labels: World economy
IMF eases lending rules, creates new line of credit news
25 March 2009

The International Monetary Fund (IMF) today approved a major overhaul of its lending framework by easing its conditionalities and announced the creation of a new flexible line of credit.

Dominique Strauss-Kahn''These reforms represent a significant change in the way the Fund can help its member countries - which is especially needed at this time of global crisis,'' IMF managing director Dominique Strauss-Kahn said in a release.

''More flexibility in our lending along with streamlined conditionality will help us respond effectively to the various needs of members. This, in turn, will help them to weather the crisis and return to sustainable growth,'' he added.

He said the new line of credit would help strong-performing countries that may be hit by the global crisis to ''further strengthen their economic position.''

The changes to the IMF's lending framework include:

  • Revision of IMF conditionalities for all borrowers,
  • Introducing a new Flexible Credit Line,
  • Enhancing the flexibility of the Fund's traditional stand-by arrangement,
  • Doubling normal access limits for nonconessional resources,
  • Simplifying cost and maturity structures, and
  • Eliminating certain seldom-used facilities.

The IMF, he said, will soon announce reforms of concessional lending instruments for low-income members as well. In addition, the IMF is consulting with its members to secure a sharp increase in its lending resources.

Access to the flexible credit line (FCL) will be particularly useful for crisis prevention purposes. FCL arrangements would be approved for countries meeting pre-set qualification criteria.

Access under the FCL would be determined on a case-by-case basis and disbursements would not be phased or conditioned to policy  understandings as is the case under a traditional Fund-supported programe, the IMF release said.

This flexible access is justified by the very strong track records of countries that qualify for the FCL, which give confidence that their economic policies will remain strong.

The FCL represent a strengthening of the earlier Short-Term Liquidity Facility (SLF), which therefore will be discontinued.

The FCL's flexibility includes:

  • Assuring qualified countries of large and upfront access to Fund resources with no ongoing (ex post) conditions;
  • Renewable credit line, which at the country's discretion could initially be for either a six-month period, or a 12-month period with a review of eligibility after six months;
  • Longer repayment period (3 to 5 years versus maximum rollover period of 9 months in the SLF);
  • No hard cap on access to Fund resources, which will be assessed on a case-by-case basis (the SLF had a cap on access of 500 per cent of quota); and
  • Flexibility to draw at any time on the credit line or to treat it as a precautionary instrument (which was not allowed under the SLF).

The pre-set qualification criteria are at the core of the FCL and serve to signal the Fund's confidence in the qualifying member's policies and ability to take corrective measures when needed.

The FCL postulates that the member has very strong economic fundamentals and institutional policy frameworks; is implementing - and has a sustained track record of implementing - very strong policies, and ) remains committed to maintaining such policies in the future.

The relevant criteria for the purposes of assessing qualification for an FCL arrangement include: a sustainable external position; a capital account position dominated by private flows; a track record of steady sovereign 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; the absence of bank solvency problems that pose an immediate threat of a systemic banking crisis;  effective financial sector supervision; and data transparency and integrity.

Strong performance against all these criteria would not be necessary to secure qualification under the FCL, as compensating factors, including corrective policy measures under way, would be taken into account in the qualification process.

By enhancing Stand-by Arrangements (SBA) - the Fund's workhorse lending instrument for crisis resolution - IMF aims to increase its flexibility and ensure its availability as a crisis prevention instrument for members that may not qualify for the FCL.

The new SBA framework will enable high-access on a precautionary basis and provide increased flexibility by allowing frontloading of access and reducing the frequency of reviews and purchases where warranted by the strength of the country's policies and the nature of the balance of payments problem faced by the country.

Doubling access limits: Nonconcessional loan access limits for countries are being doubled, with the new annual and cumulative access limits for Fund resources being 200 and 600 per cent of quota, respectively. These higher limits aim to give confidence to countries that adequate resources would be accessible to them to meet their financing needs. Access above these limits will continue to be provided on a case-by-case basis under Exceptional Access procedures, which are also being clarified and streamlined.

To create the right incentives for borrowing from the Fund, the cost and maturity structures for high-access and precautionary Fund lending are also being overhauled. The elimination of the time-based repurchase expectations policy - an administrative mechanism meant to induce early repayments - will effectively lengthen grace periods and simplify the repayment schedules of Fund lending. This administrative mechanism is replaced by the introduction of a new time-based surcharge, which together with streamlined level-based surcharges, will help mitigate credit risks without increasing the cost of borrowing to countries that make timely repayments to the Fund. The new schedule of commitment fees, which increases with the size of precautionary lending, would help mitigate liquidity risks to the Fund without discouraging early access to IMF resources.

In addition to the reform of structural conditionality, which applies also to concessional loan facilities available for low-income countries, the Fund is considering modifications to its concessional lending facilities to strengthen the IMF's lending tools for providing short-term and emergency financing to low income countries.

Some facilities that have not been recently used (Supplemental Reserve Facility and the Compensatory Financing Facility) are being eliminated.

A substantial increase in the IMF's resources is required to give full confidence to countries that the Fund will have sufficient money available should they need to borrow. Japan has already provided the IMF with an additional $100 billion to bolster the Fund's lendable resources available to address the current crisis to about $350 billion, and the European Union has committed 75 billion. Efforts are under way to further increase IMF resources in the run-up to the 2 April London summit of the G-20, and to at least double concessional resources for low-income countries, it said.


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IMF eases lending rules, creates new line of credit