August 2, 2018/IMF
The Fund is facing strong demand for financing from low-income countries (LICs). Commodity price shocks and loose fiscal policies have contributed to rising debt levels and financing needs in many countries. Several developing states, especially smaller ones, are also increasingly vulnerable to large natural disasters. At the same time, many LICs less dependent on commodity exports have enjoyed robust growth in recent years, with more contained vulnerabilities.
The current review is an opportunity for a comprehensive reassessment of the adequacy of the Fund’s toolkit for meeting LICs’ current needs. It complements an ongoing Review of Conditionality and Design of Fund-Supported Programs, as well as the implementation of an upgraded Debt Sustainability Framework for LICs.
Staff views the structure of LIC facilities as broadly appropriate, but sees scope for updating and refining the toolkit to address members’ evolving needs while adequately safeguarding Fund resources. The basic architecture of facilities put in place in 2009—the Extended Credit Facility (ECF) for protracted balance of payments (BoP) needs, the Standby Credit Facility (SCF) for short-term needs, the Rapid Credit Facility (RCF) for emergency finance without ex post policy conditionality, the Policy Support Instrument (PSI) for non-financial policy support—has generally been able to meet the diverse needs of LICs.
As to the scope for refinements, two broad themes emerged from consultations with country authorities, Executive Directors, and other stakeholders and from the staff’s review of experience: (i) the need to update access policies and financing terms, while maintaining adequate safeguards for the resources of the Poverty Reduction and Growth Trust (PRGT); and (ii) the need to explore aspects of the facilities that require additional flexibility to support a very diverse set of potential borrowers.
Updating access policies and financing terms
• There is room to adapt access levels to growing financing needs of LICs. A generalized increase in access norms and limits would offset the gradual erosion of these limit/norms relative to measures of projected financing need over time, with
June 18, 2018 the size of the feasible increase limited by the need to preserve the self-sustaining nature of the PRGT. There is also a case for easing the criteria for exceptional access to ensure that LICs with strong policies and high financing needs can be adequately supported, subject to heightened scrutiny (especially where debt levels are high).
• Alongside higher access, it will be important to ensure strong safeguards against credit risk, given rising debt vulnerabilities in many LICs. Key safeguards include robust program design, phasing of disbursements, and careful assessment of capacity to repay the Fund. Parallel work to assess program design and better identify debt vulnerabilities is either underway or being rolled out. One option to further contain credit risk would be to keep the normal cumulative access limit unchanged, implying that countries seeking higher access would face the higher scrutiny and policy standards of the (modified) exceptional access framework.
• There is also merit in reviewing the PRGT’s interest rate mechanism to ensure an adequate degree of concessionality in the context of low global interest rates. This could involve alignment of interest rate schedules across the ECF and SCF. More flexibility to respond to members’ needs for precautionary support, for financial support after natural disasters, and for support for countries in fragile situations:
• Enhanced precautionary and policy support. LICs’ rising global linkages argue for greater flexibility in the usage of the SCF, the only precautionary facility in the LIC toolkit. Options include increasing the two-year limit on SCF length and eliminating the sublimits on access under precautionary SCFs. The paper also examines the case for preserving the PSI while potentially aligning review modalities with the recentlyintroduced Policy Coordination Instrument (PCI).
• Helping members cope with large natural disasters. Fund support for countries vulnerable to natural disasters has focused on ex post financial assistance and, in rare cases, debt relief under the Catastrophe Containment and Relief Trust (CCRT). In addition to proposing higher access limits under the RCF, the paper examines the scope to: (i) expand the circumstances under which debt relief can be provided via the CCRT, which remains significantly underfunded; and (ii) establish a mechanism to provide countries with financing from an administered account or trust fund to meet debt service to the Fund in the immediate wake of the shock.
• Better tailored support for fragile states. The IEO (2018) called for the Fund to adapt its toolkit to provide more sustained support for fragile states, while recognizing that countries typically should be assisted via grants rather than IMF loans. In addition to clarifying the flexibility of ECF and RCF use, the paper considers the merits of: (i) an increase in the (relatively low) limits on RCF financing via the “regular window;” (ii) introducing a short-term ECF arrangement; and (iii) making the length of the ECF arrangement period flexible between three and five years.