IMF's $100-billion facility to aid crisis-hit nations

30 Oct 2008


The International Monetary Fund (IMF) will create a $100 billion short-term lending facility (SLF) for making available new cash for countries battered by the financial crisis.

The executive board of the IMF said the SLF will provide quick-disbursing financing for countries with strong economic policies that are facing temporary liquidity problems in the global capital markets.

"I am very pleased to announce that the executive board has approved the establishment of a new facility for market access countries - the Short-Term Liquidity Facility," said Dominique Strauss-Kahn, managing director of the IMF.

''The ongoing turmoil in global capital markets has led to significant liquidity difficulties for some emerging market countries, even those that have maintained sound macroeconomic frameworks and have sustained histories of market access. Existing Fund loan facilities offer flexibility.

However, they are fundamentally used for countries that require both financing and policy adjustment, and not for countries that, despite strong initial macroeconomic positions and policies, are facing short-term liquidity pressures. This new facility addresses that gap in the Fund's toolkit of financial support," he added.

The new three-month loans, aimed at economies the IMF judges to be troubled but basically sound, would come untied as it would  not require them to make the usual severe changes in their policies that the IMF demands.

Potential borrowers could include crisis-hit countries like Mexico, Brazil and South Korea, for these countries, have so far shunned the IMF because of the conditionalities attached to the loans.

The  IMF conditionalities are designed to help governments save money and pay for necessary imports, but they also often deepen an economic downturn, making the IMF deeply unpopular around the world.

Strauss-Kahn emphasised that the IMF is committed to promoting a coordinated and cooperative approach to dealing with the current crisis. ''Exceptional times call for an exceptional response,'' Strauss-Kahn said. ''The Fund is responding quickly and flexibly to requests for financing. We are offering some countries substantial resources on an expedited basis, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position,'' he said.

The IMF announcement coincides the coordinated launch of a reciprocal currency arrangement by the US Federal Reserve, the Banco Central do Brasil, the Banco de México, the Bank of Korea, and the Monetary Authority of Singapore of the establishment of temporary reciprocal currency arrangements (swap lines). (See: Fed opens $120-billion swap lines with Brazil, Mexico, S Korea, Singapore)

These two independent facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining foreign currency funding in fundamentally sound and well managed economies.

The SLF tries to establish a facility for quick disbursal of large, short-term financing, using existing IMF's own resources, to countries with strong policies and a good track record but which are facing temporary liquidity problems arising from developments in external capital markets.

Countries can avail of up to 500 per cent of their quota, with a three-month maturity. Eligible countries are allowed to draw a maximum of three times during any 12-month period.

Countries with track records of sound policies, access to capital markets and sustainable debt burdens are eligible for the loans. However, borrowers are expected to continue their commitment to maintain a strong macroeconomic policy framework.

The new programme, which will use up to about half the IMF's resources, represents a big break from such requirements. But it creates two classes of borrowers – an A-class and a B-class – among the emerging country  borrowers.

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