Public Information Notice No. 05/8

Public Information Notice: IMF Executive Board Approves Proposal to Subsidize Emergency Assistance for Natural Disasters for PRGF-Eligible Members

January 27, 2005

On January, 21, 2005, the Executive Board of the International Monetary Fund (IMF) approved a proposal to subsidize the Fund's emergency assistance for natural disasters to low-income members eligible for the Poverty Reduction Growth Facility (PRGF). The decision followed a discussion of an IMF staff paper on the subject.¹

Background

The IMF has a longstanding policy of providing emergency financial assistance to members adversely affected by natural disasters. To date, 24 members affected by natural disasters have received emergency assistance on 27 occasions. In most cases, such assistance has amounted to 25 percent of recipient countries' quotas in the IMF.

Emergency assistance for natural disasters is provided in the form of outright purchases when a member cannot meet its immediate balance of payments financing needs arising from a natural disaster without serious depletion of its external reserves. The amount of resources is limited to 25 percent of quota, with larger amounts available only in exceptional cases. The emergency purchase is taken into consideration in determining the amount of support under a subsequent Stand-By or Extended Arrangement. A request for emergency assistance requires a statement of economic policies that the member intends to pursue to address its balance of payments difficulties. The request is granted if the IMF is satisfied that the member would cooperate in finding a solution to its balance of payments difficulties.

Purchases under emergency assistance are subject to a market-based rate of charge (linked to the SDR interest rate) and repurchase obligations of 3¼ - 5 years from the date of purchase (eight quarterly installments). In 1995, the IMF decided to expand the policy on emergency financial assistance to cover countries in post-conflict situations. In May 2001, the IMF established an administered account for subsidizing emergency post-conflict assistance to low-income members eligible for the IMF's PRGF. Grant contributions made by members to the administered account have since been used to subsidize the rate of charge on post-conflict emergency assistance to PRGF-eligible members to 0.5 percent per annum, the same interest rate as that charged on PRGF loans.

The Board's decision extends the practice of subsidizing the rate of charge on post-conflict assistance for PRGF-eligible members to cover emergency assistance for natural disasters as well. Subject to resource availability, PRGF-eligible members requesting emergency assistance for natural disasters would—upon request—receive a subsidy to bring the rate of charge on the financial assistance to 0.5 percent per annum. Subsidization would also be available on request for those members that have already received emergency assistance for natural disasters but have not yet fully repaid such assistance. It is estimated that subsidy needs for natural disaster assistance could amount to SDR 45-65 million (or about $68-98 million) over the next five years, which would need to be met through new bilateral contributions.

Executive Board Assessment

Executive Directors welcomed the proposal to subsidize emergency assistance for natural disasters to PRGF-eligible members by extending the existing practice of subsidizing the rate of charge on emergency post-conflict assistance. The proposal will allow the Fund to provide emergency natural disaster assistance to PRGF-eligible members at a concessional interest rate, thereby supporting the broader effort by the international community to provide grants and other financial assistance to deal with natural disasters. In addition to member countries affected by future natural disasters, beneficiaries of this initiative will include members affected by the recent tsunami, and those that have previously received emergency assistance for natural disasters, but have not yet fully repaid such assistance. Directors agreed to amend the Instrument to Establish the Post-Conflict Emergency Assistance Subsidy Account for PRGF-eligible Members to expand the scope of the existing account to include emergency assistance for natural disasters.

The amended Instrument provides for the granting of a subsidy on emergency natural disaster assistance upon request, rather than automatically as is the case for emergency post-conflict assistance. A number of Directors considered that this will allow the staff an opportunity to discuss the need for subsidization, in particular with members with large quotas, where the subsidization of natural disaster assistance could severely limit the availability of subsidy resources for other members. A number of other Directors, however, would have favored automatic subsidization of emergency assistance for natural disasters, as is the case for emergency post-conflict assistance, in the interest of more symmetrical treatment of the two types of emergency assistance.

The amended Instrument expands the scope of the administered account established to subsidize emergency post-conflict assistance to subsidize also the rate of charge on purchases under emergency assistance for natural disasters. Directors considered how best to set up the administrative arrangements for the sub-accounts under the Instrument for this purpose. It was agreed that establishing three sub-accounts as proposed by the staff would both retain the distinction that some contributors may wish to maintain between the two types of emergency assistance, while allowing the necessary flexibility and avoiding a proliferation of instruments. Several Directors felt that it would be undesirable to create sub-accounts that would earmark contributions for specific countries, on the grounds that that this could be perceived as being inconsistent with the multilateral character of the Fund.

Directors considered that PRGF-eligible members struck by natural disaster and with a PRGF arrangement in place should, as a first option, request an augmentation of the existing PRGF arrangement to cover any additional balance of payments needs. For countries without a current PRGF arrangement or in cases where the current PRGF arrangement is off-track, separate emergency assistance for natural disasters could be pursued. Directors observed that there would be no presumption that members requesting emergency assistance for natural disasters would subsequently move to a PRGF arrangement. In accordance with the current policy on emergency assistance, countries will be expected to provide a statement of economic policies.

Directors noted the staff's assessment that resources in the range of SDR 45-65 million will need to be mobilized to finance the intended subsidization of emergency assistance for natural disasters over the next five years, although the estimates are subject to a considerable degree of uncertainty. A number of Directors stated the readiness of their authorities to consider providing subsidy contributions, while the Executive Director for France indicated a firm pledge by the French authorities for this effort. Directors underscored the urgency of securing sufficient contributions from a broad spectrum of countries in order to make this initiative fully effective. They also urged management and the staff to follow up on pledges of bilateral contributions and update the Board on the financing situation at an early date.

Directors underscored the importance of ensuring that undue delays in the Board's consideration of requests for emergency assistance following a country's request are avoided.