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INTERNATIONAL MONETARY FUND- IIILENDING

INTERNATIONAL FINANCE4TH SEMESTER, 2014

DEPARTMENT OF COMMERCEUNIVERSITY OF NORTH BENGAL

April 29, 2014 Ajit Kumar Ray

IMF persists that countries should undertake policies to correct underlying problems.

IMF LENDING OBJECTIVES

IMF declares that its Core Responsibility is to provide loans to member countries experiencing actual or potential balance of payment problems.

IMF believes that this financial assistance enables countries to1. rebuild their international reserves2. stabilize their currencies3. continue paying for imports4. restore conditions for strong economic growth.

A member country may request IMF financial assistance if it has a balance of payments need—that is, if it cannot find sufficient financing on affordable terms to meet its net international payments while maintaining adequate reserve buffers going forward. An IMF loan provides a cushion that eases the adjustment policies and reforms that a country must make to correct its balance of payments problem and restore conditions for strong economic growth.


Existing Loan Instruments or Facilities

Concessional Facilities for Low-Income Countries:

– Extended Credit Facility (ECF)

– Standby Credit Facility (SCF)

– Rapid Credit Facility (RCF)

Nonconcessional Loans:

– Stand by Arrangement (SBA)

– Flexible Credit Line (FCL)

– Extended Fund Facility

(EFF)

– Precautionary Credit Line (PCL)

•All nonconcessional facilities are subject to the IMF’s market related interest rate, known as the “Rate of Charge” and above certain limit carry a surcharge.

•The amount a country can borrow from the fund is known as its “Access Limit” varies depending on the type of loan, but is typically a multiple of the country’s IMF quota

•The limit may be exceeded in exceptional cases.

•The Flexible Credit Line has no pre-set cap on access.

Extended Credit Facility:Eligibility: The ECF is available to all PRGT-eligible member countries that face a protracted balance of payments problem, i.e. when the resolution of the underlying macroeconomic imbalances would be expected to extend over the medium- or longer term.Duration and repeated use: Assistance under an ECF arrangement is provided for a three-year period, extendable for up to two additional years. Following the expiration or cancellation of an ECF arrangement, additional ECF arrangements may be approved.Access: Access to ECF financing is determined on a case-by-case basis, taking into account the country’s balance of payments need and strength of its economic program, and is guided by access norms. Total access to concessional financing under the PRGT is limited to 100 percent of quota per year, and total outstanding concessional credit of 300 percent of quota. These limits can be exceeded in exceptional circumstances. Access may be augmented during an arrangement if needed.

Financing under the ECF carries a zero interest rate, with a grace period of 5½ years, and a final maturity of 10 years. The Fund reviews the level of interest rates for all concessional facilities under the PRGT every two years.

Standby Credit Facility

Eligibility. The SCF is available to PRGT-eligible member countries facing an immediate or potential balance of payments need, where the country’s financing and adjustment needs are normally expected to be resolved within two years, thus establishing a sustainable macroeconomic position.

Duration and repeated use. An SCF arrangement can range from 12–24 months. As the SCF is intended to address episodic short-term needs, its use is normally limited to two and a half out of any five years. Subject to these limits, an SCF arrangement can be extended or cancelled, and consecutive arrangements can be approved.

Access. Access to SCF financing is determined on a case-by-case basis, taking into account the country’s balance of payments need and strength of its economic program, and is guided by access norms.1 Total access to concessional financing under the PRGT is limited to 100 percent of quota per year, and 300 percent of quota in total. These limits can be exceeded in exceptional circumstances. Access may be augmented during an arrangement if needed.

Precautionary arrangements.

A member country with a potential but not immediate balance of payments need can treat access under the SCF as precautionary, in which case no disbursements will be made. However, countries retain and accumulate the rights to request disbursements under the arrangement if a financing need were to arise at a later stage.

Concessional lending terms

Financing under the SCF carries a ¼ percent interest rate, but is subject to exceptional relief of all interest payments on outstanding concessional loans due to the IMF through the end of 2011. The SCF has a grace period of 4 years, and a final maturity of 8 years. The Fund reviews the level of interest rates for all concessional facilities under the PRGT every two years.

Rapid Credit FacilityThe RCF provides low access, rapid, and concessional financial assistance to LICs facing an urgent balance of payments need, without the need for program-based conditionality. It can provide flexible support in a wide variety of circumstances, including shocks, natural disasters, and emergencies resulting from fragility. The RCF also provides policy support and can help catalyze foreign aid.

Eligibility: Outright disbursements under the RCF are available to PRGT-eligible members that face an urgent balance of payments need, and where a full-fledged economic program is either not necessary or not feasible Highly concessional lending terms:Financing under the RCF carries a zero interest rate, has a grace period of 5½ years, and a final maturity of 10 years. The Fund reviews the level of interest rates for all concessional facilities under the PRGT every two years.


http://www.imf.org/external/np/exr/facts/scf.htm

Concessional and Non-concessional Loan: Comparative Picture


Countries Eligible for the IMF Poverty Reduction and Growth Facility (PRGF) As of September 2009

1 Afghanistan 40 Liberia

2 41 Madagascar

3 42 Malawi

4 Armenia 43 Maldives 1

5 44 Mali

6 Bangladesh 45 Mauritania

7 Benin 46 Moldova

8 Bhutan 47 Mongolia

9 Bolivia 48 Mozambique

10 Burkina Faso 49 Myanmar

11 Burundi 50 Nepal

12 Cambodia 51 Nicaragua

13 Cameroon 52 Niger

14 Cape Verde 1 53 Nigeria

15 Central African Republic 54

16 Chad 55 Papua New Guinea

17 Comoros 56 Rwanda

18 Congo, Democratic Republic of 57 Samoa 1

19 Congo, Republic of 58 Sao Tomé and Príncipe

20 Côte d'Ivoire 59 Senegal


21 Djibouti 60 Sierra Leone

22 Dominica 1 61 Solomon Islands

23 Eritrea 62 Somalia

24 Ethiopia 63

25 Gambia, The 64 St. Lucia 1

26 Georgia 65 St. Vincent and the Grenadines 1

27 Ghana 66 Sudan

28 Grenada 1 67 Tajikistan

29 Guinea 68 Tanzania

30 Guinea-Bissau 69 Timor Leste

31 Guyana 70 Togo

32 Haiti 71 Tonga 1

33 Honduras 72 Uganda

34 73 Uzbekistan

35 Kenya 74 Vanuatu 1

36 Kiribati 1 75 Vietnam

37 Kyrgyz Republic 76 Yemen, Republic of

38 Lao, P.D.R. 77 Zambia

39 Lesotho 78 Zimbabwe ²


Countries Eligible for the IMF Poverty Reduction and Growth Facility (PRGF) As of August 2008

As part of the reform package, the Executive Board approved a new concessional financing framework under which a new Poverty Reduction and Growth Trust (PRGT) would replace the PRGF-ESF Trust. Separate loan and subsidy accounts would be established under the PRGT to receive and provide resources to finance new LIC lending facilities under the new Trust. These reforms became effective and operational on January 7, 2010, when all lenders and subsidy contributors to the PRGF-ESF Trust provide their consent.

In September 1999, the IMF established the Poverty Reduction and Growth Facility (PRGF)


Main Non-Concessional lending facilities


Stand-By Arrangement (SBA)

• Since its creation in June 1952, the IMF’s Stand-By Arrangement (SBA) has been used time and again by member countries

• Rates are non-concessional, although they are almost always lower than what countries would pay to raise financing from private markets.

• The SBA was upgraded in 2009 to be more flexible and responsive to member countries’ needs.

• Borrowing limits were doubled

• It is claimed that conditions were streamlined and simplified

• Borrowing on a precautionary basis is made possible


Features of Stand-by Arrangement

• Eligibility: All member countries

• Normal access: Borrowing limits were recently doubled to give countries access of up to 200 percent of quota for any 12 month period, and 600 percent of total credit outstanding

• Exceptional access: The IMF can lend amounts above normal limits on a case-by-case basis under its Exceptional Access policy.

• Rapid access: Fund support under the SBA can be accelerated under the Fund’s Emergency Financing Mechanism, which enables rapid approval of IMF lending.

conditions :

Quantitative conditions: Member countries progress is monitored using quantitative program targets.

Structural measures: Progress in implementing structural measures are to be assessed in a holistic way in the context of program reviews.

Frequency of reviews: Continuation of arrangement is subject to regular reviews by the IMF’s Executive Board

Lending terms:

•Repayment. Repayment of borrowed resources under the SBA are due within 3¼-5 years of disbursement.

•Lending rate. The lending rate is tied to the IMF’s market-related interest rate, known as the basic rate of charge plus surcharges if the amount is above 300 percent of quota.

•Commitment fee. Resources committed under all SBAs are subject to a commitment fee levied at the beginning of each 12 month period on amounts that could be drawn in the period. If the country borrows the entire amount committed under an SBA, the commitment fee is fully refunded.

Service charge. A service charge of 50 basis points is applied on each amount drawn.


Flexible Credit Line (FCL)

• The Flexible Credit Line (FCL) is for countries with very strong fundamentals, policies, and track records of policy implementation. IMF must have the confidence that the economic policies of the country that qualifies to the FCL will remain strong or that corrective measures will be taken in the face of shocks.

• It represents a significant shift in how the Fund delivers Fund financial assistance,

particularly with recent enhancements, as it has no ongoing (ex post) conditions and no caps on the size of the credit line.

• The FCL is a renewable credit line, which at the country’s discretion could be for either one- or two-years, with a review of eligibility after the first year.

• There is the flexibility to either treat the credit line as precautionary or draw on it at any time after the FCL is approved.

• Once a country qualifies (according to pre-set criteria), it can tap all resources available under the credit line at any time, as disbursements would not be phased and conditioned on particular policies as with traditional Fund-supported programs.


The criteria used to assess a country’s qualification for an FCL arrangement

• A sustainable external position • A capital account position dominated by private flows • A track record of access to international capital markets at

favorable terms • A reserve position that is relatively comfortable when the FCL

is requested on a precautionary basis • Sound public finances, including a sustainable public debt

position • Low and stable inflation, in the context of a sound monetary

and exchange rate policy framework • No bank solvency problems that pose systemic threats to

banking system stability • Effective financial sector supervision • Data integrity and transparency.


Precautionary Credit Line (PCL)

•The new Precautionary Credit Line (PCL) is also for countries with sound fundamentals and policies, and a track record of implementing such policies.

•While they may face moderate vulnerabilities that may not meet the FCL qualification standards, they do not require the same large-scale policy adjustments normally associated with traditional Fund-supported program.

•The PCL combines pre-qualification (similar to the FCL), with more focused ex-post conditions that aim at addressing the identified vulnerabilities.

•Progress is assessed in the context of semi-annual monitoring over a one to two year period.

•The size of the credit line allows access to a larger amount of resources than under a typical SBA.

•While there may be no actual balance of payments need should at the time of approval, the PCL can be drawn upon should such a need arise unexpectedly


Conditions and Costs of PCL

• The PCL is subject to the same charges, surcharges, commitment fees, and repurchase period (3½ to 5 years) as the FCL and Stand-By Arrangements (SBA).

• If funding needs do not materialize, countries pay only a commitment fee which increases with the level of access available

• The cost of drawing under the PCL varies with the scale and duration of financing. The lending rate is tied to the IMF’s market-related interest rate, known as the basic rate of charge,

• Large loans, with credit outstanding above 300 percent of quota, carry a surcharge of 200 basis points. If credit outstanding remains above 300 percent of quota after three years, the surcharge rises to 300 basis points.

• Currently, the effective interest under the FCL or an SBA for access between 500 and 1000 percent of quota—ranges between 2.1–2.7 percent, and about 2.5–3.4 percent after 3 years.


Extended Fund Facility

•The Extended Fund Facility is used to help countries address balance of payments difficulties related partly to structural problems that may take longer to correct than macroeconomic imbalances.

•A program supported by an extended arrangement usually includes measures to improve the way markets and institutions function, such as tax and financial sector reforms, privatization of public enterprises


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