extinguished and their reserve tranche positions decline.39

Through the purchase/repurchase mechanism of IMF financing, the value of the pool of subscribed assets of the IMF remains constant, though its composition changes. The IMF decides quarterly, based on projections of purchases and repurchases, which currencies are to be used (and up to what amounts) for purchases, and which currencies (and in what amounts) to accept in repurchases. These decisions are reflected in a quarterly financial transactions plan. Since 1999, preparation of the financial transactions plan has been governed by the principle that creditor members’ reserve tranche positions should remain broadly equal relative to their quotas.

Arrangements

IMF financing, whether from GRA resources or concessional resources, is provided primarily under “arrangements” from the IMF, which are similar to lines of credit. An arrangement is a decision by the Executive Board that assures a member that it will be able to make purchases or receive disbursements from the IMF in accordance with the terms of the decision during a specified period of time and up to a specified amount. Member countries request an arrangement under one or more of several IMF financing facilities or policies, described below. These arrangements can be either on concessional or non-concessional terms. In this respect, IMF terminology distinguishes between “purchases,” which relate to non-concessional lending, and “disbursements,” which related to concessional lending.

IMF lending under arrangements takes place in the context of an economic adjustment program implemented by the member country to resolve its balance of payments difficulties. The first disbursement takes place after the Executive Board has approved the arrangement. Subsequent disbursements under an arrangement are phased on a quarterly or semi-annual basis and are conditional upon satisfactory progress in implementing the economic program. For this purpose, specific performance criteria and other conditions are set in the economic program (see discussion below on conditionality), and disbursements are conditional upon observance of these criteria.

When a member seeks an IMF-supported program, but does not face a pressing balance of payments need, it may treat a IMF arrangement as precautionary—a pure “stand by”—which provides the right, conditional on implementation of specific policies, to make drawings should the need arise.40 Members retain and accumulate the rights to make drawings during the period of the arrangement, provided they have observed all the performance criteria for each drawing.

Outright Purchases

Under certain circumstances, the IMF lends outside of an arrangement with a borrowing member country. Purchases made in the absence of an arrangement are called “outright purchases.” Outright purchases apply to first credit tranche borrowing under the credit tranches (although such borrowing normally does take place in the context of an arrangement), to emergency assistance for natural disasters or to post-conflict countries, and to temporary net export shortfall-financing under the Compensatory Financing Facility (see below).41 IMF lending in these circumstances does not require that the country adopt an economic adjustment program, and therefore disbursements are not subject to phasing and performance criteria.42 Members would be required only to describe the general policies they intend to pursue to resolve their balance of payments problem, including their intention to avoid introducing or intensifying exchange and trade restrictions. Loans are approved and disbursed if the IMF is satisfied that the member will cooperate in an effort to find, where appropriate, solutions for its balance of payments difficulties.

Program Design

When member countries express a need for IMF financing, discussions begin between IMF staff and the country authorities on an economic program that could be supported by the IMF (in circumstances where an economic program is required). Discussions cover, among other things, the type of arrangement to be requested and the lending facility to be used, the policies to be pursued during the program period, the level and phasing of purchases or drawings, and the performance criteria and other types of conditionality to be used in monitoring the implementation of the program. It is understood that the economic program is entirely that of the country authorities and that the authorities are seeking IMF-support for their program. This country ownership of the economic program is critical to build domestic support for the adjustment effort and increases the chances that the program will be successfully implemented.

Approval of an Arrangement

Following the staff’s agreement that the authorities’ program is adequate and realistic, the member submits a request for an arrangement from the IMF. The request takes the form of a Letter of Intent (LOI) from the authorities to the Managing Director of the IMF, often accompanied by a more detailed Memorandum on Economic and Financial Policies (MEFP) and a Technical Memorandum of Understanding (TMU). These documents are prepared by the authorities with the cooperation and assistance of the IMF staff. They set out the agreed policy goals and strategies in the economic program, as well as conditionality and how observance will be monitored. In exceptional cases, members may communicate confidential policy understandings to the IMF in a side letter addressed to the Managing Director and disclosed to the Executive Board in a restricted session. The use of side letters will normally be limited to cases in which the premature release of the information would cause adverse market reactions or undermine the country authorities’ efforts to prepare the groundwork for a measure.

The documents submitted by the authorities are accompanied by a report prepared by the staff that verifies the balance of payments need and assesses the appropriateness of the program in light of the nature of the country’s balance of payments difficulties, and constitute the basis for an Executive Board decision on the request. These documents need to assure the Board that the member’s program is consistent with the IMF’s provisions and that the member is committed to carry out policies that will solve the balance of payments problems. Programs are approved by the IMF on the understanding that the member’s representations are accurate.

Program Review

Upon approval of the arrangement, the authorities may make the first purchase. Subsequent purchases are normally contingent on the observance of performance criteria and other types of conditionality. However, some purchases do not require a review, e.g., in case of a Stand-By Arrangement that has quarterly purchases but semi-annual reviews. If a review is required, the IMF reviews program implementation prior to the purchase to ascertain whether the relevant conditions for that purchase have been observed. These reviews also have a forward-looking element and also allow for the assessment of progress on policies that cannot easily be quantified or defined. If the reviews ascertain that performance criteria have been observed and the program remains on track to achieve its objectives, the purchase becomes available to the member. Their request, along with a staff report on the review, is considered by the Executive Board. Board approval of the authorities’ request completes the review and the loan is then disbursed. In considering the authorities’ request, the Executive Board takes into consideration the member’s past performance (including observance of performance criteria and other conditionality), policy understandings for the future, and the need to safeguard IMF resources.

If one or more performance criteria are not observed, the authorities may request waivers of observance of each of the performance criteria that were not observed to enable the disbursement to take place. The Executive Board grants a waiver only if it is satisfied that, notwithstanding the nonobservance, the program will be successfully implemented, either because of the minor or temporary nature of the nonobservance or because of corrective actions taken by the authorities.

In certain instances, where the information necessary to assess observance of a performance criterion is not available, the member may request a waiver of applicability of that performance criterion. This happens for example in cases where a review is delayed, slips past a subsequent test date, and the later performance criteria become binding. Such a waiver can only be supported by the staff and granted by the Executive Board if they are satisfied that the program will be successfully implemented and there is no clear evidence that the performance criterion has not been met. Waivers of applicability allow a window within which the purchase associated with the review may made, despite the unavailability of relevant data. Such waivers do not, however, apply to purchases after the date specified in the waiver, which can only proceed if the relevant performance criteria are met or waivers of non-compliance are granted.

General Policies Governing the Use of IMF Resources

Reserve Tranche Policies

A member’s reserve tranche position in the IMF is equal to the difference between the member’s quota and the IMF’s holdings of the member’s currency, excluding any holdings of the currency stemming from the use of IMF credit. The reserve tranche position is initially 25 percent of quota, the amount of the capital subscription paid in reserve assets, but fluctuates with members’ borrowing from or lending to the IMF. The IMF pays interest (remuneration) on members’ reserve tranche positions, except on a small portion equal to 25 percent of the member’s quota on April 1, 1978—that part of the quota that was paid in gold prior to the Second Amendment of the Articles of Agreement.* The basic rate of remuneration is equal to the SDR interest rate, which is a market-determined rate. For countries that joined the IMF after April 1, 1978, the unremunerated reserve tranche is determined in two steps—first, the average unremunerated reserve tranche of all other members as a percent of their quota is calculated on the date the new members joined the IMF; and second, this percentage is applied to the new members’ quotas to obtain the new members’ unremunerated reserve tranche. The unremunerated reserve tranche is fixed in nominal terms, so it declines as a percentage of quota when quotas are raised.

The reserve tranche position forms part of the member’s foreign exchange reserves, as the member country may draw upon it at any time.43 Reserve tranche purchases constitute use of IMF resources, but are not subject to conditionality, interest charges, or repurchase expectations or obligations. A member may draw on its reserve tranche before making use of IMF credit, or it may choose to use IMF credit without drawing on its reserve tranche.

Access Policy

While surveillance is a preventive tool, access to IMF resources under appropriate terms and conditions serves to assist members who find themselves in balance of payments difficulties.44 Defining an appropriate access policy is thus a key element of the IMF’s efforts to help resolve economic and financial crises. Access policies are reviewed every two years by the Executive Board, taking into consideration the magnitude of members’ balance of payments problems and developments in the IMF’s liquidity position.45

Access limits under the IMF’s different lending facilities are summarized in Table 3.2. These limits do not constitute targets or entitlements. The actual amount of access in individual cases will vary according to the circumstances of the borrower in accordance with criteria established by the Executive Board, and is determined on a case-by-case basis. Three general considerations govern the actual amount of IMF resources that a member may borrow:

  • The member’s actual or potential need for resources from the IMF, taking into account other sources of financing and the desirability of maintaining a reasonable level of reserves.
  • The ability of the member to service its indebtedness to the Fund, including the strength of the adjustment program.
  • The amount of the member’s outstanding use of IMF credit and its past record in using and repaying IMF resources.
Table 3.2.Terms and Conditions of IMF Lending
Repurchase (Repayment) Terms2
Credit FacilityConditionsPhasing and MonitoringAccess LimitsCharges1Obligation Schedule (years)Expectation Schedule (years)Installments
The Credit Tranches (1952)Adopt policies that provide confidence that the member’s balance of payments difficulties will be resolved within a reasonable periodQuarterly purchases (disbursements) contingent onobservance of performance criteria and other conditionsAnnual: 100% of quota; cumulative: 300% ofquotaBasic rate plus surcharge (100 basis points on amounts above 200% of quota; 200 basis points onamounts above 300%)33 ¼-52 ¼-4Quarterly
Extended Fund Facility (1974)Adopt 3-year program, with structural agenda, with annual detailed statement of policies for the next 12 monthsQuarterly or semiannual purchases (disbursements) contingent on observance of performance criteria and other conditionsAnnual: 100% of quota; cumulative: 300% of quotaBasic rate plus surcharge (100 basis points on amounts above 200% of quota; 200 basis points on amounts above 300%)34 ½-104 ½-7Semiannual
Supplemental Reserve Facility (1997)Available for capital account crisis only in context of Stand-By or Extended Arrangements with associated program and with strengthened policies to address loss of market confidenceFacility available for one year, with two or more purchases (disbursements)No access limits; access under the facility only when access under associated regular arrangement would otherwise exceed either annual or cumulative limitBasic rate plus surcharge (300 basis points rising by 50 basis points a year after first disbursement and every 6 months thereafter to a maximum of 500 basis points)2 ½-32-2 ½Semiannual
Compensatory Financing Facility (1988)Available only when the shortfall/excess is largely beyond the control of the authorities and a member has an arrangement with upper credit tranche conditionality, or when its balance of payments position excluding the shortfall/excess is satisfactoryStand-alone disbursements or, if there is an arrangement, disbursements are in two phases45% of quota each for export and cereal components. Combined limit of 55% of quota for both componentsBasic rate3 ¼-52 ¼- 4Quarterly
Emergency Assistance (1) Natural disasters (1962) (2) Post-Conflict (1995)(1) Reasonable efforts to overcome balance of payments difficulties (2) Focus on institutional and administrative capacity building to pave the way toward an upper credit tranche arrangement or PRGFNone, although post conflict assistance can be segmented into two or more purchasesGenerally limited to 25% of quota, though larger amounts can be made available in exceptional casesBasic rate. Subject to resource availability, PRGF-eligible members would—upon request—receive a subsidy to bring the rate of charge on the financial assistance to 0.5% per annum from resources contributed to an administered account.3 ¼-5Not applicableQuarterly
Poverty Reduction and Growth Facility (1999)Adopt 3-year PRGF-supported program. PRGF-supported programs are based on a Poverty Reduction Strategy Paper (PRSP) prepared by the country in a participatory process, and integrating macroeconomic, structural, and poverty reduction policiesSemiannual disbursements (or quarterly where closer monitoring is needed) contingent on observance of performance criteria and reviews140% of quota; 185% of quota in exceptional circumstances0.50%5 ½-10Not applicableSemiannual
Exogenous Shocks Facility (2005)Have a balance of payments need whose primary source is a sudden and exogenous shock. Available in support of a macroeconomic and structural adjustment program, but only if structural reforms needed to adjust to the shock are not of the type that would normally be supported by a PRGF arrangement.Semiannual or quarterly disbursements, contingent on observance of performance criteria and reviews.50% of quota, though larger amounts can be made available in exceptional circumstances.0.50%5 ½-10Not applicableSemiannual
Source: IMF, Finance Department

The basic rate of charge on funds disbursed from the General Resources Account (GRA) is set as a margin in basis points above the weekly interest rate on SDRs and is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter. In addition to the basic rate plus surcharge, an up-front commitment fee (25 basis points on committed amounts up to 100% of quota, 10 basis points thereafter) is charged on the amount that may be drawn during each (annual) period under a Stand By or Extended Arrangement. The fee is, however, refunded on a proportionate basis as subsequent drawings are made under the arrangement. A one-time service charge of 0.5 percent is levied on each drawing of IMF resources in the General Resources Account, other than reserve tranche drawings, at the time of the transaction.

For purchases made after November 28, 2000, members are expected to make repurchases (repayments) in accordance with the schedule of expectations; the IMF may upon request by a member amend the schedule of repurchase expectations if the Executive Board agrees that the member’s external position has not improved sufficiently for repurchases to be made.

Surcharges are applied to the combined amount of outstanding credit resulting from purchases made after November 2000 in the credit tranches and under the EFF.

Source: IMF, Finance Department

The basic rate of charge on funds disbursed from the General Resources Account (GRA) is set as a margin in basis points above the weekly interest rate on SDRs and is applied to the daily balance of all outstanding GRA drawings during each IMF financial quarter. In addition to the basic rate plus surcharge, an up-front commitment fee (25 basis points on committed amounts up to 100% of quota, 10 basis points thereafter) is charged on the amount that may be drawn during each (annual) period under a Stand By or Extended Arrangement. The fee is, however, refunded on a proportionate basis as subsequent drawings are made under the arrangement. A one-time service charge of 0.5 percent is levied on each drawing of IMF resources in the General Resources Account, other than reserve tranche drawings, at the time of the transaction.

For purchases made after November 28, 2000, members are expected to make repurchases (repayments) in accordance with the schedule of expectations; the IMF may upon request by a member amend the schedule of repurchase expectations if the Executive Board agrees that the member’s external position has not improved sufficiently for repurchases to be made.

Surcharges are applied to the combined amount of outstanding credit resulting from purchases made after November 2000 in the credit tranches and under the EFF.

Exceptional Access

The possibility of exceptional access to IMF resources—access above the normal limits indicated previously—has always existed. During the Mexican crisis of 1994-95, the Asian crises of 1997-98, and subsequently, the IMF in several cases provided financing in amounts well above the access limits that normally apply to SBA or EFF arrangements.

The Executive Board formalized conditions for the use of exceptional access in September 2002 and March 2003, when it confirmed that such access will sometimes be necessary, particularly if the IMF is to provide meaningful assistance to countries facing a capital account crisis. There is a presumption that exceptional access will be provided under the SRF. Exceptional access needs to be justified in light of the following four criteria:

  • The member is experiencing exceptional balance of payments pressures on the capital account resulting in the need for IMF financing that cannot be met within the normal access limits.
  • A rigorous and systematic analysis indicates that there is a high probability that debt will remain sustainable.
  • The member has good prospects of regaining access to private capital markets within the time frame that IMF resources would be outstanding, so that the IMF’s financing would provide a bridge to this access.
  • The policy program of the member country provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment.46

The procedures for decision-making on all requests for exceptional access, not just those involving capital account crises, were reviewed in 2003 and 2005. The changes emphasize early consultation with the Executive Board in cases where new or augmented exceptional access to IMF resources may be needed, including through informal meetings prior to Board consideration of the request. The evaluation of a country’s eligibility for exceptional access can be presented to the Board as part of the staff report on the authorities’ request for IMF resources. Finally, as a rule, there would be an ex post evaluation of programs with exceptional access within one year of the end of the arrangement.47

Terms of IMF Lending

Loans from the GRA carry a basic rate of charge that may be supplemented by surcharges, service charges, and commitment fees (see Table 3.2).48 The basic rate of charge is determined as a margin in basis points above the weekly interest rate on SDRs, and therefore fluctuates with the market interest rates on which the SDR rate is based. It is set at the beginning of each financial year at a level calculated to achieve a targeted net income for that financial year, and is reviewed mid-year.

Surcharges are imposed on borrowing under the credit tranches, the EFF, and the SRF in order to discourage large use of IMF resources. Under the SRF, the surcharges are higher and increase over time in order to encourage early repayment of the loans. Surcharges do not apply to loans under the CFF, Emergency Assistance Policy, or the PRGF. Commitment fees are paid on GRA funds committed under an IMF arrangement, but these are refunded to the extent that purchases are made. They are not refunded in cases of precautionary arrangements, as funds are not drawn.

All borrowing from the IMF is subject to predetermined repayment schedules, which are the borrowing member’s repayment obligations. However, since the IMF’s resources are for financing only temporary balance of payments needs and they are of a revolving character, the Articles of Agreement stipulate that borrowing members are expected to repay their loans as their balance of payments and reserve position improves.49

Accordingly, borrowing from the IMF, except under the Emergency Assistance Policy and the PRGF, are subject to pre-determined repurchase expectations schedules, as set out in Table 3.2, which the member is expected to meet if its external position is stronger than had been expected at the time the arrangement was approved.

A failure to meet a repurchase expectation results in the suspension of further lending to the member country. The suspension includes lending under the PRGF and under existing arrangements. However, the member would not be in default of its obligations to the IMF. Default arises only when the member does not meet a repayment obligation. However, the IMF may, upon request by a borrowing member, amend the schedule of repurchase expectations if the member’s external position is judged to be not sufficiently strong for payments to be made in accordance with that schedule.

Conditionality

Conditionality refers to policies and actions that a borrowing member agrees to carry out as a condition for the use of IMF resources.50 The purpose of conditionality is to ensure assistance to members to resolve their balance of payments crisis in a manner that is consistent with the IMF’s Articles and that establishes adequate safeguards for the temporary use of the IMF’s resources. The key principles guiding the design and setting of conditionality are:

  • National ownership of reform programs.
  • Parsimony in program-related conditions.
  • Tailoring of programs to a member’s circumstances.
  • Effective coordination with other multilateral institutions.
  • Clarity in the specification of conditions.

Conditionality is understood as the more stringent conditions that are applied to purchases in the upper credit tranches. First credit tranche conditions apply to outright purchases and to Stand-By Arrangements that do not extend credit beyond the first credit tranche, and the term “conditionality” is not normally used in this context.

Conditionality may take the form of prior actions, performance criteria, indicative targets, and structural benchmarks:

  • Prior actions. these are policy measures that the member country may be expected to adopt prior to the IMF’s approval of an arrangement, completion of a review, or the granting of a waiver with respect to a performance criterion, when it is critical for the successful implementation of the program that such actions be taken to underpin the upfront implementation of important measures. The normal practice is that all prior actions must be carried out at least five working days before the Board discussion to which they relate.
  • Performance Criteria. A performance criterion is a variable or measure whose observance or implementation is established as a formal condition for the making of purchases or disbursements under an IMF arrangement. Performance criteria should apply to clearly-specified variables or measures that can be objectively monitored and that are so critical for the achievement of the program goals or for monitoring implementation that purchases or disbursements under the arrangement should be interrupted in cases of nonobservance. There are two types of performance criteria: quantitative and structural, the former covering the macroeconomic elements of the program and the latter covering the structural elements. Quantitative performance criteria often contain embedded adjusters that automatically adjust the program targets for the relevant variable or measure to take into account pre-specified developments beyond the control of the authorities.
  • Indicative Targets. These may be established because of substantial uncertainty about economic trends and converted to performance criteria as uncertainty is reduced. Indicative targets may also be established in addition to performance criteria as quantitative indicators to assess the member’s progress in meeting the objectives of a program.
  • Structural Benchmarks. A measure may be established as a structural benchmark where it cannot be specified in terms that may be objectively monitored, or where its non-implementation would not, by itself, warrant an interruption of purchases or disbursements under an arrangement. They are intended to serve as clear markers in the assessment of progress in the implementation of critical structural reforms. Noncompliance does not require formal waivers by the Executive Board.

In recent years the IMF has been seeking to streamline the number of conditions attached to its loans. Conditions are established only regarding measures that are critical for the achievement of the goals of the member’s program or for monitoring the implementation of the program, or that are necessary for the implementation of specific provisions of the Articles of Agreement. They normally consist of measures that are within the IMF’s core areas of responsibility, although measures may be included in other areas if they are macro-relevant and critical. The IMF’s core areas of responsibility in this context are macroeconomic stabilization; monetary; fiscal, and exchange rate policies, including the underlying institutional arrangements and closely related structural measures; and financial system issues related to the functioning of domestic and international financial markets.

Overdue Financial Obligations to the IMF

The IMF’s strategy on overdue obligations comprises three elements: prevention, intensified collaboration (including the rights approach), and remedial measures.

Preventive measures include IMF surveillance of members’ economic policies, policy conditionality, technical assistance, the assurance of adequate balance of payments financing for members under IMF-supported programs, and other measures to protect the IMF’s resources, including safeguards assessments of members’ central banks.

As part of an intensified collaboration, staff-monitored programs and rights accumulation programs (RAPs) help members in arrears to establish a track record on policies and payments, leading to eventual clearance of arrears to the IMF.

Remedial measures are applied—using an escalating timetable—to member countries with overdue obligations that do not actively cooperate with the IMF to resolve their arrears problems.51 The intensity of remedial measures increases according to the timetable, although the country specific circumstances are taken into account. For example, civil conflicts, the absence of a functioning government, or international sanctions may prevent the Fund from assessing the member’s cooperation, thereby the application of remedial measures may be postponed. As long as a member remains in payments arrears to Fund, it has no access to the Fund’s general resources, HIPC or PRGF-ESF resources. Increasingly severe sanctions are invoked as such arrears become more protracted, which could culminate in a suspension of the member’s voting and representation rights and eventually in the compulsory withdrawal of the member from the IMF if the member is deemed to be non-cooperating with the IMF and remains non-cooperating. Technical assistance is also suspended once the member is declared non-cooperating.

To address the burden of overdue obligations to the IMF, the Fund has put in place a “burden-sharing” mechanism. Under this mechanism, the financial consequences for the IMF stemming from overdue financial obligations of members are shared equally between debtor and creditor member countries, with the sharing being applied in a simultaneous and symmetric fashion. The interest rate paid to creditors on their reserve tranche positions, normally the SDR rate, is adjusted downward by this mechanism, while the basic rate of charge is adjusted upward for borrowing countries. Arrears to the Trust Fund and the PRGF-ESF Trust are met by transfers from the Reserve Account of the PRGF-ESF Trust, thereby reducing the amount of resources that would accrue to for the benefit of the IMF’s low-income members.

In 1990, the IMF established the rights accumulation approach to help members who are in arrears to the IMF, and who are cooperating with the IMF, mobilize bilateral and multilateral support to clear their arrears to the IMF and other creditors. Under a Rights Accumulation Program (RAP), a member earns rights, conditioned upon satisfactory performance under an adjustment program monitored by the IMF. These rights accumulate toward a disbursement from the IMF once the member’s overdue obligations have been cleared and upon approval of a successor arrangement with the IMF. RAPs are usually of a three-year duration, although there is flexibility to tailor the length of the track record to the member’s specific circumstances. The member is expected, at a minimum, to remain current with respect to obligations to the IMF and the World Bank falling due during the period of the rights accumulation program. A support group of donors is established to mobilize the financial resources necessary to clear the member’s arrears. This is necessary as a form of bridge-financing pending the completion of the RAP, but the support can extend beyond the scope of the RAP in cases where arrears exceed the borrowing ceilings. Eligibility for the rights approach is limited to the 11 members who were in protracted arrears to the IMF at the end of 1989. Of these, only Liberia, Somalia, and Sudan remain with protracted arrears. Another member, Zimbabwe, has protracted arrears to the PRGF Trust.

Lending into Arrears

While the IMF is concerned with all forms of arrears (whether domestic or external, private or sovereign), arrears to external creditors have a distinctive place in IMF policies. The IMF has acknowledged that the incurrence of external payments arrears is perhaps the most disorderly way of responding to balance of payments pressures, as they undermine relations with creditors and damage the international trade and payments system. For these reasons, the IMF has developed specific policies for dealing with external payments arrears in the context of the use of IMF resources. More specifically, the lending into arrears (LIA) policy applies to arrears incurred to private creditors, whereas the IMF’s general policy on the non-toleration of arrears applies to arrears incurred to multilateral and official bilateral creditors.

The IMF does not to lend to countries that are not making a good-faith effort to eliminate their arrears with creditors.52 However, under certain circumstances, the IMF will lend to member countries that have defaulted on their debt service payments to private creditors, or that have imposed exchange controls that have resulted in payments arrears to private creditors by non-sovereign borrowers. Lending into sovereign arrears to private creditors is undertaken on a case-by-case basis and only where:

  • Prompt IMF support is considered essential for the successful implementation of the member’s adjustment program; and
  • The member is pursuing appropriate policies and is making a good faith effort to reach a collaborative agreement with its creditors.

In addition, lending into non-sovereign arrears stemming from the imposition of exchange controls also requires a finding that good prospects exist for the removal of exchange controls.

The “good faith” criterion is applied flexibly to accommodate the characteristics of each specific case, to avoid putting debtors at a disadvantage in the negotiations with creditors, and to avoid prolonged negotiations that could hamper the ability of the IMF to provide timely assistance. The following principles guide the IMF’s judgments about members’ “good faith” efforts:

  • First, when a member has reached a judgment that a restructuring of its debt is necessary, it should engage in an early dialogue with its creditors, which should continue until the restructuring is complete.
  • Second, the member should share relevant, non-confidential information with all creditors on a timely basis.
  • Third, the member should provide creditors with an early opportunity to give input on the design of restructuring strategies and the design of individual instruments.

The modalities guiding the debtor’s dialogue with its private creditors are normally tailored to the specific features of each individual case. However, the debtor is expected to initiate a dialogue with its creditors prior to agreeing on an IMF-supported program.

Purchases made while a member has outstanding arrears are subject to financing assurances reviews. These are conducted in cases where the IMF is providing financial assistance to a member that has outstanding sovereign external payments arrears to private creditors or that, by virtue of the imposition of exchange controls, has outstanding non-sovereign external payments arrears. The financing assurances review determines whether adequate safeguards exist for the further use of IMF resources and whether the member’s adjustment efforts are undermined by developments in creditor-debtor relations. Every purchase or disbursement made available after the approval of an arrangement is, while such arrears remain outstanding, made subject to the completion of a financing assurances review. Financing assurances reviews may also be established where the member has outstanding arrears to official creditors.

Prolonged Use of IMF Resources and Ex Post Assessments

IMF balance of payments support is intended to be of a short-term nature. However, in some cases long-term IMF financial engagement can help member countries to address deep-seated problems that, by their nature, require many years to resolve. These problems have been particularly prevalent in low-income countries and countries in transition. However, at times prolonged use of IMF resources can stem from inadequate progress in dealing with key economic problems, which could reflect inadequate program design and implementation.53 Prolonged use can compromise the revolving character of IMF resources.

A country is considered to be a prolonged user when it has spent 7 or more of the last 10 years under an IMF-supported program financed from the IMF’s general resources or once the country completes two consecutive concessional arrangements. However, this excludes precautionary arrangements that remain undrawn or access of the Policy Support Instrument (PSI). Prolonged users are reviewed under an Ex Post Assessments (EPA). To avoid frequent EPAs in a single country, which is less likely to offer new insights, prolonged users are reviewed under an EPA at roughly five year intervals.54

An EPA provides the IMF with the opportunity to step back from ongoing program relations with a member country and to take a fresh look at the overall strategic approach with the focus on identifying lessons for future IMF involvement. It involves a longer-term analysis of the economic problems facing the country, a critical and frank review of progress made during the period of IMF-supported programs, and a forward-looking assessment that takes into account lessons learned and that presents a strategy for future IMF engagement with the country. Where appropriate, the assessment presents an explicit strategy for the country to exit from the use of IMF resources. The assessment reflects input from the World Bank, and may also draw on outside experts.

The assessment is undertaken by an inter-departmental staff team that is usually different from the mission team and led by a mission chief from a department other than the home area department. The EPA report is usually discussed by the Board jointly with either the Article IV consultation when the arrangement is substantially complete or where this is not feasible, with the last program review. In exceptional cases, a stand-alone discussion can be considered.

Misreporting and Noncomplying Purchases and Disbursements

All IMF loan disbursements to a member are made on the condition that the data or other information provided by the member pertaining to the purchase or disbursement are accurate.55 Misreporting occurs when the information provided by the member is inaccurate, regardless of the source of the inaccuracy. Misreporting may stem from administrative lapses, weaknesses in statistical capacity, inherent subjectivity of certain data, negligence, and deliberate misrepresentation. A purchase or disbursement that a member was not entitled to under the terms of the arrangement or decision governing the purchase or disbursement is called a “noncomplying purchase” (or in the case of a disbursement, a “noncomplying disbursement”). The purchase or disbursement was made because, on the basis of the information provided to it at the time, the IMF was satisfied that all performance criteria or other conditions applicable to the purchase or disbursement had been observed, but this information later proved to be incorrect.

A member receiving IMF resources on the basis of incorrect information is expected to repurchase or reimburse the IMF normally within 30 days, unless the Executive Board grants a waiver.* Waivers may be granted only if the deviation from the relevant performance criterion or other condition is minor or temporary, or if the member has adopted additional policy measures to achieve the objectives of the economic program supported by the IMF. Failure to repay within the specified time period will lead to a suspension of further disbursements or repurchases under the arrangement, and suspension of further lending to the member country.

Modifications to make misreporting policies less onerous in de minimis cases were introduced in July 2006, as misreporting procedures could be disproportionately heavy for minor deviations from a performance criterion or other specified condition (e.g., prior actions).56 In addition to reducing the stigma and burden of misreporting, these modifications contribute to the general objective of streamlining IMF procedures expressed in the MTS. To be considered de minimis, a deviation would be so small as to be trivial with no impact on the assessment of performance under the member’s program. However, a decision whether a particular case should be considered to be de minimis will require judgment—first by management and staff, and ultimately by the Executive Board. In case of a de minimis misreporting, a waiver of a performance criterion or other specified condition is granted, in accordance with regular procedures. However, changes are applied to the regular misreporting procedures to reduce the administrative and publication requirements.

Safeguards on the Use of IMF Resources

The IMF has put in place a policy of safeguards assessments of central banks in member countries as an ex ante mechanism to help prevent the possible misuse of IMF resources, and to minimize the possibility of misreporting.57 This policy was introduced on an experimental basis in March 2000 and adopted as a permanent policy in March 2002. The safeguards policy complements other policies to safeguard the use of IMF resources, such as conditionality and monitoring, technical assistance, transparency and governance initiatives, and the policy on misreporting. It has been widely accepted by central banks, and has helped improve their operations and accounting procedures while enhancing the IMF’s reputation as a prudent lender. However, safeguards assessments are not intended to be an institution-building exercise; IMF conditionality in this area is limited to measures highly relevant to safeguarding the use of IMF resources. Nonetheless, where critical vulnerabilities are identified, concrete corrective measures may need to be adopted as a condition for IMF financing.

The assessments have the objective of providing reasonable assurance to the IMF that the central bank’s control, accounting, reporting, and auditing systems in place to manage resources, including IMF disbursements, are adequate to ensure the integrity of operations. Assessments cover five key areas: the external audit mechanism, the legal structure and independence of the central bank, the financial reporting framework, the internal audit mechanism, and the system of internal controls. A key element of the safeguards policy is that central banks of member countries making use of IMF resources publish annual financial statements independently audited by auditors external to the central banks in accordance with internationally accepted auditing standards.

All member countries receiving a new IMF arrangement are subject to a safeguards assessment of the central bank.58 The Finance Department conducts the assessment in consultation with the Area Departments. The assessment is usually initiated three months before the anticipated date of Board discussion of a new arrangement. It entails, among other things, a review of documents provided by the central bank, discussions with the central bank’s external auditors, a safeguards assessment mission if needed, and preparation of a report and a summary of findings and recommendations of the assessment. The assessment should preferably be completed prior to the date of the Executive Board’s approval of the arrangement, but in any case no later than the first program review under the arrangement. Commitments made by the authorities to implement the recommendations of safeguards assessments reports are monitored in conjunction with overall program conditionality.

The safeguards frameworks of central banks are monitored for as long as Fund credit remains outstanding. The Finance Department, in consultation with Area Departments, reviews safeguards-related developments at central banks, particularly with respect to the external audit mechanism. The findings of the monitoring process may result in new recommendations to address emerging vulnerabilities in a central bank’s safeguards framework. The results of initial safeguards assessments and the monitoring process form the basis for an updated assessment in case of successor IMF arrangements.

Financing Facilities and Arrangements

Member countries can access the IMF’s resources through a variety of channels.59 The original and basic channel is the use of quota-based resources through what is known as the credit tranches. Any member is eligible to request IMF’s resources in the credit tranches at any time simply by representing that it has a balance of payments need. Members may also access the IMF’s resources through a number of special facilities or policies that the IMF has set up to accommodate the specific balance of payments needs and circumstances of the membership. These have eligibility requirements beyond a mere general balance of payments need.

The channel of access a member selects depends on the particular circumstances of the country. The member normally would make a decision in consultation with IMF staff. The different channels of access are explained below. All, except the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF), provide access to the general resources of the IMF. As the IMF’s Articles of Agreement require that a uniform rate of charge for credit out of the General Resources Account, the PRGF and the ESF have been established under a separate trust account (the PRGFESF Trust) administered by the IMF to provide highly concessional loan resources to low-income countries.60

The facilities and arrangements described below are ones that currently exist. In the past, several special purpose facilities and policies have been created that were subsequently eliminated.61 For example, the Contingent Credit Lines facility—which was created in 1999 to provide automatic financing to members who pre-qualified, in order to prevent a capital account crisis—was never used and was allowed to lapse at the end of November 2003. Under the Medium-Term Strategy, the IMF is exploring the possibility of creating a new liquidity instrument to provide high access contingent financing to emerging market economies, and is also considering ways to enhance its support of regional and other arrangements for pooling reserves.

The Credit Tranches

Initially the IMF made credit available to its members in tranches, each equal to 25 percent of quota.62 However, as cumulative access limits in the credit tranches are now substantially above 100 percent of quota, a distinction is now drawn simply between first credit tranche borrowing and upper credit tranche borrowing, the latter referring to any borrowing above the first credit tranche. The distinction is necessary as first credit tranche borrowing is not subject to conditionality, i.e., it is usually available immediately upon request to member countries. Access to IMF resources in the credit tranches may be through outright purchases or through a formal arrangement. Outright purchases are limited to the first credit tranche, while upper credit tranche borrowing requires a formal arrangement such as a Stand-By Arrangement.

Stand-By Arrangement

Stand-By Arrangements (SBA) are the usual vehicle for members to access upper credit tranche financing. Requests for resources in the upper credit tranches require substantial justification in the form of a balance of payments need and the authorities’ promise of appropriate adjustment policies that return the economy to a sustainable balance of payments position over a specific time-frame.63 First credit tranche borrowing may also be made through an SBA, but it is not subject to phasing and performance clauses—unless the member has outstanding purchases under other facilities in the GRA.

The normal period for an SBA is 12 to 18 months, but it may extend up to a maximum of three years. All upper credit tranche borrowing is subject to phasing and observance of performance criteria, normally on a quarterly basis. Purchases in the credit tranches are subject to an annual limit of 100 percent of quota and a cumulative limit of 300 percent of quota (Table 3.2). However, the IMF may grant access beyond these limits in exceptional circumstances.

Extended Fund Facility

The IMF established the Extended Fund Facility (EFF) in 1974 as a vehicle for providing medium-term assistance to (a) an economy suffering serious payments imbalances relating to structural maladjustments in production and trade and where price and cost distortions have been widespread, or (b) an economy characterized by slow growth and an inherently weak balance of payments position which prevents pursuit of an active development policy.64

The EFF was created in view of the fact that balance of payments problems could have structural origins and would require a longer period of adjustment. Consequently, the EFF offers longer repayment periods than those under credit tranche policies, but requires more action in the structural area than is typical of Stand-By Arrangements.

Members whose balance of payments problems are of a medium-term character as described above, and who have an appropriately strong structural reform program to deal with the embedded institutional or economic weaknesses, may access the resources in the EFF through an Extended Arrangement. These are normally three-year arrangements, but they may extend for a fourth year. Purchases and performance criteria are phased on a quarterly or semi-annual basis. EFF purchases are subject to an annual limit of 100 percent of quota and a cumulative limit of 300 percent of quota, but the IMF may grant access beyond these limits in exceptional circumstances.

Supplemental Reserve Facility

The IMF established the Supplemental Reserve Facility (SRF) in December 1997 to provide financing for member countries experiencing exceptional balance of payments problems owing to a large short-term financing need resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and the member’s reserves.65 There has to be a reasonable expectation of an early correction of the difficulties based on the implementation of adjustment policies and adequate financing. The SRF is likely to be utilized in cases where the magnitude of the outflows may create a risk of contagion that could pose a potential threat to the international monetary system. Assistance under the SRF is made available if four criteria are met, specifically exceptional balance of payments pressures in the capital account, an expectation of a re-entry to capital markets, a high probability that debt will remain sustainable, and strong program design and implementation prospects.66 In approving a request for the use of IMF resources under the SRF, the IMF takes into account the financing provided by other creditors, both official and private.

Access under the SRF is separate from the access limits under the credit tranches and the EFF, and has no explicit limits of its own. SRF resources are provided under Stand-By or Extended Arrangements, to supplement credit tranche or EFF resources, when projected access to credit tranche or EFF resources would exceed the annual or cumulative limits under these facilities. There is a strong presumption that exceptional access will be provided under the SRF in capital account crises. However, access would generally be within access limits in cases of debt restructuring to avoid moral hazard. The conditionality in an arrangement involving the use of SRF resources is the same as that of the associated Stand-By or Extended Arrangement. The repurchase period for SRF resources is much shorter than that for credit tranche and EFF resources, reflecting the expectation of an early correction and a quicker turnaround in the balance of payments.

Compensatory Financing Facility

Under the Compensatory Financing Facility (CFF), the IMF may provide resources to cover export shortfalls or excess cereal import costs that are temporary and arise from events beyond the members’ control.67 Access to CFF resources may be stand-alone or in conjunction with access to other resources under a Stand-By, Extended, or PRGF Arrangement.

Stand-alone access is granted where the member’s balance of payments position is deemed satisfactory apart from the temporary export shortfall or cereal import excess. In this case, access takes the form of outright purchases. Usually the entire amount of the financing is made available in one purchase. However, if estimated data are used for 9 months or more of the 12-month period for which the export shortfall is calculated (in accordance with a predetermined formula), the purchase is made in two tranches, with the amount of the second purchase adjusted if necessary on the basis of actual data for at least 6 months of the 12-month period.

Where the member has a balance of payments need beyond the need caused by the effect of an export shortfall or cereal import excess, the request for CFF resources will be considered in the context of approving a new arrangement, completing a review or determining that the program is on track. In this case, purchases after the initial purchase are subject to phasing and observance of the performance criteria specified in the associated arrangement.

Access under the CFF is subject to its own limits, which range from 45 percent of quota for each of the export shortfall and excess cereal import cost elements to a combined limit of 55 percent of quota. Such access does not count toward the access limits under the credit tranches and the EFF, but they do count for the purpose of determining the threshold for upper credit tranche conditionality. Thus a member with outstanding CFF purchases of 25 percent of quota or more is subject to upper credit tranche conditionality even on first credit tranche purchases under a Stand-By Arrangement.

Emergency Assistance Policy

The IMF may provide emergency assistance for natural disasters and to countries in post-conflict situations under the Emergency Assistance Policy.68 Judgment on a member’s eligibility for emergency assistance is made on a case-by-case basis. In most cases where a member is afflicted by a natural disaster, assistance would be provided under the CFF, ESF, through Stand-By and Extended Arrangements, or through augmentations of existing PRGF arrangements. However, in those cases where a member cannot meet its immediate financing needs arising from a natural disaster without serious depletion of its external reserves, emergency assistance in the form of quick, outright purchases would be provided. Emergency Natural Disaster Assistance (ENDA) is designed to provide only limited foreign exchange required for immediate relief. Understandings with the member country are needed to ensure that inappropriate policies do not compound the problems caused by the natural disaster.

In 1995, the emergency assistance policy was expanded to cover post-conflict cases. Emergency Post Conflict Assistance (EPCA) is available for countries emerging from civil unrest or international armed conflict that are unable to implement regular IMF-supported programs because of damage to their institutional and administrative capacity, but that have sufficient capacity for planning and policy implementation and a demonstrated commitment on the part of the authorities. IMF assistance is provided to meet an urgent balance of payments need to help rebuild external reserves and meet essential external payments, as part of a concerted international effort to address the aftermath of the conflict in a comprehensive way. Conditions for such assistance include a statement of economic policies, a quantified macroeconomic framework to the extent possible, and a statement by the authorities of their intention to move as soon as possible to a SBA, extended arrangement or PRGF arrangement. However, the EPCA is also intended to play a catalytic role in post-conflict situations by attracting support from other official sources. The EPCA places heavy emphasis on institution building, also through increased technical assistance.

Access under the Emergency Assistance Policy is normally 25 percent of quota. An additional 25 percent of quota can be provided in exceptional circumstances, particularly where capacity rebuilding is slow and the member is not in a position to implement an IMF arrangement after about a year or more under a program supported by emergency assistance, and where there is sufficient evidence of the authorities’ commitment to reform and capacity to implement policies. EPCA-supported programs can be as long as 3 years. The additional 25 percent of quota would normally be tranched, with each purchase requiring Executive Board approval and subject to satisfactory progress in rebuilding capacity and macroeconomic stability.* Access under the Emergency Assistance Policy does not count toward the limits under the credit tranches and the EFF, but they do count for the purpose of determining the threshold for upper credit tranche conditionality. Since 2001, purchases under the Emergency Assistance Policy can benefit from interest subsidies for PRGF-eligible countries, financed by grant contributions from bilateral donors to subsidize this interest rate down to 0.5 percent per year, subject to the availability of resources for this purpose.

Poverty Reduction and Growth Facility

The IMF put in place a concessional lending facility through the establishment of the Trust Fund in 1976. In 1986, the IMF established the Structural Adjustment Facility (SAF) to provide concessional assistance to low-income countries by recycling resources lent under the Trust Fund. This was followed in 1987 by the establishment of the Enhanced Structural Adjustment Facility (ESAF) to foster stronger adjustment and reform measures than those under the SAF and to augment its concessional lending resources. In 1999, the ESAF was re-named the Poverty Reduction and Growth Facility (PRGF), and the facility’s objective was broadened to include an explicit focus on poverty reduction in the context of a comprehensive growth-oriented strategy.69

The PRGF is currently financed through bilateral loans and grants. However, in the near future the PRGF is due to become self-sustaining through the revolving use of resources accumulating in the Reserve Account of the PRGF-ESF Trust, possibly supplemented by additional loan resources.70

Eligibility is based principally on the IMF’s assessment of a country’s per capita income, drawing on the cutoff point for eligibility to World Bank concessional lending. PRGF loans are provided under three-year PRGF arrangements (which can be extended for a fourth year). Disbursements are normally on a semi-annual basis, and are subject to phasing and the observance of performance criteria. In cases where closer monitoring is needed, the arrangement may provide for quarterly phasing, performance criteria, and reviews.

An eligible country may borrow up to 140 percent of its quota under a three-year arrangement, and up to 185 percent of quota in exceptional circumstances. Unlike access to GRA facilities, there are no annual or cumulative access limits under the PRGF. There is a general presumption of declining access in successive PRGF arrangements. In March 2004 the Executive Board approved the following norms for access under successive PRGF arrangements: 90 and 65 percent for first and second arrangements, and 55, 45, 35, and 25 percent of quota for third, fourth, fifth, and subsequent arrangements. These norms are neither maxima nor entitlements. In addition, the Executive Board agreed that even lower access (such as 10 percent or less of quota) would be appropriate for countries that have limited balance of payments need for concessional resources. Access limits are reviewed by the Executive Board bi-annually.71

Exogenous Shocks Facility

The IMF approved the establishment of the Exogenous Shocks Facility (ESF) to become effective in January 2006. It strengthens the IMF’s capacity to provide policy support to low-income countries and in recognition that exogenous shocks can have a significant adverse impact on poverty and growth.72 The ESF is directed at PRGF-eligible members that do not have in place a PRGF arrangement and experience a sudden and exogenous shock. Countries with a PRGF arrangement would qualify for augmentation of access under that arrangement. The ESF aims to facilitate quick access to financing, while assisting the country’s efforts to put in place an appropriate adjustment to the underlying shock and ensuring adequate safeguards for the use of PRGF-ESF Trust resources. It provides financing under an ESF arrangement for a maximum period of two years in support of a macroeconomic and structural adjustment program. A member may not have more than one ESF arrangement for the same shock, but resources committed under an ESF arrangement may be augmented to help the member meet a larger than expected balance of payments need. A member also may not receive financial assistance from the ESF and the PRGF at the same time.

To qualify for assistance under the ESF, a PRGF-eligible member must have a balance of payments need arising from a sudden and exogenous shock. An exogenous shock is understood to be an event beyond the control of the authorities, with a significant negative impact on the economy. There is no specific, pre-defined set of qualifying shocks. Examples of shocks that may qualify for the ESF are terms of trade shocks, natural disasters, shocks to demands for exports, or conflicts or crises in neighboring countries that may have adverse effects on the balance of payments. However, shocks resulting from the variability of aid flows would not normally qualify for the ESF, nor would balance of payments needs arising primarily from domestic policy slippages. With its focus on adjustment to the underlying shock, a program supported by the ESF will rely more on macroeconomic adjustment and likely be less ambitious in terms of structural reform than PRGF-supported programs. Nevertheless, structural issues considered important for adjustment to the shock, or for mitigating the impact of future shocks, are expected to be adequately addressed.

The terms and conditions of ESF-supported programs are similar to those of PRGF-supported programs. These programs must meet the standards required by upper credit tranche conditionality. However, structural reforms could be less ambitious than under a PRGF arrangement, comprising mainly structural issues deemed important for adjustment to the underlying shock. Disbursements may be at semi-annual or quarterly intervals, depending on factors such as the arrangement’s duration, the balance of payments need, and administrative capacity constraints on the part of the authorities. Except for the disbursement available upon approval of the arrangement, subsequent disbursements are subject to phasing and the observance of performance criteria, and in most cases completion of a review. Furthermore, the member country must represent that it has an actual balance of payments need arising from a shock at the time of each disbursement. While the IMF will not challenge ex ante a member’s representation of a balance of payments need, remedial action would be taken if it were later discovered that an ESF disbursement was made in the absence of a need, namely, the member may be expected to repay the IMF the amount of disbursement provided in the absence of the need.

Given the diverse nature of exogenous shocks and the uncertainty about their net impact on the balance of payments need, access will be assessed on a case-by-case basis. The actual access, determined at the time of the request for assistance, depends on the balance of payments need, the size and likely persistence of the shock, the strength of the adjustment program, projected response from donors, the outstanding use of credit from the IMF, and the member’s record in using IMF credit in the past. However, the norm for annual access under the ESF is 25 percent of quota. The maximum limit on total outstanding access to ESF resources is 50 percent of quota, but this limit may be exceeded in exceptional circumstances. For low-income countries subject to a blending of concessional and non-concessional IMF financing, the annual access norm is 12.5 percent of quota under the ESF. Similar to the PRGF, loans under the ESF carry an annual interest rate of 0.5 percent, with repayments made semiannually, beginning 5½ years and ending 10 years after the disbursement.

Concessional lending under the ESF is administered by the IMF, as trustee, through the PRGF-ESF Trust. The Trust borrows from central banks, governments, and official institutions generally at market-related interest rates, and lends them on a pass-through basis to PRGF-eligible countries. The difference between the market-related interest rate paid to PRGF-ESF Trust lenders and the rate of interest paid by the borrowing members is financed by contributions from bilateral donors and the IMF’s own resources.

Trade Integration Mechanism

The IMF is a strong advocate of multilateral trade liberalization, and has pressed for the completion of the Doha Round, as well as of earlier rounds of multilateral trade negotiations. To help advance the Doha Round discussions, in April 2004 the Executive Board approved the establishment of a Trade Integration Mechanism (TIM) to address balance of payments difficulties that may result from implementation of trade liberalization measures undertaken by other countries.73

Eligibility to use the TIM is limited to countries that experience balance of payments difficulties arising from trade liberalization measures introduced by other countries that result in more open market access for goods and services or that remove trade-distorting subsidies. Qualifying liberalization measures would normally be limited to measures introduced either under a World Trade Organization (WTO) agreement or on a non-discriminatory basis, irrespective of context. Members are not eligible to use the TIM for the adverse effects of their own trade liberalization measures that are not specific to multilateral trade negotiations, but these measures remain standard part of IMF-supported adjustment programs.

The TIM is not a new lending facility that will provide resources on special terms; it is a policy that will provide access under the IMF’s existing facilities (SBA, EFF, or PRGF). The TIM may be accessed in conjunction with a new arrangement or in the context of a program review under an existing arrangement. Access will be governed by the access policies and the terms and conditions of the underlying arrangement through which the policy is activated. The amount of access is governed by an initial baseline projection of the impact of the trade measures, but it could be augmented by up to 10 percent under simplified procedures if the actual (ex post) balance of payments effect is larger than expected.

The TIM was envisaged to be a temporary policy that would lapse after the specified trade policies agreed under the Doha Round had been fully implemented. In light of the delays in advancing the Doha Round, it is expected that a decision on the duration of the TIM will be taken in light of the expected completion of the negotiations.74

Special Instruments

Special arrangements exist to review members’ economic conditions and policies outside the framework of Article IV consultations and outside of IMF arrangements. These instruments serve special purposes, involve more intensive scrutiny of members’ economic policies than under normal Article IV consultation procedures, and do not involve the use of IMF resources. These instruments comprise enhanced surveillance, rights-accumulation programs, staff-monitored programs, post-program monitoring, and the policy support instrument.

Enhanced Surveillance

Enhanced surveillance was developed in 1985 as a signaling device to assist members in addressing their debt problems with commercial creditors. The procedure facilitated commercial bank multi-year rescheduling agreements by providing private creditors with information about the member’s economic program and progress in its not just to mobilize external financing. Enhanced surveillance does not imply IMF approval or endorsement of the member’s economic program. The procedure has not been used since the early 1990s.75

Rights-Accumulation Programs

The rights-accumulation program (RAP), established in 1990, allows members to resolve large and protracted arrears to the IMF in the context of the “rights approach” as part of the Fund’s strengthened cooperative strategy on arrears.76 Eligibility to the RAP is limited to the eleven members that had protracted arrears to the Fund at end-1989.* Under a RAP, member would earn rights towards a disbursement from the Fund once members’ arrears to the Fund had been cleared, and upon the approval by the Executive Board of a successor Fund arrangement.77

A RAP adheres to the macroeconomic and structural policy standards consistent with upper credit tranche conditionality, but does not involve the use of IMF resources. A member would be expected to make maximum efforts to reduce its arrears to the Fund during the RAP, and would, at a minimum, remain current on obligations falling due to the Fund and the World Bank. The member would also be expected to obtain financing assurances from external creditors needed to finance its adjustment and reform program. The IMF monitors implementation based on quarterly performance targets. Observance of program targets serves to establish a track record of performance and cooperation prior to the clearance of arrears. The length of the RAP is normally three years, but with scope for variation in either direction on a case-by-case basis.

Staff-Monitored Programs

A staff-monitored program (SMP) may be used in cases where member countries need to establish a track record of policy implementation before discussions can begin on an IMF-supported economic program, or a re-activation of a program that has gone off-track.

An SMP closely resembles a formal IMF-supported program. However, it is an informal arrangement to monitor the implementation of the authorities’ economic program without entailing Executive Board endorsement. It also does not have to meet the standards of upper credit tranche conditionality. SMPs’ normal duration is 6 to 18 months, although longer durations are possible. Similar to a formal IMF-supported program, they are based on a quantitative macroeconomic framework and include quarterly performance benchmarks. Assessments are completed on a quarterly or semi-annual basis. The Executive Board has the opportunity to comment on SMPs during Article IV consultation discussions, informal country matters sessions, or it may also request formal discussion of an SMP that was submitted to it for information.

The policy content of an SMP is guided by previous country reports. If an SMP is initiated during or between Article IV consultations, the policy content is guided by the current or preceding Article IV consultation discussions; if an SMP is intended to reactivate IMF support after a program has gone off-track, it must be consistent with the achievement of the original or updated objectives of the IMF-supported program.

Post-Program Monitoring

In September 2000, the IMF introduced a policy of enhanced monitoring of economic developments and policies in member countries that have come to the end of their IMF arrangement and whose credit outstanding exceeds 100 percent of quota.78 This post-program monitoring (PPM) was first applied to use of credit in the IMF’s General Resources Account, but was expanded in March 2005 to include the use of resources in the Poverty Reduction and Growth Facility (PRGF).79 PPM is not automatically triggered, but there is a presumption that the Managing Director will recommend it to the Executive Board when a member meets the relevant criteria. PPM may also be triggered if credit outstanding is less than 100 percent of quota, if there are developments that suggest the need of such a process, particularly where developments call into question the member’s progress toward external viability.

PPM is intended to provide an early warning of policies that could call into question a member’s continued progress toward external viability, which could eventually imperil IMF resources or indicate that IMF resources are not being used for their intended purpose. It also serves as a mechanism for bringing these concerns to the attention of the authorities and the Board and stimulating action to improve the situation.

PPM focuses on macroeconomic and structural policies that have a bearing on external viability. Member countries are expected to engage in policy discussions with the IMF staff, including with regard to a quantified macroeconomic framework, much as is done in Article IV consultation discussions. The staff formally reports to the Board on the member’s policies, including the consistency of these policies with the objective of medium-term viability and their implications for the member’s capacity to repay the IMF. There are normally two PPM Board discussions a year: at the time of the Article IV consultation and a mid-term review between Article IV consultations. As with Article IV consultations, PPM discussions can be concluded on a lapse-of-time basis.

The Policy Support Instrument

In October 2005, the IMF introduced the Policy Support Instrument (PSI). The PSI is a non-financial instrument for low-income countries that either do not want or need financial assistance from the IMF, but still want IMF advice, monitoring, and endorsement of their economic policies. The PSI is available alongside existing IMF instruments and is intended to meet the needs of members without PRGF arrangements or who are about to graduate from PRGF arrangements. PSIs are designed to (i) promote a close policy dialogue between the IMF and the member country, (ii) provide more frequent IMF assessments of the member country’s economic and financial policies, and (iii) deliver clear signals that could be taken into account by donors, creditors, and the general public on the strength of these policies. It is planned that a review of the experience with the PSI will be conducted in 2008.

The PSI is available to all PRGF-eligible IMF members with a poverty reduction strategy in place and that have a policy framework focused on consolidating macroeconomic stability and debt sustainability, while deepening structural reforms in key areas in which growth and poverty reduction are constrained. Such countries are considered to be “mature stabilizers.” PSI-supported programs are expected to focus on medium-term growth-enhancing reforms and would benefit from a medium-term framework for donor assistance.

The Executive Board considers approval of a PSI based on a staff report and the authorities’ Memorandum of Economic and Financial Policies (MEFP), provided eligibility conditions are met, and the members’ policies meet conditionality requirements. A PRS document should have been issued within the previous 18 months. A PSI can be approved for 1-3 years, but can be extended for up to 4 years. PSI reviews will normally be scheduled semi-annually. Publication of PSI-related documents is voluntary but presumed, particularly given the signaling function of the PSI.

*The gold tranche is not remunerated, since gold held by the IMF does not earn interest income that could be passed on to the membership.
*In practice, where waivers have not been granted, noncomplying disbursements have often been repaid over a period longer than 30 days.
*Tranching is different from phasing in that purchases are not conditional upon observance of pre-specified performance criteria. Rather, requests for purchases are considered on their own individual merits.
*These were Cambodia, Guyana, Honduras, Liberia, Panama, Peru, Sierra Leone, Somalia, Sudan, Vietnam, and Zambia. RAPs facilitated the clearance of arrears with Peru (1993), Sierra Leone (1994), and Zambia (1995), and with the availability of the approach having been extended, it remains available for Liberia, Somalia, and Sudan.

    Other Resources Citing This Publication