The Chair’s Summing Up Changes to the Fund’s Financing Assurances Policy in the Context of Fund Upper Credit Tranche Financing Under Exceptionally High Uncertainty Executive Board Meeting 23/19, March 15, 2023

Executive Directors welcomed the opportunity to consider reforms to the Fund’s Financing Assurances Policy that would enable the approval of upper credit tranche Fund arrangements (UCT arrangements) in cases of exceptionally high uncertainty. Directors stressed that emergency financing through the Rapid Financing Instrument and/or Rapid Credit Facility would generally be the appropriate modality for the Fund to support members with urgent balance of payments (BOP) needs in the context of exceptionally high uncertainty. However, stronger Fund engagement in a UCT context with a member facing exceptionally high uncertainty might be deemed appropriate and consistent with Fund policies in certain cases.

Directors agreed that a case of “exceptionally high uncertainty” is characterized by all of the factors set out in paragraph 13 of the paper. Directors stressed that the assessment of whether a case is one of “exceptionally high uncertainty” must be made in a manner that ensures uniformity of treatment and evenhandedness across the membership.

Directors recognized that it is extremely difficult to design a UCT-quality arrangement in cases of exceptionally high uncertainty. They supported the approach detailed in the paper of setting out two fully elaborated scenarios in such cases, covering both a baseline and a downside scenario, noting the need to demonstrate that a Fund-supported program could work in both scenarios, and that these scenarios would need to be sufficiently separated to generate confidence that the program could succeed and solve the member’s BOP problem and restore the member to medium-term external viability, notwithstanding the exceptionally high uncertainty about the ongoing shock.

Directors stressed that a member would need to have the capacity and commitment to implement a UCT arrangement in such circumstances and to provide the necessary data for the Fund to be able to monitor the program, and that a Staff Monitored Program or Program Monitoring with Board involvement might first be necessary to establish a track record on this. Directors stressed that proceeding with a Fund-supported program in cases of exceptionally high uncertainty would require careful judgment about whether such a program would be feasible and credible given its likely risk characteristics, and be consistent with legal and policy requirements for Fund lending. These requirements include providing adequate confidence about the ability of the program to solve the member’s BOP problem and restore the member to medium-term external viability, while providing adequate safeguards for the repayment of the Fund’s financing. The Board would need to make this judgement, based on a recommendation from Management and staff, at the time of approval of the arrangement as well as at subsequent reviews. Directors expected that, to the extent the exceptionally high uncertainty dissipates, the program design would revert to the standard Fund approach to lending built just around the baseline. In the event that the circumstances of exceptionally high uncertainty were to deteriorate and questions arose about whether the level of confidence had become too low to clearly and credibly establish a program design to resolve the member’s BOP problem and/or restore debt sustainability, then Directors would need to determine whether further financing under the arrangement would become infeasible.

To support the Fund’s ability to approve UCT arrangements in cases of exceptionally high uncertainty, Directors endorsed the use of a procedural safeguard set out in paragraph 18 of the paper for an initial engagement with Executive Directors. Some Directors called for a broader engagement than set out in the paper, with a few Directors calling for a formal Board meeting.

Directors also supported two policy modifications, applying only to cases of exceptionally high uncertainty, to allow UCT arrangements. First, Directors supported the modified approach in cases of exceptionally high uncertainty set out in paragraph 25 of the paper for official bilateral creditors to deliver credible upfront assurances covering their commitments to help restore debt sustainability where contributions from official bilateral creditors are needed to restore debt sustainability. Directors also endorsed the proposal set out in paragraph 26 of the paper, for situations of exceptionally high uncertainty, to extend the existing use of a capacity-to-repay assurance from official bilateral creditors/donors to ensure adequate safeguards for the repayment of the Fund’s financing from an emergency financing context to a UCT program context.

Directors welcomed the paper’s discussion of risks and noted that the proposed policy changes involve considerable enterprise risks to the Fund while also noting the mitigants to address these risks identified in the paper. However, they generally agreed that when considering these risks—including reputational and spillover risks—the benefit of having the option of supporting members facing exceptionally high uncertainty outweighs the additional risk of the proposed policy change.

SU/23/41,

March 17, 2023

Attachments

SM/23/56, 3/2/2023

Paragraph 13

13. Exceptionally high uncertainty is a different situation. It is characterized by a combination of several factors:

• • It originates in an exogenous shock; that is, an ongoing shock to a members’ economic capacity that originates in factors beyond the authorities’ control.

• • It originates in an exogenous shock; that is, an ongoing shock to a members’ economic capacity that originates in factors beyond the authorities’ control.

• • The impact of the shock on the economy depends on events fundamentally outside of the control of the authorities’ economic policies, at least in the near-term.

• • Thus, it involves severe and continuing balance of payment impacts, making the scale of the BoP challenge difficult to assess with the usual degree of confidence associated with UCT lending (although there could still be a credible basis for assessing that UCT requirements are met as discussed below). An example is a shock in the form of a large-scale war.

• • No one scenario that characterizes the evolution of the ongoing shock can be seen as sufficiently “central”, and indeed the situation involves significant adverse tail risks where the shock and/or its impacts could continue beyond the usual Fund program timeframe.

• • The ability of official bilateral creditors to ensure debt sustainability through upfront debt write-downs is impaired due to the lack of a sufficiently “central” scenario and given the presence of large downside risks, and broader sources of financing must be catalyzed to help resolve the BoP problem.

  Paragraph 18

18. In view of the risks of engaging in UCT lending under exceptionally high uncertainty, as defined above, a procedural safeguard is proposed. Engaging in such circumstances would involve a material increase in risks to the Fund (as discussed further below in Section VI). For a member facing such uncertainty initial Board engagement would be expected in the context of convening creditor and donor support or emergency financing. The Board would need to consider the issue of whether exceptionally high uncertainty, as defined above, exists, and whether the Fund would be prepared to accept higher risks, and pursue a UCT arrangement, if the member had requested it at that point. The international community may wish to have a more structured framework in place to catalyze broader support for such a member, for example due to concern about global risks from spillovers from that members’ situation.¹ To the extent the issues were not covered in initial engagements, or a request for UCT financing from the member had been subsequently received, a dedicated Board meeting could be called to consider these issues.

Paragraph 25

25. The first targeted policy change would allow, in situations involving exceptionally high uncertainty, official bilateral creditors to deliver credible assurances upfront, but with a second-stage contingent element. Thus, they would provide:

• i. An upfront “credible and specific” assurance covering what is needed in the baseline scenario to restore debt sustainability. This could be cast as a flow then stock treatment (per HIPC), although the scale of the second stage debt relief commitment would need to be clear to help condition expectations of the other creditors expected to restructure in the interim (e.g., the private sector, which would not be eligible for such an approach under Fund policies).

• ii. An upfront assurance to provide the necessary financial support to restore debt sustainability in a second stage once the exceptionally high uncertainty abates within program (or based on a best estimate at the last program review, whichever comes first). The program’s downside scenario would provide an upfront estimate of the possible scale of the needed financial support, in the event outcomes are more adverse. In line with standard program practice, scenarios would be updated at each program review and financing commitments updated if necessary, providing full transparency to creditors and donors and control over their commitment.

Together, these would also help establish the ability of the program to resolve the BoP problem by restoring debt sustainability. The assurances would be given by a recognized creditor forum, and/or directly (in line with the Fund’s standards for such assurances).²

Paragraph 26

26. The second policy change would extend the existing use of a capacity-to-repay assurance from official creditors/donors for safeguards purposes in an emergency financing context to a UCT context. The use of such an assurance would be required in situations of exceptionally high uncertainty, since this would be critical for the assessment that the UCT program provides adequate safeguards for the Fund’s lending (given tail risk scenarios where the member may not be able to generate the resources to repay any creditor). The assurance:

• • Should be extended by a significant group of creditors/donors. Considering the long potential timeframe during which an assurance could be outstanding, having a significant group of creditors/donors would help ensure that adverse changes in individual members’ external position would not undermine the credibility of the assurance, and give confidence that it could be amended as needed during program reviews, if necessary. A group also ensures that a sufficient shareholding in the Fund is represented (and the group would thus bear a meaningful collective cost of not standing behind the assurance). Individual members of the group should be participants in the Fund’s FTP and have a collective history of contributions to multilateral debt relief initiatives commensurate with the scale of their collective assurance. The joint nature of the assurance would leave space for the group to manage different domestic processes. Normally, a suitable statement from the Executive Directors representing the relevant official bilateral creditors/donors, on behalf of their country authorities would suffice to provide the assurance. The statement would need to be in the public domain.

• • It would confirm the creditors’/donors’ recognition of the Fund’s de facto preferred creditor status (PCS) and complement the Fund’s risk management framework with the aim to prevent any overdue financial obligations to the Fund from the borrowing member and to thus establish “ex ante” adequate lending safeguards. Management, staff and the Board would need to assess at program outset and each review that scenarios which would give rise to any overdue financial obligations are very unlikely, and adequate safeguards for Fund lending are in place as required under the Articles. This type of assurance would cease to be effective upon approval of a new arrangement for the member (unless specifically renewed, for example, because of a continuation of the exceptionally high uncertainty).

¹ For instance, the member in question could be deeply integrated into financial markets or have concentrated enough positions in global production or value chains such that not providing large financing to assist it would have significant global risks.

² Note that in some circumstances restoring sustainability might go beyond debt relief to a need for financing on highly concessional terms. The mix of relief and new financing is within the discretion of the creditors/donors, provided it adds up to provide the required financing. For new highly con-cessional financing, the requirements for standard financing assurances would apply.