In the midst of the global financial and economic crisis the IMF amended its lending framework for low-income countries (LICs). It now has three main instruments for LICs – the Extended Credit Facility, the Standby Credit Facility and the Rapid Credit Facility. The three different programmes are subsidised by the newly created Poverty Reduction and Growth Trust (PRGT). The IMF also engages with LICs through non-financial facilities, especially the Policy Support Instrument (PSI) and the Staff Monitored Programme (SMP).
The latest revision of the Fund’s lending architecture for LICs entered into force in January 2010. According to the IMF, it is part of a broader reform to flexibly cater to country specific problems, with political and economic conditionalities becoming less rigid and tailored to individual countries.
The Extended Credit Facility (ECF) replaces the Poverty Reduction and Growth Facility (PRGF), which was in operation from 1999 to 2009 as the successor of the Structural Adjustment Facility and provides medium-term financial support to countries with persistent balance of payments problems. The ECF requires an IMF-approved Poverty Reduction Strategy Paper (PRSP, see Update 39) in which the client government lays out future economic policies. In terms of the conditionality imposed under this programme, policies have not changed substantially compared to previous facilities. Policy implementation is assessed before each loan instalment is disbursed on a three to six month basis for the duration of the programme, which can vary between three and five years. Repayments of an ECF loan have to be completed after five and a half to ten years, with a current zero per cent interest rate. Interest rates for all LIC instruments under the PRGT are reviewed on a two year basis.
The Standby Credit Facility (SCF) is a new lending tool, succeeding the high-access component of the Exogenous Shocks Facility (ESF), which itself was only established in 2008. In contrast to the medium-term ECF, the programme targets LICs with short-term balance of payment problems and lasts between 12 and 24 months. SCF assistance is only available to countries that the IMF judges to have a sustainable macroeconomic position. To secure market confidence it can be used on a precautionary basis, meaning that financing terms between a country and the Fund are agreed without actual lending taking place, but offering the possiblity of immediate access if needed. The SCF does not require a PRSP, but conditionality, implementation reviews and disbursements under this arrangement work in the same way as under the ECF. The loan needs to be repaid after four to eight years and currently carries an interest rate of 0.25 per cent.
The Rapid Credit Facility (RCF) replaces the rapid access component of the ESF as well as the Emergency Natural Disaster Assistance (ENDA) and the Emergency Post-Conflict Assistance (EPCA) facilities. Assistance is provided rapidly and with limited conditionality. In contrast to other financing arrangements, loans are provided as a single disbursement, but are normally limited to comparatively small amounts of 25 per cent of the country’s Fund quota per year. Currently, the arrangement carries a zero per cent interest rate and has to be repaid after a period of five and a half to ten years.
The PRGT, which provides the subsidy resources for the new facilities, replaces the previous PRGF-ESF Trust and has roughly doubled the annual amount of financing available to individual countries.
The Policy Support Instrument (PSI) was introduced in 2005 for economically stable LICs that do not want or need the Fund’s financial help, but seek support to monitor and review their economic performance (see Update 48). By undertaking a PSI, countries hope to send strong signals about their economic position to donors and markets. Policy reforms agreed under the facility operate like lending conditionality and are assessed every six months over a total period that varies between one and four years. If a country fails two consecutive assessments, its programme is terminated.
The Staff Monitored Program (SMP) operates along the same lines as the PSI but is generally used by countries with very fragile economic foundations, such as those in post-conflict situations which are not eligible for a PSI arrangement. Since donors might not be willing to provide financing to those countries under a SMP, its main purpose is to establish a track record for future engagement with donors and IFIs.