On May 24, 2019 the Executive Board of the International Monetary Fund (IMF) concluded the 2018-19 Review of Facilities for Low-Income Countries—Reform Proposals (“Facilities Review”) and the companion Review of the Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Countries (“Financing Review”).
The current framework for IMF concessional lending and program support for low-income countries (LICs), established in 2009, includes three lending facilities and one non-financial instrument. The Extended Credit Facility (ECF) is used to provide financial support to countries facing protracted balance of payments problems; the Standby Credit Facility (SCF) is used to provide financial support to countries facing actual or potential short-term balance of balance of payments needs; and the Rapid Credit Facility (RCF) is used to provide emergency financing to countries facing urgent balance of payments needs, including as a result of natural disasters, fragility or conflict situations, and other adverse shocks. The Policy Support Instrument (PSI) is used by countries that have a broadly stable macroeconomic position who wish to provide a signal to private investors and development partners regarding the strength of their economic policies along with a framework for provision of Fund policy advice and technical assistance.
Financial support under the IMF’s LIC facilities is provided on concessional terms, with the interest rate set at zero since 2009. [1] Subsidies needed to lend at concessional interest rates are provided by the Poverty Reduction and Growth Trust (PRGT), which is administered by the IMF. The PRGT operates on a self-sustaining basis, with income from investments of the resources in the trust fund covering the costs of these subsidies over time. Given the size of the trust fund, there are annual and cumulative limits on the amounts eligible countries can borrow on concessional terms to ensure that the PRGT is not depleted.
The 2018-19 review of the LIC facilities framework reviews the experience with use of the facilities since they were established and draws lessons on how the facilities might be adjusted to better meet the needs of LICs in the context of the changing economic landscape that they face. The review takes place against the backdrop of rising income levels in most LICs, along with greater trade and financial integration of LICs into the global economy. This has implied a gradual erosion of the limits on access to concessional financing relative to LICs’ GDP levels and external financing needs since the last access increase in 2015. Several countries have experienced a sharp increase in temporary financing needs as a result of falling export prices, while the increasing frequency and intensity of natural disasters has led to greater demand for emergency financing. At the same time, debt vulnerabilities have risen across many countries, while fragility and institutional weaknesses continue to impede economic progress in a wide range of countries.
The staff papers prepared for Board discussion concluded that the general framework of IMF facilities for LICs remains broadly appropriate, while noting that some changes were warranted to respond to evolving challenges. Reforms proposed included:
· An increase in access limits and norms, within the financing constraints of the self-sustained PRGT, to address erosion of access limits.
· Better tailoring of LIC facilities to the needs of fragile and conflict-affected states and to states vulnerable to natural disasters, including through increased access to the RCF.
· Better targeting of scarce subsidy resources to the poorest and most vulnerable countries by expanding the use of blending of concessional and non-concessional financing for higher-income LICs with substantial access to international financial markets.
· Heightened attention to debt sustainability and transparency through strengthening safeguards for high access and exceptional access cases.
· Changes to some features of the SCF and ECF instruments to increase their flexibility.
The companion Financing Review paper concluded that the proposed reforms to the LIC facilities are consistent with preserving the financial self-sustainability of the PRGT, with risks evenly balanced over the medium term.
The Facilities Review is part of a wider policy work agenda related to the IMF’s engagement with LICs. It follows the May 2019 Board paper on Building Resilience in Developing Countries Vulnerable to Large Natural Disasters , draws on the findings of the 2018 Review of Program Design and Conditionality, and is coordinated with the parallel Review of the PRGT Interest Rate Structure and the upcoming review of Eligibility to Use the Fund’s Facilities for Concessional Financing, 2019
