IMF Financing Helps Members Pursue Sound Policies

IMF Financing Helps Members Pursue Sound Policies

1998 IMF Survey Supplement on the Fund

September 1998

The IMF uses its financial resources to help members redress balance of payments problems and to help cushion the impact of adjustment. The IMF’s financing is provided through both its general resources and its concessional financing facilities, which are administered separately. The extension of IMF credit is subject to Executive Board approval and, in most cases, to the member’s commitment to take steps to address the causes of its payments imbalance (see Conditionality). Members using the IMF’s general resources “purchase” (or draw) other members’ currencies or SDRs with an equivalent amount of their own currency. The IMF levies charges on these drawings and requires that members “repurchase” (or buy back) their own currency from the IMF with other members’ currencies or SDRs within a specified time. Concessional financing under the Enhanced Structural Adjustment Facility (ESAF) is provided in the form of low-interest loans and grants under the HIPC (heavily indebted poor countries) debt initiative.

Total IMF Credit Outstanding to Members¹
(billion SDR's end of period)

¹The IMF's financial year begins on May 1 and ends on April 30.
Data: IMF, Annual Report 1998

Regular Facilities

Reserve Tranche. A member has a reserve tranche position if the IMF’s holdings of its currency in the General Resources Account, excluding those holdings that reflect the member’s use of IMF resources, are less than its quota. A member may draw up to the full amount of its reserve tranche position at any time, subject only to the member’s representation of a balance of payments need. A reserve tranche drawing does not constitute a use of IMF credit and is not subject to charges or to an expectation or obligation to repurchase.

Credit Tranches. IMF credit is subject to different conditionality and phasing, depending on whether it is made available in the first credit “tranche” (or segment) of 25 percent of a member’s quota or in the upper credit tranches (any segment above 25 percent of quota). For drawings in the first credit tranche, members must demonstrate reasonable efforts to overcome their balance of payments difficulties.

Upper credit tranche drawings are made in installments, or phased, and are released when performance targets are met. Such drawings are normally associated with Stand-By or Extended Arrangements, which typically seek to resolve balance of payments difficulties and to support structural policy reforms where appropriate. Performance criteria and periodic reviews are used to assess policy implementation.

Stand-By Arrangements. Stand-By Arrangements give members the right to draw up to a specified amount of IMF resources during a prescribed period. Drawings are normally phased on a quarterly basis, with their release conditional upon meeting performance criteria and the completion of periodic reviews. Performance criteria generally cover bank credit, government or public sector borrowing, trade and payments restrictions, foreign borrowing, and international reserve levels. These criteria allow both the member and the IMF to assess progress and may signal the need for further corrective policies. Stand-By Arrangements typically cover a 12–18 month period (although they can extend up to three years). Repayments are to be made within 3¼ to 5 years of each drawing.

In 1997/98, the IMF approved commitments under nine new Stand-By Arrangements totaling SDR 27.3 billion. Stand-By Arrangements totaling SDR 26.7 billion were approved for Indonesia (SDR 7.3 billion), Korea (SDR 15.5 billion), the Philippines (SDR 1.0 billion), and Thailand (SDR 2.9 billion). The arrangement for Korea—the largest in the IMF’s history—included SDR 10.0 billion available until December 1998 under the newly created Supplementary Reserve Facility (SRF). Stand-By Arrangements totaling SDR 0.6 billion were also approved for Cape Verde, Estonia, Latvia, Ukraine, and Uruguay. As of April 30, 1998, 14 countries had Stand-By Arrangements with the IMF, with total commitments of SDR 28.3 billion and undrawn balances of SDR 12.4 billion. Commitments totaling SDR 1.2 billion have been approved since April 30, 1998. This includes an augmentation of SDR 1.0 billion for Indonesia.

Extended Fund Facility (EFF). The EFF provides assistance for adjustment programs over longer periods and with generally larger amounts of financing than under Stand-By Arrangements. Extended Arrangements, which normally run for three years (and can be extended for a fourth), are designed to rectify balance of payments difficulties that stem largely from structural problems and require a longer period of adjustment.

A member requesting an Extended Arrangement outlines its objectives and policies for the period of the arrangement and presents a detailed statement each year of the policies and measures to be pursued over the next 12 months. The phasing and performance criteria are comparable to those of Stand-By Arrangements, although phasing on a semiannual basis is possible. Repayments are to be made within 4½ to 10 years of each drawing.

During 1997/98, four new Extended Arrangements totaling SDR 2.8 billion were approved for Argentina, Pakistan, Panama, and Yemen. In addition, the Extended Arrangement for the Philippines was augmented by SDR 0.3 billion. The Extended Arrangements for Pakistan and Yemen were approved in conjunction with ESAF arrangements. As of April 30, 1998, 13 countries had Extended Arrangements, with commitments totaling SDR 12.3 billion and undrawn balances of SDR 6.8 billion.

Overall, new commitments of IMF resources under Stand-By and Extended Arrangements amounted to SDR 30.4 billion in 1997/98. Of this total, nearly 90 percent was approved for Asian countries directly affected by the regional financial crisis. In July 1998, there was an augmentation of commitments amounting to SDR 6.3 billion for Russia, financed under the GAB.

Special Facilities

The IMF’s special facilities include the Compensatory and Contingency Financing Facility (CCFF), the Buffer Stock Financing Facility—which has not been used since 1984—and the Supplemental Reserve Facility (SRF).

Compensatory and Contingency Financing Facility. The export compensatory element of the CCFF provides timely financing to members experiencing a temporary shortfall in export earnings or an excess in cereal import costs, attributable to factors largely beyond the member’s control. This element of the facility has been used particularly by commodity exporters. The contingency element helps members with IMF arrangements keep their adjustment programs on track when faced with unexpected adverse external shocks. The affected variables could include export earnings, import prices, and international interest rates; workers’ remittances and tourism receipts may also be covered if they are a significant component in the member’s current account. During the 1997/98 fiscal year, no member used the CCFF. In July 1998, the IMF approved financial support for Russia in the amount of SDR 2.16 billion under the CCFF to compensate for a shortfall in export earnings related mainly to lower crude oil prices.

Buffer Stock Financing Facility. Under this facility, the IMF helps finance members’ contributions to approved international buffer stocks if the member demonstrates a balance of payments need. No drawings have been made under this facility for the past 14 years.

Supplemental Reserve Facility (SRF). In December 1997, the Executive Board opened a new lending window—the SRF—for member countries experiencing exceptional balance of payments problems owing to a large short-term financing need resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and the member’s reserves. Assistance under the SRF is available when there is a reasonable expectation that implementation of strong adjustment policies and adequate financing will result, in a short period, in early correction of the balance of payments difficulties. Although resources under IMF facilities are available to all members, the SRF is likely to be used in cases where the magnitude of the outflows may create a risk of contagion that could potentially threaten the international monetary system. In approving a request for the use of IMF resources under the SRF, the IMF takes into account the financing provided by other creditors. To minimize moral hazard, a member using resources under the SRF is encouraged to maintain the participation of creditors—both official and private—until the pressure on the balance of payments ceases.

Financing under the SRF, available in the form of additional resources under a Stand-By or Extended Arrangement, is committed for up to one year and generally available in two or more drawings. The first drawing is available at the time of approval of the financing, which normally coincides with the approval of the corresponding arrangement.

Countries drawing under the SRF are expected to repay within 1 to 1½ years of the date of each purchase. The Board may, however, extend this repayment period by up to one year, at which point repayment is obligatory. During the first year from the date of approval of financing to a country under the SRF, the use of IMF resources is subject to a surcharge of 300 basis points above the rate of charge on IMF loans. This rate will be increased by 50 basis points at the end of that period and every six months thereafter until the surcharge reaches 500 basis points. The IMF first activated the SRF in December 1997, committing SDR 9.95 billion to Korea as part of its Stand-By Arrangement. In July 1998, SDR 4 billion was committed to Russia under the SRF as part of the augmentation of Russia’s Extended Arrangement by SDR 6.3 billion.

Concessional Facilities

Enhanced Structural Adjustment Facility (ESAF). This facility, which was established by the Executive Board in 1987 and extended and enlarged in February 1994, is the principal means by which the IMF provides financial support, in the form of highly concessional loans, to low-income member countries facing protracted balance of payments problems and loans and grants under the HIPC Initiative.

At the same time that the ESAF was extended and enlarged, no new resources were made available for its precursor—the Structural Adjustment Facility (SAF), which had been established in 1986. All remaining SAF resources were disbursed by end-1995. The objectives and primary features of the SAF were similar to those of the current ESAF, but programs supported under ESAF arrangements are more ambitious with regard to macroeconomic policy and structural reform measures.

ESAF resources are intended to support strong medium-term structural adjustment programs. Eligible members seeking ESAF resources must develop, with the assistance of the staffs of the IMF and the World Bank, a policy framework paper (PFP) for a three-year adjustment program. The PFP, which is updated annually, describes the authorities’ economic objectives, macroeconomic and structural policies during the three-year period, and associated external financing needs and major sources of financing. The PFP, which is a document of the national authorities, is intended to ensure a consistent framework for economic policies and to attract financial and technical assistance in support of the adjustment program.

Adjustment measures under ESAF-supported programs are expected to strengthen substantially a country’s balance of payments position and foster growth during the three-year period. Monitoring under ESAF arrangements is conducted through quarterly financial and structural benchmarks. In addition, semiannual performance criteria are set for key quantitative and structural targets. ESAF loans are disbursed semiannually, initially upon approval of an annual arrangement and subsequently based on the observance of performance criteria and after completion of a midterm review. ESAF loans are repaid in ten equal semiannual installments, beginning 5½ years and ending 10 years after the date of each disbursement. The interest rate on ESAF loans is 0.5 percent a year.

In 1997/98, the IMF approved eight new ESAF arrangements totaling SDR 1.7 billion for Cameroon, Côte d’Ivoire, Mongolia, Nicaragua, Pakistan, Senegal, Uganda, and Yemen, as well as an ESAF grant to Uganda under the HIPC Initiative. As of April 30, 1998, 33 ESAF arrangements were in effect. Cumulative commitments under all SAF and ESAF arrangements approved since 1986 (excluding undisbursed amounts under expired and canceled arrangements) totaled SDR 9.9 billion as of April 30, 1998, compared with SDR 8.8 billion a year earlier. ESAF disbursements in 1997/98 totaled SDR 1.0 billion, compared with SDR 0.7 billion in 1996/97, bringing cumulative SAF and ESAF disbursements through April 30, 1998, to SDR 8.1 billion. Since April 30, 1998, seven new ESAF arrangements have been approved for a total of SDR 0.4 billion.

Financing the ESAF Trust. The resources to finance lending in support of ESAF arrangements are kept separate from the general resources of the IMF and are administered by the IMF as Trustee of the ESAF Trust. ESAF operations are conducted through three accounts with separate functions. The ESAF Trust borrows resources through the Loan Account for onlending to eligible members under ESAF arrangements, with the maturity of drawings coinciding with the maturity of loans to ESAF borrowers. Lenders have extended loans to the ESAF Trust on different interest rate terms, free of interest in one case and highly concessional in others. Also, most lenders making loans at market-related interest rates have made separate contributions to help reduce the interest rate charged to borrowers. Subsidy contributions (including a contribution from the IMF’s Special Disbursement Account in 1994) are channeled through the Subsidy Account and have taken the form of direct grants or deposits at concessional interest rates. These funds are invested by the Trust, with the subsidy contribution being equal to the interest rate differential. Resources are set aside in the Reserve Account to provide security to lenders’ claims on the Trust against the risk of nonpayment by borrowers. These latter resources result mainly from repayments of SAF loans and the part of ESAF loans that was financed with SAF resources and ultimately originate in the profits from gold sales undertaken by the IMF in 1976–81.

Making the ESAF Self-Sustaining. Based on the broad agreement that the ESAF is, and will remain, the centerpiece of the IMF’s support for the poorest countries, including in the context of the HIPC Initiative, the Executive Board in 1996 agreed on a framework for the continuation of ESAF operations. Under current projections, available ESAF resources are expected to be fully committed by mid-2000. A self-sustained ESAF, with a commitment capacity of about SDR 0.8 billion a year, would begin in the year 2005, or perhaps earlier, financed from the IMF-owned resources set aside in the Reserve Account, which will be freed as ESAF lenders are repaid. This would leave an interim period of about four years during which financing of an estimated SDR 1.7 billion on an “as needed” basis would need to be mobilized to cover interest subsidies. In addition, financing needs for special ESAF operations under the HIPC Initiative are estimated to be SDR 1.1 billion on an “as needed” basis.

Other IMF Policies and Procedures

For specific circumstances that cannot be adequately addressed under its regular and special facilities, the IMF extends financing to member countries under a variety of special mechanisms. These include an emergency financing mechanism, support for currency stabilization funds, and emergency assistance to members facing balance of payments difficulties arising from sudden and unforeseeable natural disasters or in post-conflict situations. In addition, special accelerated procedures are available to facilitate rapid Board approval of IMF financial support in emergency cases.

Support for Currency Stabilization Funds. In September 1995, the Executive Board decided that in the framework of an upper credit tranche Stand-By or Extended Arrangement, the IMF could provide financial support for the establishment of a currency stabilization fund to bolster confidence, for a transitional period, in an exchange-rate-based stabilization strategy. For a currency stabilization fund to play its intended role, economic policies would have to be sufficiently tight to deliver an inflation path compatible with the targeted exchange rate anchor, so that little, if any, use of the currency stabilization fund for exchange market intervention would be expected. The most appropriate exchange rate arrangement to be supported by a currency stabilization fund would be an exchange rate peg with relatively narrow margins or a preannounced crawl.

IMF support would be conditional upon fiscal adjustment and credit creation consistent with targeted inflation, appropriate measures to deal with backward-looking automatic wage and other indexation schemes, a high degree of current account convertibility and an open trade regime and other measures to encourage a return of flight capital, contingency plans to deal with large capital account outflows or inflows, integrated management of foreign exchange reserves and intervention policy, and other structural and institutional elements designed to reduce inflation sharply. So far, no occasion has arisen for the IMF to provide financial support for currency stabilization funds.

Emergency Assistance. The IMF can also provide emergency financial assistance to a member facing balance of payments difficulties caused by a natural disaster and has provided such assistance on a number of occasions. The assistance is available through outright purchases, usually limited to 25 percent of quota, provided that the member is cooperating with the IMF to find a solution to its balance of payments problem. In most cases, this assistance has been followed by an arrangement with the IMF under one of its regular facilities.

In 1995, the policy on emergency assistance was expanded to cover countries in post-conflict situations. This assistance may be provided when the member’s institutional or administrative capacity has been disrupted as a result of the conflict but there is still sufficient capacity for planning and policy implementation and a demonstrated commitment on the part of the authorities; there is an urgent balance of payments need; and IMF support could be catalytic and is part of a concerted international effort. Conditions for the assistance include a statement of economic policies, a quantified macroeconomic framework to the extent possible, and a statement of the authorities’ intention to move as soon as possible to an upper credit tranche Stand-By or Extended Arrangement, or to an ESAF Arrangement. The conditionality is tailored to the individual country situation and to rebuilding the country’s administrative and institutional capacity. In 1997/98, three countries (Albania, Rwanda, and Tajikistan) made purchases totaling SDR 30 million under the IMF’s policy on emergency post-conflict assistance.

Emergency Financing Mechanism (EFM). A set of procedures to facilitate rapid Executive Board approval of IMF financial support while ensuring the conditionality necessary to warrant such support, these emergency measures are to be used only in rare circumstances representing, or threatening to give rise to, a crisis in a member’s external accounts that requires an immediate IMF response. The EFM was established by the Executive Board in September 1995, and it was first activated in support of the Philippines’ request in July 1997 for an extension and augmentation of its three-year extended arrangement. It was used again in August, November, and December 1997, and in July 1998—together with the provision of exceptional financial support—for Thailand, Indonesia, Korea, and Russia, respectively.

Access Limits Are Guided by Quotas

Access Limits (Percent of member's quota)
Stand-By and Extended Arrangements¹
Annual	100
Cumulative	300
Special Facilities
Supplemental Reserve Facility	none
Compensatory and Contingency
Financing Facility
Export earnings shortfall²	30
Excess cereal import costs²	15
Contingency financing	30
Optional tranche	20
Buffer Stock Financing Facility	35
Enhanced Structure Adjustment Facility
Three-year access
Regular	190
Exceptional	255
¹Under exceptional circumstances, these limits may be exceeded. ²When a member has a satisfactory balance of payments position except for the effect of an export earnings shortfall or an excess in cereal import costs, a limit of 65 percent of quota applies to either the export earnings shortfall or the excess cereal imports costs, with a joint limit of 80 percent.

The rules governing access to the IMF’s general resources apply uniformly to all members. Access is determined primarily by a member’s balance of payments need, the strength of its adjustment policies, and its capacity to repay the IMF. Except for the Supplemental Reserve Facility (SRF), access is permitted up to limits defined in relation to the member’s quota.

The Executive Board reviews the access limits in the credit tranches and under the Extended Fund Facility (EFF) annually in light of many elements, including the magnitude of members’ payments problems and developments in the IMF’s liquidity. Guided by the principle that strong adjustment programs deserve strong support and by the need to safeguard the monetary character and catalytic role of the IMF, the Executive Board decided that, for a three-year period beginning October 24, 1994, the annual limit for access to the IMF’s general resources in the credit tranches and under extended arrangements would rise to 100 percent of quota from 68 percent of quota. The cumulative access limit was left unchanged at 300 percent of quota, net of scheduled repayments. At the November 1997 review, the Board decided to maintain the annual and cumulative access limits set in 1994 until the next review of access policies to be held not later than October 1998.

These limits may be exceeded in exceptional cases. The limits exclude drawings under the SRF, the Compensatory and Contingency Financing Facility (CCFF), and the Buffer Stock Financing Facility (BSFF), and loans under the Enhanced Structural Adjustment Facility (ESAF). Access under the SRF is not subject to limits in relation to quota. The IMF determines access under the SRF based on the financing needs of the member; its capacity to pay, including in particular the strength of its program; its outstanding use of IMF credit; and its record in using IMF resources in the past and in cooperating with the IMF in surveillance, as well as the IMF’s liquidity. The current overall access limit under the CCFF is set at 95 percent of a member’s quota. For the BSFF, the access limit is 35 percent of quota.

Access under ESAF arrangements also differs according to members’ balance of payments needs, the strength of their adjustment efforts, and their capacity to repay. An eligible member country may borrow a maximum of 190 percent of its quota under a three-year ESAF arrangement, although this limit may be increased, under exceptional circumstances, up to a maximum of 255 percent of quota.

External Evaluation of the ESAF

In the spring of 1997, a panel of outside experts began work on an independent evaluation of SAF/ESAF-supported programs. This was the first time that an external evaluation of the IMF’s work had been commissioned by the Executive Board. The evaluators used a case-study approach to examine social policies and the composition of government spending; developments in countries’ external positions; and the determinants and influence of differing degrees of national ownership of ESAF-supported programs. They offered the following main recommendations:

Social Impact

The IMF should seek ex ante assessments by the World Bank of the likely impact that ESAF-supported programs will have on the incomes of the poor and of the real projected value of social service provision. These impact assessments could be taken into account at the program design stage and should be updated during program implementation. The IMF should draw formally on the household poverty expertise of the World Bank.
In program design, the IMF should explicitly analyze trade-offs between the short run and long run. The analysis would address sequencing issues, front-loading of structural reforms, and the efficiency costs of revenue measures.
In the area of fiscal policy, IMF-World Bank collaboration should be increased to allow for more joint analysis and to address overlaps concerning the macroeconomic concerns of the IMF and the microeconomic concerns of the Bank.
The ESAF should have a new role in the post-stabilization environment to help reforming governments build reputations and to enable the IMF to play a role in potential ESAF countries that do not currently use the facility.

External Viability

ESAF financing should be provided as budget support rather than to central banks.
Equal or more weight should be given to indicators that relate total debt and debt service to GDP rather than to the traditional export-based indicators, as the latter are overly sensitive to an economy’s openness.

Ownership and Governance

Countries have primary responsibility for economic reform programs and they should develop and build a consensus behind a program capable of achieving sustainable growth. The IMF should make the negotiation process and conditionality regime more supportive of country ownership.
The IMF should ensure greater flexibility in the negotiating frameworks, develop systematic mechanisms for ex-post support for country-initiated programs, strengthen resident representative missions in ESAF countries, engage in regular informal policy dialogue with the country’s political leadership, and find ways to improve the IMF’s image.
Countries should create economic management teams comprising economic and social sector ministries and political leaders to oversee the reform process and hold national conferences where alternatives and trade-offs can be openly debated.

In discussing an internal review of the ESAF in July 1997 and the external evaluation in March 1998, Executive Directors requested that the staff draw together the conclusions of these evaluations and develop specific proposals for improving future ESAF operations. The full texts of the external review, including the staff response and a follow-up paper, Distilling the Lessons from the ESAF Reviews, are available on the IMF’s web site (http://www.imf.org).

Objectives | Operations | Effectiveness