Public Information Notice No. 00/79

Public Information Notice: IMF Board Agrees on Changes to Fund Financial Facilities

September 18, 2000

On September 14–15, the Executive Board completed a series of discussions reviewing the Fund’s nonconcessional facilities. The Board had also held discussions on July 24 and September 7. The staff papers on which the discussions were based and the Concluding Remarks by the Chairman following the July 24 meeting will be posted on the IMF website shortly.

Background

The Board held an initial wide-ranging discussion of the Fund’s nonconcessional facilities in March 2000.¹ In that discussion, the Board agreed to eliminate a number of little-used and obsolete facilities, and to streamline the Compensatory Financing Facility. The discussion also began a more fundamental process aimed at better adapting the Fund’s lending instruments to the changing nature of the global economy. At its meeting in Washington in April 2000, the IMFC requested that the Board secure rapid progress in this more fundamental review and report to the Committee’s next meeting. The Committee asked that the Board consider changes that would allow the Fund’s facilities to play a more effective role in supporting members’ efforts to prevent crises, and help ensure a more efficient use of the Fund’s resources.

In response to the Committee’s request, the Board discussed in July and September an array of possible changes to the Fund’s facilities. It considered proposals for changes in the operation of the Contingent Credit Lines (CCL), a new facility which was approved by the Board in April 1999, but which has not yet been used by members. The proposals were designed to enhance the CCL’s effectiveness in encouraging and supporting members’ efforts at crisis prevention. The Board also examined whether stand-by arrangements and the Extended Fund Facility were being used efficiently, particularly against the background of the increasing growth and integration of global capital markets, and considered proposals for these facilities involving expectations of early repurchase of Fund resources and surcharges at high levels of credit outstanding. Finally, the Board examined ways of enhancing post-program monitoring.

Executive Board Assessment

The Executive Board began the process of reviewing of the Fund’s facilities earlier this year, and has today had a very constructive further exchange of views. Notwithstanding divergent, and strongly held, views on individual elements of the policy package, Directors demonstrated their desire to find a consensus and to develop new approaches. In this spirit, the Board has agreed on a number of changes that should allow the Fund’s facilities to play a more effective role in supporting members’ efforts to prevent crises, and that should help ensure a more efficient use of the Fund’s resources. Taken together, the measures agreed this week represent an important step forward for the IMF.

Contingent Credit Lines (CCL)

Executive Directors acknowledged that the CCL, which had been conceived as an important instrument to encourage members’ efforts at crisis prevention and as a new way of doing business for the Fund, had not achieved its objectives, and that a number of changes were needed to allow it to play an effective role. While the eligibility criteria for the CCL remained appropriate, the Board agreed on a major overhaul of other features of the facility.

The Board recognized that members that might make use of the CCL have had justified concerns about how intensive might be the monitoring of arrangements under the facility. The existing CCL decision could be read to imply a monitoring framework akin to that under other Fund arrangements, where deviations from the agreed policies generally need to be fully explained and justified in the context of a Board discussion. However, it has been agreed that less intensive monitoring arrangements would be appropriate for a country that had a strong track record on policies and met the other requirements that would permit it to prequalify for the CCL.

Recognizing this, the Board clarified a number of points regarding the way in which the member would present its program to the Board as part of its request for a commitment of CCL resources and the way in which it would be monitored. While the member would present a quarterly quantified framework that would guide its macroeconomic policies and that would constitute a baseline for monitoring, there would not be a need for quarterly or monthly quantitative benchmarks. There would also be no need for a Technical Memorandum of Understanding or similarly detailed definitions of program targets, as long as the basis on which the authorities compiled and reported data was well understood. And while the initial consideration of the member’s eligibility would assess its structural program and the progress expected under that program during the period of commitment of CCL resources, it would also not be necessary for the structural program of a member that has prequalified for the CCL to be specified to the degree of detail that would be entailed by structural benchmarks. Directors also agreed that, in appropriate cases, it would be possible to complete the midterm review on a lapse-of-time basis.

The Board recognized that additional concerns had been raised with respect to the interpretation of condition (iii) of the existing CCL for completion of the activation review—namely, the condition that “up to the time of the crisis, the member has successfully implemented the economic program that it had presented to the Board as a basis for its access to CCL resources.” Again, this condition could be read as implying a very detailed assessment, when the intention was instead to guard against the possibility that the member’s own policies had contributed to the development of the pressures in its balance of payments—something that would likely be predicated on major slippages from the program, rather than minor deviations. To ensure greater clarity on this point, the Board agreed to eliminate, as a separate condition, condition (iii) for the activation review. Rather, in determining whether the other conditions for the activation review had been met—in particular, the condition that the member’s difficulties were judged to be largely beyond its control—an assessment would be made as to whether the member’s own policies had not been a cause of the pressures in its balance of payments.

There was full agreement that the Fund must have the means to make a member exit from the CCL—that is, to interrupt the member’s right to make purchases, including purchases associated with the activation review. These means take the form of the limited (one year) commitment period under the CCL and, importantly, the midterm review. At the same time, the Board recognized that, since the opportunities for a formal exit arise only every six months or so, ongoing close contact between the Fund and the member are crucial in the interim. It was clarified that staff and management would be expected to remain in close consultation with the member, particularly should any untoward developments occur, and would bring the member’s situation to the attention of the Board should there be concerns that slippages in the member’s policies might make it vulnerable to crisis. Such close consultation would help provide a signal to the member if developments affected the likelihood that it would be able to complete the activation review if the relevant circumstances arose.

There was also agreement that there should be greater automaticity in the provision of resources for a country in crisis as a result of contagion. Under the present construct for the CCL, the Fund would complete the activation review, inter alia, only if it were satisfied that “the member is committed to adjusting policies to deal with any real economic impact from contagion.” Under this construct, members might justifiably be concerned that activation would involve a lengthy negotiation of policy changes, akin to the negotiation of a new arrangement. The Board recognized that, for the CCL to play a useful role and in light of the demanding eligibility criteria for the CCL, members should be given greater assurance of the ready availability of resources. Directors agreed that it was feasible to do so without exposing Fund resources to undue risk, given the high likelihood that qualifying members would react appropriately to changes in their circumstances. Thus, the Board agreed to divide the activation review into an “activation” and a “post-activation” review. The former would be completed expeditiously and would release a predetermined, large amount of resources, and the member would be given the strong benefit of the doubt as to any required policy adjustments. In the post-activation review, the Fund and the member would reach understandings on policies to be pursued from that point onward, and phasing and conditionality (which, in light of the nature of the crisis, would generally be expected to involve macroeconomic rather than structural policies) would be specified for access to the remaining resources. While the post-activation review would normally follow the activation review with some lag, albeit short in most cases, Directors agreed that, if the member requested it and if the Board agreed that the member’s situation and the Board’s familiarity with and assessment of its policies warranted it, it would be possible to combine these reviews.

The Board also agreed to reduce the rate of charge on CCL resources, which is currently the same as on resources under the Supplemental Reserve Facility (SRF). The initial surcharge would be reduced from 300 basis points to 150 basis points, and the surcharge would then rise with time at the same rate as the surcharge under the SRF, to a ceiling of 350 basis points.

Finally, the Board agreed that it was desirable to reduce the commitment fee on arrangements with CCL resources. Directors agreed that the commitment fee on the CCL should be reduced by replacing the current flat commitment fee of 25 basis points with the following schedule, which would be applied to all Fund arrangements: 25 basis points on amounts committed up to 100 percent of quota; and 10 basis points for amounts committed in excess of 100 percent of quota. The schedule of annual commitment fees would apply to the amounts that could be purchased for the next twelve months.

Directors agreed that the discussions that had taken place on the CCL during the course of the review of Fund facilities were sufficient to constitute completion of the review of the CCL.

Repurchase Expectations

In its review of ways of ensuring efficient use of Fund resources, the Board agreed that the problem of long use of Fund resources following the resolution of a balance of payments problem should be addressed through the introduction of time-based repurchase expectations. In stand-by arrangements (SBAs), members would be expected to begin repurchases after 2¼ years and complete repurchases after 4 years, as compared with repurchase obligations that span 3¼ to 5 years. Under the Extended Fund Facility (EFF), members would begin repurchases after 4½ years, as at present, but expected repurchases would be completed in 7 years, rather than 10 years under the obligation schedule. The member would be expected to meet these expectations, but the Fund could extend them on request by the member, if the Board agreed that the member’s external position had not improved sufficiently for repurchases to be made. The member could make such a request at any time when expected repurchases remained to be made, and the Board could either agree to the request by extending any or all remaining expected repurchases or deny the request. Fund-supported programs would normally continue to be formulated on the assumption that the member would meet the repurchase obligations (rather than the expectations), and the member’s ability to meet repurchase expectations would be intended to signal a stronger-than-expected improvement in its external position, rather than a failure to achieve the targeted improvement.

Repurchase expectations would not apply to credit outstanding to any member at the time the policy change was introduced, but would apply to all purchases under current or new arrangements made after decisions are taken to give effect to these policy changes.

Surcharges on Credit Outstanding Above a Threshold Level

The Board also agreed to introduce surcharges on credit outstanding above a certain level under the credit tranches and the EFF. The surcharge would begin at a level of 100 basis points at 200 percent of quota, and would rise to 200 basis points with credit outstanding above 300 percent of quota. The surcharge would apply only to the additional amount of credit above the threshold at which it enters into force, not to the total amount of outstanding credit. Purchases made under the SRF and under the CCL would continue to be subject to special surcharges and would not be subject to the suggested level-based surcharge, and the amount of credit outstanding under the SRF and CCL would not be taken into account in determining the applicable surcharge on other Fund credit. Directors also agreed that purchases under the policies on emergency assistance for natural disasters or post-conflict cases should not be subject to the surcharge, or taken into account in determining the surcharge, and requested that a decision be prepared to give effect to this by converting these policies into special facilities.

Credit outstanding at the time the policy changes were made effective would be “grandfathered,” so that graduated charges would not apply to it. As regards the treatment of new purchases, the Board agreed that the amount of credit outstanding at the time of introduction of the policy change should not be taken into account in determining whether new purchases, made after the effective date of the decision, would be subject to surcharges, so that surcharges would begin to apply only once new purchases reach the threshold for the initial rate of surcharge.

Directors considered that the surcharges adopted in the context of this discussion on the review of the Fund’s facilities should not be changed for a period of at least four years. They also considered that the Fund’s net income target should not be increased for the primary purpose of achieving an increase in the basic rate of charge.

Extended Fund Facility

As regards the EFF, the Board confirmed that it saw a need to ensure that arrangements under the EFF be granted only in cases that met fully the terms and spirit of the EFF Decision. These would be cases where there is a reasonable expectation that the member’s balance of payments difficulties will be relatively long-term, including because it has limited access to private capital, and where there is an appropriately strong structural reform program to deal with the embedded institutional or economic weaknesses. The Board agreed that extended arrangements should generally not be formulated on a precautionary basis, as circumstances where potential balance of payments difficulties were likely to turn out to be longer-term are probably very rare. It was also noted that members with meaningful access to capital markets were not likely to suffer from the problems described in the EFF Decision, and hence that such members would not normally be expected to seek extended arrangements. It is understood that the EFF could be especially appropriate for graduating-PRGF and some transition countries that do not have, or do not have enough, access to capital markets. At the same time, the EFF remains available to all members, and there will be circumstances where it will be the most appropriate instrument to meet a member’s needs.

Post-Program Monitoring

The Board agreed that enhanced post-program monitoring (PPM), with more formal involvement of the Board, could be useful in certain cases. To this end, Directors agreed that there should be a presumption that members that met certain criteria would engage in post-program monitoring by the Fund of economic developments and policies after the expiration of their arrangements. A key criterion would be when a member’s credit outstanding at the end of the arrangement exceeds a threshold of 100 percent of quota. A presumption of PPM would not imply that members that met the criteria would automatically be subject to PPM. Rather, the Managing Director would be expected to recommend PPM to the Board at the time of the last review of the member’s arrangement, unless in his view the member’s circumstances were such that the process was unnecessary. There would remain a possibility of requiring PPM of a member that did not meet the criteria for the presumption of PPM, as already provided for in the consultation clauses in all Fund arrangements. The Board’s discussions of PPM papers would be reflected in a Public Information Notice (PIN). The publication of PINs would follow the normal PIN procedure, including the requirement for the member’s consent. Experience with PPM could be reviewed in about 18 months.

In sum

In reaching agreement on these various policy changes, Directors noted that there would be a number of technical aspects which remained to be specified in detail, and they asked the staff to prepare proposals on these issues and proposed decisions in the coming weeks. Despite the many differences of view expressed in discussions on the review of Fund facilities, Directors agreed that the policy proposals discussed in this summing up should form the basis for an important improvement in the operation of the Fund’s facilities, and that these measures, together with the streamlining of facilities already agreed by the Board earlier this year, should be presented to the IMFC in fulfillment of the Committee’s request that the Board should review the Fund’s facilities with a view to better adapting the Fund’s lending instruments to the changing nature of the global economy.