IMF Approves Policy Reforms, Funding Package To Better Support Recovery From Pandemic

(CMC) – The Executive Board of the International Monetary Fund (IMF) has approved a set of reforms to the fund’s concessional lending facilities to better support Low Income Countries’ (LICs), such as those in the Caribbean, during the COVID-19 pandemic and the recovery.

The Executive Board also approved an associated funding strategy to support the long-term sustainability of the Poverty Reduction and Growth Trust (PRGT).

The Washington-based financial institution said these reforms are set to ensure that the fund has the capacity to respond flexibly to LICs’ needs over the medium term while continuing to provide concessional loans at zero interest rates.

The IMF said lending to LICs increased dramatically in 2020—an eightfold increase from average lending levels in 2017–2019—and is projected to continue at elevated levels for several years, “as LICs seek financial assistance to help them respond to and recover from the pandemic.

“The bulk of future financial assistance is expected to be provided through multi-year lending arrangements—a shift from 2020, when most assistance was provided through the fund’s emergency financing facilities,” the IMF said.

It said the centrepiece of the approved policy reforms is a 45 per cent increase in the normal limits on access to concessional financing, coupled with the elimination of limits on access to the poorest countries provided their economic programmes meet the requirements for obtaining above-normal access.

“These higher access limits will allow provision of more concessional support to countries with large balance of payments needs that are implementing strong economic programs to restore inclusive growth, while maintaining sustainable debt positions,” the IMF said.

To support concessional financing to LICs through the PRGT, it said grant resources are needed to cover the costs associated with providing zero-interest lending.

In 2019, the PRGT was assessed to have sufficient resources to finance interest subsidies on the fund’s concessional lending on a self-sustaining basis over the long term, the IMF said.

However, it said the volume of pandemic-linked lending—already provided or expected to be provided in the next few years—far exceeds what had been anticipated or previously recorded, “creating a sizable shortfall in the necessary resources.”

The IMF said its Executive Directors supported the proposed package of reforms to the concessional financing facilities and the associated two-stage funding strategy to ensure sustainability of concessional lending.

“Directors agreed that low-income countries (LICs) have been particularly hard hit by the COVID-19 pandemic and would face significant challenges in achieving sustainable inclusive growth in the coming years,” the statement said, “They noted that the fund has responded quickly to provide financial support to LICs at an unprecedented scale, and, looking ahead, should continue supporting countries that are implementing strong economic programs aimed at recovering from the pandemic and raising living standards.”

The IMF said the directors were in broad agreement that the proposed reform package would better position the fund to respond to the needs of LICs.

They supported the proposed increases in limits on normal access to resources of the PRGT and the removal of the limits on exceptional access for the poorest countries, the IMF said.

It went on to state that some directors, however, expressed concern about entirely removing the hard caps on PRGT exceptional access for poorer LICs.

Some directors suggested that the new access limits should include a sunset clause set to coincide with the time of the next full review of concessional facilities, the IMF said.

It said the directors generally agreed that higher access limits would provide the fund with the flexibility to increase concessional financial support for countries with strong reform programs.

However, they emphasised that access levels in individual fund-supported programs should continue to be based on a case-by-case assessment applying the established access criteria, including balance of payments needs, strength of economic program, and capacity to repay the fund, the IMF said.

In this context, the lending agency said most directors underscored the importance of maintaining the fund’s established role in catalysing financing from other sources, while noting that the fund must respond to its membership’s needs in line with its mandate, particularly during crisis times.

“They supported the proposed simplification of access norms, while emphasising that norms are neither a floor nor a ceiling on access levels in individual program cases.”

With many LICs facing substantial debt vulnerabilities, the IMF said the directors agreed that program design needs to pay close attention to the expected evolution of debt burdens and the risk of countries falling into debt distress.

“Higher levels of lending would mean higher credit risk to the fund and a corresponding need for more in-depth analysis of capacity to repay the fund,” the IMF said.