The April 2009 G20 meeting in London agreed to reform the IMF’s lending to low-income countries (LICs). The new lending facilities came into effect in 2010 (see Update 67).
The lending mechanisms for LICs consist of: the Extended Credit Facility (ECF), the Standby Credit Facility (SCF), and the Rapid Credit Facility (RCF).
The ECF, which provides loans over the medium to the long term, is the most commonly used mechanism. Lending programmes are normally for three years, but can be extended to a maximum of five years. Following expiration, an additional loan can be given. Countries with prolonged balance of payment needs are eligible for ECF. Access is set at 120 per cent of quota (based on country’s financial commitment to the IMF) per arrangement, but is determined on a case-by-case basis. The norm is 75 per cent of quota if the country’s total concessional credit outstanding is 100 per cent of quota or above. As of December 2013, there are 17 countries with an ECF agreement with total overall approved lending equalling $2.8 billion, excluding outstanding credit from expired loans.
The SCF provides financial and policy assistance to countries with short-term financing needs caused by shocks or policy failures expected to be resolved within two years. The SCF can also be used on a precautionary basis by countries currently not facing financing issues, but that might do so in the future. It is offered for a period of 12 to 24 months. It is normally limited to 2.5 years, but can be extended. It normally carries a 0.25 per cent interest rate. SCF lending limits are normally set at 120 per cent of quota, but it depends on prior lending history with the Fund. As of December 2013, Tanzania and Georgia have SCF agreements totalling $422 million. In financial year 2012, Georgia and Solomon Islands had SCF agreements totalling $201 million.
The RCF is an emergency loan intended for countries facing immediate shortages of finance, for instance following natural disasters or shocks. RCF is provided rapidly as a one-off sum and does not require programme-based conditionality or reviews. Access to the RCF is set to 25 per cent of quota per year and 100 per cent of quota on a cumulative basis. There are currently no RCF arrangements, but some developing countries have called for greater use of RCF facilities and increased availability. Between 2009 and 2012, eight countries used the RCF, some of which now have ECFs as longer term loans, including Côte d’Ivoire, Nepal and Yemen.
The ECF involves the most conditionality, whilst the RCF has the least. Interest rates for all mechanisms are reviewed every two years, and the next review is at end-2014. Loans currently carry zero interest rates throughout 2014, followed by a 0.5 per cent rate thereafter (except SCF with a 0.25 per cent interest rate). ECF and RCF loans mature after ten years and SCF after eight years. Apart from the SCF (which has a four year grace period), the lending mechanisms have a grace period of five and a half years, meaning loans begin to be repaid after that period. Demand for concessional lending went up from $1.23 billion in the period 2001 to 2008, to $2.47 billion between 2009 and 2012. The number of LICs with an IMF agreement also increased, from 38 countries in 2007 to 51 in 2010.
The Policy Support Instrument (PSI) is a free of charge service designed to provide support without a loan arrangement (see Update 71, 48). It involves semi-annual programme reviews and policy conditions, identical to the loan facilities’ conditionality. In order for LICs to qualify for a PSI, they need to demonstrate a policy framework focused on creating macroeconomic stability, debt sustainability and “structural reforms in key areas in which growth and poverty reduction are constrained”. In the case of short-term financing needs, the PSI may be used in combination with the SCF and the RCF, but not the ECF. To date, seven countries have utilised the PSI: Cape Verde, Mozambique, Nigeria, Rwanda, Senegal, Tanzania and Uganda.
According to the Fund’s website, the lending mechanisms aim to provide lending on more concessional terms than before and “improve the tailoring and flexibility of Fund support”. They intend to increase flexibility by no longer binding countries to structural performance criteria, which the Fund has replaced with benchmarks. The lending mechanisms are also supposed to increase the focus on poverty reduction compared to previous lending windows and each programme request has to provide information on how loans will impact on poverty reduction and growth. For instance, LICs applying for concessional lending should present “specific targets to safeguard social and other priority spending”.
The LICs’ concessional financing is funded through a dedicated account at the Fund called the Poverty Reduction and Growth Trust (PRGT). The Fund projects that the PRGT should be able to accommodate a $1.25 billion annual lending capacity. It is expected to be self-sustainable and is financed through the IMF’s own accumulated funds, bilateral donor contributions and member states re-investing their portion of the gold sales windfall policy (see Update 84). Projected average annual demand for PRGT resources are estimated by the Fund to range between $1.85 billion and $3.24 billion for the period 2013 to 2035, according to the IMF’s 2013 review.
An April 2012 report written by Development Finance International, an advocacy and research organisation based in London, on IMF LICs lending found no evidence of a “strong emphasis on poverty alleviation and growth”, particularly because many of the PRGT countries do not have a social expenditure floor or go below the floor. The same report stated that LICs governments perceive little change between benchmarks and the prior approach using performance criteria.
The 2013 review
In April 2013, the IMF executive board held its second review of the LICs lending facilities (the first was in 2012). It was restated that the PRGT should be self-sustainable. In order to achieve this, the use of blending (mixing concessional lending with lending from the Fund’s General Resource Account), was reaffirmed. This implies that better-off countries should make increasing use of non-concessional lending. Only the poorest and most vulnerable countries will be granted 100 per cent concessional lending. Three microstates were added to the list of countries eligible for concessional lending: the Marshall Islands, Micronesia and Tuvalu, whilst Georgia and Armenia were taken off the list. The Fund also removed some of the restrictions on the precautionary SCF lending facilities, for instance, the period a country does not face a balance of payment problem will no longer count towards the SCF time limit. The procedural qualification requirements to enter a PSI agreement were also eased. The next review is expected to take place in 2015.