In November, the IMF’s board approved the establishment of the Exogenous Shocks Facility (ESF) to provide quick-disbursing funds to countries experiencing exogenous shocks. The Fund defines an exogenous shock as “an event that has a significant negative impact on the economy and that is beyond the control of the government. That could include commodity price changes (including oil), natural disasters, and conflicts and crises in neighbouring countries that disrupt trade”. The board agreed that shocks due to shortfalls in aid flows “would not normally qualify for the ESF“.
The ESF has been established within the Poverty Reduction and Growth Facility (PRGF) trust. It will provide cheap financing (0.5 per cent interest and maturity of ten years) to low-income countries (annual per capita income below $895) that are experiencing shocks but which do not have a PRGF programme. For countries which do have a PRGF programme, the Fund will simply increase support to deal with the shock. An ESF arrangement can be extended up to a maximum of two years, during which time the amount of resources committed may be increased if the need is greater than originally expected. Access will be determined on a case-by-case basis, but the “norm” for annual access is set at 25 per cent of the member’s quota in the Fund up to a maximum of 50 per cent.
It is unclear what conditions countries will have to meet to access the new fund. An interim Poverty Reduction Strategy Paper will have to be in place at the time of approval, or at the latest by the time of the first review of the ESF (which would take place bi-annually). As for structural reforms, the board would only say that they “could be less ambitious than under a PRGF arrangement”.
The ESF adds to a growing list of virtually untouched IMF emergency funds – Emergency Post-Conflict Assistance, Emergency Natural Disaster Assistance, and the Compensatory Financing Facility. The difference with the ESF, according to the IMF, is that it is available at lower interest rates and requires the “formulation of a comprehensive economic programme”. While lower interest rates are always more attractive to borrowers, the ambiguity over the amount of Fund conditionality that will accompany the facility makes it unclear if there will be any more interest in the ESF than there has been in its predecessors.
Analysts, while welcoming the idea in principle, are troubled by the details of ESF implementation. German NGO Erlassjahr is concerned that the definition of what constitutes a shock, the amount of funds that a country requires to tide it over the shock, and the structural adjustment needed to address the underlying cause of the shock are all left “up to the discretionary assessment of the Fund”. Erlassjahr also questions the appropriateness of the timeframe for assistance, eligibility criteria which would exclude many disaster-prone countries, and the sufficiency of the resources available.
All 43 contributors to the PRGF trust subsidy account have consented to the activation of the account. Donor contributions totalling $700 million are needed to subsidise planned total lending of $2.8 billion over the first five years of the facility. So far, the UK has pledged $85 million, Japan $29 million, and France and Saudi Arabia have pledged to follow suit. UK chancellor Gordon Brown has encouraged oil producers to pay into the fund.